UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-K10-K/A
(Amendment No. 1)
____________________________
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212023
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35424
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HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
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| Washington | | 91-0186600 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification Number) |
601 Union Street, Ste. 2000
Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 623-3050
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, no par value | HMST | Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ☐ | Accelerated filer | | ☒ |
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| Non-accelerated filer | | ☐ | Smaller reporting company | | ☐☒ |
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Emerging growth Companycompany | | ☐ | | | |
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ☐ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2021,2023, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting common stock held by non-affiliates was approximately $685$91 million based on a closing price of $40.74$5.92 per share of common stock on the Nasdaq Global Select Market on such date. Shares of common stock held by each executive officer and director and by each person known to the Company who beneficially owns more than 10% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates.
The number of outstanding shares of the registrant's common stock as of March 1, 2022April 25, 2024 was 19,315,831.18,857,566.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, will be incorporated by reference from the registrant’s definitive proxy statement relating to the annual meeting of the shareholders to be held in 2022, to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this Report relates. If a definitive proxy statement of the registrant is not filed within such period, the registrant will instead file such information on an amendment to this Report within such 120 days of the end of the registrant’s fiscal year to which this Report relates.None.
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| CERTIFICATIONS |
| EXHIBIT 21 |
| EXHIBIT 31.1 |
| EXHIBIT 31.2 |
| EXHIBIT 32 |
PART I
FORWARD-LOOKING STATEMENTSEXPLANATORY NOTE
ThisHomeStreet Inc. (the “Company,” “HomeStreet,” “we” or “us”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend the Annual Report on Form 10-K ("Form 10-K") andfor the documents incorporated by reference contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-looking statements include the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “goal,” “upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address and/or include beliefs, assumptions, estimates, projections and expectations of our future performance, financial condition, long-term value creation, capital management, reduction in volatility, reliability of earnings, provisions and allowances for credit losses, cost reduction initiatives, performance of our continued operations relative to our past operations, and restructuring activities are forward-looking statements within the meaning of the Reform Act. Forward-looking statements involve inherent risks, uncertainties and other factors, many of which are difficult to predict and are generally beyond management’s control. Forward-looking statements are based on the Company’s expectations at the time such statements are made and speak only as of the date made. The Company does not assume any obligation or undertake to update any forward-looking statements after the date of this release as a result of new information, future events or developments, except as required by federal securities or other applicable laws, although the Company may do so from time to time. The Company does not endorse any projections regarding future performance that may be made by third parties. For all forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act.
We caution readers that actual results may differ materially from those expressed in or impliedfiscal year ended December 31, 2023 originally filed by the Company’s forward-looking statements. Rather, more important factors could affect the Company’s future results, including but not limited to the following: (1) the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients; (2) the continued impact of COVID-19 on our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may arise in our primary markets; (3) the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control; (4) there may be increases in competitive pressure among financial institutions or from non-financial institutions; (5) changes in the interest rate environment may reduce interest margins; (6) changes in deposit flows, loan demand or real estate values may adversely affect the business of our primary subsidiary, the Bank, through which substantially all of our operations are carried out; (7) our ability to control operating costs and expenses; (8) our credit quality and the effect of credit quality on our credit losses expense and allowance for credit losses; (9) the adequacy of our allowance for credit losses; (10) changes in accounting principles, policies or guidelines may cause our financial condition to be perceived differently; (11) legislative or regulatory changes that may adversely affect our business or financial condition, including, without limitation, changes in corporate and/or individual income tax laws and policies, changes in privacy laws, and changes in regulatory capital or other rules, and the availability of resources to address or respond to such changes; (12) general economic conditions, either nationally or locally in some or all areas in which we conduct business, or conditions in the securities markets or banking industry, may be less favorable than what we currently anticipate; (13) challenges our customers may face in meeting current underwriting standards may adversely impact all or a substantial portion of the value of our rate-lock loan activity we recognize; (14) technological changes may be more difficult or expensive than what we anticipate; (15) a failure in or breach of our operational or security systems or information technology infrastructure, or those of our third-party providers and vendors, including due to cyber-attacks; (16) success or consummation of new business initiatives may be more difficult or expensive than what we anticipate; (17) our ability to grow efficiently both organically and through acquisitions and to manage our growth and integration costs; (18) our ability to attract and retain key members of our senior management team; (19) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force and potential associated charges; (20) litigation or other matters before regulatory agencies, whether currently existing or commencing in the future, may delay the occurrence or non-occurrence of events longer than what we anticipate; and (21) our ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us or the Bank, or repurchases of our common stock. A discussion of the factors, risks and uncertainties that could affect our financial results, business goals and operational and financial objectives cited in this release, other releases, public statements and/or filingsCompany with the Securities and Exchange Commission (“SEC”(the “SEC”) is also contained inon March 6, 2024 (the “Original Form 10-K”), solely for the “Risk Factors” sectionpurpose of thisincluding the information required by Items 10 through 14 of Part III of Form 10-K. We strongly recommend readers review those disclosuresThis information was omitted from the Original Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits such information to be incorporated by reference from a registrant’s definitive proxy statement, if filed with the SEC not later than 120 days after the end of the fiscal year covered by a Form 10-K (the “Filing Deadline”). The Company’s proxy statement will not be filed with the Commission within 120 days after the end of the fiscal year, and we are therefore amending and restating in their entirety Items 10, 11, 12, 13, 14, 15 and 16 of Part III and Part IV of the Original Form 10-K and deleting the incorporation by reference language on the cover page of the Original Form 10-K.
Except as expressly set forth in this Amendment No. 1, no portion of the Original Form 10-K is being amended or updated by this Amendment No. 1 and Amendment No. 1 does not otherwise reflect any events occurring after the filing of the Original Form 10-K.Accordingly, Amendment No. 1 should be read in conjunction with the discussions herein.Original Form 10-K and the Company’s filings made with the SEC subsequent to the filing of the Original Form 10-K. Capitalized terms used herein and not otherwise defined are defined as set forth in the Original Form 10-K.
All future writtenPursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Amendment No. 1 also contains new certifications of the Company’s Chief Executive Officer and oral forward-lookingChief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements attributableare included in Amendment No. 1, and Amendment No. 1 does not contain or amend any disclosure with respect to Items 307 or 308 of Regulation S-K promulgated by the U.S. Securities and Exchange Commission under the Exchange Act, paragraphs 3, 4 and 5 of the Section 302 certifications have been omitted. In addition, because no financial statements are included in Amendment No. 1, new certifications of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are not required to be included with Amendment No. 1.
PART III
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Board of Directors
Our Board of directors (the "Board") currently consists of eight members. The following table sets forth certain information with respect to directors, including each director’s age as of April 15, 2024.
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| Director | | Age | | Director Since |
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| Mark K. Mason, Chairman | | 64 | | 2010 |
| Scott M. Boggs | | 69 | | 2012 |
| Sandra A. Cavanaugh | | 69 | | 2018 |
| Jeffrey D. Green | | 60 | | 2020 |
| Joanne R. Harrell | | 69 | | 2022 |
| James R.. Mitchell, Jr., Lead Independent Director | | 74 | | 2020 |
| Nancy D. Pellegrino | | 67 | | 2019 |
| S. Craig Tompkins | | 73 | | 2023 |
Under our Bylaws, any director nominee’s eligibility to serve as a director of the Company is subject to any required notification to, or approval, nonobjection or requirement of, the Board of Governors of the Federal Reserve System, the Washington State Department of Financial Institutions or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for the Company to predict these events or how they may affectother regulatory entity having jurisdiction over the Company.
The number of directors may be increased or decreased from time to time by the Board, provided that a reduction in the number of directors may not shorten the term of an incumbent. Our Bylaws permit our Board to establish by resolution the authorized number of directors, which shall be between seven and 13 directors. Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board may be filled solely by the affirmative vote of a majority of the remaining directors then in office, unless otherwise provided by law or by resolution of the Board. All of our
ITEM 1.BUSINESSdirectors, except for Mr. Mason, satisfy the definition of “independent director” under the corporate governance rules of Nasdaq.
Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to "we," "our," and “us” refer to HomeStreet, Inc., a Washington corporation, ("HomeStreet," or the "Company,") and its consolidated subsidiaries, HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation ("Capital").Key Qualifications
OverviewThe following table sets forth certain key qualifications and skills of Board members. The lack of a mark for a particular item does not mean that the director does not possess that qualification, characteristic, skill or experience. We look to each director to be knowledgeable in these areas; however, the mark indicates that the item is a particularly prominent qualification, characteristic, skill or experience that the director brings to the Board. Board composition reflects the Board’s desire that directors have the broad expertise and perspective needed to govern our business and strengthen and support senior management.
We are a diversified financial services company with offices in Washington, Oregon, California, Hawaii, Arizona, Utah and Idaho serving customers throughout the western United States. We were founded in 1921 and are headquartered in Seattle, Washington. We provide commercial banking products and services to small and medium sized businesses, real estate investors and professional firms and consumer banking products and services to individuals. As of December 31, 2021, we had $7.2 billion of total assets, $5.7 billion of loans and $6.1 billion of deposits. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Qualification | | Mark
Mason | | Scott
Boggs | | Sandra
Cavanaugh | | Jeffrey
Green | | Joanne
Harrell | | James
Mitchell Jr. | | | | Nancy
Pellegrino | | S. Craig Tompkins | |
| | | | | | | | | | | | | | | | | | | |
| Financial Expertise Literacy | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Corporate Governance | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Public Company Board Experience | | ü | | ü | | ü | | ü | | | | ü | | | | ü | | | |
| Strategic Planning | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Legal | | ü | | | | | | | | | | ü | | | | | | ü | |
| Capital Management | | ü | | | | | | | | | | ü | | | | | | ü | |
| Technology Cybersecurity | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | | |
| Audit | | ü | | ü | | ü | | ü | | | | ü | | | | | | ü | |
| Human Capital Management | | ü | | | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Marketing | | ü | | | | ü | | ü | | ü | | ü | | | | ü | | | |
| Regulatory Risk Management | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Business Development | | ü | | | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Business Operations | | ü | | ü | | ü | | ü | | ü | | ü | | | | ü | | ü | |
| Public Company Executive Experience | | ü | | ü | | ü | | | | ü | | ü | | | | ü | | ü | |
| Accounting | | ü | | ü | | | | ü | | | | ü | | | | | | | |
| Industry Experience | | ü | | | | ü | | ü | | ü | | ü | | | | ü | | ü | |
With the exception of the updates provided below, the information required under Part I. Item 1. – “Business” is incorporated by reference to Part I, Item 1, "Business" in our Annual Report on Form 10-K for the year ended December 31, 2020.Mark K. Mason, Director, Chairman, Chief Executive Officer and President
Human CapitalMr. Mason has been the Company's Chief Executive Officer (“CEO”) and a member of the Company's Board of directors and HomeStreet Bank’s Chairman of the Board and Chief Executive Officer since January 2010. He became Chairman of the Board of the Company in March 2015 after serving as Vice Chairman of the Board since January 2010. Mr. Mason brings extensive business, managerial and leadership experience to the Board. From 1998 to 2002, Mr. Mason was president, chief executive officer and chief lending officer for Bank Plus Corporation and its wholly owned banking subsidiary, Fidelity Federal Bank, where Mr. Mason also served as the chief financial officer from 1994 to 1995 and as chairman of the board of directors from 1998 to 2002. From February 2008 to October 2008, Mr. Mason also served as president of a startup energy company, TEFCO, LLC. He has served on the boards of directors of Hanmi Financial Corp., San Diego Community Bank and The Bjurman Barry Family of Mutual Funds. Mr. Mason is on the boards of directors of the Pacific Bankers Management Institute (the parent company of the Pacific Coast Banking School) and The Washington Bankers Association and is an advisory board member of Seattle University’s Albers School of Business and Economics. Mr. Mason is a certified public accountant (inactive) and holds a bachelor’s degree in business administration with an emphasis in accounting from California State Polytechnic University.
Employee Headcount
AsMr. Mason was selected to serve as a director because of December 31, 2021, the Company employed 984 employees acrosshis position as our geographic footprint, including 934 employees classifiedCEO and his significant experience as full-time employeesan executive officer, director of and 50 employees classified as part-time. Our employee turnover rate was 24% during the year ended December 31, 2021, with a voluntary turnover rate of 21%.
Company Culture
As a financial institution, HomeStreet Bank occupies a position of trustconsultant to other banks and mortgage companies, his credit and lending experience, finance and accounting education and experience and his relationships in the community, among its customersbanking industry and employees, and with its regulators. We have earned that trust by developing a reputation for fairness, honesty, integrity and community service- since the Company’s inception in 1921. Our reputation is directly tied to the individual decisions, actions, and sense of business ethics of each and every one of our employees. We believe a high level of trust gives us a competitive advantage in an environment that is increasingly sensitive to business ethics. It is our belief that employees and customers are attracted to work for, and do business with, a company that prides itself on maintaining the highest ethical standards. For all of these reasons, a commitment to fairness, honesty, integrity and community service are core values of the Company.
As part of this commitment to our core values, HomeStreet holds regular meetings of a diverse group of employees who make up our Culture Committee. That Committee has identified five key values built on specific behaviors that bring our values to life: a focus on customers, collaboration as one team, delivering excellence, embodying a spirit to serve the communities that we are in, and being engaged in our work in a manner that can be described as “all in." In 2021, the Culture Committee launched an employee sentiment survey and developed tools to allow for all employees to take advantage of mentorship through a new mentor-mentee program. Further, the Committee launched a program to support employee resource groups.
Diversity, Equity and Inclusion
HomeStreet is an equal opportunity employer committed to a diverse workplace with employees from a wide range of backgrounds. We recognize that diverse organizations are more likely to have employees with increased job satisfaction, higher levels of trust and greater engagement, which in turn translates to a greater capacity for customer service. We focus on recruiting, retaining and promoting employees from diverse backgrounds and who are representative of the people in our communities. By doing so, we believe we are better able to serve our customers and understand their financial needs and goals.
We have a Diversity Committee made up of employees from a variety of ethnic backgrounds, job functions, and titles to identify ways to increase and promote opportunities for all employees within the Company. This Committee works with management to identify and promote practices that will help us achieve these diversity goals. We also promote policies and practices to combat harassment, discrimination, retaliation, or disrespectful or other unprofessional conduct based on an individual’s identity, including sex, gender, sexual orientation, race, religion, color, ancestry, physical disability, mental disability, age, marital status and more.capital markets.
Compensation of EmployeesScott M. Boggs, Director
As partMr. Boggs joined HomeStreet Bank in 2006 as a member of our goalits board of providing high-quality bankingdirectors and financial services to our customers while creatingbecame a positive impact in the local communities in which we do business, we designed our compensation program with the intention of attracting and retaining highly qualified employees. We use a mix of base salary, cash-based short-term incentive plans and defined contributions to the 401(k) plans for participating employees to incentivize our employees classified as exempt employees, and provide equity-based long-term incentive compensation for membersdirector of the management team who are seniorCompany in February 2012. Mr. Boggs served as the Lead Independent Director of the Board from March 2015 through June 2018. Prior to joining HomeStreet Bank’s board of directors, Mr. Boggs was employed by Microsoft Corporation from 1993 to 2003 where he served in a variety of positions, including vice president, corporate controller from 1998 to 2003. Mr. Boggs was also an adjunct professor for the Seattle University Albers School of Business and above. Employee performanceEconomics, teaching accounting and information systems from 2004 until 2009. Mr. Boggs previously served as a trustee and chair of the audit committee and budget and investments committee of the Financial Executives Research Foundation from 2002 to 2008, as director, chair of the pension committee and a member of the audit committee of the Cascade Natural Gas Corporation from 2004 to 2007, and director, vice chair of audit committee and designated financial expert of the Safeco family of mutual funds from 2002 to 2004. He is considered, evaluateda former member of the Seattle University Internal Audit Advisory Board, the King County Strategic Technology Advisory Council, the Seattle University Accounting Advisory Board and discussed through quarterly performance check-ins between managerthe Financial Executives International. Mr. Boggs started his career as a certified public accountant (currently inactive) with Deloitte, Haskins & Sells from 1977 to 1985, and direct report, while those employees eligible for short-term annual incentives also have an annual performance review. Our non-exempt employees are paid hourly wages with benefitshe received his bachelor’s degree in accounting from the University of working overtime along with defined contributions to the 401(k) plan for participating employees.Washington.
We haveMr. Boggs was selected to serve as a varietydirector because of group benefit programs designed to provide our employees with healthhis significant accounting and wellness benefits, financial benefits in the event of planned or unplanned expenses, or losses relating to illness, disability or death; programsexperience, his accounting credentials and benefits to help plan for retirement;degree and programs to deal with job-related or personal problems.his experience as a designated financial expert on audit committees.
Employee Training and DevelopmentSandra A. Cavanaugh, Director
Ms. Cavanaugh joined the Board in May 2018. Ms. Cavanaugh has more than 30 years of experience in the financial services, banking and mutual fund industries. As partpresident and CEO of our employee development program, we provideU.S. Private Client Services of Russell Investments from January 2010 until her retirement in June 2016, Ms. Cavanaugh oversaw a variety$45 billion mutual fund business in the U.S. Prior to joining Russell Investments, Ms. Cavanaugh was an executive vice president at SunTrust Bank in 2009, and held senior executive positions at Washington Mutual/JP Morgan Chase from 2007 to 2009, including as president of trainingWM Funds Distributor and educational opportunitiesShareholder Services from 1997 to 2007. Ms. Cavanaugh also held various senior positions with AIM Mutual Funds, First Interstate Bank and American Savings Bank. Since her retirement from Russell Investments in 2016, Ms. Cavanaugh has provided consulting services to help our employees stay current on regulatory compliance issuesfinancial services companies build and develop their professional skills. We use an online learning management systemexecute brand, product and distribution strategies. In addition to create, assign,her executive career, Ms. Cavanaugh holds several board and track complianceadvisory roles. She received her bachelor’s degree in history with a minor in business from California State University, Fresno and professional development learning programs across many topical areas such as banking, mortgagepreviously held active NASD/FINRA Securities Licenses Series 7, 24, and regulatory education, technology training, public speaking and proactive communication, development of strong customer relationship and customer service skills.53.
Employee Safety; ResponseMs. Cavanaugh was selected to COVID-19serve as a director because of her executive management, human capital management, business and financial experience and her background as an expert in the financial services industry.
Employee safety is a priority, and we promote workplace safety in many ways. Early in the pandemic, we designed and adopted HomeStreet’s Social Distancing Policy and COVID-19 Sanitation Measures which were based on US Department of Labor Occupational Safety and Health Administration Guidance on Preparing Workplaces for COVID-19, the Center for Disease Control ("CDC") guidance, the President’s Coronavirus Guidelines for America and orders and guidance from state and local authorities. The Department of Homeland Security has designated the financial services sector as a Critical Infrastructure Sector, and, as a bank, HomeStreet continued to carry out its responsibilities and provide financial services to our customers and communities. In doing so, we have made the safety of our employees, customers and communities where we serve, one of our key priorities. Our policy applies to all HomeStreet locations in the several states where we do business.Jeffrey D. Green, Director
The COVID-19 pandemic threat continued throughout 2021Mr. Green was appointed as a member of the Board in June 2020 to fill a vacancy on the Board. Mr. Green retired as the Financial Institutions National Practice leader and audit and client service Partner of Moss Adams LLP, a national accounting, tax, and advisory firm in December 2018, having served with the firm since 1990. From 2015 to 2018, Mr. Green was Moss Adams’ Financial Institutions National Practice Leader, and in that role, was responsible for that firm’s national financial institutions practice, covering accounting, auditing, internal control, and strategic issues facing publicly traded bank reporting companies, community banks, thrifts, and mortgage banking companies. From 2007 to 2015, Mr. Green was the Managing Partner of Moss Adams’ Everett, Washington practice office. Over his 31 year career in public accounting, Mr. Green gained significant experience working with the boards and audit committees of publicly traded banking and lending institutions while federal, statemanaging major client relationships across multiple markets. In those roles, Mr. Green developed expertise in complex accounting, auditing, internal control, financial reporting, and local governments implemented or attempted to implement manifold policy changes around indoor, outdoor,regulatory compliance matters. He holds a bachelor of science degree in business administration with a focus in accounting from Washington State University and workplace safety. We enhanced protections for our employees inis a certified public accountant and member of the formWashington State Society of masks, gloves, deep cleanings, paid COVID time off,Certified Public Accountants and at-home COVID test kits, as we continued to encourage employees to stay home when not feeling well. We also continued to facilitate work from home capabilities for a large portionthe American Institute of our workforce and supported a hybrid or fully-remote working model for those whose jobs were not dependent on being customer-facing. We continued the use of barriers and specialized safety protocols to limit exposure for our employees who work face-to-face with customers. To encourage and then monitor the variable around vaccination and booster shot status, we implemented a tracking process within our Human Resources Information System to enable employees to voluntarily enter their status. HomeStreet offered wellness credits as an incentive to vaccinate and achieved a vaccination status of greater than 80%. Our crisis management team continued to meet regularly to discuss changes to and maintain ongoing specialized safety standards and protocols as part of our social distancing and a phased return to work plan.Certified Public Accountants.
Employee Community InvolvementMr. Green was selected to serve because of his background as an audit partner for companies in the financial institutions industry, expertise in commercial banking, professional qualifications, financial literacy and his qualification as an audit committee “financial expert”.
HomeStreet is committed to our communities, and as part of that commitment we support the active involvement of our employees in supporting their communities. Employees are given time off to volunteer for community organizations, and where employees make a substantial commitment of time to a particular organization, HomeStreet offers an additional financial contribution to those organizations in recognition of the commitment of our employees. We also create active partnerships with hundreds of local organizations, and our employees provide leadership, educational support, hands-on service, expertise, and financial support to those organizations. We focus primarily on organizations within the scope of the Community Reinvestment Act ("CRA") – those that provide support for housing, basic needs, and economic development for those of low and moderate
Joanne R. Harrell, Director
Ms. Harrell joined the Board in January 2022. From 2001 until her retirement in October 2021 as Senior Director, USA AI, Sustainability & Market Development Strategy at Microsoft Corporation, Ms. Harrell held various executive positions with Microsoft where she led teams in the sales, marketing and services disciplines focused on enterprise, public sector and original equipment manufacturing customers and partners. Ms. Harrell has served as a Regent for the University of Washington since 2009. Prior to joining Microsoft in 2001, Ms. Harrell was President and Chief Executive Officer of the United Way of King County, Washington and held various positions with US West Communications, Inc. and AT&T, Inc. Ms. Harrell holds a bachelor of arts degree in communications-advertising and a masters of business administration in marketing from the University of Washington.
Ms. Harrell was selected to serve as director because of her experience in the areas of marketing, sales, strategy, communications, community service and diversity, social responsibility, sustainability, public affairs and corporate citizenship, in addition to her extensive background in executive management.
James R. Mitchell, Jr., Director
Mr. Mitchell joined the Board in January 2020. Mr. Mitchell has worked in commercial banking for more than 40 years, including founding Puget Sound Bank in 2004, where he served as president and chief executive officer from inception until the merger of that bank with Heritage Bank in January 2018. He was also a member of the board of directors of Puget Sound Bank from 2004 through January 2018, serving as chairman of the board from 2004 through 2008. After the merger of Puget Sound Bank and Heritage Bank, Mr. Mitchell served as the market president for King County for Heritage Bank for the next year, until January 2019, and then as a consultant to Heritage Bank until January 2020. Prior to founding Puget Sound Bank, Mr. Mitchell served as a Senior Vice President at Sterling Bank, where he opened and grew the Seattle corporate banking office, from 2002 to 2004, and a Senior Vice President and team leader for the Seattle corporate banking team of U.S. Bank from 1990 through 2002. Mr. Mitchell served on the board of directors of the Washington Bankers Association from 2011 to 2018, the board of directors of the Western Bankers Association from 2015 to 2018, and the board of Bellevue LifeSpring, a nonprofit organization, from 2009 to 2017. Mr. Mitchell received his bachelor’s degree from Seattle University, a masters of business administration from the University of Washington and his juris doctorate from Southwestern University School of Law.
Mr. Mitchell was selected to serve as a director based on his knowledge of the banking industry, experience as a chief executive officer and director of a bank, and expertise in commercial banking.
Nancy D. Pellegrino, Director
Ms. Pellegrino joined the Board in October 2019. Ms. Pellegrino has more than 30 years of experience in the financial services, private banking, and wealth management industries. She served as a Managing Director and Regional CEO for Citi Private Bank from July 2010 through October 2013 and BNY Mellon Wealth Management from August 2000 through July 2010 where she served as Pacific Northwest President and Regional Director. She was also at Banc One Corp from June 1990 through June 2000, rising to the position of Senior Vice President and Regional Sales Director for the Midwest, prior to which she was a Vice President at Texas Commerce Bank Trust Company, which she joined in 1982. She also served on the board of directors of Puget Sound Bank from September 2014 until January 2018. Since her retirement from Citi Private Bank in 2013, Ms. Pellegrino is providing consulting services to individuals, teams and organizations drawing on her corporate and board leadership experience. She also serves on the boards of several nonprofit organizations, including the Fred Hutch Cancer Research Center Board of Ambassadors. She also has held numerous board leadership positions for a number of non-profit organizations including Fred Hutchinson Cancer Research Center and Woodland Park Zoo, where she is currently Director Emeritus, Ms. Pellegrino received her bachelor’s degree from Vanderbilt University in fine arts and is a graduate of the Northwestern University Graduate Trust School.
Ms. Pellegrino was selected to serve as a director because of her executive leadership, management, risk management and business experience in the financial services industry.
S. Craig Tompkins, Director
S. Craig Tompkins, Director. Mr. Tompkins joined the Board in May 2023. Since 2017, Mr. Tompkins has been the Executive Vice President and General Counsel of Reading International and has served in a variety of officer and director capacities with Reading and its predecessors (Craig Corporation, Citadel Holding Corporation and Reading Entertainment, Inc.) since February 1993. Prior to this, Mr. Tompkins was a partner at Gibson Dunn & Crutcher from 1984 to 1993 practicing as a corporate, securities and banking lawyer. Mr. Tompkins was a principal equity holder in and, between 2007 to 2017, served as the Executive Chairperson and from 2017 to 2022 as the Chairperson of Marshall & Stevens, Incorporated, a privately held valuation and consulting firm specializing in the valuation of real estate, business enterprises and alternative energy assets. From 1993 to 2006, Mr. Tompkins served as a director and as the Chairperson of the Audit Committee of G&L Realty (an NYSE REIT specializing in medical properties), and from 1998 to 2001 as a director and member of the Compensation Committee and of the Special Independent Committee of Fidelity Federal Bank, FSB. Mr. Tompkins is also the Chairperson and Chief Executive Officer of Kirtland Farms, Inc. (a Tompkins family-owned agricultural operation in Southern Oregon). Mr. Tompkins holds a bachelor of arts from Claremont McKenna College, and a juris doctorate from the Harvard Law School.
Mr. Tompkins was selected to serve as a director because of his executive leadership experience and his experience, including as a director, of companies in the financial services industry.
income. Our senior management also helps to educate our employees on the importance of our community responsibility focus and strategies.CORPORATE GOVERNANCE AND OTHER MATTERS
Environmental, SocialAs a bank holding company, we believe it is important to foster an operating environment that articulates a strong focus on compliance and Governance Mattersethical standards, and our Board sets this tone from the top. Our Board is actively engaged in designing, monitoring and enforcing compliance with high governance standards. We discuss our most important corporate governance policies and practices below. Each of our corporate governance policies is reviewed by the committee responsible for that policy and the full Board at least annually, and more frequently if warranted.
Code of Ethics
In 2021, we amendedThe Board has established a code of ethics as defined under the charterExchange Act, which applies to all directors, officers and employees of the Human ResourcesCompany and its subsidiaries, including our principal executive officer, principal financial officer and principal accounting officer or controller. A copy of our Code of Business Conduct and Ethics (“Code of Ethics”) can be found on our investor relations website: http://ir.homestreet.com. We will post on our website any amendments to, or waivers (with respect to our principal executive officer, principal financial officer and principal accounting officer or controller) from, this Code of Ethics within four business days of any such amendment or waiver and, to the extent required by the listing standards of Nasdaq, by filing a Current Report on Form 8-K with the SEC disclosing such information.
Whistleblower Policy
In addition to our Code of Ethics, we maintain a whistleblower policy which is intended to provide guidance to employees, shareholders and others who may be aware of or concerned about potential violations of our Code of Ethics or other forms of misconduct and wish to report such concerns to our Ethics Compliance Officer, either directly or anonymously through our whistleblower hotline or website.
We have crafted our whistleblower policy to make clear we are committed to providing a confidential process by which individuals can raise questions and concerns about potential misconduct, including potential violations of law, regulation or Company policy, and report potential misconduct while strictly prohibiting any attempt by any director, officer or employee of the Company to identify whistleblowers or retaliate or attempt to retaliate against any whistleblower, anonymous or otherwise. Nothing in the policy is intended to prohibit or impede the reporting of alleged accounting irregularities or securities violations, or anything else covered by the Sarbanes-Oxley Act, the Dodd-Frank Act or any other applicable law directly to the SEC whether or not an initial report is made internally to the Company.
We provide information on how to access our third-party whistleblower hotline, EthicsPoint, by telephone or through the Internet on both our internal human resources website and our external investor relations website at
http://ir.homestreet.com.
At each regular meeting the Audit Committee discusses whistleblower reports, if any, with the Ethics Compliance Officer, including all new reports received since the last meeting, any ongoing whistleblower investigations, and the resolution of any closed investigation.
Principles of Corporate Governance
The Company has adopted Principles of Corporate Governance, Committee (the “HRCG Committee”)which can be found on our investor relations website: http://ir.homestreet.com. Shareholders may request a free copy of the Principles of Corporate Governance by writing to Investor Relations, HomeStreet, Inc., 601 Union Street, Suite 2000, Seattle, Washington 98101.
Director Independence
The Board has determined that, with the exception of Mark K. Mason, our Chairman of the Board and Chief Executive Officer, all of its members are “independent directors” as that term is defined in the listing standards of Nasdaq and, where applicable, the regulations adopted under Sections 10A and 10C of the Exchange Act. In the course of determining the independence of each nonemployee director, the Board considered the annual amount of our sales to, or purchases from, any company where a nonemployee director serves as an executive officer as well as all other relevant facts and circumstances, including the director’s commercial, accounting, legal, banking, consulting, charitable and familial relationships.
Board Diversity
Our Principles of Corporate Governance include a commitment to diversity as a guideline for our director nomination process. In particular, the guideline provides that the Board and N&G Committee “will actively seek to include withinhighly qualified women and individuals from minority groups in the HRCGpool of candidates from which nominees for director positions are chosen, and in choosing between equally qualified candidates will give extra weight to diversity of the candidates.” The N&G Committee continues to consider diversity an important goal in Board refreshment, consistent with the diversity expectations the Company continues to hear from its shareholders in our engagement process.
Our Board is comprised of 38% of individuals who identify as women. The current composition of our Board reflects our ongoing commitment to diversity in the director nomination process.
| | | | | | | | | | | | | | | | | | | | | | | |
| Board Diversity Matrix (As of April 15, 2024) | | | | | | | |
| Total Number of Directors: 8 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Female | | Male | | Non-Binary | | Did Not
Disclose
Gender |
| | | | | | | | |
| Part I: GENDER IDENTITY | | | | | | | | |
| Directors | | 3 | | 5 | | — | | — |
| Part II: DEMOGRAPHIC BACKGROUND | | | | | | | | |
| African American or Black | | 1 | | — | | — | | — |
| Alaskan Native or Native American | | — | | — | | — | | — |
| Asian | | — | | — | | — | | — |
| Hispanic or Latinx | | — | | — | | — | | — |
| Native Hawaiian or Pacific Islander | | — | | — | | — | | — |
| White | | 2 | | 5 | | — | | — |
| Two or More Races or Ethnicities | | — | | — | | — | | — |
| LGBTQ+ | | — | | — | | — | | — |
| Did Not Disclose Demographic Background | | — | | — | | — | | — |
Board Assessment, Refreshment and Orientation Process
Each year, our Board undertakes a formal self-evaluation process during which all members are asked to identify their areas of strength and expertise. The N&G Committee then aggregates this information into a report on the strength of the Board which includes, among other things, the skills matrix that is included elsewhere in this Amendment No. 1. This assessment process, and especially the skills matrix, allows the N&G Committee to identify where there may be gaps in the overall skill set of the Board as a whole so that the Company can, if necessary, undertake a search for qualified candidates who not only have
senior-management level experience in public companies, financial institutions and banking and fit the stated goals for diversity in our Principles of Corporate Governance, but can also help to broaden or deepen the skillset that we have on our Board.
Our Board believes it is in the best interests of our shareholders to refresh our Board membership on a regular basis by considering new director candidates who can bring a fresh or different perspective to the Board. We have heard from our shareholders that they also value regular board refreshment measures.
While board refreshment is important to bring new perspectives, our Board has also implemented a formal onboarding and orientation process for new directors in order to maintain continuity and bring new directors up to speed with the Company's operations, corporate governance practices and overall strategy. The orientation is designed to help new directors contribute fully to their governance work on the Board as early in their tenure as possible. As a result of the process, directors are expected to understand: (1) their roles and responsibilities and time commitment to their governance work; (2) the current goals, opportunities and challenges facing the Company; (3) major lines of business and the key leaders; (4) key initiatives and overall business strategy; (5) our stakeholders; (6) how the directors’ own background, knowledge and skillsets can contribute to the Board's work and the Company’s goals; (7) the background, knowledge and skillsets of each of the other directors and key leaders of the Company; (8) how Board decisions are made; and (9) the Company’s formal governing policies and practices. The onboarding and orientation process involves several meetings with the CEO, the lead independent director, standing committee chairpersons, a Board mentor, key executives including the general counsel and other staff members. These meetings cover a broad array of topics including the strategic plan and planning process; the Company's vision values goals and culture; the Company's recent successes and challenges; charters of the Company, its principal subsidiaries and various committees; Board and executive compensation details and philosophies; recent CEO performance reviews; executive leadership and succession planning; organization charts; biographies; Board development and training. Copies of key Board documents are scheduled and provided in hard copy or by electronic access to each new member.
Board Leadership Structure
Our Board believes that it is in the best interests of the Company and its shareholders for the Board to retain discretion to determine whether to separate the roles of Chairman of the Board and CEO based upon varying circumstances, and the majority of our shareholders have supported this approach, voting against a proposal to require the separation of those roles at our 2019 annual shareholder meeting. The Board is currently chaired by Mr. Mason, our CEO, who is subject to re-appointment as Chairman of the Board each year by the Board. Our Principles of Corporate Governance provide that if the Chairman of the Board is an executive of the Company, the independent directors shall elect a Lead Independent Director.
The Company’s Bylaws and Principles of Corporate Governance provide a clear description of the role of the Lead Independent Director. The Lead Independent Director presides over all executive sessions of independent or non-management directors, and in the absence of the Chairman of the Board presides over shareholder meetings and Board meetings; serves as the liaison between the Chairman and the independent directors; meets with the Chairman prior to all Board meetings to review and discuss the agenda; and has the right to approve meeting agendas, meeting schedules and other information sent to the Board. The Lead Independent Director also serves as the primary point of contact (through the Corporate Secretary) for shareholders wishing to engage with the Board.
The Board maintains a Lead Independent Director to facilitate discussion, coordinate and reflect the views of the independent directors and, most importantly, to ensure that the Company’s governance practices are aligned in the best interests of all shareholders. Mr. Mitchell was appointed Lead Independent Director by the independent directors of the Company in 2023 and currently serves in that role. The Board reviews the appointment of our Lead Independent Director position each year.
The Board believes that this leadership structure provides balance and currently is in the best interests of the Company and its shareholders. The role given to the Lead Independent Director helps to ensure a strong, independent and active Board, while Mr. Mason serving as the Chairman of the Board enables the Company and the Board to continue to benefit from his skills and expertise, including his extensive knowledge of the Company and its industry and his experience successfully navigating the Company through both strong and challenging periods.
The following table illustrates how responsibilities are delegated between the CEO and the Lead Independent Director:
| | | | | | | | | | | | | | |
| Responsibility | | Chairman/Chief Executive Officer | | Lead Independent Director |
| | | | |
| Board Meeting | | • Authority to call full meetings of the Board • Presides over meetings of the full Board | | • Attends full meetings of the Board • Presides over meetings of independent directors and non-management directors • Briefs Chairman on issues arising from executive sessions of independent directors • Presides over meetings of the Board in the absence of the Chairman
•Prepares minutes from executive sessions of independent directors for any Board actions
|
| Agenda | | • Primary responsibility for shaping Board agendas, consulting with the Lead Independent Director | | • Collaborates with Chairman to set Board agenda and provide the Board with information • Approves agenda and meeting schedules to be sent to the Board |
| Board Communications | | • Communicates with all directors on key issues and concerns outside meetings of the Board | | • Facilitates discussion among independent directors on key issues and concerns outside meetings of the Board, including contributing to the oversight of the Chairman and management succession planning |
| Shareholder Communications | | • Primary spokesperson for the Company in communications to shareholders | | • Serves as liaison for shareholders who wish to communicate with the Board (such communications to be sent through the Corporate Secretary) |
Board Role in Risk Oversight
The Board, together with its committees and senior management, has oversight of our risk management framework and is responsible for helping to ensure that our risks are managed in a sound manner. The Board's principal responsibility in this area is to oversee an enterprise-wide approach to risk management and ensure that sufficient resources, with appropriate technical and managerial skills, are provided throughout the Company to identify, assess and facilitate processes and practices to address material risks. We believe that the current leadership structure enhances the Board's ability to fulfill this oversight responsibility, as the Chairman, in his role as CEO, is able to focus the Board’s attention on the key risks we face.
In addition, the Board has delegated oversight of certain categories of risk to the Audit Committee, the Enterprise Risk Management (“ERM”) Committee, the Compensation Committee and the N&G Committee. The Audit Committee reviews and discusses with management significant financial and non-financial risk exposures and the steps management has taken to monitor, control and report such exposures. The ERM Committee oversees and assesses the adequacy of the Company’s risk management framework, monitors compliance with the Board-approved risk appetite measures and other key risk measures and oversees management of key risks not overseen by other committees of the Board, including legal, compliance and operational risks, information technology, information security and cybersecurity risks. The Compensation Committee oversees management of risks relating to the Company’s compensation plans and programs. The N&G Committee oversees management of risks relating to the Company’s nominating and corporate governance functions. The Audit Committee, the ERM Committee, the Compensation Committee and the N&G Committee report to the Board as appropriate on matters that involve specific areas of risk that each committee oversees, and with the Board, each committee periodically discusses with management the Company’s policies with respect to risk assessment and risk management. The board of directors of our primary subsidiary, HomeStreet Bank, also oversees certain risks specific to HomeStreet Bank, including credit, liquidity, interest rate and price risk, through various committees of the HomeStreet Bank board of directors, including joint audit, ERM, Compensation and N&G committees as well as credit and finance committees.
ESG Oversight
At the Board level, the N&G Committee’s purpose, duties and responsibilities include oversight of our environmental, socialhuman capital management and governance (“ESG”)ESG programs, policies and practices. The HRCGN&G Committee’s oversight of our ESG programs, policies and practices includes oversight of any climate-related programs, policies and practices, unless delegated to another committee of
the Board. The N&G Committee’s specific duties and responsibilities in this regardwith respect to ESG include monitoring and evaluating the Company’s programs, policies and practices relating to ESG issues and making recommendations to the Board of Directors regarding the Company’s overall strategy with respect to ESG matters. In addition, in 2021, we have established an ESG Management Steering Committee comprised of senior management members and included ESG as part of our strategic planning process.including the CEO. The purpose of the ESG Management Steering Committee is to assist the HRCGN&G Committee in fulfilling its oversight responsibilities with respect to ESG matters.matters, which oversight responsibilities include oversight of climate-related matters, unless delegated to another committee of the Board. The Company published its inaugural ESG report to its website in April 2023 and we continue to examine the ESG topics that are most relevant to our business as we advance our ESG strategy.
Locations
We operate 60 full service bank branches in Washington, in Northern and Southern California, in the Portland, Oregon area and in Hawaii, as well as five primary stand-alone commercial lending centers located in Central Washington, Oregon, Southern California, Idaho and Utah.
Where You Can Obtain Additional Information
We file annual, quarterly, current and other reports with the Securities and Exchange Commission (the "SEC"). We make available free of charge on or through our website http://www.homestreet.com all of these reports (and all amendments thereto), as soon as reasonably practicable after we file these materials with the SEC. Please note that the contents of our website do not constitute a part of our reports, and those contents are not incorporated by reference into this Form 10-K or any of our other securities filings. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information that we file or furnish electronically with the SEC.
ITEM 1A RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Annual Report.
Risks Related to the COVID-19 Pandemic
Our customers may be negatively impacted by the COVID-19 pandemic, which may result in adverse impacts to our financial position and results of operations.
Since March 2020, the communities where we do business have been under varying degrees of restrictions on social gatherings and retail operations due to the COVID-19 global pandemic. These restrictions, combined with related changes in consumer behavior and significant increases in unemployment, have resulted in extreme financial hardship for certain industries, especially travel, energy, hotel, food and beverage service and retail. While some governmental programs have provided assistance to unemployed consumers and certain businesses that have been especially hard hit, these programs are of limited scope and duration, and the ultimate impact of those programs is not yet known.
It is not clear when the economic impacts of the pandemic will subside or what the overall effect will be on our customers. Some of our customers may be unable to meet their debt obligations to us in a timely manner, or at all, and we may continue to experience a heightened number of requests from customers for forbearances on loans, especially as government programs subside. Federal, state and local moratoriums on evictions for non-payment of rent during this time may also negatively impact the ability of some borrowers to make payments on loans made for multifamily housing. In addition, while current laws and regulatory guidance allow us to presume that certain borrowers are not experiencing financial difficulties at the time of a modification for purposes of determining if a loan is a troubled debt restructuring ("TDR") if it is in response to the COVID-19 pandemic, in the long run a meaningful number of the loans in our portfolio may ultimately need additional forbearance or significant modification and migrate to an adverse risk rating because of lingering impacts of an economic recession.
In 2020, we substantially increased our allowance for credit losses in response to the negative economic impacts of the COVID-19 pandemic to adjust the expected historic loss rates for current and forecasted conditions as some of the economic conditions created by the pandemic are not incorporated into the historical loss information. In 2021, due partially to an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recovered a significant portion of the 2020 increase. However, we cannot be sure that our allowance for credit losses will be adequate or that additional increases to the allowance for credit losses will not be needed in subsequent periods. The actual and full economic impact of the pandemic is still undetermined, and if our allowance is not adequate, future net charge-offs may be in excess of current expected losses, which would create the need for more provisioning and have a negative impact on our financial condition, results of operations and capital position.
Our business operations may be negatively impacted by the COVID-19 pandemic.
Most of our employees have been working from home during the pandemic and many will continue to do so as we move to a hybrid remote-work model. We face risks associated with having a significant portion of our employees continue working from home as we may have less oversight over certain internal controls and the confidentiality requirements of our compliance and contractual obligations may be more challenging to meet as confidential information is being accessed from a wider range of locations and there may be more opportunity for inadvertent disclosure or malicious interception. Many of our vendors are also allowing their workforce to work primarily from home, which may create similar issues if our confidential information is being accessed by employees of those vendors in connection with their performance of services for us. While we have not identified any significant concerns to date with our internal controls, compliance obligations or confidentiality requirements, the change in work environment, team dynamics and job responsibilities for us and our vendors could increase our risk of failure in these areas, which could have a negative impact on our financial reporting, compliance risk, operational risk and reputational risk.
Risks Related to Operations
We rely on third party purchasers to buy our loans in the secondary market, and changes to their policies and practices may significantly impact our financial results.
We originate a substantial portion of our single family mortgage loans for sale to third party investors, including government-sponsored enterprises ("GSE") such as Fannie Mae, Freddie Mac and Ginnie Mae. Changes in the types of loans purchased by
these GSEs or the program requirements for those entities could adversely impact our ability to sell certain of the loans we originate for sale, leaving us unable to find a buyer on similar terms. Similarly, changes in the fee structures by any of our third party loan purchasers, including the GSEs, may increase our costs of doing business, the cost of loans to our customers, and the cost of selling loans to third party loan purchasers, all of which could in turn decrease our margin and negatively impact our profitability. In addition, significant changes in the underwriting criteria of third party loan purchasers could increase our costs or decrease our ability to sell into the secondary markets. Any of these changes can have a negative impact on our liquidity, financial condition, results of operations and capital position.
We are bound by representations or warranties we make to third party purchasers of our loans or mortgage servicing rights ("MSRs") and may be liable for certain costs and damages if those representations are breached.
We make certain representations and warranties to third party purchasers of our loans, including GSEs, about the loans and the manner in which they were originated, including adherence to strict origination guidelines for loans originated for sale to GSEs. Our sale agreements generally require us to either repurchase loans if we have breached any of these representations or warranties, which may result in recording a loss and/or bearing any subsequent loss on the loan, or pay monetary penalties. We may not be able to recover our losses from a borrower or other third party in the event of such a breach of representation or warranty due to a lack of remedies or lack of financial resources of the borrower, and may be required to bear the full amount of the related loss. Similarly, we have sold significant amounts of our MSRs in recent years, and the agreements governing those sales also have representations and warranties relating to the documentation and collectability of those MSRs; a breach of those representations and warranties could also require us to either pay monetary damages or, in some cases, repurchase the defective MSRs.
We also originate, purchase, sell and service loans insured by the Federal Housing Administration (“FHA”) and U.S. Department of Housing and Urban Development (“HUD”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”), and certify that such loans have met their requirements and guidelines. We are subject to audits of our processes, procedures and documentation of such loans, and any violations of the guidelines can result in monetary penalties, which could be significant if there are systemic violations, as well as indemnification requirements or restrictions on participation in the program.
If we experience increased repurchase and indemnity demands on loans or MSRs that we have sold or that we sell from our portfolios in the future, or if we are assessed significant penalties for violations of origination guidelines, our liquidity, financial condition, results of operations and capital position may be adversely affected.
A portion of our revenue is derived from residential mortgage lending which is a market sector that experiences significant volatility.
Residential mortgage lending is subject to substantial volatility due to changes in interest rates, a significant lack of housing inventory in our principal markets, and other market forces beyond our control. Increases in interest rates may materially and adversely affect our future loan origination volume and margins. Decreases in the availability of housing inventory may reduce demand and adversely impact our future loan origination volume. Decreases in the value of the collateral securing our outstanding loans may increase rates of borrower default which would adversely affect our financial condition, results of operations and capital position.
Our capital management strategy may impact the value of our common stock and could negatively impact our ability to maintain a well-capitalized position.
We actively manage our capital levels with a goal of returning excess capital to shareholders, which we currently do through dividend and stock repurchase programs. While we have been able to sustain and even increase our dividend payments and reinstate stock repurchases during the pandemic, a materially negative change to our business, results of operations and capital position, could cause us to suspend those programs to preserve capital. In addition, our regulators could restrict our ability to pay dividends or repurchase our stock, which happened to certain financial institutions larger than us during the pandemic.
While the intent of our capital management strategy is to improve the long-term value of our stock, we cannot be assured that our stock repurchases will actually enhance long-term shareholder value. Repurchases may affect our stock price and increase its volatility in the short term While the existence of the program may increase the price and decrease liquidity in our stock in the short term, other market factors may cause the stock price of our common shares to fall below the price we paid for the repurchase of our common stock. As a result, shareholders may not see an increase in the value of their holdings.
While we historically have maintained capital ratios at a level higher than the regulatory minimums to be “well-capitalized”, our capital ratios in the future may decrease due to economic changes, utilization of capital to take advantage of growth or
investment opportunities, or the return of additional capital to our shareholders. In the event the quality of our assets or our economic position were to deteriorate significantly, lower capital ratios may require us to raise additional capital in the future in order to remain compliant with capital standards. We may not be able to raise such additional capital at the time when we need it, or on terms that are acceptable to us, especially if capital markets are especially constrained, if our financial performance weakens, or if we need to do so at a time when many other financial institutions are competing for capital from investors in response to changing economic conditions. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, results of operations and capital position. In addition, any capital raising alternatives could dilute the value of our outstanding common stock held by our existing shareholders and may adversely affect the market price of our common stock.
HomeStreet, Inc. primarily relies on dividends from the Bank, which may be limited by applicable laws and regulations.
HomeStreet, Inc. is a separate legal entity from the Bank, which is the primary source of funds available to HomeStreet Inc. to service its debt, pay dividends to shareholders, repurchase shares and otherwise satisfy its obligations. The availability of dividends from the Bank is limited by various statutes and regulations, capital rules regarding requirements to maintain a "well capitalized" ratio at the Bank, as well as by our policy of retaining a significant portion of our earnings to support the Bank's operations. For additional information on these restrictions, see "Item 1 Business" in this Annual Report. If the Bank cannot pay dividends to HomeStreet Inc., HomeStreet, Inc. may be limited in its ability to service its debt, fund its operations, repurchase shares and pay dividends to its shareholders.
Our business is geographically confined to certain metropolitan areas of the Western United States, and events and conditions that disproportionately affect those areas may pose a more pronounced risk for our business.
Although we presently have retail deposit branches in four states, with lending offices in these states and two others, a substantial majority of our revenues are derived from operations in the Puget Sound region of Washington, the Portland, Oregon metropolitan area, the San Francisco Bay Area, and the Los Angeles, Orange County, Riverside and San Diego metropolitan areas in Southern California. All of our markets are located in the Western United States. Each of our primary markets is subject to various types of natural disasters, including earthquakes, wildfires, volcanic eruptions, mudslides and floods, and many have experienced disproportionately significant economic volatility in the past, as well as more recent local political unrest and calls to action, including calls for rent disruption, when compared to other parts of the United States. Economic events, political unrest or natural disasters that affect the Western United States and our primary markets in that region may have an unusually pronounced impact on our business. Because our operations are not more geographically diversified, we may lack the ability to mitigate those impacts from operations in other regions of the United States.Cybersecurity Risk Management
The significant concentration of real estate secured loans inBoard oversees our portfolio has had a negative impact on our asset quality and profitability in the past and there can be no assurance that it will not have such impact in the future.
A substantial portion of our loans are secured by real property, including a growing portfolio of commercial real estate ("CRE") loans. Our real estate secured lending is generally sensitive to national, regional and local economic conditions, making loss levels difficult to predict. Declines in real estate sales and prices, significant increases in interest rates, unforeseen natural disasters and a decline in prevailing economic conditions may result in higher than expected loan delinquencies, foreclosures, problem loans, other real estate owned ("OREO"), net charge-offs and provisions for credit and OREO losses. If real estate market values decline significantly, as they did in the 2008 to 2011 recession, the collateral for our loans may provide less security and reduce our ability to recover the principal, interest and costs due on defaulted loans. Such declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more diversified, and we could face reduced liquidity, constraints on capital resources, increased obligations to investors to whom we sell mortgage loans, declining income on mortgage servicing fees and a related decrease in the value of MSRs, and declining values on certain securities we hold in our investment portfolio.
Deficiencies in our internal controls over financial reporting or enterprisecyber risk management framework may result in ineffective mitigationprogram through the ERM Committee which is tasked with oversight of risk issues, including cybersecurity and information security risks, and is comprised entirely of independent directors. Our Chief Information and Operations Officer and Chief Information Security Officer, who oversee our information security program and our vendor management program, have led the way to develop programs and policies designed to address and respond to security incidents and cyberattacks in order to protect and preserve the confidentiality, integrity and availability of information owned by, controlled by or an inability to identify and accurately report our financial results.
Our internal controls over financial reporting are intended to ensure we maintain accurate records, promote the accurate and timely reportingin possession of our financial information, maintain adequate control over our assets, and prevent and detect unauthorized acquisition, use or disposition of our assets. Effective internal and disclosure controls are necessary for us to provide reliable financial reports, effectively prevent fraud, and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results may be harmed. In addition to our internal controls, we use an enterprise risk management framework in an effort to achieve an appropriate balance between risk and return, with established processes and procedures intended to identify, measure, monitor, report, analyze and control our primary risks,
including liquidity risk, credit risk, price risk, interest rate risk, operational risk, legal and compliance risk, strategic risk and reputational risk. We also maintain a compliance program to identify, measure, assess and report on our adherence to applicable laws, policies and procedures.
While we assess and improve these controls and programs on an ongoing basis, there can be no assurance that our controls and programs will effectively mitigate all risk and limit losses in our business. In addition, as we make strategic shifts in our business, we implement new systems and processes. If our change management processes are not sound and adequate resources are not deployed to support these implementations and changes, we may experience additional internal control deficiencies that could expose the Company to operating losses or fail to appropriately anticipate or identify new risks related to such shifts in the business. Any failure to maintain effective controls or timely implement any necessary improvement ofand our internal and disclosure controls in the future could create losses, cause us to incur additional costs or fail to meet our reporting obligations. Failing to maintain an effective risk management framework or compliance program could also expose us to losses, adverse impacts to our financial position, results of operations and capital position, or regulatory criticism or restrictions.
We use a variety of estimates in our accounting processes which may prove to be imprecise and result in significant changes in valuation and inaccurate financial reporting.
We use a variety of estimates in our accounting policies and methods, including complex financial models designed to value certain of our assets and liabilities, including our allowance for credit losses. These models are complex and use specific judgment-based assumptions about the effect of matters that are inherently uncertain. Different assumptions in these models could result in significant changes in valuation, which in turn could affect earnings or result in significant changes in the recorded amount of assets and liabilities reported on the balance sheet. The assumptions used may be impacted by numerous factors, including economic conditions, consumer behavior, changes in interest rates and changes in collateral values. A failure to make appropriate assumptions in these models could have a negative impact on our liquidity, result of operations and capital position.
We are subject to extensive and complex regulations which are costly to comply with and may subject us to significant penalties for noncompliance.
Our operations are subject to extensive regulation by federal, state and local governmental authorities,vendors, including the Federal Deposit Insurance Corporation ("FDIC"), the Washington Department of Financial InstitutionsCompany's proprietary, sensitive and the Federal Reserve, and to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Many of these laws are complex, especially those governing fair lending, predatory or unfair or deceptive practices, and the complexity of those rules creates additional potential liability for us because noncompliance could result in significant regulatory action, including restrictions on operations and fines, and could lead to class action lawsuits from shareholders, consumers and employees. In addition, various states have their own laws and regulations, especially California, which has heightened data privacy, employment law and consumer protection regulations, and the cost of complying with state rules that differ from federal rules can significantly increase compliance costs.
Our consumer business, including our mortgage and other consumer lending and non-lending businesses, is also governed by policies enacted or regulations adopted by the Consumer Financial Protection Bureau ("CFPB") which under the Dodd-Frank Act has broad rulemaking authority over consumer financial products and services. Our regulators, including the FDIC, use interpretations from the CFPB and relevant statutory citations in certain parts of their assessments of our regulatory compliance, including the Real Estate Settlement Procedures Act, the Final Integrated Disclosure Rule, known as TRID, and the Home Mortgage Disclosure Act, adding to the complexity of our regulatory requirements, increasing our data collection requirements and increasing our costs of compliance. The laws, rules and regulations to which we are subject evolve and change frequently, including changes that come from judicial or administrative agency interpretations of laws and regulations outside of the legislative process that may be more difficult to anticipate, and changes to our regulatory environment are often driven by shifts of political power in the federal government. In addition, we are subject to various examinations by our regulators during the course of the year. Regulatory authorities who conduct these examinations have extensive discretion in their supervisory and enforcement activities, including the authority to restrict our operations and certain corporate actions. Administrative and judicial interpretations of the rules that apply to our business may change the way such rules are applied, which also increases our compliance risk if the interpretation differs from our understanding or prior practice. Moreover, an increasing amount of the regulatory authority that pertains to financial institutions is in the form of informal "guidance" such as handbooks, guidelines, examination manuals, field interpretations by regulators or similar provisions that could affect our business or require changes in our practices in the future even if they are not formally adopted as laws or regulations. Any such changes could adversely affect our cost of doing business and our profitability.
In addition, changes in regulation of our industry have the potential to create higher costs of compliance, including short-term costs to meet new compliance standards, limit our ability to pursue business opportunities and increase our exposure to potential fines, penalties and litigation.
Significant legal claims or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and have a material adverse effect on our business and results of operations.
We are from time to time subject to legal claims or regulatory actions related to our operations. These legal claims or regulatory actions could include supervisory or enforcement actions by our regulators, criminal proceedings by prosecutorial authorities, claims by customers or by former and current employees, including class, collective and representative actions, or environmental lawsuits stemming from property that we may hold as OREO following a foreclosure action in the course of our business. Such actions are a substantial management distraction and could involve large monetary claims, including civil money penalties or fines imposed by government authorities and significant defense costs.
To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil monetary penalties or fines imposed by government authorities and may not cover all other claims that might be brought against us, including certain wage and hour class, collective and representative actions brought by customers, employees or former employees. In addition, such insurance coverage may not continue to be available to us at a reasonable cost or at all. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, financial condition, results of operations and capital position. Substantial legal liability or significant regulatory action against us could cause significant reputational harm to us and/or could have a material adverse impact on our business, prospects, financial condition, results of operations and capital position.
If we are not able to retain or attract key employees, or if we were to suffer the loss of a significant number of employees, we could experience a disruption in our business.
As the Company has focused on efficiency in recent years, we have significantly reduced our employee headcount. However, hiring remains competitive in certain areas of our business. We rely on a number of key employees who are highly sought after in the industry. If a key employee or a substantial number of employees depart or become unable to perform their duties, it may negatively impact our ability to conduct business as usual. We might then have to divert resources from other areas of our operations, which could create additional stress for other employees, including those in key positions. The loss of qualified and key personnel, or an inability to continue to attract, retain and motivate key personnel could adversely affect our business and consequently impact our financial condition and results of operations.
Risk Related to Market Factors
Changes to monetary policy by the Federal Reserve could adversely impact our results of operations.
The Federal Reserve is responsible for regulating the supply of money in the United States, including open market operations used to stabilize prices in times of economic stress, as well as setting monetary policies. These activities strongly influence our rate of return on certain investments, our hedge effectiveness for mortgage servicing and our mortgage origination pipeline, as well as our costs of funds for lending and investing, all of which may adversely impact our liquidity, results of operations, financial condition and capital position.
Changes in market factors beyond our control, including fluctuation in interest rates, may adversely impact our profitability and financial results.
Market factors outside of our control, including changing interest rate environments, regulatory decisions, increased competition, changes in the yield curve, consumer confidence, rates of unemployment and other forces of market volatility, can have a significant impact on our results of operations, financial condition and capital positions.
Our earnings are dependent on the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in interest rates impact the rates earned on loans and investment securities and the rates paid on deposits and borrowings and may negatively impact our ability to attract deposits, make loans, and achieve satisfactory interest rate spreads. In addition, changes to market interest rates may impact the demand for loans, levels of deposits and investments and the credit quality of existing loans. These results may adversely impact our liquidity, financial condition, results of operations and capital position.
The rate of prepayment of loans, which is impacted by changes in interest rates and general economic conditions, among other things, impacts the value of our MSRs. We actively hedge this risk with financial derivative instruments to mitigate losses, but changes in interest rates can be difficult to predict and changes in our hedging instruments may not correlate with changes in the values of our MSRs and LHFS.
In addition to overall fluctuations in interest rates, asymmetrical changes in interest rates, for example a greater increase in short term rates than in long term rates, could adversely impact our net interest income because our liabilities tend to be more sensitive to short term rates while our assets tend to be more sensitive to long term rates. In addition, it may take longer for our assets to reprice to adjust to a new rate environment because fixed rate loans do not fluctuate with interest rate changes and adjustable rate loans often have a specified period of reset. As a result, a flattening or an inversion of the yield curve is likely to have a negative impact on our net interest income.
Our securities portfolio also includes securities whose value is sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of shareholders' equity until realized upon sale. Interest rate fluctuations may impact the value of these securities and as a result, shareholders' equity, and may cause material fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a sale could adversely affect our operating results, financial condition and capital position.
The financial services industry is highly competitive, and as a result, our business, results of operations, financial condition and capital position may be adversely affected,
We face pricing competition for loans and deposits, both in pricing and products, as well as in customer service and convenience. Our most direct competition comes from other banks, credit unions, mortgage banking companies and finance companies, and more recently has also come from companies that rely heavily on technology to provide financial services, are moving to provide cryptocurrency products and offerings, and often target a younger customer demographic. The significant competition in attracting and retaining deposits and making loans, as well as in providing other financial services, throughout our market area may impact future earnings and growth. Our success depends, in part, on the ability to adapt products and services to evolving industry standards and customer preferences and trends and provide consistent customer service while keeping costs in line. We sometimes experience increasing pressure to provide products and services at lower prices, which could reduce net interest income and noninterest income from fee-based products and services. New technology-driven products and services are often introduced and adopted, including innovative ways that customers can make payments, access products and manage accounts. We could be required to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services or those new products may not achieve market acceptance. In addition, advances in technology such as telephone, text and online banking, e-commerce and self-service automatic teller machines and other equipment, as well as changing customer preferences to access our products and services through digital channels, could decrease the value of our branch network and other assets. As a result of these competitive pressures, our business, financial condition, results of operations and capital position may be adversely affected.
Uncertainty relating to the phasing out of London Interbank Offered Rate ("LIBOR") may adversely affect our business, financial condition and results of operations.
LIBOR is scheduled to be discontinued in June 2023. While we no longer originate loans indexed to LIBOR, trailing risk still exists for those loans that were originated prior to December 31, 2021. We will need to transition LIBOR-based loans originated prior to December 31, 2021 to a new index prior to June 2023. Our attempt to educate borrowers regarding the need to transition from LIBOR, including borrowers with loans that do not have adequate fallback language, may fail if borrowers do not comprehend the need for the change, are unresponsive to our efforts to communicate or claim a lack of transparency in the transition process. In addition, LIBOR-based rates, at the time of transition, may be lower than the alternative indices, resulting in an increase in rates to the borrower. Once LIBOR rates are no longer available, we may be subject to disputes or litigation with customers and creditors over the appropriateness or the comparability to LIBOR of the alternative indices, which could have an adverse effect on our financial condition, results of operations and capital position.
The implementation of alternative indices may require us to significantly enhance, modify, upgrade, convert or outsource our software, IT and other tools, systems, controls, operational processes, procedures and risk or valuation models associated with the transition to a new reference rate. This transition could be costly, require significant resources and increase the risk of error in implementation. In addition, the use of an alternative index may result in lower interest income if the index rate is lower than what a comparable LIBOR rate would have been. Each of these factors could have an adverse effect on our results of operations, financial condition and capital position.
Uncertainties still exist regarding our other financial instruments. For loans serviced for any of the agencies, FNMA, FHMLC, and GNMA, for loans originated prior to September 30, 2020, we are uncertain of the agencies plan to transition away from LIBOR. The ultimate selection of the alternative index may result in significant implementation costs for our portfolio of loans serviced for others and higher borrowing costs on our trust preferred debt.
Our outstanding debt and other financial instruments may be adversely affected by the transition from LIBOR as a reference rate.
We have outstanding LIBOR-based trust preferred debt securities, and the trustee has not yet provided any guidance regarding the transition from LIBOR to an alternative index. It is unclear whether the trustee will select a widely used and recognized reliable market benchmark as an acceptable alternative to and replacement for LIBOR. Uncertainty as to the trustee’s anticipated alternative index selection could adversely affect the value of and return on our debt and other financial instruments. The trustee’s selection of the alternative index may result in higher borrowing costs on our LIBOR-based trust preferred debt, as well as significant implementation costs for our portfolio of loans serviced for others. Until the trustee selects an alternative index, any uncertainty regarding the continued use and reliability of LIBOR could have a negative impact on our debt and other financial instruments tied to LIBOR rates.
The implementation and use of the Secured Overnight Financing Rate (“SOFR”) as an index replacement for LIBOR may adversely impact our net interest income and create litigation exposure.
In the U.S., the Alternative Rates Reference Committee, convened in 2014 by a group of market participants to help ensure a successful transition away from LIBOR, identified SOFR has its preferred alternative rate. SOFR is a single overnight rate, while LIBOR includes rates of different tenors, and SOFR is considered a credit risk-free rate, while LIBOR incorporates an evaluation of credit risk. In 2020, we transitioned to SOFR the majority of our products indexed to LIBOR.
Implementation of SOFR is intended to have a minimal economic effect on borrowers under LIBOR-indexed instruments. Margins or spreads on new SOFR-indexed products may result in lower rates because SOFR is typically likely to be lower when compared to LIBOR, resulting in reduced spreads and a lower net interest income. However, it is impossible to predict whether the SOFR index could be more volatile than LIBOR, which could thereby increase loan rates and borrowing costs on borrowing facilities previously indexed to LIBOR. Borrowers may not fully understand SOFR as an index replacement or may be adversely impacted by implementation of SOFR. The transition to SOFR, or a transition to any other index that becomes widely accepted in the marketplace, could also result in borrower confusion and additional operational, compliance, systems and other related transition costs. This transition may also result in our customers challenging the determination of their interest payments, entering into fewer transactions or postponing their financing needs, and we may be subject to disputes or litigation with borrowers over the appropriateness or comparability of SOFR or other selected indices to LIBOR. These potential outcomes could have an adverse effect on our financial condition, results of operations and capital position.
Further, the uncertainty regarding the transition from LIBOR to SOFR or other benchmark rates could adversely affect floating-rate obligations, deposits, loans, derivatives and other financial instruments, including the rates we pay on our subordinated debentures and trust preferred securities, which could, in turn, adversely affect our financial condition, results of operation and capital position.
To support our growth, we may need to rely on funding sources in addition to growth in deposits and such funding sources may not be adequate or may be more costly.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to deposit growth and repayments and maturities of loans and investments, including Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased, brokered certificates of deposit and issuance of equity or debt securities. While we continue to have adequate liquidity even in the face of economic uncertainties, changes in global markets and customer demand, adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources and could make our existing funds more volatile. Our financial flexibility may be materially constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. When interest rates change, the cost of our funding may change at a different rate than our interest income, which may have a negative impact on our net interest income and, in turn, our results of operations and capital position. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our results of
operations and capital position would be adversely affected. Further, the volatility inherent in some of these funding sources, particularly brokered deposits, may increase our exposure to liquidity risk.
Risks Related to Information Technology
HomeStreet’s operational systems and networks, and those of our third-party vendors, have been, and will continue to be, subject to continually evolving cybersecurity risks that could result in the theft, loss, misuse or disclosure of confidential client or customer information or otherwise disrupt or adversely affect our business.
As a financial institution, we are susceptible to fraudulent activity, operational and informational security breaches and cybersecurity incidents that may be committed against us or our customers, employees, third-party vendors and others, which may result in financial losses or increased costs, disclosure or misuse of our information or customer information, misappropriation of assets, data privacy breaches, litigation or reputational damage. Related risks for financial institutions have increased in recent years in part because of proliferation and use of new and existing technologies to conduct financial transactions and transmit data, as well as the increased sophistication and unlawful or clandestine activities of organized crime, state-sponsored and other hackers, terrorists, activists, and other malicious external parties to engage in fraudulent activity such as phishing or check, electronic or wire fraud, unauthorized access to our controls and systems, denial or degradation of service attacks, malware and other dishonest acts. Within the financial services industry, the commercial banking sector has generally experienced, and will continue to experience, increased electronic fraudulent activity, security breaches and cybersecurity-related incidents. The nature of our industry sector exposes us to these risks because our business and operations include the protection and storage of confidential and proprietary corporate and personal information, including sensitive financial and other personal data, and any breach thereof could resultin identity theft, account or credit card fraud or other fraudulent activity that could involve their accounts and business with us.The risk to our organization may be further elevated over the near term because of recent geopolitical events in Eastern Europe, which may result in increased attacks against U.S. critical infrastructure, including financial institutions.
Our computer systems, software and networks are subject to ongoing cyber incidents such as unauthorized access; loss or destruction of data (including confidential client information); account takeovers; unavailability of service; computer viruses or other malicious code; cyber-attacks; and other events. While we have experienced various forms of these cyber incidents in the past, we have not been materially impacted by them. There can be no assurance that cyber incidents will not occur again, and they could occur more frequently and on a more significant scale.
Our business and operations rely on the secure processing, transmission, protection and storage of confidential, private and personal information by our computer operation systems and networks, as well as our online banking or reporting systems used by customers to effect certain financial transactions, all of which are either managed directly by us or through our third-party data processing vendors. The secure maintenance and transmission of confidential information and the executioninformation of transactions through our systems,its customers, employees and affiliates. These programs and policies are critical to protecting usreviewed and our customers against fraudupdated on a regular basis, and security breaches and to maintain customer confidence.To access our products and services, our customers may use personal computers, smartphones, tablet PCs, and other mobile devices that function beyond our control systems. Although we believe we have invested in, and plan to continue investing in, maintaining and routinely testing adequate operational and informational security procedures and controls, we rely heavily on our third-party vendors, technologies, systems, networks and our customers' devices, all of which may become the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, theft or destruction of our confidential, proprietary and other information or that of our customers, or that could disrupt our operations or those of our customers or third parties.Even though we have taken those actions, we may fail to anticipate or sufficiently mitigate security breaches, or we may experience data privacy breaches, that could result in losses to us or our customers, damage to our reputation, incurrence of significant costs, business disruption, our inability to grow our business and exposure to regulatory scrutiny or penalties, litigation and potential financial liability, any of which could adversely affect our business, financial condition, results of operations or capital position.
Our computer systems could be vulnerable to unforeseen problems other than cybersecurity related incidents or other data security breaches, including the potential for infrastructure damage to our systems or the systems of our vendors from fire, power loss, telecommunications failure, physical break-ins, theft, natural disasters or similar catastrophic events. Any damage or failure that causes interruptions in operations may compromise our ability to perform critical functions in a timely manner (or may give rise to perceptionsimplementation of such compromise)programs and could increasepolicies is overseen by those officers along with our costs of doing business, or have a material adverse effect onInformation Security Program Office. Additional information about our results of operations results as well as our reputation and customer or vendor relationships.
In addition, some of the technology we use in our regulatory compliance, including our mortgage loan origination technology, as well as other critical business activities such as core systems processing, essential web hosting and deposit and processing services, as well as security solutions, is provided by third party vendors. If those providers fail to update their systems or
services in a timely manner to reflect new or changing regulations, or if our personnel operate these systems in a non-compliant manner, our ability to meet regulatory requirements maycybersecurity program can be impacted and may expose us to heightened regulatory scrutiny and the potential for monetary penalties. These vendors could also be sources of operational and informational security risk to us, including from interruptions or failures of their own systems, cybersecurity or ransomware attacks, capacity constraints or failures of their own internal controls. To date, we are not aware of any system breaches at any of our third party vendors or service providers that has also breached the integrity of our confidential customer data. However, such third parties may also be targets of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers, ransomware attacks or information security breaches that could compromise the confidential or proprietary information of HomeStreet and our customers.
The failure to protect our customers' confidential information, data and privacy could adversely affect our business.
We are subject to federal and state privacy regulations and confidentiality obligations, including the California Consumer Privacy Act of 2018 and the California Privacy Rights Act of 2020, that, among other things restrict the use and dissemination of, and access to, certain information that we produce, store or maintain in the course of our business and establishes a new state agency to enforce these rules. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors and customers. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information, and in some instances may impose indemnity obligations on us relating to unlawful or unauthorized disclosure of any such information.
The continued development and enhancement of our information security controls, processes and practices designed to protect customer information, our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for our management as we increase our online and mobile banking offerings. As cyber threats continue to evolve, including supply chain risks, our costs to combat the cybersecurity threat may also increase. Nonetheless, our measures may be insufficient to prevent all physical and electronic break-ins, denial of service and other cyber-attacks or security breaches.
If we do not properly comply with privacy regulations and contractual obligations that require us to protect confidential information, or if we experience a security breach or network compromise, we could face regulatory sanctions, penalties or fines, increased compliance costs, remedial costs such as providing credit monitoring or other services to affected customers, litigation and damage to our reputation, which in turn could result in decreased revenues and loss of customers, any or all of which would have a material adverse effect on our business, financial condition, results of operations and capital position.
We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to provide products and services using technology that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as Internet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements. However, we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.
Risk Related to our $65 million senior notes due 2026, our $62 million of junior subordinated deferrable interest debentures due in 2035, 2036 and 2037 and our $100 million subordinated notes due 2032 (collectively the “HomeStreet Notes”).
Payments on the HomeStreet Notes will depend on receipt of dividends and distributions from our subsidiaries.
We are a bank holding company and we conduct substantially all of our operations through subsidiaries, including the Bank. We depend on dividends, distributions and other payments from our subsidiaries to meet our obligations, including to fund payments on the HomeStreet Notes.
Federal and state banking regulations limit dividends from our bank subsidiary to us. Generally, banks are prohibited from paying dividends when doing so would cause them to fall below regulatory minimum capital levels. In addition, under Washington law, the board of directors of the Bank generally may not declare a cash dividend on its capital stock in an amount greater than its retained earnings without the approval of the Washington State Department of Financial Institutions, Division of Banks ("WDFI"). We also have a policy of retaining a significant portion of our earnings to support the Bank’s operations.
In addition, federal bank regulatory agencies have the authority to prohibit the Bank from engaging in unsafe or unsound practices in conducting its business. The payment of dividends or other transfers of funds to us, depending on the financial condition of the Bank, could be deemed an unsafe or unsound practice.
Accordingly, we can provide no assurance that we will receive dividends or other distributions from our bank subsidiary and our other subsidiaries in an amount sufficient to pay interest on or principal of the HomeStreet Notes.
Regulatory guidelines may restrict our ability to pay the principal of, and accrued and unpaid interest on, the Notes.
As a bank holding company, our ability to pay the principal of, and interest on, the Notes is subject to the rules and guidelines of the Federal Reserve regarding capital adequacy. We intend to treat the Notes as “Tier 2 capital” under these rules and guidelines. The Federal Reserve guidelines generally require us to review the effects of the cash payment of Tier 2 capital instruments, such as the Notes, on our overall financial condition. The guidelines also require that we review our net income for the current and past four quarters, and the amounts we have paid on Tier 2 capital instruments for those periods, as well as our projected rate of earnings retention. Moreover, pursuant to federal law and Federal Reserve regulations, as a bank holding company, we are required to act as a source of financial and managerial strength to the Bank and commit resources to its support, including, without limitation, the guarantee of its capital plans if it is undercapitalized. Such support may be required at times when we may not otherwise be inclined or able to provide it. As a result of the foregoing, we may be unable to pay accrued interest on the Notes on one or more of the scheduled interest payment dates, or at any other time, or the principal of the Notes at the maturity of the Notes.
If we were to be the subject of a bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code, then the bankruptcy trustee would be deemed to have assumed, and would be required to cure, immediately any deficit under any commitment we have to any of the federal banking agencies to maintain the capital of the Bank, and any other insured depository institution for which we have such a responsibility, and any claim for breach of such obligation would generally have priority over most other unsecured claims.
ITEM 1BUNRESOLVED STAFF COMMENTS
None.
ITEM 2PROPERTIES
We lease principal offices, which are located in downtown Seattle at 601 Union Street, Suite 2000, Seattle, WA 98101. This lease provides sufficient space to conduct the management of our business. The Company conducts its Commercial and Consumer Banking activities in locations in Washington, California, Oregon, Hawaii, Idaho, and Utah. As of December 31, 2021, we operated in five primary commercial lending centers, 60 retail deposit branches, and one insurance office. As of such date, we also operated three facilities for the purpose of administrative and other functions in addition to the principal offices: a call center and operations support facility located in Federal Way, Washington; a loan fulfillment center in Lynnwood, Washington and an operations support center in Spokane, Washington. Of these properties, we own six of the retail deposit branches, the call center and operations support facility in Federal Way, and we own 50% of a retail branch through a joint venture. All facilities are in a good state of repair and appropriately designed for use as banking or administrative office facilities.
ITEM 3LEGAL PROCEEDINGS
Because the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with various state and federal lending laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment matters. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated financial position, results of operation or liquidity, or for which there would be a reasonable possibility of such a loss based on information known at this time.
ITEM 4MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol "HMST."
As of March 1, 2022, there were 2,258 shareholders of record of our common stock.
Dividend Policy
In January 2020, HomeStreet's Board of Directors approved a dividend policy that contemplates the payment of quarterly cash dividends on our common stock when, if and in an amount declared by the Board after taking into consideration, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth. The payment of a dividend and the dividend rate to be paid will be reassessed each quarter by the Board of Directors in accordance with the dividend policy. Our ability to pay dividends to shareholders is dependent on many factors, including the Bank's ability to pay dividends to the Company. Therefore, we cannot give assurance that we will be able to continue to pay a regular dividend in any future period.
Sales of Unregistered Securities
There were no sales of unregistered securities in the fourth quarter of 2021.
Purchases of Equity Securities by the Issuer
Shares repurchased pursuant to the common equity repurchase program during the three months ended December 31, 2021, were as follows.
| | | | | | | | | | | | | | | | | | | | |
| (in thousands, expect share and per share information) | | Total shares of common stock purchased | | Average price paid per share of common stock | | Dollar value of remaining authorized for repurchase (1) |
| | | | | | |
| October | | — | | | $ | — | | | $ | 20,000 | |
| November | | 374,320 | | | 51.17 | | | 847 | |
| December | | — | | | — | | | 847 | |
| Total | | 374,320 | | | $ | 51.17 | | | |
| | | | | | |
(1) Stock repurchases in November were made pursuant to a Board authorized share repurchase program approved on October 28, 2021 pursuant to which the Company could purchase up to $20 million of its issued and outstanding common stock, no par value, at prevailing market rates at the time of such purchase. On January 27, 2022, the Board authorized an addition to our share repurchase program of $75 million while eliminating the $0.8 million outstanding under the previous plan.
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of HomeStreet, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison from December 31, 2016 through December 31, 2021 of the cumulative total return for our common stock, the Russell 2000 Index (RUT) and the KBW Regional Banking Index ("KRX"). The graph assumes that $100 was invested at the market close on December 31, 2016 in the common stock of HomeStreet, Inc., the Russell 2000 Index, the KBW Regional Banking Index and data for HomeStreet, Inc., the Russell 2000 Index and the KBW Regional Banking Index assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
ITEM 6 Reserved.
ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of results of operations and financial condition ("MD&A") is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated Company. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Part II, Item 8 of Part II of this Annual Report on Form 10-K. A comparison of the financial results for the year ended December 31, 2020 to the year ended December 31, 2019, is included in Part II, Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations"found in our Annual Report on Form 10-K for the year ended December 31, 2020.
Management's Overview of 2021 Financial Performance
Recent Developments
COVID-19 Pandemic
During 2021, the economy continued to generally improve with increased vaccination rates and business activity. However, there still remains much uncertainty around containment of the pandemic and the trajectory of the broader economic recovery, particularly in light of the spread of the Omicron variant that has caused the number of cases to increase in the United States. We cannot predict at this time the scope and duration of the pandemic, which will depend2023 filed on a variety of factors, including but not limited to, the extent and spread of the Omicron variant and other variants of the virus; the availability, adoption and efficacy of vaccines and vaccine booster shots, as well as government and other actions to mitigate the spread of COVID-19, such as stay at home orders, vaccination and mask mandates, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures. The economic, market and business conditions impacted by COVID-19 may be slow to recover or may worsen if the pandemic continues for a prolonged period of time. Even if the pandemic subsides, there may be additional variants of the virus or a resurgence of the pandemic, as we have seen domestically and internationally. We may be subject to heightened business, operational, market, credit and other risks related to the COVID-19 pandemic environment, which may have an adverse effect on our business, financial condition and results of operations. (See “Risk Factors” under Part I, Item 1A of this Annual Report).
Economic and Market Conditions
Inflationary pressures can adversely impact our operations by increasing our costs, including compensation costs which we expect to be higher in 2022. Increases in market interest rates, resulting in part from increases in the Federal Reserve target federal funds rate, can impact our operations by increasing the yields we receive on our loans and investments and increasing the rates by pay on our deposits and borrowings. We attempt to maintain an interest-neutral balance sheet position so that our results are not as impacted by changes in interest rates.
Other Items
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes initially will accrue at a rate equal to 3.50% per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering expenses. The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other general corporate purposes, including support for growth of its assets.
On January 27, 2022, the Board of Directors approved a $75 million expansion of the share repurchase program, subject to the approval or nonobjection of our regulators and a dividend of $0.35 per common share. The dividend is payable on February 23, 2022 to shareholders of record at the close of business on February 9, 2022.
As part of our capital management strategy, in 2021, we repurchased a total of 1,873,294 shares of our common stock at an average price of $44.92 per share, representing 8.6% of the shares outstanding at December 31, 2020.
Critical Accounting Policies and Estimateson Risk Management
The following discussionmanagement of the Company and analysis of financial conditionthe Compensation Committee have assessed the risks associated with our compensation policies and practices for all employees, including non-executive officers. Based on the results of operationsthis assessment, we do not believe that its compensation policies and practices for any employees, including non- executive officers, create excessive risks or risks that are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require usreasonably likely 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 valueCompany.
Board Meetings and Committees
During the year ended December 31, 2023, the Board held 19 meetings. Each of assetsour directors attended or participated in 75% or more of the aggregate of the total number of meetings of the Board and liabilitiesthe total number of meetings held by all committees of the Board on which that director served during the past fiscal year.
The Board has five standing committees: an Executive Committee, an Audit Committee, an ERM Committee, a Compensation Committee and a Nominating & Governance Committee.
Committee Memberships of Directors of HomeStreet, Inc.
The following table indicates the current membership of each committee.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Director | | Executive Committee | | Audit Committee | | Nominating and Governance Committee | | Compensation Committee | | ERM Committee |
| | | | | | | | | | |
| Mark K. Mason, Chairman | | Chair | | | | | | | | |
| Scott M. Boggs | | ü | | ü | | | | | | ü |
| Sandra A. Cavanaugh | | ü | | ü | | ü | | Chair | | ü |
| Jeffrey D. Green | | | | Chair | | ü | | | | |
| Joanne R. Harrell | | | | | | Chair | | ü | | ü |
| James R. Mitchell, Jr. | | | | ü | | ü | | ü | | |
| Nancy D. Pellegrino | | | | | | ü | | ü | | Chair |
| S. Craig Tompkins | | | | | | ü | | ü | | ü |
Executive Committee
The Executive Committee of the Board is composed of at least three members of the Board, a majority of whom are required to be and are independent directors as determined by the Board. The Chairman of the Board serves as the Chair of the Executive Committee. The Executive Committee is delegated authority to act on our resultsbehalf 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 aboutthe Board on certain matters that are inherently uncertain and becausenot otherwise delegated to another committee of the likelihoodBoard in between regularly scheduled Board meetings. The Executive Committee is not authorized to take any action that materially different amounts wouldcannot be reporteddelegated by the Board under different conditionsWashington law and is also expressly not authorized to adopt any agreement for merger or using different assumptions. These policies relateconsolidation, recommend to shareholders the sale, lease or exchange of all or substantially all of the Company's assets, recommend a dissolution of the Company (or the revocation of a dissolution) to the allowance for credit losses ("ACL")shareholders, amend the Bylaws, elect officers, fill vacancies on the Board, declare a dividend, or authorize the issuance of stock (other than pursuant to specific delegation from the Board where the Board has already approved the issuance and the valuationExecutive Committee is approving certain details of residential mortgage servicing rights ("MSR").the issuance), all of which are expressly reserved to the full Board. The Executive Committee did not meet during the year ended December 31, 2023.
Audit Committee
Our ACLAudit Committee is established through a provision for credit losses charged to expensecomposed solely of independent directors as required by Nasdaq corporate governance standards, and may be reduced by a recapture of previously established loss reserves, which are also reflected in the income statement. Loans are charged-off against the ACL when management believes that collectabilityeach member of the principal is unlikely.Audit Committee meets the independence requirements set forth in all applicable Nasdaq corporate governance standards, including independence requirements for audit committee members, and Rule 10A-3 under the Exchange Act. The CECL model requires the ACL to cover estimated credit losses expected over the life ofBoard has determined that both Mr. Boggs and Mr. Green are qualified as an exposure. This evaluation takes into consideration such factors as current economic projections, projected payment estimates, changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and certain other factors that may affect the borrower’s ability to pay. While we use the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant changes in economic or other conditions that can affect the collectability of loans in our loan portfolio.“audit committee financial expert.”
MSRs are recognized as separate assets when servicing rights are acquired throughOur Board has adopted a written Audit Committee charter that meets the sale of loans or purchased. For sales of mortgage loans, the fair valuerequirements of the MSR is estimatedapplicable Exchange Act rules and capitalized. Purchased MSRs are capitalized at the cost to acquire. Initial and subsequent fair value measurements are determined using a discounted cash flow model. To determineapplicable Nasdaq corporate governance standards. A copy of this charter can be found on our investor relations website: http://ir.homestreet.com. Among other things, the fair valueAudit Committee charter requires the Audit Committee to:
•oversee the financial reporting process on behalf of the MSR,Board, review and discuss the present value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptionsaudited financial statements, including significant financial reporting judgments, with management and the MSR fair valueCompany’s auditors and report the results of its activities to the Board;
•be responsible for the appointment, retention, compensation, oversight, evaluation and termination of our auditors and review the engagement and independence of our auditors;
•review and approve non-audit services of our independent registered public accounting firm;
•review the adequacy of our internal accounting controls and financial reporting processes;
•approve and monitor our internal audit plans and policies;
•annually review the performance compensation and independence of our Chief Audit Officer; and
•annually evaluate the performance of the Audit Committee and assess the adequacy of the Audit Committee charter.
The Audit Committee meets jointly with the Audit Committee of HomeStreet Bank. The Audit Committee held eight meetings during the year ended December 31, 2023.
Audit Committee Report
As more fully described in the Audit Committee Charter, the Audit Committee, which consists solely of directors who satisfy applicable independence requirements of Nasdaq and SEC rules, is responsible for overseeing the integrity of the Company’s financial reporting process, financial statements and internal accounting controls.
The Audit Committee is also directly responsible for the appointment, compensation and oversight of the independent registered public accounting firm to perform quarterly reviews and an annual audit of the Company’s financial statements. Crowe LLP served as the Company’s independent registered public accounting firm for 2023 and conducted an audit of the Company’s consolidated financial statements for fiscal year 2023.
In fulfilling its responsibilities, the Audit Committee has:
•Reviewed and discussed the adequacy and effectiveness of the Company’s internal controls over financial reporting with management and Crowe;
•Reviewed and discussed the Company’s critical accounting policies, practices, and estimates arewith management and Crowe;
•Reviewed and discussed the Company’s audited financial statements with management and Crowe;
•Discussed with Crowe matters required by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC;
•Received and reviewed the written disclosures and the letter from Crowe required by applicable requirements of the PCAOB regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with Crowe the independent accountant’s independence; and
•Received and reviewed written communications from Crowe regarding their internal quality control procedures including the results of internal and peer reviews and PCAOB inspections.
Based on its review and discussions, the Audit Committee recommended to the full Board that the audited consolidated financial statements for the year ended December 31, 2023 be included in the Company’s 2023 Annual Report on Form 10-K filed with the SEC.
Submitted by the Audit Committee of the Board of Directors of HomeStreet, Inc.
Jeffrey D. Green, Chair
Scott M. Boggs
Sandra A. Cavanaugh
James R. Mitchell, Jr.
Enterprise Risk Management Committee
The membership of the ERM Committee is limited to persons who meet the independence standards established by Nasdaq corporate governance rules and is currently comprised solely of independent directors as defined by such rules. The ERM Committee of the Company meets jointly with the ERM Committee of HomeStreet Bank, and together they oversee and assess the adequacy of the Company’s tolerance and management of key enterprise-wide risks, including credit, interest rate, liquidity, price, operational, compliance/legal, strategic and reputational risks. The ERM Committee is also comparedresponsible for monitoring the Company’s risk profile and exposure to observable tradesvarious types of similar portfoliosrisks, including cybersecurity and information security risks, as well as reviewing management’s adherence to MSR broker valuationsthe Company’s established risk management policies and industry surveys, as available. We also utilize a third party valuation firm to value our MSRs on a periodic basis, the results of which we utilize as a baseline for our valuation modeling. Actual market conditions could vary significantly from current conditions which could result in the estimated lifebenchmarks. As with other committees of the underlying loans being different which would changeCompany, the fair valueERM Committee is authorized to hire such independent experts as the committee may deem necessary or appropriate, and at present engages a cybersecurity and information security legal expert to help with oversight and assessment of the MSR. We carry our single family residential mortgage servicing assetsCompany’s risks in those areas. The ERM Committee is required to meet at fair value and report changes in fair value through earnings. MSRsleast quarterly.
Our Board has adopted a written charter for loansthe ERM Committee. A copy of this charter can be found on the Company's investor relations website: http://ir.homestreet.com. Among other than single family loans are adjusted to fair value ifthings, this charter requires the carrying value is higher than fair value and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.ERM Committee to:
•define, in conjunction with the Board and management, the Company’s risk appetite and tolerances for risk for the Company;
•annually review and approve the Company’s enterprise risk assessments as a component of the Company’s strategic plan, including the capital plan;
•monitor the Company’s risk profile and ongoing and potential exposure to material risks of various types, including a review of the Company’s overall capital adequacy and capacity within the context of the approved risk limits and actual results;
•provide a forum for evaluating and integrating risk issues, processes and events arising within the Company and its subsidiaries;
•coordinate with various Board committees a discussion of the Company’s significant processes for risk assessment, risk management and actions taken by management to monitor, control and remediate risk exposures;
•oversee compliance and fair lending practices, including:
•review regulatory examinations and reports;
•monitor the implementation of any corrective measures;
•review and approve the Company’s Compliance Management System, Fair Lending Policy and other compliance policies as deemed necessary;
•approve the initial appointment of the Chief Compliance Officer and Fair Lending Officer and ratify/affirm such appointment annually;
•monitor the implementation of changes in significant regulation and the impact upon significant risk(s) throughout the Company;
•oversee information technology, and corporate security and physical security practices, including:
•reviewing reports from management on technology and security risks; and
•appointing the Security Officer and Chief Information Security Officer;
•review and approve, at least annually, risk related policies; and
•review the performance, compensation and independence of the Chief Risk Officer.
The ERM Committee held four meetings during the year ended December 31, 2023.
Summary Financial DataCompensation Committee
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| (dollars in thousands, except per share data and FTE data) | 2021 | | 2020 | | | | | | |
| | | | | | | | | |
| Select Income Statement data: | | | | | | | | | |
| Net interest income | $ | 227,057 | | | $ | 208,662 | | | | | | | |
| Provision for credit losses | (15,000) | | | 20,469 | | | | | | | |
| Noninterest income | 119,975 | | | 149,364 | | | | | | | |
| Noninterest expense | 215,343 | | | 235,663 | | | | | | | |
| Income: | | | | | | | | | |
| Before income taxes | 146,689 | | | 101,894 | | | | | | | |
| Total | 115,422 | | | 79,990 | | | | | | | |
| Income per share - diluted | $ | 5.46 | | | $ | 3.47 | | | | | | | |
| Select Performance Ratios: | | | | | | | | | |
| Return on average equity | 15.9 | % | | 11.3 | % | | | | | | |
Return on average tangible equity (1) | 16.8 | % | | 12.1 | % | | | | | | |
| Return on average assets | 1.58 | % | | 1.10 | % | | | | | | |
Efficiency ratio (1) | 61.9 | % | | 61.4 | % | | | | | | |
| Net interest margin | 3.38 | % | | 3.13 | % | | | | | | |
| Other Data: | | | | | | | | | |
| Full time equivalent employees | 991 | | | 1,003 | | | | | | | |
| | | | | | | | | |
Our Compensation Committee is composed solely of independent directors under Nasdaq corporate governance rules, each of whom has also been determined to be independent pursuant to Rule 10C-1(b)(1) of the Exchange Act describing independence standards relating to members of a compensation committee. Although the Compensation Committee receives input from our CEO, executive leadership and the Compensation Committee’s independent compensation advisor, the Compensation Committee makes its own independent determinations regarding executive officer compensation.
Our Board has adopted a written charter for the Compensation Committee that satisfies the applicable standards of Nasdaq Corporate Governance rules as to compensation committee requirements. A copy of this charter can be found on our investor relations website: http://ir.homestreet.com. Among other things, this charter requires the Compensation Committee to:
•oversee the Company’s overall compensation structure, policies and programs, and assess whether the Company’s compensation structure establishes appropriate incentives for management and employees;
•review and approve the incentive plan arrangements as they are developed, added or modified for (1) the senior management team; (2) individual employees, including non- executive employees, whose activities may expose the Company to material amounts of risk; and (3) groups of associates who are subject to the same or similar incentive compensation arrangements and who, in the aggregate, may expose the Company to material amounts of risk, even if no individual associate is likely to expose the Company to material risk;
•review the Company’s incentive compensation arrangements to determine whether they encourage excessive risk taking, and review and discuss at least annually the relationship between risk and management policies and practices and compensation, and evaluate compensation policies and practices that could mitigate such risk;
•approve, amend or modify the terms of any compensation or benefit plan that does not require shareholder approval;
•review and approve the corporate goals and objectives relevant to the compensation of the CEO, evaluate the CEO’s performance in light of those goals and objectives, and recommend to the independent directors the CEO’s compensation level based on this evaluation;
•oversee, review and approve the evaluation of other executive officers, including the performance of executive officers in light of approved goals and objectives, and set the compensation of the other executive officers based on this evaluation review;
•periodically review and approve the companies included in the compensation peer group (the “Peer Group”) based on criteria the Compensation Committee deems appropriate;
•review and approve the design of other benefit plans subject to the Board's approval pertaining to executive officers and employees;
•review the compensation of directors for service on the Board and its committees at least annually and recommend changes in compensation to the Board;
•make recommendations to the Board with respect to the Company’s incentive-compensation and equity-based compensation plans that are subject to the approval of the Board;
•approve stock option and other stock incentive awards for executive officers;
•monitor compliance by executive officers and directors with the Company’s stock ownership guidelines requirements, if any;
•review, approve and recommend to the Board, employment agreements and severance arrangements for executive officers, including change-in- control provisions, plans or agreements, which includes the ability to adapt, amend and terminate such agreements or arrangements;
•to the extent applicable, review and discuss with management the Company’s Compensation Discussion and Analysis and related disclosures, recommend to the Board based on the review and discussions whether the Compensation Discussion and Analysis should be included in the annual report and proxy statement, and prepare the compensation committee report required by SEC rules for inclusion in the Company's annual report and proxy statement; and
•review succession plans relating to positions held by Executive Vice Presidents and make recommendations to the Board regarding the selection of individuals to fill these positions.
The Compensation Committee meets jointly with the Compensation Committee of HomeStreet Bank. The Compensation Committee held ten meetings during the year ended December 31, 2023.
Interaction with Consultants
Pursuant to its charter, the Compensation Committee has the authority, in its sole discretion, to select, retain and obtain the advice of a compensation consultant, legal counsel or other advisors. The Compensation Committee sets the compensation and oversees the work of any compensation consultant, legal counsel or other advisors. The Company is required to provide appropriate funding, as determined by the Compensation Committee for payment of compensation to its compensation consultants, legal counsel and any other advisors.
The Compensation Committee has retained Pearl Meyer & Partners (“Pearl Meyer”) as its independent executive compensation consultant. None of the Company’s management participated in the Compensation Committee’s decision to retain Pearl Meyer. Pearl Meyer reports directly to the Compensation Committee and the Compensation Committee may replace Pearl Meyer or hire additional consultants at any time. Pearl Meyer attends meetings of the Compensation Committee, as requested, and communicates with the Chair of the Compensation Committee between meetings; however, the Compensation Committee makes all decisions regarding the compensation of the Company’s executive officers.
Pearl Meyer provides various executive compensation services to the Compensation Committee with respect to our executive officers and other key employees pursuant to a written consulting agreement with the Compensation Committee. The services Pearl Meyer provides under the agreement include advising the Compensation Committee on the principal aspects of our executive compensation program, evolving best practices given the Company’s particular circumstances, and providing market information and analysis regarding the competitiveness of our program design and our award values in relationship to its performance.
The Compensation Committee regularly reviews the services provided by its outside consultants and believes that Pearl Meyer is independent in providing executive compensation consulting services. The Compensation Committee periodically monitors the Company’s relationship with Pearl Meyer with regard to, among other things, the requirements of Nasdaq rules related to the selection and assessment of conflicts of interest pertaining to compensation consultants and determined that Pearl Meyer’s work for the Compensation Committee did not raise any conflicts of interest.
Nominating and Governance Committee
The N&G Committee has the authority to establish and implement our corporate governance practices, nominate individuals for election to the Board, evaluate and oversee issues related to management of human capital resources, among other things. Beginning in 2021, the N&G Committee receives reports from the Company’s Community Relations and Diversity Equity & Inclusion Officer at least two times a year to increase oversight of and involvement in the management of our human capital resources.
Our Board has adopted a written charter for the N&G Committee that satisfies the applicable standards of Nasdaq Corporate Governance rules as to nominating committee requirements. A copy of this charter can be found on our investor relations website: http://ir.homestreet.com. Among other things, this charter requires the N&G Committee to:
•develop and recommend to the Board criteria for identifying and evaluating director candidates;
•identify, review the qualifications of, and recruit candidates for election to the Board;
•assess the contributions and independence of incumbent directors in determining whether to recommend them for reelection to the Board and appointment to one or more committees of the Board;
•periodically review the procedures for the consideration of Board candidates recommended for the N&G Committee’s consideration by the Company’s shareholders contained in the Company’s Shareholder Engagement Procedures and Practices and recommend any changes to such procedures to the Board;
•recommend to the Board the Company’s candidates for election or reelection to the Board at each annual meeting of shareholders;
•recommend to the Board candidates to be elected by the Board as necessary to fill vacancies and newly created directorships;
•develop and recommend to the Board a set of corporate governance principles, and annually review and recommended changes as appropriate to such principles;
•review and recommend changes as appropriate to the Board in the Code of Ethics, and biannually review this code;
•make recommendations to the Board concerning the structure, composition and functioning of the Board and its committees;
•recommend to the Board candidates for appointment to Board committees and consider periodically rotating directors among the committees;
•review and recommend to the Board retirement and other tenure policies for directors;
•review directorships in other public companies held by or offered to directors and senior officers of the Company;
•review and assess the channels through which the Board receives information, and the quality and timeliness of the information received;
•develop and oversee an orientation program for new directors and a continuing education program for all directors and review and revise such programs as appropriate;
•oversee the evaluation of the Board and its committees;
•monitor and evaluate the Company’s programs, policies and practices and relevant risks and opportunities relating to ESG issues and related disclosures, and make recommendations to the Board regarding the Company’s overall strategy with respect to ESG matters;
•oversee our engagement with proxy advisory firms and other stakeholders on ESG matters and review shareholder proposals submitted to the Company that are within the purview of the N&G Committee; and
•review with management the Company’s practices, policies and strategies relating to human capital management, including but not limited to practices, policies and strategies regarding recruiting, talent development and retention, culture, diversity, equity and inclusion and human health and safety.
The N&G Committee charter allows the committee to delegate its duties and responsibilities related to nomination and corporate governance to a subcommittee of the N&G Committee that consists of not less than two members of the N&G Committee.
The N&G Committee held six meetings during the year ended December 31, 2023.
Process for Recommending Candidates for Election to the Board of Directors
The N&G Committee is responsible for, among other things, determining the criteria for membership to the Board and recommending candidates for election to the Board. It is the policy of the N&G Committee to consider recommendations for candidates to the Board from shareholders. Nominees for our Board must also meet any approval requirements set forth by our regulators.
The N&G Committee regularly reviews the current composition and size of the Board. The N&G Committee’s criteria and process for evaluating and identifying the candidates that it recommends to the full Board for selection as director nominees are as follows:
•In its evaluation of director candidates, including the members of the Board eligible for re-election, the N&G Committee seeks to achieve a balance of knowledge, experience and capability on the Board and considers (1) the current size and composition of the Board and the needs of the Board and the respective committees of the Board, (2) such factors as issues of character, integrity, judgment, diversity of experience, independence, area of expertise, corporate experience, length of service, potential conflicts of interest, other commitments and the like, and (3) such other factors as the N&G Committee may consider appropriate.
•In addition to the criteria listed above, the Board and the N&G Committee have made our commitment to diversity on the Board a priority. Our Principles of Corporate Governance include a mandate that the N&G Committee actively seek to include highly qualified women and individuals from minority groups in the pool
of candidates from which nominees for director positions are chosen, and in choosing between equally qualified candidates to give extra weight to the diversity of the candidates.
•While the N&G Committee and the Board have not established specific minimum qualifications for director candidates, the N&G Committee believes that candidates and nominees must reflect a Board that is comprised of directors who: (1) are predominantly independent, (2) are of high integrity, (3) have broad, business-related knowledge and experience at the policy-making level in business or technology, including their understanding of the Company’s business in particular, (4) have qualifications that will increase the overall effectiveness of the Board and (5) meet other requirements as may be required by applicable rules, such as financial literacy or financial expertise with respect to audit committee members. The N&G Committee evaluates all nominees appropriately submitted, regardless of source of recommendation, using the same rigorous evaluation process and criteria.
•With regard to candidates who are properly recommended by shareholders or by other means, the N&G Committee will review the qualifications of any such candidate, which review may, in the N&G Committee’s discretion, include interviewing references for the candidate, direct interviews with the candidate, requesting additional information to be shared with our regulators or other actions that the N&G Committee deems necessary or proper.
•In evaluating and identifying candidates, the N&G Committee has the authority to retain and terminate any third-party search firm that is used to identify director candidates and has the authority to approve the fees and retention terms of any search firm.
•The N&G Committee will apply these same principles when evaluating Board candidates who may be elected initially by the full Board to fill vacancies or add additional directors prior to the annual meeting of shareholders at which directors are elected.
•After completing its review and evaluation of director candidates, the N&G Committee recommends the director nominees to the full Board.
Attendance at Annual Meetings of Shareholders by the Board of Directors
Our Principles of Corporate Governance provide that, absent unusual circumstances, our directors are expected to attend our shareholder meeting. All eight of our directors then serving on our Board virtually attended the Company’s 2023 annual meeting of shareholders.
Insider Trading Policy and Rule 10b5-1 Trading Plans
The Company has adopted an Insider Trading Policy applicable to our directors, officers, employees and consultants. our Insider Trading Policy prohibits, among other things, short-term trading, short sales, transactions involving derivative securities relating to our common stock and hedging transactions. Under our Insider Trading Policy, directors, officers, employees and consultants are prohibited from trading in the Company's stock when in possession of material nonpublic information about the Company. Furthermore, our Insider Trading Policy includes guidelines regarding the use of Rule 10b5-1 trading plans which require them to be compliant with Rule 10b5-1, as amended.
Contacting the Board of Directors
Our Board has adopted the HomeStreet, Inc. Shareholder Engagement Practices and Procedures, a copy of which can be found on our investor relations website: http://ir.homestreet.com. Shareholders who desire to contact our non-employee directors may do so by writing our Corporate Secretary at HomeStreet, Inc., 601 Union Street, Suite 2000, Seattle, Washington 98101 or by sending an email to corporatesecretary@homestreet.com.
Shareholders can also communicate with independent directors as a group through our investor relations website at http://ir.homestreet.com; by email at ir@homestreet.com; or by mail to the attention of the Independent Directors c/o the Corporate Secretary at HomeStreet, Inc., 601 Union Street, Suite 2000, Seattle, Washington 98101. Any communications so received will be collected and organized by the Corporate Secretary and will periodically, but in any event prior to each regularly scheduled Board meeting, be reported and/or delivered to the independent directors.
Our Corporate Secretary receives these communications unfiltered by the Company forwards communications to the Board, individual directors or the appropriate committee of the Board and facilitates an appropriate response. The Board will generally respond, or cause the Company to respond, in writing to bona fide communications from shareholders addressed to one or more directors. The Corporate Secretary will not forward spam, junk mail, mass mailings, customer complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate materials to the Board or any directors. Correspondence relating to certain of these matters such as customer issues may be distributed internally for review and possible response.
Please note that requests for investor relations materials should be sent to ir@homestreet.com.
Director Compensation
Non-Employee Director Compensation
All directors of the Company also serve as directors of HomeStreet Bank. We believe that our overall non-employee director compensation program is reasonable and appropriate based on our review of peer group financial institution data and the data provided by Pearl Meyer, the Compensation Committee’s independent external compensation consultant.
For the first half of 2023, our non-employee directors were paid an annual retainer of $90,000 ($45,000 for the six-month period), with a minimum of 50% of that fee being paid in fully vested stock (subject to any individual director’s election to receive more of the fees in fully vested stock, up to 100% of all fees). Committee chairs of the Compensation Committee, N&G Committee, Audit Committee and ERM Committee earned an additional $15,000 annual retainer ($7,500 for the six-month period). Chairs of HomeStreet Bank’s Finance Committee and Credit Committee earned an additional $10,000 annual retainer ($5,000 for the six-month period). The Lead Independent Director received an additional annual retainer of $30,000 ($15,000 for the six-month period). Each non-employee director also earned a fee of $500 per committee meeting attended for all committees (or $250 in the case of short, telephonic meetings) other than the Executive Committee. Members of the Executive Committee were paid an additional annual retainer of $10,000 ($5,000 for the six-month period) for their service on that committee in lieu of per-meeting fees.
For the second half of 2023, the Company’s non-employee directors were paid an annual retainer of $130,000, with $60,000 in cash and $70,000 in stock ($65,000 for the six- month period, with $30,000 in cash and $35,000 in stock). Committee chairs of the Compensation Committee, N&G Committee and ERM Committee earned an additional $15,000 annual retainer ($7,500 for the six-month period). The Audit Committee chair earned an additional $20,00 annual retainer ($10,000 for the six-month period). Chairs of HomeStreet Bank’s Finance Committee and Credit Committee earned an additional $10,000 annual retainer ($5,000 for the six-month period). The Lead Independent Director received an additional annual retainer of $30,000 ($15,000 for the six-month period). Members of the Executive Committee were paid an additional annual retainer of $10,000 ($5,000 for the six-month period). No per meeting fees were paid for the second half of 2023.
For the first half of 2023, annual retainer fees were paid one-half in cash and one-half in fully vested stock, subject to any individual director’s election to receive more than 50% of such fees in stock. Meeting fees were paid in cash, subject to any individual director’s election to receive any portion of such fees in fully vested stock. For the second half of 2023, the additional retainer fees were paid one-half in cash and one-half in fully vested stock.
All fees are paid on a quarterly basis, and fees that are paid in fully vested stock or deferred stock awards were granted under the Amended and Restated 2014 Equity Incentive Plan (the “2014 Plan”). The number of shares or deferred stock awards granted in 2023 was determined based on dividing the amount of fees to be paid by the average price of our common stock over the prior 20 trading days. We believe this approach reduces volatility in award levels based on daily stock price fluctuations.
Directors are able to elect to receive some or all of their stock compensation in the form of fully vested deferred stock awards that are settled upon the termination of their service on the Board or at another future date of the director’s choosing. None of the directors made such an election for 2023 fees.
Following the expiration of the 2014 Plan on March 12, 2024, all annual retainer fees will be paid to directors in cash and the directors will no longer be able to elect to receive any portion of such fees in stock.
Director Stock Ownership Guidelines
Our Principles of Corporate Governance contain stock ownership guidelines pursuant to which each non-executive director is expected to own shares of the Company's common stock totaling at least three (3) times the annual retainer fee,
valued at the closing price of the common stock on the date of acquisition, (the “Minimum Ownership Level”) at all times from and after the third anniversary of such director’s appointment or election to the Board until the end of such director’s service to the Company as a director. Directors are not required to acquire additional stock to increase their holdings to the Minimum Ownership Level in the event of a decline in the stock value. However, if a sale or other transfer from a director’s account results in the director owning less than the Minimum Ownership Level in shares of the Company's common stock, the director is then required to re-establish his or her Minimum Ownership Level. Stock received by non-executive directors as part of their director compensation may be counted toward the accumulation of the Minimum Ownership Level. As of April 2, 2024, all directors who have been on the Board for three years or more are in compliance with our stock ownership guidelines, measured based on the annual retainer fee paid to directors in 2023.
Compensation for Employee Directors
Employee directors do not receive compensation for serving on our Board. Accordingly, Mark K. Mason, who serves as Chairman and is an executive of the Company, is not paid any additional retainer or compensation for his services as a director and Chairman.
2023 Director Compensation Table
The following table shows the compensation earned by our non-employee directors for 2023.
| | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) (2) (3) | | | | Total ($) |
| | | | | | | | |
| Scott M. Boggs | | 68,285 | | | 65,483 | | | | | 133,768 | |
| Sandra A. Cavanaugh | | 72,866 | | 70,553 | | | | 143,419 | |
| Jeffrey A. Green | | 69,516 | | 66,237 | | | | 135,753 | |
Joanne R. Harrell (1) | | 40,775 | | 91,227 | | | | 132,002 | |
| James R. Mitchell, Jr | | 78,056 | | 74,511 | | | | 152,567 | |
Mark R. Patterson (4) | | 33,140 | | 27,882 | | | | 61,022 | |
| Nancy D. Pellegrino | | 65,948 | | 63,637 | | | | 129,585 | |
S. Craig Tompkins (5) | | 35,591 | | 39,558 | | | | 75,149 | |
(1)ReturnMs. Harrell elected to receive $26,000 of her cash fees in fully vested stock grant.
(2)The amounts shown represent the aggregate grant date fair value for the stock awards granted in fiscal 2023.
(3)Stock awards granted to non-employee directors in fiscal 2023 consist of shares of common stock granted quarterly to our non-employee directors as part of their individual annual retainer.
(4)Retired from his service as a director in May 2023.
(5)Joined the Board in May 2023.
Other Matters
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who beneficially own more than 10% of the Company’s common stock to file with the SEC reports of ownership regarding the common stock and other Company equity securities. In January 2024, each of the following had one Form 4 that was not timely filed: John Michel (vesting of RSUs and one transaction relating to an RSU award), Diane Novak, David Parr, Paulette Lemon and Darrell Van Amen (vesting of restricted stock and share withholding for payment of taxes relating to RSU vesting and one transaction relating to an RSU award), in each case due to third party system difficulties.
Executive Officers
For information on our executive officers, see “Information About Our Executive Officers” in Part I, Item 1. Business in the Original Form 10-K.
ITEM 11
EXECUTIVE COMPENSATION
2023 EXECUTIVE COMPENSATION PROGRAM
Base Salary
Base salary represents annual fixed compensation and is a standard element of compensation necessary to attract and retain executive leadership talent. In making base salary decisions, the Compensation Committee considers the CEO’s recommendations, as well as each NEO’s position and level of responsibility within the Company. The Compensation Committee also takes into account factors such as the NEO’s individual performance, experience, contributions and length of service, and relevant market data. The Compensation Committee determined the appropriate annual base salary rate, effective March 2023, for each NEO as follows:
| | | | | | | | | | | | | | | | | | | | |
| NEO | | 2023 Base
Salary ($) | | 2022 Base
Salary ($) | | %
Adjustment (1) |
| | | | | | |
| Mark K. Mason | | 830,180 | | | 798,252 | | | 4.0 | % |
| John M. Michel | | 475,150 | | | 456,820 | | | 4.0 | % |
| William D. Endresen | | 417,768 | | | 401,700 | | | 4.0 | % |
| | | | | | |
| | | | | | |
(1) The Company took a stratified approach to merit increases for all employees in 2023. This approach was based, in part, on actions taken by competitors in our markets and in part based on responses to inflationary pressures. The stratification provided merit increase opportunities based on annualized base pay levels, with merit increase opportunities ranging from 4% for senior roles to 8% for entry level roles. All NEOs received a 4% adjustment, the minimum level of adjustment.
Annual Cash Incentives
All of our NEOs are eligible to receive incentive awards, which are intended to focus executives on short-term financial and strategic goals that are designed to contribute to long-term value.
Mr. Mason and Mr. Michel, the non-commissioned NEOs, are eligible to participate in the Annual Incentive Plan, which provides an opportunity to receive an annual incentive award that is contingent on achieving pre-defined annual corporate objectives, as well as individual goals which target their respective areas of responsibility. Mr. Endresen is eligible for annual incentive awards under a separate arrangement, which provides for incentive payout opportunities based on business unit performance results.
Annual Incentive Plan Awards
The Annual Incentive Plan provided the non-commissioned NEOs with the opportunity to earn a performance-based annual cash incentive award. Actual bonus payouts depend on the achievement of pre-established performance objectives and can range from 0% to 150% of target award amounts.
Target annual incentive opportunities are expressed as a percentage of base salary and were established by the Compensation Committee for 2023 based on the NEO’s level of responsibility and his ability to impact overall results. The Compensation Committee also considers comparable market data in setting target award amounts. The 2023 target award opportunities in terms of percentage of salary for the non-commissioned NEOs were as follows:
| | | | | | | | |
| Non-Commissioned NEO | | Target
Opportunity
as % of Base
Salary |
| | |
| Mark K. Mason | | 75% |
| John M. Michel | | 60% |
| | |
| | |
Actual awards for the CEO are assessed by the Compensation Committee based on performance against corporate financial goals and individual performance. Actual awards for the other non-commissioned NEO, Mr. Michel, are based on the achievement of corporate or business unit financial goals and individual performance objectives as assessed and recommended by the CEO and approved by the Compensation Committee. For 2023, the Compensation Committee established the following balance between corporate and individual goals:
| | | | | | | | | | | | | | |
| Non-Commissioned NEO | | Corporate
Goals Weight | | Individual
Goals Weight |
| | | | |
| Mark K. Mason | | 80% | | 20% |
| John M. Michel | | 80% | | 20% |
| | | | |
| | | | |
Corporate Performance Goals, Metrics and Results
In 2023, corporate performance measured against the Company’s 2023 strategic plan was the basis for awards. The target level, thresholds and maximums were established by the Board based on the 2023 strategic plan. Any performance results below the threshold would result in no payout. Performance results between threshold and target and between target and maximum would be calculated on a straight-line interpolation basis.
Below are the performance measures used for 2023:
◦Core ROAA: Defined as net income, adjusted to exclude any non-core items such as goodwill impairment charges and merger expenses.
◦Core ROATE: Defined as net income, excluding any amortization of intangible assets and adjusted to exclude any non-core items such as goodwill impairment charges and merger expenses, as a percentage of total average tangible equity, which is average equity less average intangible assets.
◦Efficiency Ratio: Defined as noninterest expenses, adjusted to exclude any nonrecurring or unusual items, as a percentage of the total of net interest income and noninterest income, adjusted to exclude any nonrecurring or unusual items. In 2023, a goodwill impairment charge and merger expenses were excluded as nonrecurring items. A lower ratio is a more positive result.
◦Nonperforming Assets (“NPAs”) to Total Assets: Defined as nonperforming loans plus other real estate owned divided by total assets. This is considered a key measure of the efficiencyquality of HomeStreet Bank’s loan portfolio. Credit risk management remains a major focus of HomeStreet Bank. A lower ratio is a more positive result.
◦Core Deposit Balances: Core deposits for these purposes is defined as total deposits less certificates of deposit. Core deposits are non-GAAP financial measures. Forthe most beneficial source of funding due to their relatively low cost and tendency to be more stable. Growth is calculated as the change from the average core deposits for the fourth quarter of the current year as compared average core deposits for the fourth quarter of the prior year. Any deposits added through mergers or acquisitions are excluded from the computation and any deposits sold are removed from this computation.
A Core ROATE of 11% or higher is required to receive a reconciliationcombined award in excess of return on average tangible equity to100% of target opportunity.
The following table provides the nearest comparable GAAP financial25th (Threshold), 50th (Target) and 75th (Maximum) percentiles of the performance measures for the set by the Board, our results, the weighting of each performance measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Summary Financial Data (continued)
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| (dollars in thousands, except share and per share data) | 2021 | | 2020 | | | | | | |
| | | | | | | | | |
| Selected Balance Sheet Data: | | | | | | | | | |
| Loans held for sale ("LHFS") | $ | 176,131 | | | $ | 361,932 | | | | | | | |
| Loans held for investment ("LHFI"), net | 5,495,726 | | | 5,179,886 | | | | | | | |
| ACL | 47,123 | | | 64,294 | | | | | | | |
| Investment securities | 1,006,691 | | | 1,076,364 | | | | | | | |
| Total assets | 7,204,091 | | | 7,237,091 | | | | | | | |
| Deposits | 6,146,509 | | | 5,821,559 | | | | | | | |
| Borrowings | 41,000 | | | 322,800 | | | | | | | |
| Long-term debt | 126,026 | | | 125,838 | | | | | | | |
| Total shareholders' equity | 715,339 | | | 717,750 | | | | | | | |
| Other data: | | | | | | | | | |
| Book value per share | 35.61 | | | 32.93 | | | | | | | |
Tangible book value per share (1) | 34.04 | | | 31.42 | | | | | | | |
| Total equity to total assets | 9.9 | % | | 9.9 | % | | | | | | |
Tangible common equity to tangible assets (1) | 9.5 | % | | 9.5 | % | | | | | | |
| Shares outstanding at period end | 20,085,336 | | | 21,796,904 | | | | | | | |
| Loans to deposits ratio | 93.0 | % | | 96.3 | % | | | | | | |
| Credit quality: | | | | | | | | | |
ACL to total loans (2) | 0.88 | % | | 1.33 | % | | | | | | |
ACL to nonaccrual loans | 386.2 | % | | 310.3 | % | | | | | | |
| Nonaccrual loans to total loans | 0.22 | % | | 0.40 | % | | | | | | |
| Nonperforming assets to total assets | 0.18 | % | | 0.31 | % | | | | | | |
| Nonperforming assets | $ | 12,936 | | | $ | 22,097 | | | | | | | |
| Regulatory Capital Ratios: | | | | | | | | | |
| Bank | | | | | | | | | |
| Tier 1 leverage ratio | 10.11 | % | | 9.79 | % | | | | | | |
| Total risk-based capital | 13.77 | % | | 14.76 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Company | | | | | | | | | |
| Tier 1 leverage ratio | 9.94 | % | | 9.65 | % | | | | | | |
| Total risk-based capital | 12.66 | % | | 14.00 | % | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Target Performance | | Company
Results | | Excess
(Shortfall)
To Target | | Weighting | | Computed
Award |
| Performance Measure | | 25th
Percentile
Threshold | | 50th
Percentile
Target | | 75th
Percentile
Maximum | |
| | | | | | | | | | | | | | |
Core ROAA (1) | | 0.28% | | 0.37% | | 0.74% | | 0.09% | | (0.28)% | | 20% | | —% |
Core ROATE (1) | | 5.40% | | 7.20% | | 14.40% | | 2.0% | | (5.20)% | | 30% | | —% |
Efficiency Ratio (1) | | 92.10% | | 80.10% | | 68.10% | | 95.60% | | (15.50)% | | 20% | | —% |
| NPAs to Total assets | | 0.36% | | 0.18% | | 0.14% | | 0.45% | | (0.27)% | | 20% | | —% |
| Core Deposit Balances (average) | | $3,617,000 | | $4,019,000 | | $4,421,000 | | $3,345,500 | | (16.76)% | | 10% | | —% |
| Total | | | | | | | | | | | | | | —% |
(1)Tangible book value per shareFor core ROAA, core ROATE and tangible common equity to tangible assets areefficiency ratio, see Appendix A at the end of this 2023 Executive Compensation Program section for reconciliations of these non-GAAP financial measures. For a reconciliationresults of operations to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Managements' Discussion and Analysis of Financial Condition and Results of Operations.
(2)The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including Paycheck Protection Program ("PPP") loan balances.measures.
The Compensation Committee has the discretion to reduce or increase the payouts to the extent it determines appropriate to reflect the business environment and market conditions that may affect the Company’s financial and stock price performance. No such discretion was exercised by the Compensation Committee for payouts earned in 2023.
Individual Performance Goals
Individual performance goals are established at the beginning of each plan year. An NEO’s individual goals may relate to responsibilities, projects and initiatives specific to the executive’s business or function that are not covered in the corporate performance measurements.
To assess individual performance against the goals, the Compensation Committee selected qualitative goals for the CEO tied to key strategic initiatives that are aligned with the Company’s 2023 – 2025 Strategic Plan as approved by the Board, as well as his responsibility in the areas of profitability, diversification, business growth and credit quality as such areas correlate to the 2023 – 2025 Strategic Plan. Similarly, the CEO recommended qualitative goals for Mr. Michel based on the specific department and business goals that support the Company’s 2023 – 2025 Strategic Plan, which were adopted by the Compensation Committee.
Results of Operations | | | | | | | | |
| Mr. Mason, Chairman, President, Chief Executive Officer | | |
| Strategic Qualitative Objective | | Key Results |
| | |
| Strategic leadership | | Led executive management team and Board through important strategic transactions including the strategic alternatives process that resulted in the announced merger of the Company and FirstSun Capital Bancorp ("FirstSun") which has been strongly accepted by shareholders with HMST stock rising approximately 50% within days after the announcement; and closing and integration of three branches acquired from Union Bank which resulted in $271 million of low cost deposits at December 31, 2023. |
| Effective Leadership & Corporate Governance | | Continued to provide effective leadership through the adverse impacts of increasing interest rates on profitability. Maintained effective communication with staff, the Board, customers and investors. Onboarded a new member to the Board in May 2023. Under the CEO’s leadership, we published an inaugural ESG report in the second quarter of 2023. which presents in a public facing way, the principal elements of our ESG program based on the ESG priorities as we have determined are most relevant to our company.
|
| Cost Efficiency | | As a result of the progress made in recent years, we entered 2023 with a strong foundation for efficient operations. In fact, total full time equivalent employees declined in 2023 from the prior year. Excluding non-core items, non-interest expenses as a percentage of total average assets decreased form 2.45% in 2022 to 2.12% in 2023. |
| Continuation of Core Business Focused on Profitable Growth | | Interest rate driven challenges drove our inability to maintain or improve our overall profitability, particularly in our Commercial Real Estate and Single Family Lending businesses. Executive succession planning remained strong and effective while our risk management infrastructure remained sound with no material losses, credit or otherwise. We did not experience any loss of leadership in the company this year.
|
| Audits and Compliance | | No material findings from external or internal audits, and all specific internal goals related to audit and compliance were achieved in 2023. |
2021 Compared to 2020Mr. Michel, Executive Vice President, Chief Financial Officer
| | | | | | | | |
| Strategic Qualitative Objective | | Key Results |
| | |
| Strategic activities | | Assisted in analysis of strategic options which resulted in the announced merger of the Company and FirstSun, including supporting negotiation and execution of merger agreement. |
| Improve the efficiency and effectiveness of the finance, treasury and accounting functions | | Coordinated successful change to new external auditors resulting in lower fees. Oversaw successful implementation of new accounting system for investment securities. Reduced or maintained staffing levels in each of the departments reporting to me and managed non-interest expense levels within budget. |
| Assist managing the Company’s capital management strategy. | | Assisted in completion of purchase of three southern California deposit branches.
Coordinated merger of HomeStreet Capital into HomeStreet Bank.
|
| Maintain effective controls over financial reporting and accounting functions. | | Did not receive any significant adverse findings or material adverse comments from financial, regulatory and internal audit examinations and audits. |
General: Our net income and income before income taxes were $115.4 million and $146.7 million, respectively, in 2021, as compared to $80.0 million and $101.9 million, respectively, in 2020. The $44.8 million increase in income before taxes was due to higher net interest income, a lower provision for credit losses and lower noninterest expense, partially offset by lower noninterest income.2023 Annual Incentive Plan Results
Income Taxes: Our effective tax rate during 2021 was 21.3% as compared to 21.5% in 2020Based on the corporate results and a statutory ratethe evaluation of 23.3%. Our effective tax rate was lower than our statutory rate due primarily toindividual performance achievements described above, the benefits of tax advantaged investments.Compensation Committee approved the following Annual Incentive Plan incentive award payouts:
Net Interest Income: The following table presents, for the periods indicated, information regarding (i) the total dollar amount of interest income earned from interest-earning assets and the weighted average yields on those assets; (ii) the total dollar amount of interest expense paid on interest-bearing liabilities and the weighted average costs of those liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2021 | | 2020 | |
| (dollars in thousands) | Average
Balance | | Interest | | Average
Yield/Cost | | Average
Balance | | Interest | | Average
Yield/Cost | |
| | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Interest-earning assets | | | | | | | | | | | | |
Loans (1) | $ | 5,653,930 | | | $ | 222,909 | | | 3.91 | % | | $ | 5,544,847 | | | $ | 229,813 | | | 4.10 | % | |
Investment securities (1) | 1,020,530 | | | 24,262 | | | 2.38 | % | | 1,086,415 | | | 24,507 | | | 2.26 | % | |
| FHLB Stock, Fed Funds and other | 96,303 | | | 569 | | | 0.59 | % | | 63,443 | | | 1,227 | | | 1.90 | % | |
| Total interest-earning assets | 6,770,763 | | | 247,740 | | | 3.63 | % | | 6,694,705 | | | 255,547 | | | 3.78 | % | |
| Noninterest-earning assets | 547,742 | | | | | | | 555,929 | | | | | | |
| Total assets | $ | 7,318,505 | | | | | | | $ | 7,250,634 | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | |
Deposits: (2) | | | | | | | | | | | | |
| Demand deposits | $ | 525,836 | | | $ | 726 | | | 0.14 | % | | $ | 435,830 | | | $ | 929 | | | 0.21 | % | |
| Money market and savings | 2,996,757 | | | 4,449 | | | 0.15 | % | | 2,661,996 | | | 12,086 | | | 0.45 | % | |
| Certificates of deposit | 1,048,218 | | | 6,236 | | | 0.59 | % | | 1,245,513 | | | 20,782 | | | 1.67 | % | |
| Total deposits | 4,570,811 | | | 11,411 | | | 0.25 | % | | 4,343,339 | | | 33,797 | | | 0.78 | % | |
| Borrowings: | | | | | | | | | | | | |
| Borrowings | 109,513 | | | 394 | | | 0.36 | % | | 604,278 | | | 3,773 | | | 0.62 | % | |
| Long-term debt | 125,925 | | | 5,433 | | | 4.30 | % | | 125,737 | | | 5,780 | | | 4.58 | % | |
| Total interest-bearing liabilities | 4,806,249 | | | 17,238 | | | 0.36 | % | | 5,073,354 | | | 43,350 | | | 0.85 | % | |
| Noninterest-bearing liabilities | | | | | | | | | | | | |
Demand deposits (2) | 1,596,653 | | | | | | | 1,276,780 | | | | | | |
| Other liabilities | 189,801 | | | | | | | 194,340 | | | | | | |
| Total liabilities | 6,592,703 | | | | | | | 6,544,474 | | | | | | |
| | | | | | | | | | | | |
| Shareholders' equity | 725,802 | | | | | | | 706,160 | | | | | | |
| Total liabilities and shareholders’ equity | $ | 7,318,505 | | | | | | | $ | 7,250,634 | | | | | | |
Net interest income | | | $ | 230,502 | | | | | | | $ | 212,197 | | | | |
| Net interest rate spread | | | | | 3.27 | % | | | | | | 2.93 | % | |
| Net yield on interest-earning assets | | | | | 3.38 | % | | | | | | 3.13 | % | |
(1)Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.4 million and $3.5 million for 2021 and 2020, respectively. The estimated federal statutory tax rate was 21% for both 2021 and 2020.
(2)Cost of all deposits, including noninterest-bearing demand deposits, was 0.18% and 0.60% for 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-Commissioned NEO | | Corporate
Component
(% of Target
Achieved) | | Individual
Component
(% of Target
Achieved) | | Overall Award
(As a % of a
Target
Opportunity) | | Actual
Payout
($) |
| | | | | | | | |
Mark K. Mason (1) | | — | % | | 150.0 | % | | 30.0 | % | | 185,410 | |
John M. Michel (2) | | — | % | | 150.0 | % | | 30.0 | % | | 84,900 | |
| | | | | | | | |
| | | | | | | | |
(1) Mr. Mason was awarded 150% of target for his individual performance given his leadership through the strategic alternatives process that resulted in the announced merger of the Company and FirstSun and the integration of three branches acquired from Union Bank and his effective leadership through the challenges the Company faced.
(2) Mr. Michel was awarded 150% of target for his individual performance given his support of the strategic alternatives process that resulted in the announced merger of the Company and FirstSun and the integration of three branches acquired from Union Bank and his actions supporting expense reductions and controls.
Mr. Endresen’s Incentive Plan Arrangement
Rate
Mr. Endresen is eligible for annual incentive awards under a separate arrangement, which provides for payout opportunities based on business unit performance results to incentivize him to generate profitable quality loans for HomeStreet Bank, which aligns with his role and Volume Analysisresponsibilities. The Company believes a commissioned program is consistent with competitor practices for similar positions and generally provides for a larger portion of his compensation to be at-risk.
Mr. Endresen’s incentive plan is comprised of two parts: a production incentive, which is paid out monthly and a profitability incentive, 50% of which is paid out quarterly with the remaining 50% paid in the following year. The production incentive is based on loan commitments originated by the Company’s commercial real estate (“CRE”) business unit, with a higher rate paid for Fannie Mae loan commitments. The profitability incentive is based on the income before tax of the CRE business unit, which includes corporate funding and overhead allocations. We are not disclosing the payout formula used due to confidentiality and competitive concerns. The profitability incentive payout is subject to a discount based on levels of classified loans in the CRE portfolio. This incentive discount is intended to encourage loan production consistent with the safety and soundness of HomeStreet Bank.
Performance Goals, Metrics and Results
The following table presentsshows the extent to which changes in interest ratesperformance measures and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense, excluding interest income from nonaccrual loans. Information is provided in each category with respect to: (1) changes attributable to changes in volume, (2) changes attributable to changes in rate and (3) the net change.
| | | | | | | | | | | | | | | | | | | | |
| |
| | 2021 vs. 2020 | |
| | Increase (Decrease) Due to | | Total Change | |
| (in thousands) | Rate | | Volume | | |
| | | | | | |
| Assets: | | | | | | |
| Interest-earning assets | | | | | | |
| Loans | $ | (11,113) | | | $ | 4,209 | | | $ | (6,904) | | |
| Investment securities | 1,283 | | | (1,528) | | | (245) | | |
| FHLB stock, Fed Funds and other | (1,092) | | | 434 | | | (658) | | |
| Total interest-earning assets | (10,922) | | | 3,115 | | | (7,807) | | |
| Liabilities: | | | | | | |
| Deposits | | | | | | |
| Demand deposits | (370) | | | 167 | | | (203) | | |
| Money market and savings | (8,987) | | | 1,350 | | | (7,637) | | |
| Certificates of deposit | (11,673) | | | (2,873) | | | (14,546) | | |
| Total interest-bearing deposits | (21,030) | | | (1,356) | | | (22,386) | | |
| Borrowings: | | | | | | |
| Borrowings | (1,149) | | | (2,230) | | | (3,379) | | |
| Long-term debt | (356) | | | 9 | | | (347) | | |
| Total interest-bearing liabilities | (22,535) | | | (3,577) | | | (26,112) | | |
| Total changes in net interest income | $ | 11,613 | | | $ | 6,692 | | | $ | 18,305 | | |
Net interest | | | | | | | | | | | | | | | | | | | | |
| Performance Measures | | Target | | Results | | Results
(% of Target) |
| | | | | | |
| CRE Business Unit: Mr. Endresen | | | | | | |
Profitability (1) | | $ | 85.0 million | | $ | 73.6 million | | 86.6 | % |
Loan Production (2) | | $ | 644.9 million | | $ | 175.5 million | | 27.2 | % |
| | | | | | |
| | | | | | |
| | | | | | |
(1) Profitability is a percentage of the pre-tax income was higher in 2021 as compared to 2020 primarily due to an increase in our net interest margin from 3.13%(after determining allocation of consolidated company overhead expenses) of the related business units.
(2) Loan production is total dollar amount of loan commitments in the 2020 to 3.38% in 2021. The increase in our net interest margin was due to a 34 basis point increase in our net interest rate spread as decreases incurrent year for the rates paid on interest-bearing liabilities were greater than the decreases in yields on our interest-earning assets. The 15 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 liabilities decreased from 0.85% in 2020 to 0.36% in 2021 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates.related business unit. For commercial real estate loan production payouts vary by certain channels.
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 $15.0 million recovery of our allowance for credit losses in 2021. Due to adverse economic conditions related to the COVID-19 pandemic, in 2020, we recorded a $20.5 million provision for credit losses as an estimate of the potential adverse impact of those conditions on our loan portfolio.
2023 Award Payouts
Based on the performance results described above, the following incentive award was paid to Mr. Endresen:
| | | | | | | | | | | | | | | | | | | | |
| | Target
Payout
($) | | Actual Payout |
| Commissioned NEO | | ($) | | % of
Target |
| | | | | | |
| William D. Endresen | | 816,363 | | | 608,221 | | | 74.5 | % |
| | | | | | |
Long-Term Incentives
The Company’s long-term incentive compensation consists of a combination of RSUs and PSUs, which were granted under the 2014 Plan. The Company will no longer grant equity awards under the 2014 Plan, as the 2014 Plan expired pursuant to its terms on March 12, 2024.
2023 Target Long-Term Incentive Award Grants.
In 2023, the Company granted long-term incentive awards consisting of 50% PSUs and 50% RSUs, as approved by the Compensation Committee. The value of the equity awards determined by the Compensation Committee was based on a target value as a percentage of base salary. The Compensation Committee determined the target by reviewing Peer Group data and appropriate market data relevant to the banking industry and sets targets at levels intended to create a meaningful opportunity for reward predicated on increasing shareholder value. In addition to considering competitive market data, the Compensation Committee also considered the NEO’s performance history, experience, potential for future advancement and promotions, the CEO’s recommendations for awards other than his own, and the value of existing vested and unvested outstanding equity awards.
The table below shows the grant date fair value of long-term incentive awards granted in 2023 to each of the NEOs:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs | | Total |
| NEO | | Value
($) | | Shares
(#) | | Value
($) | | Target Shares
(#) | | Value
($) | | Target
Shares
(#) |
| | | | | | | | | | | | |
| Mark K. Mason | | $ | 409,508 | | | 14,848 | | | $ | 416,189 | | | 14,848 | | | $ | 825,697 | | | 29,696 | |
| John M. Michel | | 140,603 | | | 5,098 | | | 142,897 | | | 5,098 | | | 283,500 | | | 10,196 | |
| William D. Endresen | | 103,039 | | | 3,736 | | | 104,720 | | | 3,736 | | | 207,759 | | | 7,472 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The PSUs are earned and vested based on achieving a specified company performance result and continued employment over the three-year performance period. In each case, the vesting of the award is also contingent on the NEO’s employment with the Company not having been terminated for any reason other than retirement, death or disability prior to the date the Compensation Committee certifies the achievement of the performance goal for the relevant performance period.
The RSUs awarded annually as part of the long-term incentive plan vest incrementally in three equal installments on the first, second and third anniversaries from the grant date. In each case, the vesting of the award is contingent on the NEO’s employment with the Company not having been terminated for any reason other than retirement, death or disability prior to the applicable vesting date.
A Closer Look at PSUs
PSUs are designed to focus the NEOs on long-term value creation for shareholders. PSUs are earned and vest at the end of a three-year performance period based on our total shareholder return (“TSR”) relative to a peer group.
TSR is calculated as the change in share price from January 1, of the beginning of the three-year period to December 31 at the end of the three-year period assuming that all dividends are reinvested in shares on the date paid. The PSU peer group consists of all companies included in the KRX at the end of the Performance Period (excluding the Company itself, if it happens to be a component company on that date). For results in between the 25th and 50th or 50th and 75th, there will be a straight-line interpolation calculation. Any achievement below the 25th percentile will result in 0% vesting.
| | | | | | | | | | | | | | | | | | | | |
| | Threshold | | Target | | Maximum |
| | | | | | |
| Relative TSR performance | | 25th percentile | | 50th percentile | | 75th percentile |
| Payment as a % of target | | 50% | | 100% | | 150% |
2021 – 2023 Performance Period Results and Payouts. For the 2021 – 2023 performance period, PSUs would have been earned based on the same design as the PSUs for the 2023 – 2025 Performance Period. The following chart shows the threshold, target and maximum metrics for the 2021 – 2023 PSUs and performance for this period.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Threshold | | Target | | Maximum | | Results |
| | | | | | | | |
| TSR Percentile Rank | | 25th percentile | | 50th percentile | | 75th percentile | | zero percentile |
| Payout as a % of Target | | 50% | | 100% | | 150% | | 0% |
Noninterest income consisted ofNo 2021 PSUs were earned based on the following:
| | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | |
| (in thousands) | 2021 | | 2020 | | | |
| | | | | | |
| Noninterest income | | | | | | |
Gain on loan origination and sale activities (1) | | | | | | |
| Single family | $ | 66,850 | | | $ | 100,795 | | | | |
| CRE, multifamily and SBA | 25,468 | | | 21,769 | | | | |
| Loan servicing income | 7,233 | | | 9,491 | | | | |
| Deposit fees | 8,068 | | | 7,083 | | | | |
| Other | 12,356 | | | 10,226 | | | | |
| Total noninterest income | $ | 119,975 | | | $ | 149,364 | | | | |
| | | | | | |
(1) Includes loans originated as heldresults for investment.
Loan servicing income,a component of noninterest income, consisted of the following:
| | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | |
| (in thousands) | | 2021 | | 2020 | | |
| | | | | | |
| Single family servicing income (loss), net: | | | | | | |
| Servicing fees and other | | $ | 15,658 | | | $ | 17,477 | | | |
Changes - amortization (1) | | (19,669) | | | (17,754) | | | |
| Subtotal | | (4,011) | | | (277) | | | |
| Risk management, single family MSRs: | | | | | | |
Changes in fair value due to assumptions (2) | | 7,379 | | | (19,955) | | | |
| Net gain (loss) from derivatives hedging | | (8,238) | | | 20,820 | | | |
| Subtotal | | (859) | | | 865 | | | |
| Total | | $ | (4,870) | | | $ | 588 | | | |
| | | | | | |
| Commercial loan servicing income: | | | | | | |
| Servicing fees and other | | $ | 19,684 | | | $ | 14,560 | | | |
| Amortization of capitalized MSRs | | (7,581) | | | (5,657) | | | |
| Total | | 12,103 | | | 8,903 | | | |
| Total loan servicing income | | $ | 7,233 | | | $ | 9,491 | | | |
(1)Represents changes due to collection/realization of expected cash flows and curtailments.
(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
The decrease in noninterest income for 2021 as compared to 2020 was due to decreases in gain on loan origination and sale activities and loan servicing income, which was partially offset by higher deposit fees and higher other income. The $30.2 million decrease in gain on loan origination and sale activities was due to a $33.9 million decrease in single family gain on loan origination and sale activities which was partially offset by a $3.7 million increase in 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 30% decrease in rate locks. The increase in CRE and commercial gain on loan origination and sale activities was due to a 17% increase in the realized gain on sale which was partially offset by a 15% decrease in the volume of loans sold. The $2.3 million decrease in loan servicing income was due to a $5.5 million decrease in single family servicing income which was partially offset by a $3.2 million increase in commercial loan servicing income. The decrease in single family servicing income was due primarily to a decline in the servicing portfolio balance due to high levels of prepayments and a $1.7 million decrease in risk management results. The increase in commercial loan servicing income was primarily due to higher levels of prepayment fees. The higher deposit fees were due to higher demand deposit balances and increased customer activity levels. The $2.1 million increase in other income was due to higher income from investments and a gain on sale of OREO realized in 2021.
Noninterest expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Years Ended December 31, | | |
| (in thousands) | | | | | | | 2021 | | | 2020 | | |
| | | | | | | | | | | | | | |
| Noninterest expense | | | | | | | | | | | | | | |
| Compensation and benefits | | | | | | | | | $ | 132,015 | | | | $ | 136,826 | | | |
| Information services | | | | | | | | | 27,913 | | | | 30,004 | | | |
| Occupancy | | | | | | | | | 23,832 | | | | 35,323 | | | |
| General, administrative and other | | | | | | | | | 31,583 | | | | 33,510 | | | |
| Total noninterest expense | | | | | | | | | $ | 215,343 | | | | $ | 235,663 | | | |
The $20.3 million decrease in noninterest expense in 2021 as compared to 2020 was due to lower compensation and benefit costs, information services expense, occupancy expense and general, administrative and other expenses. The $4.8 million decrease in compensation and benefits expense is primarily due to lower levels of staffing. The $2.1 million decrease in information services costs is primarily due to lower core processing costs related to a renegotiation of our contract which became effective at the beginning of 2021. The occupancy expenses in 2020 included $10.2 million of impairments related to ongoing restructuring of our facilities and staffing, with no similar charges in 2021. The remaining decrease in occupancy costs relates to a reduction in leased space. The decrease in general, administrative and other costs was due to charges related to our efficiency improvement initiatives incurred in 2020 and lower FDIC fees, which were partially offset by higher marketing costs in 2021. | | | | | | | | | | | | | | |
| NEO | | Target
Share (#) | | Award (#) |
| | | | |
| Mark K. Mason | | 11,595 | | | — |
| John M. Michel | | 3,905 | | | — |
| William D. Endresen | | 2,805 | | | — |
| | | | |
| | | | |
| | | | |
Review of Financial Condition – December 31, 2021 compared to December 31, 2020
During 2021, total assets decreased by $33 million due to decreases in investment securities and other assets, partially offset by a $316 million increase in LHFI. LHFI increased due to $3.3 billion of originations, which were partially offset by prepayments and scheduled payments of $2.6 billion and transfer of loans to LHFS of $393 million. The $282 million decrease in borrowings reflects the reduced need of wholesale funding resulting from a $325 million increase in deposits. The growth in deposits was due to new customers and increases in existing customer balances.
Investment Securities
The fair values of our investment securities available for sale ("AFS") are as follows:
| | | | | | | | | | | | | | |
| | | At December 31, |
| | 2021 | | 2020 |
| (in thousands) | | Fair Value | | Fair Value |
| | | | |
| Investment securities AFS: | | | | |
| Mortgage-backed securities: | | | | |
| Residential | | $ | 32,963 | | | $ | 51,046 | |
| Commercial | | 62,792 | | | 45,184 | |
| Collateralized mortgage obligations: | | | | |
| Residential | | 187,394 | | | 234,909 | |
| Commercial | | 136,659 | | | 159,183 | |
| Municipal bonds | | 539,923 | | | 564,703 | |
| Corporate debt securities | | 19,616 | | | 15,222 | |
| U.S. Treasury securities | | 23,175 | | | — | |
| Agency debentures | | — | | | 1,846 | |
| Total | | $ | 1,002,522 | | | $ | 1,072,093 | |
Loans
The following table details the composition of our LHFI portfolio by dollar amount:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | | | | | | | | | | |
| (in thousands) | 2021 | | 2020 | | | | | | |
| | | | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | | | |
| Non-owner occupied CRE | $ | 705,359 | | | | | $ | 829,538 | | | | | | | | | | | |
| Multifamily | 2,415,359 | | | | | 1,428,092 | | | | | | | | | | | |
| Construction/land development | 496,144 | | | | | 553,695 | | | | | | | | | | | |
| Total | 3,616,862 | | | | | 2,811,325 | | | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | | | | |
| Owner occupied CRE | 457,706 | | | | | 467,256 | | | | | | | | | | | |
| Commercial business | 401,872 | | | | | 645,723 | | | | | | | | | | | |
| Total | 859,578 | | | | | 1,112,979 | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | | |
Single family (1) | 763,331 | | | | | 915,123 | | | | | | | | | | | |
| Home equity and other | 303,078 | | | | | 404,753 | | | | | | | | | | | |
| Total | 1,066,409 | | | | | 1,319,876 | | | | | | | | | | | |
| Total LHFI | 5,542,849 | | | | | 5,244,180 | | | | | | | | | | | |
| ACL | (47,123) | | | | | (64,294) | | | | | | | | | | | |
| Total LHFI less ACL | $ | 5,495,726 | | | | | $ | 5,179,886 | | | | | | | | | | | |
(1)Includes $7.3 million and $7.1 million of loans at December 31, 2021 and 2020, respectively, where a fair value option election was made at the time of origination and; therefore, are carried at fair value with changes recognized in the consolidated income statements.
The following tables show the contractual maturity of our loan portfolio by loan type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | Loans due after one year
by rate characteristic |
| (in thousands) | Within one year | | After
one year through
five years | | After
five
years | | Total | | Fixed-
rate | | Adjustable-
rate |
| | | | | | | | | | | |
| CRE | | | | | | | | | | | |
| Non-owner occupied CRE | $ | 21,514 | | | $ | 150,110 | | | $ | 533,735 | | | $ | 705,359 | | | $ | 87,050 | | | $ | 596,795 | |
| Multifamily | 17,826 | | | 50,693 | | | 2,346,840 | | | 2,415,359 | | | 5,028 | | | 2,392,505 | |
| Construction/land development | 418,649 | | | 77,495 | | | — | | | 496,144 | | | 31,654 | | | 45,841 | |
| Total | 457,989 | | | 278,298 | | | 2,880,575 | | | 3,616,862 | | | 123,732 | | | 3,035,141 | |
| Commercial and industrial loans | | | | | | | | | | | |
| Owner occupied CRE | 11,481 | | | 94,284 | | | 351,941 | | | 457,706 | | | 120,047 | | | 326,178 | |
| Commercial business | 77,268 | | | 184,279 | | | 140,325 | | | 401,872 | | | 120,077 | | | 204,527 | |
| Total | 88,749 | | | 278,563 | | | 492,266 | | | 859,578 | | | 240,124 | | | 530,705 | |
| Consumer loans | | | | | | | | | | | |
| Single family | 206 | | | 503 | | | 762,622 | | | 763,331 | | | 318,756 | | | 444,369 | |
| Home equity and other | 33 | | | 34 | | | 303,011 | | | 303,078 | | | 6,909 | | | 296,136 | |
| Total | 239 | | | 537 | | | 1,065,633 | | | 1,066,409 | | | 325,665 | | | 740,505 | |
| Total LHFI | $ | 546,977 | | | $ | 557,398 | | | $ | 4,438,474 | | | $ | 5,542,849 | | | $ | 689,521 | | | $ | 4,306,351 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | Loans due after one year
by rate characteristic |
| (in thousands) | Within one year | | After
one year through
five years | | After
five
years | | Total | | Fixed-
rate | | Adjustable-
rate |
| | | | | | | | | | | |
| CRE | | | | | | | | | | | |
| Non-owner occupied CRE | $ | 9,600 | | | $ | 160,614 | | | $ | 659,324 | | | $ | 829,538 | | | $ | 119,032 | | | $ | 700,906 | |
| Multifamily | 8,035 | | | 42,416 | | | 1,377,641 | | | 1,428,092 | | | 14,416 | | | 1,405,641 | |
| Construction/land development | 505,218 | | | 47,877 | | | 600 | | | 553,695 | | | 17,917 | | | 30,560 | |
| Total | 522,853 | | | 250,907 | | | 2,037,565 | | | 2,811,325 | | | 151,365 | | | 2,137,107 | |
| Commercial and industrial loans | | | | | | | | | | | |
| Owner occupied CRE | 2,904 | | | 53,265 | | | 411,087 | | | 467,256 | | | 135,111 | | | 329,241 | |
| Commercial business | 59,780 | | | 408,029 | | | 177,914 | | | 645,723 | | | 371,123 | | | 214,820 | |
| Total | 62,684 | | | 461,294 | | | 589,001 | | | 1,112,979 | | | 506,234 | | | 544,061 | |
| Consumer loans | | | | | | | | | | | |
| Single family | 2,238 | | | 1,235 | | | 911,650 | | | 915,123 | | | 256,515 | | | 656,370 | |
| Home equity and other | 28 | | | 65 | | | 404,660 | | | 404,753 | | | 26,349 | | | 378,376 | |
| Total | 2,266 | | | 1,300 | | | 1,316,310 | | | 1,319,876 | | | 282,864 | | | 1,034,746 | |
| Total LHFI | $ | 587,803 | | | $ | 713,501 | | | $ | 3,942,876 | | | $ | 5,244,180 | | | $ | 940,463 | | | $ | 3,715,914 | |
Loan Roll-forward
| | | | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | |
| | | | | |
| Loans - beginning balance January 1, | | $ | 5,244,180 | | | $ | 5,114,556 | | |
| Originations and advances | | 3,279,593 | | | 2,846,270 | | |
| Transfers to LHFS | | (392,555) | | | (569,534) | | |
| Payoffs, paydowns and other | | (2,586,525) | | | (2,145,893) | | |
| Charge-offs and transfers to OREO | | (1,844) | | | (1,219) | | |
Loans - ending balance December 31, | | $ | 5,542,849 | | | $ | 5,244,180 | | |
| | | | | |
| | | | | |
Loan Originations and Advances
| | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| | | | |
| CRE | | | | |
| Non-owner occupied CRE | | $ | 86,167 | | | $ | 82,975 | |
| Multifamily | | 1,600,133 | | | 1,097,555 | |
| Construction/land development | | 721,059 | | | 621,591 | |
| Total | | 2,407,359 | | | 1,802,121 | |
| Commercial and industrial loans | | | | |
| Owner occupied CRE | | 81,066 | | | 58,689 | |
| Commercial business | | 334,315 | | | 484,903 | |
| Total | | 415,381 | | | 543,592 | |
| Consumer loans | | | | |
| Single family | | 340,363 | | | 371,484 | |
| Home equity and other | | 116,490 | | | 129,073 | |
| Total | | 456,853 | | | 500,557 | |
| Total | | $ | 3,279,593 | | | $ | 2,846,270 | |
Production Volumes for Sale to the Secondary Market | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands) | | 2021 | | 2020 |
| | | | |
| Loan originations | | | | |
| Single family loans | | $ | 1,961,298 | | | $ | 2,079,094 | |
| Commercial and industrial and CRE loans | | 295,366 | | | 414,550 | |
Loans sold | | | | |
| Single family loans | | 2,046,811 | | | 1,985,944 | |
Commercial and industrial and CRE loans (1) | | 773,378 | | | 908,776 | |
| | | | |
| Net gain on loan origination and sale activities | | | | |
| Single family loans | | 66,850 | | | 100,795 | |
Commercial and industrial and CRE loans (1) | | 25,468 | | | 21,769 | |
| Total | | $ | 92,318 | | | $ | 122,564 | |
(1) May include loans originated as held for investment.
Capitalized Mortgage Servicing Rights ("MSRs")
| | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | | | |
| (in thousands) | | 2021 | | 2020 | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Single Family MSRs | | | | | | | |
| Beginning balance | | $ | 49,966 | | | $ | 68,109 | | | | |
| Additions and amortization: | | | | | | | |
| Originations | | 23,908 | | | 19,424 | | | | |
| | | | | | | |
| | | | | | | |
Amortization (1) | | (19,669) | | | (17,754) | | | | |
| Net additions and amortization | | 4,239 | | | 1,670 | | | | |
Change in fair value due to assumptions (2) | | 7,379 | | | (19,813) | | | | |
| Ending balance | | $ | 61,584 | | | $ | 49,966 | | | | |
| Ratio to related loans serviced for others | | 1.11 | % | | 0.85 | % | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Multifamily and SBA MSRs | | | | | | | |
| Beginning balance | | $ | 35,774 | | | $ | 29,494 | | | | |
| Originations | | 11,222 | | | 11,587 | | | | |
| Amortization | | (7,581) | | | (5,307) | | | | |
| Ending balance | | $ | 39,415 | | | $ | 35,774 | | | | |
| Ratio to related loans serviced for others | | 1.94 | % | | 1.99 | % | | | |
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
Deposits
Deposit balances and weighted average rates were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, | |
| | 2021 | | 2020 | |
| (in thousands) | | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate | |
| | | | | | | | | |
| Deposits by product: | | | | | | | | | |
| Noninterest-bearing demand deposits | | $ | 1,433,566 | | | — | % | | $ | 1,092,735 | | | — | % | |
| Interest-bearing transaction and savings deposits: | | | | | | | | | |
| Interest-bearing demand deposits | | 513,810 | | | 0.10 | % | | 484,265 | | | 0.10 | % | |
| Savings accounts | | 302,389 | | | 0.06 | % | | 264,024 | | | 0.07 | % | |
| Money market accounts | | 2,806,313 | | | 0.15 | % | | 2,596,453 | | | 0.21 | % | |
| Total interest-bearing transaction and savings deposits | | 3,622,512 | | | 0.08 | % | | 3,344,742 | | | 0.10 | % | |
| Total transaction and savings deposits | | 5,056,078 | | | | | 4,437,477 | | | | |
| Certificates of deposit | | 906,928 | | | 0.51 | % | | 1,139,807 | | | 0.93 | % | |
| Noninterest-bearing accounts - other | | 183,503 | | | — | % | | 244,275 | | | — | % | |
| Total | | $ | 6,146,509 | | | 0.15 | % | | $ | 5,821,559 | | | 0.29 | % | |
The following table presents the schedule of maturities of certificates of deposit as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Three Months or Less | | Over Three Months to Twelve Months | | Over One Year through Three Years | | Over Three Years | | Total | |
| | | | | | | | | | | |
| Time deposits of $250,000 or less | | $ | 207,025 | | | $ | 428,470 | | | $ | 157,676 | | | $ | 5,912 | | | $ | 799,083 | | |
| Time deposits of $250,000 or more | | 28,650 | | | 54,693 | | | 23,831 | | | 671 | | | 107,845 | | |
| Total | | $ | 235,675 | | | $ | 483,163 | | | $ | 181,507 | | | $ | 6,583 | | | $ | 906,928 | | |
Credit Risk Management: Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
As of December 31, 2021, our ratio of nonperforming assets to total assets remained low at 0.18% while our ratio of total loans delinquent over 30 days to total loans was 0.38%. The Company recorded a recovery of our allowance for credit losses of $15.0 million in 2021, and the ACL for loans decreased by $17.2 million, as a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio.
Delinquent loans by loan type consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 | |
| Past Due and Still Accruing | | | | | | | | | |
| (in thousands) | 30-59 days | | 60-89 days | | 90 days or
more | | Nonaccrual | | Total past due and nonaccrual (3) | | Current | | Total loans | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | | |
| Non- owner occupied CRE | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 705,359 | | | $ | 705,359 | | |
| Multifamily | — | | | — | | | — | | | — | | | — | | | 2,415,359 | | | 2,415,359 | | |
| Construction and land development | | | | | | | | | | | | | | |
| Multifamily construction | — | | | — | | | — | | | — | | | — | | | 37,861 | | | 37,861 | | |
| CRE construction | — | | | — | | | — | | | — | | | — | | | 14,172 | | | 14,172 | | |
| Single family construction | — | | | — | | | — | | | — | | | — | | | 296,027 | | | 296,027 | | |
| Single family construction to permanent | — | | | — | | | — | | | — | | | — | | | 148,084 | | | 148,084 | | |
| Total | — | | | — | | | — | | | — | | | — | | | 3,616,862 | | | 3,616,862 | | |
| Commercial and industrial loans | | | | | | | | | | | | | | |
| Owner occupied CRE | — | | | — | | | — | | | 3,568 | | | 3,568 | | | 454,138 | | | 457,706 | | |
| Commercial business | 198 | | | — | | | — | | | 5,023 | | | 5,221 | | | 396,651 | | | 401,872 | | |
| Total | 198 | | | — | | | — | | | 8,591 | | | 8,789 | | | 850,789 | | | 859,578 | | |
| Consumer loans | | | | | | | | | | | | | | |
| Single family | 892 | | | 820 | | | 6,717 | | (2) | 2,802 | | | 11,231 | | | 752,100 | | | 763,331 | | (1) |
| Home equity and other | 118 | | | 74 | | | — | | | 808 | | | 1,000 | | | 302,078 | | | 303,078 | | |
| Total | 1,010 | | | 894 | | | 6,717 | | | 3,610 | | | 12,231 | | | 1,054,178 | | | 1,066,409 | | |
| Total loans | $ | 1,208 | | | $ | 894 | | | $ | 6,717 | | | $ | 12,201 | | | $ | 21,020 | | | $ | 5,521,829 | | | $ | 5,542,849 | | |
| % | 0.02 | % | | 0.02 | % | | 0.12 | % | | 0.22 | % | | 0.38 | % | | 99.62 | % | | 100.00 | % | |
(1) Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in our consolidated income statements.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 | |
| Past Due and Still Accruing | | | | | | | | | |
| (in thousands) | 30-59 days | | 60-89 days | | 90 days or
more | | Nonaccrual | | Total past due and nonaccrual (3) | | Current | | Total loans | |
| | | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Non- owner occupied CRE | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 829,538 | | | $ | 829,538 | | |
| Multifamily | — | | | | | — | | | — | | | — | | | 1,428,092 | | | 1,428,092 | | |
| Construction and land development | | | | | | | | | | | | | | |
| Multifamily construction | — | | | — | | | — | | | — | | | — | | | 115,329 | | | 115,329 | | |
| CRE construction | — | | | — | | | — | | | — | | | — | | | 27,285 | | | 27,285 | | |
| Single family construction | — | | | — | | | — | | | — | | | — | | | 259,170 | | | 259,170 | | |
| Single family construction to permanent | — | | | — | | | — | | | — | | | — | | | 151,911 | | | 151,911 | | |
| Total | — | | | — | | | — | | | — | | | — | | | 2,811,325 | | | 2,811,325 | | |
| Commercial and industrial loans | | | | | | | | | | | | | | |
| Owner occupied CRE | — | | | — | | | — | | | 4,922 | | | 4,922 | | | 462,334 | | | 467,256 | | |
| Commercial business | — | | | | | — | | | 9,183 | | | 9,183 | | | 636,540 | | | 645,723 | | |
| Total | — | | | — | | | — | | | 14,105 | | | 14,105 | | | 1,098,874 | | | 1,112,979 | | |
| Consumer loans | | | | | | | | | | | | | | |
| Single family | 2,161 | | | 418 | | | 11,476 | | (2) | 4,883 | | | 18,938 | | | 896,185 | | | 915,123 | | (1) |
| Home equity and other | 228 | | | 135 | | | — | | | 1,734 | | | 2,097 | | | 402,656 | | | 404,753 | | |
| Total | 2,389 | | | 553 | | | 11,476 | | | 6,617 | | | 21,035 | | | 1,298,841 | | | 1,319,876 | | |
| Total loans | $ | 2,389 | | | $ | 553 | | | $ | 11,476 | | | $ | 20,722 | | | $ | 35,140 | | | $ | 5,209,040 | | | $ | 5,244,180 | | |
| % | 0.05 | % | | 0.01 | % | | 0.22 | % | | 0.40 | % | | 0.67 | % | | 99.33 | % | | 100.00 | % | |
| | | | | | | | | | | | | | |
(1)Includes $7.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in our consolidated income statements.
(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $14.7 million.
As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of these forbearances as of December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Forbearances Approved (2) |
| | Total | | Expired | | Outstanding |
| (in thousands) | | Number of loans | | Amount | | Number of loans | | Amount | | Number of loans | | Amount |
| | | | | | | | | | | | |
| Loan type: | | | | | | | | | | | | |
| Commercial and CRE | | | | | | | | | | |
| Commercial business | | 100 | | | $ | 51,674 | | | 100 | | | $ | 51,674 | | | — | | | $ | — | |
| CRE owner occupied | | 26 | | | 65,984 | | | 26 | | | 65,984 | | | — | | | — | |
| CRE nonowner occupied | | 14 | | | 59,327 | | | 13 | | | 45,289 | | | 1 | | | 14,038 | |
| Total | | 140 | | | $ | 176,985 | | | 139 | | | $ | 162,947 | | | 1 | | | $ | 14,038 | |
| | | | | | | | | | | | |
Single family and consumer (1) | | | | | | | | | |
| Single family | | | | | | | | | | 24 | | | $ | 12,068 | |
| Home equity and other | | | | | | | | | | 16 | | | 1,898 | |
| Total | | | | | | | | | | 40 | | | $ | 13,966 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Does not include any single family loans that are guaranteed by Ginnie Mae.
(2) Does not include constructions 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. At December 31, 2021, two of these loans with $2 million in balances were still operating under the terms of their modifications.
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, home equity and consumer loans were generally for a period of three to six months. As of December 31, 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 that were not completed as of December 31, 2021 are scheduled to be completed in the first quarter of 2022.
The following table presents the ACL by product type at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 | |
| (in thousands) | Amount | | Rate (1) | | Amount | | Rate (1) | | | | | |
| | | | | | | | | | | | |
| CRE | | | | | | | | | | | | |
| Non-owner occupied CRE | $ | 7,509 | | | 1.06 | % | | $ | 8,845 | | | 1.07 | % | | | | | |
| Multifamily | 5,854 | | | 0.24 | % | | 6,072 | | | 0.43 | % | | | | | |
| Construction/land development | | | | | | | | | | | | |
| Multifamily construction | 507 | | | 1.34 | % | | 4,903 | | | 4.25 | % | | | | | |
| CRE construction | 150 | | | 1.06 | % | | 1,670 | | | 6.12 | % | | | | | |
| Single family construction | 6,411 | | | 2.16 | % | | 5,130 | | | 1.98 | % | | | | | |
| Single family construction to permanent | 1,055 | | | 0.71 | % | | 1,315 | | | 0.87 | % | | | | | |
| Total | 21,486 | | | 0.59 | % | | 27,935 | | | 0.99 | % | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | |
| Owner occupied CRE | 5,006 | | | 1.10 | % | | 4,994 | | | 1.08 | % | | | | | |
| Commercial business | 12,273 | | | 3.39 | % | | 17,043 | | | 4.72 | % | | | | | |
| Total | 17,279 | | | 2.11 | % | | 22,037 | | | 2.67 | % | | | | | |
| Consumer loans | | | | | | | | | | | | |
| Single family | 4,394 | | | 0.68 | % | | 6,906 | | | 0.85 | % | | | | | |
| Home equity and other | 3,964 | | | 1.31 | % | | 7,416 | | | 1.83 | % | | | | | |
| Total | 8,358 | | | 0.88 | % | | 14,322 | | | 1.18 | % | | | | | |
| Total ACL | $ | 47,123 | | | 0.88 | % | | $ | 64,294 | | | 1.33 | % | | | | | |
(1) The rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.
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 four years.
At December 31, 2021, the Bank had available borrowing capacity of $1.8 billion from the FHLB, $274 million from the FRBSF and $1.0 billion under borrowing lines established with other financial institutions. We believe that our current unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity will be sufficient to meet our liquidity needs for at least the next 12 months. We are currently not aware of any other trends or demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our liquidity needs during or beyond the next 12 months.
Cash Flows
For 2021 and 2020, cash and cash equivalents increased $7.2 million and $0.2 million, respectively. As a banking institution, the Company has extensive access to liquidity. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.
Cash flows from operating activities
The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For 2021, $173 million of cash was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. For 2020, cash of $26 million was used in operating activities, primarily to fund an increase in our LHFS which was partially offset by cash generated from our operations.
Cash flows from investing activities
The Company's investing activities are primarily related to investment securities and LHFI. For 2021, cash of $126 million was used in investing activities for the origination of LHFI and the purchase of investment securities, partially offset by principal repayments and the proceeds from the sale of LHFI and investment securities. For 2020, cash of $233 million was used in investing activities for the origination of LHFI and the purchase of investment securities, which were partially offset by principal payments and the proceeds from sale of LHFI and investment securities.
Cash flows from financing activities
The Company's financing activities are primarily related to deposits, net proceeds from borrowings and equity transactions. For 2021, cash of $40 million was used in financing activities from net repayment of short-term borrowings, repurchases of and dividends paid on our common stock, partially offset by growth in deposits. For 2020, cash of $258 million as provided by financing activities from growth in deposits, which was partially offset by net repayment of short-term borrowings, repurchases of our common stock and the payment of dividends on our common stock.
Capital Resources and Dividends
The capital rules applicable to United States based bank holding companies and federally insured depository institutions ("Capital Rules") require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following tables set forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as of the dates indicated below, as compared to the respective regulatory requirements applicable to them:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| | Actual | | For Minimum Capital
Adequacy Purposes | | To Be Categorized As
"Well Capitalized" |
| (dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| HomeStreet, Inc. | | | | | | | | | | | | |
| Tier 1 leverage capital (to average assets) | | $ | 723,232 | | | 9.94 | % | | $ | 291,098 | | | 4.0 | % | | NA | | NA |
| Common equity tier 1 capital (to risk-weighted assets) | | 663,232 | | | 10.84 | % | | 275,281 | | | 4.5 | % | | NA | | NA |
| Tier 1 risk-based capital (to risk-weighted assets) | | 723,232 | | | 11.82 | % | | 367,041 | | | 6.0 | % | | NA | | NA |
| Total risk-based capital (to risk-weighted assets) | | 774,695 | | | 12.66 | % | | 489,388 | | | 8.0 | % | | NA | | NA |
| HomeStreet Bank | | | | | | | | | | | | |
| Tier 1 leverage capital (to average assets) | | $ | 727,753 | | | 10.11 | % | | $ | 287,990 | | | 4.0 | % | | $ | 359,988 | | | 5.0 | % |
| Common equity tier 1 capital (to risk-weighted assets) | | 727,753 | | | 12.87 | % | | 254,442 | | | 4.5 | % | | 367,527 | | | 6.5 | % |
| Tier 1 risk-based capital (to risk-weighted assets) | | 727,753 | | | 12.87 | % | | 339,256 | | | 6.0 | % | | 452,341 | | | 8.0 | % |
| Total risk-based capital (to risk-weighted assets) | | 778,723 | | | 13.77 | % | | 452,341 | | | 8.0 | % | | 565,426 | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| | Actual | | For Minimum Capital
Adequacy Purposes | | To Be Categorized As
"Well Capitalized" |
| (dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | | |
| HomeStreet, Inc. | | | | | | | | | | | | |
| Tier 1 leverage capital (to average assets) | | $ | 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 | % |
At each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both the Company and the Bank are required to maintain a "conservation buffer" consisting of additional Common Equity Tier 1 Capital which is at least 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and the Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At December 31, 2021, capital conservation buffers for the Company and the Bank were 4.66% and 5.77%, respectively.
The Company paid a quarterly cash dividend of $0.25 per common share in each of the four quarters of 2021. It is our current intention to continue to pay quarterly dividends and the Company has declared a cash dividend of $0.35 per common share payable on February 23, 2022. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain statutory requirements and regulatory restrictions.
We had no material commitments for capital expenditures as of December 31, 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.
Accounting Developments
See Financial Statements and Supplementary Data - Note 1, Summary of Significant Accounting Policies for a discussion of accounting developments.
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.2023 EXECUTIVE COMPENSATION PROGRAM SECTION NON-GAAP FINANCIAL MEASURES
In this annual report on Form 10-K,amendment, we use (i)the following non-GAAP measures: (1) 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)(2) an efficiency ratio, which is the ratio of noninterest expenseexpenses 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 stateState of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expenseexpenses impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes. For the purposes of computing returns on tangible common equity, we exclude from earnings the amortization of intangible assets.
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 the Company's 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-GAAPnon- GAAP financial measures also facilitate a comparison of ourthe Company's performance to prior periods. We believeThe Board believes these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. However, theseThese 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 havethe Company has provided a reconciliationreconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this annual report on Form 10-K,Amendment No. 1, or a reconciliationthe calculation of the non-GAAP calculation of the financial measure.
| | | | | | | | | | | | | | |
| Appendix A | | As of or For the Year Ended |
| (in thousands, except share and per share data) | | December 31,
2023 | | December 31,
2022 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Core net income | | | | |
| Net income (loss) | | $ | (27,508) | | | |
| Adjustments (tax effected) | | | |
| Merger related expenses | | 1,170 | | | |
| Goodwill impairment charge | | 34,622 | | | |
| Total | | $ | 8,284 | | | |
| | | | |
| Return on average assets - Core | | | | |
| Average assets | | $ | 9,469,170 | | | |
| | | | |
| Core net income | | 8,284 | | | |
| Ratio | | 0.09 | % | | |
| | | | |
| Return on average tangible equity | | | | |
| Average shareholders’ equity | | $ | 552,234 | | | |
| Less: Average goodwill and other intangibles | | (25,695) | | | |
| Average tangible equity | | $ | 526,539 | | | |
| | | | |
| Net income | | $ | 8,284 | | | |
| Adjustments (tax effected) | | | | |
| Amortization of core deposit intangibles | | 2,302 | | | |
| Tangible income applicable to shareholders | | $ | 10,586 | | | |
| Ratio | | 2.0 | % | | |
| | | | |
| Efficiency ratio | | | | |
| Noninterest expense | | | | |
| Total | | $ | 241,872 | | | $ | 205,419 | |
| Adjustments: | | | | |
| Merger related expenses | | (1,500) | | | — | |
| Goodwill impairment charge | | (39,857) | | | — | |
| State of Washington taxes | | (994) | | | (2,311) | |
| Adjusted total | | $ | 199,521 | | | $ | 203,108 | |
| Total revenues | | | | |
| Net interest income | | $ | 166,753 | | | $ | 233,307 | |
| Noninterest income | | 41,921 | | | 51,570 | |
| Gain on sale of branches | | — | | | (4,270) | |
| Adjusted total | | $ | 208,674 | | | $ | 280,607 | |
| Ratio | | 95.6 | % | | 72.4 | % |
| | | | |
| Cost efficiency | | | | |
| Adjusted total noninterest expense | | $ | 241,872 | | | $ | 205,419 | |
| Merger related expenses | | (1,500) | | | — | |
| Goodwill impairment charge | | (39,857) | | | — | |
| | $ | 200,515 | | | $ | 205,419 | |
| Total Average Assets | | $ | 9,469,170 | | | $ | 8,396,078 | |
| As a percentage of total assets | | 2.12 | % | | 2.45 | % |
Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures: | | | | | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended |
| (in thousands, except ratio) | | | | | 2021 | | 2020 | | |
| | | | | | | | | |
| Return on average tangible equity (annualized) | | | | | | | | | |
| Average shareholders' equity | | | | | $ | 725,802 | | | $ | 706,160 | | | |
| Less: Average goodwill and other intangibles | | | | | (32,337) | | | (33,613) | | | |
| Average tangible equity | | | | | 693,465 | | | 672,547 | | | |
| | | | | | | | | |
| Net income | | | | | $ | 115,422 | | | $ | 79,990 | | | |
| Adjustments (tax effected): | | | | | | | | |
| Amortization on core deposit intangibles | | | | | 923 | | | 1,082 | | | |
| Tangible income applicable to shareholders | | | | | $ | 116,345 | | | $ | 81,072 | | | |
| | | | | | | | | |
| Ratio | | | | | 16.8 | % | | 12.1 | % | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Efficiency ratio | | | | | | | | | |
| Noninterest expense | | | | | | | | | |
| Total | | | | | $ | 215,343 | | | $ | 235,663 | | | |
| Adjustments: | | | | | | | | | |
| Restructuring related charges | | | | | — | | | (11,837) | | | |
| Legal fees recovery | | | | | 1,900 | | | — | | | |
| Prepayment fee on FHLB advances | | | | | — | | | (1,492) | | | |
| State of Washington taxes | | | | | (2,423) | | | (2,920) | | | |
| Adjusted total | | | | | $ | 214,820 | | | $ | 219,414 | | | |
| | | | | | | | | |
| Total revenues | | | | | | | | | |
| Net interest income | | | | | $ | 227,057 | | | $ | 208,662 | | | |
| Noninterest income | | | | | 119,975 | | | 149,364 | | | |
| Adjustments: | | | | | | | | | |
| Contingent payout | | | | | — | | | (566) | | | |
| Adjusted total | | | | | $ | 347,032 | | | $ | 357,460 | | | |
| | | | | | | | | |
| Ratio | | | | | 61.9 | % | | 61.4 | % | | |
| | | | | | | | | | | | |
| | As of | |
| (in thousands, except share data) | December 31, 2021 | | December 31, 2020 | |
| | | | |
| Tangible book value per share | | | | |
| Shareholders' equity | $ | 715,339 | | | $ | 717,750 | | |
| Less: goodwill and other intangibles | (31,709) | | | (32,880) | | |
| Tangible shareholder's equity | $ | 683,630 | | | $ | 684,870 | | |
| | | | |
| Common shares outstanding | 20,085,336 | | | 21,796,904 | | |
| | | | |
| Computed amount | $ | 34.04 | | | $ | 31.42 | | |
| | | | |
| Tangible common equity to tangible assets | | | | |
| Tangible shareholder's equity (per above) | $ | 683,630 | | | $ | 684,870 | | |
| Tangible assets | | | | |
| Total assets | $ | 7,204,091 | | $ | 7,237,091 | |
| Less: Goodwill and other intangibles | (31,709) | | (32,880) | |
| Net | $ | 7,172,382 | | | $ | 7,204,211 | | |
| | | | |
| Ratio | 9.5 | % | | 9.5 | % | |
| | | | | |
ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
OTHER PRACTICES, POLICIES AND GUIDELINES
Market Risk ManagementRecoupment of Incentive Compensation
Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks to which we are exposed are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from changesOur short-term cash incentive plans include a clawback provision in the valueevent of either assetsa material restatement of financial results. If the Board reasonably determines that an executive engaged in knowing or liabilitiesintentionally fraudulent or illegal conduct that are entered into as partmaterially contributed to the need for the restatement, the Board, based on available remedies, will seek recovery or forfeiture from that executive officer of distributingall or managing risk. Interest rate risk is defined as riska portion of his or her incentive compensation. The clawback amount would be determined by comparing the actual incentive received by the executive officer under the short-term incentive plan during the period prior to current or anticipated earnings or capital arisingthe restatement, with the amount that should have been earned had performance been measured on the basis of the restated results. The difference would be recovered from movements in interest rates.the executive.
ForIn June 2023, the Company, price and interest rate risks arise fromSEC approved the financial instruments and positions we hold. This includes loans, mortgage servicing rights, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due toNasdaq’s proposed rules implementing the nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets and, in particular, the regional economyincentive-based compensation recovery provisions of the western United States, including Hawaii.Dodd-Frank Wall Street Reform and Consumer Protection Act, which require listed companies to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers and to satisfy related disclosure obligations. In November 2023, the Compensation Committee adopted the Compensation Recovery Policy, which applies to all executive vice presidents and above to reflect these new requirements. In addition to requiring the recovery of compensation in the event of a restatement, the Compensation Recovery Policy also allows the Compensation Committee to recover incentive-based compensation in the event of legal and compliance violations committed by covered persons.
The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.Hedging Policy
Our Insider Trading Policy expressly bars hedging, derivative, or any other speculative transactions involving the Company’s stock by all directors, officers, employees and contractors of the Company, including its subsidiaries. Such prohibited transactions include hedging or derivative transactions, such as “cashless” collars, forward contracts, equity swaps or other similar or related transactions, or any short sale, “sale against the box,” or any equivalent transaction involving the Company’s stock. We estimatealso prohibit such persons from purchasing the sensitivityCompany's stock on margin (including in connection with exercising any of the Company's stock options). In addition, we prohibit our net interest incomeexecutive officers, directors, and employees from purchasing or selling the Company’s securities while in possession of material, non-public information, or otherwise using such information for their personal benefit and maintains a quarterly black-out window where applicable individuals may not trade. We may, in appropriate circumstances, permit transactions pursuant to changesa blind trust or a pre-arranged trading program that complies with Rule 10b5-1 to take place during periods in market interest rates using an interest rate simulation model that includes assumptions related towhich the level of balance sheet growth, deposit repricing characteristics andindividual entering into the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristicstransaction may have material nonpublic information or during the periods of changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps.black-out periods.
The following table presents sensitivity gaps forAll NEOs are provided with the same medical, dental, vision and life insurance programs as all other benefits-eligible employees of the Company on the same terms and conditions as applicable to these different intervals.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| (dollars in thousands) | 3 Mos.
or Less | | More Than
3 Mos.
to 6 Mos. | | More Than
6 Mos.
to 12 Mos. | | More Than
12 Mos.
to 3 Yrs. | | More Than
3 Yrs.
to 5 Yrs. | | More Than
5 to 15 Yrs. | | More Than 15 Yrs. | | Non-Rate-
Sensitive | | Total |
| | | | | | | | | | | | | | | | | |
| Interest-earning assets | | | | | | | | | | | | | | | | | |
| Cash & cash equivalents | $ | 65,214 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 65,214 | |
| FHLB Stock | 1,733 | | | — | | | — | | | — | | | — | | | — | | | 8,628 | | | — | | | 10,361 | |
Investment securities (1) | 126,141 | | | 16,768 | | | 41,320 | | | 118,437 | | | 125,501 | | | 450,335 | | | 128,189 | | | — | | | 1,006,691 | |
| LHFS | 176,131 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 176,131 | |
LHFI1) | 1,254,743 | | | 623,888 | | | 496,227 | | | 1,145,132 | | | 1,178,980 | | | 824,525 | | | 19,354 | | | — | | | 5,542,849 | |
| Total | 1,623,962 | | | 640,656 | | | 537,547 | | | 1,263,569 | | | 1,304,481 | | | 1,274,860 | | | 156,171 | | | — | | | 6,801,246 | |
| Noninterest-earning assets | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 402,845 | | | 402,845 | |
| Total assets | $ | 1,623,962 | | | $ | 640,656 | | | $ | 537,547 | | | $ | 1,263,569 | | | $ | 1,304,481 | | | $ | 1,274,860 | | | $ | 156,171 | | | $ | 402,845 | | | $ | 7,204,091 | |
| Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Demand deposit accounts (2) | $ | 513,810 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 513,810 | |
Savings accounts (2) | 302,389 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 302,389 | |
Money market accounts (2) | 2,806,313 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,806,313 | |
| Certificates of deposit | 235,675 | | | 181,599 | | | 301,564 | | | 181,507 | | | 6,583 | | | — | | | — | | | — | | | 906,928 | |
| | | | | | | | | | | | | | | | | |
| FHLB advances | 41,000 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 41,000 | |
| Borrowings | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Long-term debt (3) | 61,026 | | | — | | | — | | | — | | | 65,000 | | | — | | | — | | | — | | | 126,026 | |
| Total | 3,960,213 | | | 181,599 | | | 301,564 | | | 181,507 | | | 71,583 | | | — | | | — | | | — | | | 4,696,466 | |
| Noninterest-bearing liabilities | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,792,286 | | | 1,792,286 | |
| Shareholders' Equity | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 715,339 | | | 715,339 | |
| Total liabilities and shareholders’ equity | $ | 3,960,213 | | | $ | 181,599 | | | $ | 301,564 | | | $ | 181,507 | | | $ | 71,583 | | | $ | — | | | $ | — | | | $ | 2,507,625 | | | $ | 7,204,091 | |
| Interest sensitivity gap | $ | (2,336,251) | | | $ | 459,057 | | | $ | 235,983 | | | $ | 1,082,062 | | | $ | 1,232,898 | | | $ | 1,274,860 | | | $ | 156,171 | | | | | |
| Cumulative interest rate sensitivity gap | | | | | | | | | | | | | | |
| Total | $ | (2,336,251) | | | $ | (1,877,194) | | | $ | (1,641,211) | | | $ | (559,149) | | | $ | 673,749 | | | $ | 1,948,609 | | | $ | 2,104,780 | | | | | |
| As a % of total assets | (32) | % | | (26) | % | | (23) | % | | (8) | % | | 9 | % | | 27 | % | | 29 | % | | | | |
| As a % of cumulative interest-bearing liabilities | 41 | % | | 55 | % | | 63 | % | | 88 | % | | 114 | % | | 141 | % | | 145 | % | | | | |
(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.
(2)Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.
(3)Based on contractual maturity.employees generally.
As of December 31, 2021, the Company is considered liability-sensitive as exhibited by the gap table but our net interest income sensitivity analysis shows positive results in the increasing interest rate scenarios. This is because of the impact of our historical deposit repricing betas which result in an assumed delay in repricing of deposits in an increasing interest rate scenario and a lower magnitude of repricing compared to the repricing of loans and other interest-earning assets. Net interest income would be expected to rise in the long term if interest rates were to rise due to the Bank’s cumulative asset-sensitive position.401(k) Savings Plan
ChangesAll employees, including the NEOs, are eligible to make pre-tax contributions under the HomeStreet, Inc. 401(k) Plan (the “401(k) Plan”) and may be eligible to receive a discretionary matching contribution. An employer matching contribution may begin immediately after enrollment in the mix401(k) Plan for employees who are at least 18 years of interest-earning assets or interest-bearing liabilities can either increase or decreaseage and meet applicable service requirements. Currently, the net interest margin, without affecting interest rate sensitivity. In addition,Company matches 100% on the interest rate spread between an earning assetfirst 3% and its funding
liability can vary significantly, while50% on the timingnext 2% of repricing for bothdeferrals (up to a maximum of 4%). This matching contribution is taxable when the asset andemployee withdraws the liability remainsmoney unless the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.
The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of December 31, 2021 and 2020 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2021 | | December 31, 2020 |
Change in Interest Rates (basis points) (1) | | Percentage Change |
| Net Interest Income (2) | | Net Portfolio Value (3) | | Net Interest Income (2) | | Net Portfolio Value (3) |
| | | | | | | | |
| +200 | | 7.8 | % | | (5.0) | % | | 3.5 | % | | (9.3) | % |
| +100 | | 3.5 | % | | (2.8) | % | | 1.2 | | | (4.3) | % |
| -100 | | (1.3) | % | | 1.9 | % | | (3.8) | | | (3.7) | % |
| -200 | | (2.5) | % | | (4.9) | % | | (4.7) | % | | (5.7) | % |
(1)For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a low rate environment like the one we are currently experiencing.
(2)This percentage change represents the impact to net interest income for a one-year period, assuming there is no change in the structure of the balance sheet.
(3)This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.
At December 31, 2021 and 2020 we believe our net interest income sensitivity did not exhibit a strong bias to either an increase in interest rates or a decline in interest rates. The changes in interest rate sensitivity between December 31, 2021 and 2020 reflected the impact of higher market interest rates, a steeper yield curve and changes to overall balance sheet composition. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios may result in negative rates that may cause the modeling resultsemployee elects matching funds to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influencescontributed on our deposits.a post-tax basis.
ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersPerquisites and the Board of Directors of HomeStreet, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HomeStreet, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, and the related consolidated income statements, statements of comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses for Loans Held for Investment — Economic Values and Management Overlay Qualitative Factors — Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter DescriptionOther Personal Benefits
The Company accountsdoes not have a formal perquisite policy or provide any supplemental executive retirement plans, although the Compensation Committee periodically reviews perquisites for its allowance for credit losses (“ACL”) for loans held for investment in accordancethe NEOs. We provide the NEOs with Accounting Standards Update No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement of the current expected credit losses for financial assets held at the reporting date. The ACL is a valuation accountbenefits that is deducted from the amortized cost basis to present the net amount expected to be collected on the loans. Management estimates the ACL balance using relevant available information from internal and external sources relating to past events, current conditions andwe believe are reasonable and supportable forecasts. Historical credit loss experience providesconsistent with the basis foroverall compensation program and beneficial to the estimation of expected credit losses.Company in attracting and retaining qualified executives. Among these benefits are health club memberships and parking.
The Company's ACL model uses statistical analysis to determine life of loan default rates for the quantitative component and analyzes qualitative factors (Q-Factors) that assess the current loan portfolio and forecasted economic environment and management overlay values. The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are
Executive Employment Agreements and Change in Control Agreements
The Company uses employment agreements to attract and retain certain executives and the talent, skills, experience and expertise that they provide to the Company, with a goal of protecting and striking the right balance among such executives, the Company and the shareholders and providing necessary stability and skilled leadership for the Company.
The Company has entered into executive employment agreements with each of the NEOs, which provide for certain severance benefits in the event of a qualified termination with each of the NEOs. Mr. Mason’s employment agreement also provides for certain severance benefits in the event of a qualified termination in connection with a change in control event. In conjunction with and as part of their employment agreements, each of Messrs. Michel and Endresen have entered into an Executive Change in Control Agreement with the Company (“CIC Agreement”) which provides for certain severance benefits in the event of a qualified termination in connection with a change in control event. The table below summarizes the severance benefits for each NEO. Incentive amounts for severance purposes are determined as the greater of the executive’s then-current target performance incentive or the performance incentive the executive received in the prior year.
| | | | | | | | | | | | | | |
| NEO | | Involuntary Termination
without Cause or
Resignation for Good
Reason | | Termination without cause or
for Good Reason in
Connection with a
Change in Control |
| | | | |
| Mark K. Mason | | 2x salary | 2x incentive | | 2.5x salary | 2.5x incentive |
| John M. Michel | | 2x salary | 2x incentive | | 2x salary | 2x incentive |
| William D. Endresen | | 2x salary | 2x incentive | | 2x salary | 2x incentive |
| | | | |
| | | | |
| | | | |
In addition, Messrs. Mason, Michel and Endresen are each entitled to receive 18 months of continuing health insurance coverage for each such executive and with respect to Mr. Mason, his dependents, in the event of an involuntary termination without cause or resignation for good reason, regardless of whether a change in control occurs.
All employment agreements of the Company with its executive officers provide that in the event any payment or benefits to be provided to the executive under such employment agreement would constitute “parachute payments” within the meaning of Section 280G of the Code, the executive would be entitled to receive either (a) the full amount of such payment or benefit, taking into account the amount that would actually be received by the executive after application of all taxes and the excise tax imposed by Section 4999 of the Code, or (b) an amount reduced to the minimum extent necessary to avoid such payment or benefit being a “parachute payment”, depending on which alternative provided the executive the highest payment net of tax treatment. Executives would be responsible for any excise tax owing on any “parachute payments” paid under their employment agreements. None of our employment agreements with any executive or any other employee contains any provision to provide for a gross up of excise tax payments under any circumstances, including a change in control.
Mr. Mason’s employment agreement, effective January 25, 2018, provides for an annual base salary of not less than $700,000 and eligibility for an annual performance-based incentive bonus with a target award equal to 75% of his annual salary, provided that the Board or the Compensation Committee may set a lower or higher bonus amount based on individual and company performance and Peer Group data supplied by the Company’s outside compensation consultant. Mr. Mason’s target award was increased to 100% effective January 2021, decreased to 75% effective January 2023 and his base salary was increased to $855,088, effective March 2024. In the event of a termination without cause or termination by him for good reason (as those terms are defined in the agreement), Mr. Mason will receive the termination benefits described in the table above. On December 13, 2022, the term of Mr. Mason’s employment agreement was extended to December 31, 2025, with an automatic renewal for successive one-year terms absent notice from either party not to renew within 180 days before the end of the term.
Mr. Michel’s employment agreement, effective May 11, 2020, provides for an annual base salary of not less than $435,000 and eligibility for an annual performance- based incentive bonus with a target award equal to 60% of his annual salary, provided that the Board or the Compensation Committee may set a lower or higher bonus amount based on individual and company performance and Peer Group data supplied by the Company’s outside compensation consultant. Mr. Michel’s base salary was increased to $489,398, effective March 2024. In the event of a termination without cause or termination by him for good reason (as those terms are defined in the agreement), Mr. Michel will receive the termination benefits described in the table above. Effective August 4, 2022, the term of Mr. Michel’s employment agreement was extended to August 4, 2025, with an automatic renewal for successive one-year terms absent notice from either party not to renew within 180 days before the end of the term.
Mr. Endresen’s employment agreement, effective February 26, 2018, provides for an annual base salary of not providedless than $315,000 and a loan production commissioned based incentive plan. Mr. Endresen’s base salary was increased to $430,300 effective March 2024. On February 25, 2021, the Company entered into an amended and restated Executive Employment Agreement with Mr. Endresen, which amended and restated his prior agreement dated February 26, 2018. The material terms of his Executive Employment Agreement remain the same as they were under his prior agreement. On February 28, 2023, the term of Mr. Endresen’s Employment Agreement was extended to December 31, 2025, with an automatic renewal for insuccessive one-year terms absent notice from either party not to renew within 180 days before the historical loss information. The significant qualitative adjustments relate toend of the economic and management overlay values Q-Factors.term.
We identified the estimate of the current conditions and reasonable and supportable forecast within the economic value Q-Factor and the estimate of the management overlay Q-Factor as a critical audit matter because of the significant judgment applied by management in determining the respective qualitative adjustments. Auditing the Company’s qualitative adjustments for economic and management overlay Q-Factors required a high degree of auditor judgment and an increased extent of effort.
2023 SUMMARY COMPENSATION TABLE
HowThe following table sets forth certain information regarding the Critical Audit Matter Was Addressed incompensation awarded to, earned by, or paid to our named executive officers during 2023 and 2022, to the Auditextent required by SEC executive compensation disclosure rules.
Our audit procedures related to the portion of the ACL attributable to the economic and management overlay Q-Factors included the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Positions | | Year | | Salary ($) | | | | Stock Awards ($) (1) | | | | Non-Equity
Plan
Compensation
Earnings
($) (2) | | | | All Other
Compensation ($) (3) | | Total
($) |
| | | | | | | | | | | | | | | | | | |
| Mark K. Mason | | 2023 | | 824,040 | | | | | 825,697 | | | | | 185,410 | | | | | 28,962 | | | 1,864,109 | |
| Chairman, Chief Executive Officer, President | | 2022 | | 793,780 | | | | | 794,978 | | | | | 204,490 | | | | | 26,289 | | | 1,819,537 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| John M. Michel | | 2023 | | 471,625 | | | | | 283,500 | | | | | 84,900 | | | | | 64,862 | | | 904,887 | |
| EVP, Chief Financial Officer | | 2022 | | 454,235 | | | | | 272,932 | | | | | 81,120 | | | | | 91,239 | | | 899,526 | |
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| William D. Endresen | | 2023 | | 414,678 | | | | | 207,759 | | | | | 608,221 | | | | | 27,278 | | | 1,257,936 | |
| EVP, Commercial Real Estate President | | 2022 | | 399,450 | | | | | 200,033 | | | | | 1,157,472 | | | | | 25,279 | | | 1,782,234 | |
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•We tested(1) Amounts represent the effectiveness of controls over Q-Factor adjustments within the ACL model, including management’s review of the economic and management overlayaggregate grant date fair market value Q-Factors.
•We assessed the appropriateness of the framework for the Q-Factor adjustments.
•We tested the mathematical accuracy of Q-Factor adjustments within the ACL model.
•We evaluated management’s forecasts usedcomputed in its qualitative adjustments by comparing the forecasts to relevant external data.
•We tested management’s process to evaluate the relationship between changes in economic and management overlay value data and historical credit losses and to determine qualitative adjustments attributable to the economic and management overlay Q-Factors by evaluating whether, and to what extent, the current and forecasted conditions warranted a qualitative adjustment.
Single Family Mortgage Servicing Rights (“MSRs”) — Projected Prepayment Speed and Discount Rate Assumptions — Refer to Notes 1, 9, and 14 to the financial statements
Critical Audit Matter Description
The Company initially records, and subsequently measures, single family MSRs ataccordance with FASB ASC Topic 718. See grant date fair value table above for additional information regarding the issuance of these awards.
(2) Represents amounts earned for services rendered during the fiscal year, whether or not actually paid during such fiscal year under the Annual Incentive Plans.
(3) Includes (i) 401k matching contributions; (ii) other fringe benefits including health club memberships and categorizes its single family MSRs as “Level 3” financial instruments. Management uses a valuation model that calculates the present valueparking; (iii) for Mr. Michel, housing and relocation benefits of estimated future net servicing cash flows to estimate the fair value of single family MSRs. Changes$47,895 and $75,272 in the fair value of single family MSRs result from changes in (1) model inputs2023 and assumptions and (2) modeled amortization, representing the collection and realization of expected cash flows and curtailments over time. The significant model inputs used to estimate the fair value of single family MSRs include assumptions regarding projected prepayment speeds and discount rates. The Company's methodology for estimating the fair value of single family MSRs is highly sensitive to changes in these assumptions.
We identified the prepayment speed and discount rate assumptions used in the single family MSRs valuation as a critical audit matter because of the significant judgment applied by management in determining these assumptions. Auditing the Company’s single family MSRs valuation required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists to evaluate the reasonableness of management’s assumptions related to the selection of prepayment speeds and discount rates used in the valuation of the single family MSRs.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the reasonableness of prepayment speed and discount rate assumptions used in the valuation of the single family MSRs included the following:
•We tested the effectiveness of controls over the fair value of single family MSRs, including controls over management’s review of the prepayment speeds and discount rates.
•We compared management’s estimate of fair value for selected pools of single family MSRs to a fair value estimate independently determined by our fair value specialists using prepayment speeds and discount rates obtained from market survey data.
•We compared management’s single-family MSR fair value estimate and prepayment speed and discount rate assumptions to a third-party valuation report for the same portfolio.
•We performed analytical procedures to compare changes in certain interest and mortgage rates to changes in single family MSR values and prepayment speeds.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 4, 2022,
We have served as the Company’s auditor since 2013.
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | At December 31, |
| (in thousands, except share data) | | 2021 | | 2020 |
| | | | |
| ASSETS | | | | |
| Cash and cash equivalents | | $ | 65,214 | | | $ | 58,049 | |
| | | | |
| Investment securities | | 1,006,691 | | | 1,076,364 | |
| Loans held for sale ("LHFS") | | 176,131 | | | 361,932 | |
| Loans held for investment ("LHFI") (net of allowance for credit losses of $47,123 and $64,294) | | 5,495,726 | | | 5,179,886 | |
| Mortgage servicing rights ("MSRs") | | 100,999 | | | 85,740 | |
| Premises and equipment, net | | 58,154 | | | 65,102 | |
| Other real estate owned ("OREO") | | 735 | | | 1,375 | |
| Goodwill and other intangible assets | | 31,709 | | | 32,880 | |
| Other assets | | 268,732 | | | 375,763 | |
| | | | |
| Total assets | | $ | 7,204,091 | | | $ | 7,237,091 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
| Liabilities: | | | | |
| Deposits | | $ | 6,146,509 | | | $ | 5,821,559 | |
| Borrowings | | 41,000 | | | 322,800 | |
| Long-term debt | | 126,026 | | | 125,838 | |
| Accounts payable and other liabilities | | 175,217 | | | 249,144 | |
| | | | |
| Total liabilities | | 6,488,752 | | | 6,519,341 | |
| Commitments and contingencies (Note 10) | | 0 | | 0 |
| Shareholders' equity: | | | | |
| | | | |
| Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 20,085,336 shares and 21,796,904 shares | | 249,856 | | | 278,505 | |
| Retained earnings | | 444,343 | | | 403,888 | |
| Accumulated other comprehensive income | | 21,140 | | | 35,357 | |
| Total shareholders' equity | | 715,339 | | | 717,750 | |
| Total liabilities and shareholders' equity | | $ | 7,204,091 | | | $ | 7,237,091 | |
See accompanying notes to consolidated financial statements.
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands, except share and per share data) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Interest income: | | | | | | |
| Loans | | $ | 222,166 | | | $ | 228,999 | | | $ | 256,043 | |
| | | | | | |
| Investment securities | | 21,560 | | | 21,786 | | | 20,531 | |
| Cash, Fed Funds and other | | 569 | | | 1,227 | | | 1,032 | |
| Total interest income | | 244,295 | | | 252,012 | | | 277,606 | |
| Interest expense: | | | | | | |
| Deposits | | 11,411 | | | 33,797 | | | 70,389 | |
| Borrowings | | 5,827 | | | 9,553 | | | 17,827 | |
| Total interest expense | | 17,238 | | | 43,350 | | | 88,216 | |
| Net interest income | | 227,057 | | | 208,662 | | | 189,390 | |
| Provision for credit losses | | (15,000) | | | 20,469 | | | (500) | |
| Net interest income after provision for credit losses | | 242,057 | | | 188,193 | | | 189,890 | |
| Noninterest income: | | | | | | |
| Net gain on loan origination and sale activities | | 92,318 | | | 122,564 | | | 44,122 | |
| Loan servicing income | | 7,233 | | | 9,491 | | | 9,785 | |
| Deposit fees | | 8,068 | | | 7,083 | | | 7,926 | |
| Other | | 12,356 | | | 10,226 | | | 12,599 | |
| Total noninterest income | | 119,975 | | | 149,364 | | | 74,432 | |
| Noninterest expense: | | | | | | |
| Compensation and benefits | | 132,015 | | | 136,826 | | | 124,354 | |
| Information services | | 27,913 | | | 30,004 | | | 31,603 | |
| Occupancy | | 23,832 | | | 35,323 | | | 27,119 | |
| General, administrative and other | | 31,583 | | | 33,510 | | | 32,538 | |
| Total noninterest expense | | 215,343 | | | 235,663 | | | 215,614 | |
| Income from continuing operations before income taxes | | 146,689 | | | 101,894 | | | 48,708 | |
| Income taxes for continuing operations | | 31,267 | | | 21,904 | | | 7,988 | |
| Income from continuing operations | | 115,422 | | | 79,990 | | | 40,720 | |
| Loss from discontinued operations before income taxes | | — | | | — | | | (28,285) | |
| Income tax benefit for discontinued operations | | — | | | — | | | (5,077) | |
| Loss from discontinued operations | | — | | | — | | | (23,208) | |
| Net income | | $ | 115,422 | | | $ | 79,990 | | | $ | 17,512 | |
| Net income (loss) per share | | | | | | |
| Basic: | | | | | | |
| Income from continuing operations | | $ | 5.53 | | | $ | 3.50 | | | $ | 1.57 | |
| Loss from discontinued operations | | — | | | — | | | (0.91) | |
| Total | | $ | 5.53 | | | $ | 3.50 | | | $ | 0.66 | |
| Diluted: | | | | | | |
| Income from continuing operations | | $ | 5.46 | | | $ | 3.47 | | | $ | 1.55 | |
| Loss from discontinued operations | | — | | | — | | | (0.90) | |
| Total | | $ | 5.46 | | | $ | 3.47 | | | $ | 0.65 | |
| Weighted average shares outstanding: | | | | | | |
| Basic | | 20,885,509 | | 22,867,268 | | 25,573,488 |
| Diluted | | 21,143,414 | | 23,076,822 | | 25,770,783 |
See accompanying notes to consolidated financial statements.
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Net income | $ | 115,422 | | | $ | 79,990 | | | $ | 17,512 | |
| Other comprehensive income: | | | | | |
| Unrealized gain (loss) on investment securities available for sale ("AFS") | (17,934) | | | 39,627 | | | 27,490 | |
| Reclassification for net (gains) losses included in income | (62) | | | (341) | | | 7 | |
| Other comprehensive income (loss) before tax | (17,996) | | | 39,286 | | | 27,497 | |
| Income tax impact of: | | | | | |
| Unrealized gain (loss) on investment securities AFS | (3,766) | | | 8,322 | | | 5,656 | |
| Reclassification for net (gains) losses included in income | (13) | | | (72) | | | 1 | |
| Total | (3,779) | | | 8,250 | | | 5,657 | |
| Other comprehensive income (loss) | (14,217) | | | 31,036 | | | 21,840 | |
| Total comprehensive income | $ | 101,205 | | | $ | 111,026 | | | $ | 39,352 | |
See accompanying notes to consolidated financial statements.
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share data) | Number
of shares | | Common
stock | | Retained
earnings | | Accumulated
other
comprehensive
income (loss) | | Total temporary equity | | Total permanent equity |
| | | | | | | | | | | |
| Balance, December 31, 2018 | 26,995,348 | | | $ | 342,950 | | | $ | 412,009 | | | $ | (15,439) | | | $ | — | | | $ | 739,520 | |
| Net income | — | | | — | | | 17,512 | | | — | | | — | | | 17,512 | |
| Share-based compensation expense | — | | | (163) | | | — | | | — | | | — | | | (163) | |
| Common stock issued - Option exercise; stock grants | 104,080 | | | 105 | | | — | | | — | | | — | | | 105 | |
| Cumulative effect of adoption of new accounting standards | — | | | — | | | 1,532 | | | (2,080) | | | — | | | (548) | |
| Other comprehensive income | — | | | — | | | — | | | 21,840 | | | — | | | 21,840 | |
| Common stock repurchased | (3,208,573) | | | (20,287) | | | (25,521) | | | — | | | (52,735) | | | (98,543) | |
| Reclassification to temporary equity | — | | | (21,876) | | | (30,859) | | | — | | | 52,735 | | | — | |
| Balance, December 31, 2019 | 23,890,855 | | | 300,729 | | | 374,673 | | | 4,321 | | | — | | | 679,723 | |
| Net income | — | | | — | | | 79,990 | | | — | | | — | | | 79,990 | |
| Share-based compensation expense | — | | | 2,693 | | | — | | | — | | | — | | | 2,693 | |
| Common stock issued - Option exercise; stock grants | 140,386 | | | 782 | | | — | | | — | | | — | | | 782 | |
| Cumulative effect of adoption of new accounting standards | — | | | — | | | (3,740) | | | — | | | — | | | (3,740) | |
| Other comprehensive income | — | | | — | | | — | | | 31,036 | | | — | | | 31,036 | |
| Dividends declared ($0.60 per share) | — | | | — | | | (13,865) | | | — | | | — | | | (13,865) | |
| Common stock repurchased | (2,234,337) | | | (25,699) | | | (33,170) | | | — | | | — | | | (58,869) | |
| | | | | | | | | | | |
| Balance, December 31, 2020 | 21,796,904 | | | 278,505 | | | 403,888 | | | 35,357 | | | — | | | 717,750 | |
| Net income | — | | | — | | | 115,422 | | | — | | | — | | | 115,422 | |
| Share-based compensation expense | — | | | 3,398 | | | — | | | — | | | — | | | 3,398 | |
| Common stock issued - Option exercise; stock grants | 260,267 | | | 2,418 | | | — | | | — | | | — | | | 2,418 | |
| | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | (14,217) | | | — | | | (14,217) | |
| Dividends declared ($1.00 per share) | — | | | — | | | (21,338) | | | — | | | — | | | (21,338) | |
| Common stock repurchased | (1,971,835) | | | (34,465) | | | (53,629) | | | — | | | — | | | (88,094) | |
| Balance, December 31, 2021 | 20,085,336 | | | $ | 249,856 | | | $ | 444,343 | | | $ | 21,140 | | | $ | — | | | $ | 715,339 | |
See accompanying notes to consolidated financial statements.
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 115,422 | | | $ | 79,990 | | | $ | 17,512 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
| Provision for credit losses | (15,000) | | | 20,469 | | | (500) | |
| Depreciation and amortization, premises and equipment | 9,908 | | | 9,438 | | | 10,769 | |
| Amortization of premiums and discounts: securities, deposits, debt | 6,002 | | | 9,013 | | | 7,655 | |
| Operating leases: excess of payments over amortization | (4,029) | | | (3,488) | | | (2,597) | |
| Amortization of finance leases | 1,066 | | | 1,277 | | | 2,029 | |
| Amortization of core deposit intangibles | 1,171 | | | 1,372 | | | 1,636 | |
| Amortization of deferred loan fees and costs | (8,569) | | | 1,195 | | | 1,643 | |
| Share-based compensation expense | 3,398 | | | 2,693 | | | (163) | |
| | | | | |
| Lease impairment costs | — | | | 10,873 | | | 16,619 | |
| Deferred income tax expense (benefit) | 7,884 | | | (10,065) | | | (29,903) | |
| Loss on debt extinguishment | — | | | 1,492 | | | — | |
| Origination of LHFS | (2,251,090) | | | (2,453,110) | | | (3,757,549) | |
| Proceeds from sale of LHFS | 2,379,116 | | | 2,407,287 | | | 4,097,511 | |
| Net fair value adjustment and gain on sale of LHFS | (42,358) | | | (81,439) | | | (78,994) | |
| Origination of MSRs | (34,445) | | | (31,012) | | | (34,606) | |
| | | | | |
| | | | | |
| Net gain on sale of loans originated as LHFI | (11,377) | | | (6,895) | | | (9,534) | |
| | | | | |
| Change in fair value of MSRs | 12,290 | | | 37,567 | | | 35,902 | |
| Amortization of servicing rights | 7,581 | | | 5,657 | | | 5,214 | |
| Gain on sale of MSRs | — | | | — | | | (6,206) | |
| (Increase) decrease in other assets | (5,796) | | | (39,069) | | | 14,939 | |
| Increase (decrease) in accounts payable and other liabilities | 1,861 | | | 11,210 | | | (32,547) | |
| Net cash provided by (used in) operating activities | 173,035 | | | (25,545) | | | 258,830 | |
| | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchase of investment securities | (179,398) | | | (373,264) | | | (330,532) | |
| Proceeds from sale of investment securities | 28,187 | | | 62,378 | | | 184,871 | |
| Principal payments on investment securities | 197,253 | | | 208,610 | | | 145,771 | |
| Proceeds from sale of OREO | 541 | | | 650 | | | 1,138 | |
| Proceeds from sale of loans originated as LHFI | 504,584 | | | 576,388 | | | 769,354 | |
| Purchase of LHFI | — | | | (20,124) | | | — | |
| Proceeds from sale of MSRs | — | | | — | | | 3,255 | |
| | | | | |
| Net cash provided by disposal of discontinued operations | — | | | 2,800 | | | 182,189 | |
| Net increase in LHFI | (683,822) | | | (690,302) | | | (822,474) | |
| Proceeds from sale of premises and equipment | — | | | 1,460 | | | — | |
| Purchases of premises and equipment | (2,941) | | | (3,298) | | | (2,257) | |
| Net cash used for acquisitions | — | | | — | | | (47,389) | |
| Proceeds from sale of Federal Home Loan Bank stock | 109,484 | | | 145,801 | | | 161,254 | |
| Purchases of Federal Home Loan Bank stock | (99,526) | | | (143,721) | | | (138,156) | |
| Net cash provided by (used in) investing activities | (125,638) | | | (232,622) | | | 107,024 | |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Increase in deposits, net | $ | 347,867 | | | $ | 481,464 | | | $ | 213,572 | |
| Changes in short-term borrowings, net | (281,800) | | | (143,200) | | | (424,000) | |
| Proceeds from other long-term borrowings | 50,000 | | | — | | | — | |
| Repayment of other long-term borrowings | (50,000) | | | (7,082) | | | (56,000) | |
| | | | | |
| Repayment of finance lease principal | (1,070) | | | (1,209) | | | (1,694) | |
| Repurchases of common stock | (84,154) | | | (58,009) | | | (98,543) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from exercise of stock options | 263 | | | 237 | | | 105 | |
| Dividends paid on common stock | (21,338) | | | (13,865) | | | — | |
| Net cash provided by (used in) financing activities | (40,232) | | | 258,336 | | | (366,560) | |
| Net increase (decrease) in cash and cash equivalents | 7,165 | | | 169 | | | (706) | |
Cash and cash equivalents, beginning of year
| 58,049 | | | 57,880 | | | 58,586 | |
Cash and cash equivalents, end of year
| $ | 65,214 | | | $ | 58,049 | | | $ | 57,880 | |
| | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | |
| Cash paid during the period for: | | | | | |
| Interest | $ | 17,303 | | | $ | 44,466 | | | $ | 93,325 | |
| Federal and state income taxes | 34,429 | | | 20,992 | | | 33,625 | |
| Non-cash activities: | | | | | |
| LHFI foreclosed and transferred to OREO | — | | | 370 | | | 915 | |
| Loans transferred from LHFI to LHFS, net | 392,555 | | | 569,534 | | | 907,778 | |
| Ginnie Mae loans recognized with the right to repurchase, net | — | | | 92,366 | | | — | |
| Ginnie Mae loans derecognized with the right to repurchase, net | 89,408 | | | — | | | 28,281 | |
| Repurchase of common stock - award shares | 3,940 | | | 860 | | | — | |
| Receivable from sale of MSRs | — | | | — | | | 2,117 | |
| Acquisition: | | | | | |
| Assets acquired | — | | | — | | | 116,402 | |
| Liabilities assumed | — | | | — | | | 74,941 | |
| Goodwill | — | | | — | | | 5,928 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Equity Awards at 2023 Fiscal Year-End |
| | | | | | STOCK AWARDS |
| NEO | | Grant
Date | | | | | | | | | | | | Number of
Shares
or Units of
Stock That
Have Not
Vested (#) (1) | | Market Value of
Shares or Units of
Stock That Have
Not Vested ($) (2) | | Equity Incentive
Plan Awards:
Number of
Unearned Shares,
Units or Other
Rights That
Have Not
Vested
(#) (3) | | Equity Incentive Plan
Awards: Market
or Payout Value of
Unearned Shares,
Units or Other Rights
That Have Not
Vested ($) (2) |
| | | | | | | | | | | | | | | | | | | | |
| Mark K. Mason | | 1/1/21 | | | | | | | | | | | | 3,865 | | | 39,810 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 1/1/22 | | | | | | | | | | | | 5,140 | | | 52,942 | | | — | | | — | |
| | 1/1/22 | | | | | | | | | | | | — | | | — | | | 3,855 | | | 39,707 | |
| | 1/1/23 | | | | | | | | | | | | 14,848 | | | 152,934 | | | — | | | — | |
| | 1/1/23 | | | | | | | | | | | | — | | | — | | | 7,424 | | | 76,467 | |
| | | | | | | | | | | | | | | | | | | | |
| John M. Michel | | 1/1/21 | | | | | | | | | | | | 1,302 | | | 13,411 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 1/1/22 | | | | | | | | | | | | 1,765 | | | 18,180 | | | — | | | — | |
| | 1/1/22 | | | | | | | | | | | | — | | | — | | | 1,324 | | | 13,637 | |
| | 1/1/23 | | | | | | | | | | | | 5,098 | | | 52,509 | | | — | | | — | |
| | 1/1/23 | | | | | | | | | | | | — | | | — | | | 2,549 | | | 26,255 | |
| | | | | | | | | | | | | | | | | | | | |
| William D. Endresen | | 1/1/21 | | | | | | | | | | | | 935 | | | 9,631 | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 1/1/22 | | | | | | | | | | | | 1,294 | | | 13,328 | | | — | | | — | |
| | 1/1/22 | | | | | | | | | | | | — | | | — | | | 970 | | | 9,991 | |
| | 1/1/23 | | | | | | | | | | | | 3,736 | | | 38,481 | | | — | | | — | |
| | 1/1/23 | | | | | | | | | | | | — | | | — | | | 1,868 | | | 19,240 | |
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See accompanying notes to consolidated financial statements.
HomeStreet, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
HomeStreet, Inc., a State(1) Amount shown reflects the number of Washington corporation organized in 1921, (the "Corporation") is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States.
The Bank, the Company’s principal operating subsidiary, is engaged in commercial banking, mortgage banking and consumer/retail banking activities. The Bank was incorporated in the State of Washington in 1986, and as a state-chartered non-member commercial bank is subject to examination by the State of Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation ("FDIC").
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The Company allocates resources and assesses financial performance on a consolidated basis and therefore has one reporting segment. In preparing the consolidated financial statements, management is required to make estimates and assumptionsRSUs that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates.
Reclassifications
Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation. These reclassifications had no effect on prior years' net income or stockholders’ equity.
Discontinued Operations
During 2019, the Company's Board of Directors (the "Board") adopted a Resolution of Exit or Disposal of Home Loan Center ("HLC") Based Mortgage Banking Operations to sell or abandon the assets and transfer or terminate the personnel associated with the Company's high-volume HLC-based mortgage origination business and related servicing. The Company also successfully closed and settled 2 separate sales of the rights to service $14.3 billion in total unpaid principal balance of single family mortgage loans serviced for others. At the end of the second quarter 2019, we also entered into a non-binding letter of interest to sell our ownership interest in WMS LLC. In accordance with Accounting Standards Codification (ASC) 205-20, the Company determined that the Board's decision to sell or abandon the assets and personnel associated with the Company's HLC-based mortgage business, the related mortgage servicing rights ("MSR") sales and the sale of WMS LLC met the criteria to be classified as discontinued operations and its operating results and financial condition are presented as discontinued operations in the consolidated financial statements for 2019. These discontinued operations activities, including the exit or disposal of the former Mortgage Banking Segment, were concluded by December 31, 2019. Consequently, we ceased discontinued operations accounting effective January 1, 2020. Unless otherwise indicated, information included in these notes to the consolidated financial statements for 2019 are presented on a consolidated operations basis, which includes results from both continuing and discontinued operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, certificates of deposits with original maturities of less than ninety days, investment securities with original maturities of less than ninety days and federal funds sold. The Bank maintains most of its excess cash at the Federal Reserve Bank of San Francisco ("FRBSF"), with well-capitalized correspondent banks or with other depository institutions at amounts less than the FDIC insured limits. Restricted cash of $8.1 million and $6.6 million at December 31, 2021 and 2020, respectively, is included in cash and cash equivalents.
Investment Securities
Investment securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. Investments not classified as trading securities nor as held-to-maturity ("HTM") securities are classified as AFS securities and recorded at fair value. Unrealized gains or losses on AFS securities are excluded from net income and reported net of taxes as a separate component of other comprehensive income included in shareholders’ equity. Purchase premiums and discounts are recognized in interest income using the effective interest method over the life of the securities. Purchase premiums or discounts related to mortgage-backed securities are amortized or accreted using projected prepayment speeds. Gains and losses on the sale of AFS securities are recorded on the trade date and are determined using the specific identification method.
The Company evaluates AFS securities in an unrealized loss position, using a qualitative approach, at the end of each quarter to determine whether the decline in value is temporary or permanent. An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. When qualitative factors indicate that a credit loss may exist, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. The Company recognizes an ACL if a loss is considered to exist, measured as the difference between the present value of expected cash flows and the amortized cost basis of the security, limited by the amount that the security’s fair value is less than its amortized cost basis. The Company does not believe any of these securities that were in an unrealized loss position at December 31, 2021 have a credit loss impairment.
The Company evaluates HTM securities at the end of each quarter to determine if any expected credit losses exist. No ACL for HTM securities was recordedvested as of December 31, 2023. In each case, the vesting of RSUs is contingent on the NEO’s employment with the Company not having been terminated for any reason other than retirement, death or disability on the applicable vesting date. In addition, such awards may vest in connection with a change in control in certain circumstances. For more information, please see “Long-Term Incentives” on page 25 of this Amendment No. 1, and “Potential Payments upon Termination or Change in Control” on page 31 of this Amendment No. 1
(2) Based on the December 31, 2023 closing market price of our shares of common stock on Nasdaq of $10.30 per share.
(3) Includes PSU awards granted in 2022 and 2023. Vesting of PSUs is based on achievement of a performance goal that was based on TSR. For PSUs granted in 2022, the performance period covers fiscal years 2022 – 2024. For PSUs granted in 2023, the performance period covers fiscal years 2023 – 2025. Excludes PSUs issued in 2021 and 2020.
Federal Home Loan Bank Stock
The Bank is a memberthat were forfeited as the performance metrics were not met. In each case, the vesting of the Federal Home Loan Bankaward is also contingent on the NEO’s employment with the Company not having been terminated for any reason other than retirement, death or disability prior to the date the Compensation Committee certifies the achievement of Des Moines ("FHLB"), and as such, is requiredperformance goals for the relevant performance period. Pursuant to own a certain amount of FHLB stockSEC rules, the amounts included in the table are based on the level of borrowings and other factors. FHLB stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are recorded as a component of interest income.
LHFS
Loans originated for sale inthreshold award amounts given the secondary market or designated for whole loan sales are classified as LHFS. Management has elected the fair value option for all single family LHFS (originated with the intent to market for sale) and records these loans at fair value. Gains and losses from changes in fair value on LHFS are recognized in net gain on mortgage loan origination and sale activities within noninterest income. Direct loan origination costs and fees for single family loans originated as held for sale are recognized in earnings.
Multifamily and Small Business Administration ("SBA") LHFS are accounted for at the lower of amortized cost or fair value ("LOCOM"). LOCOM valuations are performed quarterly or at the time of transfer to or from LHFS. Related gains and losses are recognized in net gain on mortgage loan origination and sale activities. Direct loan origination costs and fees for multifamily and SBA loans classified as held for sale are deferred at origination and recognized in earnings at the time of sale.
LHFI
LHFI are reported at the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. When a loan is designated as held for investment, the intent is to hold these loans for the foreseeable future or until maturity or pay-off. If subsequent changes occur as part of the balance sheet management process, the Company may change its intent to hold these loans. Once a determination has been made to sell such loans, they are transferred to LHFS and carried at the lower of amortized cost or fair value. Interest on loans is recognized at the contractual rate of interest and is only accrued if deemed collectible. Deferred fees and costs and premiums and discounts are amortized over the contractual terms of the underlying loans using the constant effective yield (the interest method) or straight-line method.
Nonaccrual Loans
Loans forCompany’s current performance trends, which the accrual of interest has been discontinued are designated as nonaccrual loans. Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost recovery method, all cash collected is applied first to reduce the outstanding principal balance. A loan may be returned to accrual status if all delinquent principal and interest payments are brought current and the collectability of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans whose repayments are insured by the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans' Affairs ("VA") are maintained on accrual status even if 90 days or more past due.
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual restructured terms for a time frame of at least six months, and the ultimate collectability of the total contractual restructured principal and interest is reasonably assured.
ACL for LHFI
The ACL for LHFI is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loan balances are charged off against the ACL when management believes the non-collectability of a loan balance is confirmed. Recoveries are recorded as an increase to the ACL for LHFI to the extent they do not exceed the related charge-off amounts. The ACL for LHFI, as reported in our consolidated balance sheets, is adjusted by a provision for credit losses and reduced by the charge-offs of loan amounts, net of recoveries.
Management estimates the ACL balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix or delinquency levels or other relevant factors.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of its two loan portfolios, the consumer loan portfolio and the commercial loan portfolio. These two portfolios are further disaggregated into loan pools, the level at which credit risk is monitored. When computing ACL levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts. Determining the appropriateness of the ACL is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, based on the factors and forecasts then prevailing, maywould result in material changesa below target payout. In addition, such awards may vest in the ACL and provision for credit losses in those future periods.
Credit Loss Measurement
The ACL level is influenced by current conditions related to loan volumes, loan asset quality ratings ("AQR") migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses has two basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics and second an asset-specific component involving individual loans that do not share risk characteristicsconnection with other loans and the measurement of expected credit losses for such individual loans.
The Company's ACL model methodology is to build a reserve rate using historical life of loan default rates combined with assessments of current loan portfolio information and current and forecasted economic environment and business cycle information. The model uses statistical analysis to determine the life of loan default rates for the quantitative component and analyzes qualitative factors (Q-Factors) that assess the current loan portfolio conditions and forecasted economic environment and collateral values. Below is the general overview our ACL model.
Loans that Share Similar Risk Characteristics with Other Loans
For loans that share similar risk characteristics, loans are segregated into loan pools based on similar risk characteristics, like product types or areas of risk concentration to estimate the ACL.
Historical Loss Rates
The Company analyzed loan data from a full economic cycle, to the extent that data was available, to calculate life of loan loss rates. Based on the current economic environment and available loan level data, it was determined the Loss Horizon Period ("LHP") should begin prior to the economic recession that began in 2007. The Company monitors and reviews the LHP on an annual basis to determine appropriate time frames to be included based on economic indicators.
Under current expected credit losses methodology ("CECL"), the Company groups pools of loans by similar risk characteristics. Using these pools, sub-pools are established at a more granular level incorporating delinquency status and original FICO or original LTV (for consumer loans) and risk ratings (for commercial loans). Using the pool and sub-pool structure, cohorts are established historically on a quarterly basis containing the population in these sets as of that point in time. After the establishment of these cohorts, the loans within the cohorts are then tracked from that point forward to establish long-term Probability of Default ("PD") at the sub-pool level and Loss Given Default ("LGD") for the pool level. These historical cohorts and their PD/LGD outcomes are then averaged together to establish expected PDs and LGDs for each sub-pool.
Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events. The Company has defined default events as the first dollar of loss. If a loan in the cohort has experienced a default event over the LHP then the balance of the loan at the time of cohort establishment becomes part of the numerator of the PD calculation. The Loss Given Probability of Default ("LGPD") or Expected Loss ("EL") is the weighted average PD for each sub-pool cohort times the average LGD for each pool. The output from the model then is a series of EL rates for each loan sub-pool, which are applied to the related outstanding balances for each loan sub-pool to determine the ACL reserve based on historical loss rates.
Q-Factors
The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. The Company has established a methodology for adjusting historical expected loss rates based on these more recent or forecasted changes. The Q-Factor methodology is based on a blend of quantitative analysis and management judgment and reviewed on a quarterly basis.
Each of the thirteen factors in the FASB standard were analyzed for common risk characteristics and grouped into seven consolidated Q-Factors as listed below:
| | | | | | |
Qualitative Factor | | Financial Instruments - Credit Losses |
Portfolio Credit Quality | | The borrower's financial condition, credit rating, credit score, asset quality or business prospects |
| The borrower's ability to make scheduled interest or principal payments |
| The volume and severity of past due financial assets and the volume and severity of adversely classified or rated financial assets |
Remaining Payments | | The remaining payment terms of the financial assets |
| The remaining time to maturity and the timing and extent of payments on the financial assets |
Volume & Nature | | The nature and volume of the entity's financial assets |
Collateral Values | | The value of underlying collateral on financial assets in which the collateral-dependent practical expedient has not been utilized |
Economic | | The environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: changes and expected changes in national, regional and local economic and business conditions and developments in which the entity operates, including the condition and expected condition of various market segments |
Credit Culture | | The entity's lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off and recovery practices, as well as knowledge of the borrower's operations or the borrower's standing in the community |
| The quality of the entity's credit review system |
| The experience, ability and depth of the entity's management, lending staff, and other relevant staff |
Business Environment | | The environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: regulatory, legal, or technological environment to which the entity has exposure |
| The environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: changes and expected changes in the general market condition of either the geographical area or the industry to which the entity has exposure |
An eighth Q-Factor, Management Overlay, allows the Bank to adjust specific pools when conditions exist that were not contemplated in the model design that warrant an adjustment. The economic downturn caused by the COVID-19 pandemic and resulting accounting treatment of forbearances is an example of such a condition.
The Company has chosen two years as the forecast period based on management judgment and has determined that reasonable and supportable forecasts should be made for two of the Q-Factors: Economic and Collateral values.
Management has assigned weightings for each qualitative factor as well as individual metrics within each qualitative factor as to the relative importance of that factor or metric specific to each portfolio type. The Q-Factors above are evaluated using a seven-point scale ranging from significant improvement to significant deterioration.
The CECL Q-Factor methodology bounds the Q-Factor adjustments by a minimum and maximum range, based on the Bank’s own historical expected loss rates for each respective pool. The rating of the Q-Factor on the seven-point scale, along with the allocated weight, determines the final expected loss adjustment. The model is constructed so that the total of the Q-Factor adjustments plus the current expected loss rate cannot exceed the maximum or minimum two-year loss rate for that pool, which is aligned with the Bank's chosen forecast period. Loss rates beyond two years are not adjusted in the Q-Factor process and the model reverts to the historical mean loss rates. Management Overlays are not bounded by the historical maximums.
Quarterly, loan data is gathered to update the portfolio metrics analyzed in the Q-Factor model. The model is updated with current data and applicable forecasts, then the results are reviewed by management. After consensus is reached on all Q-Factor ratings, the results are input into the Q-Factor model and applied to the pooled loans which are reviewed to determine the adequacy of the reserve.
Additional details describing the model by portfolio are below:
Consumer Loan Portfolio
The consumer loan portfolio is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower's capacity, credit and collateral. Other consumer loans are grouped with home equity loans. Capacity refers to a borrower's ability to make payments on the loan. Several factors are considered when assessing a borrower's capacity, including the borrower's employment, income, current debt, assets and level of equity in the property. Credit refers to how well a borrower manages current and prior debts as documented by a credit report that provides credit scores and current and past information about the borrower's credit history. Collateral refers to the type and use of property, occupancy and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan amount and lien position are considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices, demand for housing and levels of unemployment.
Consumer Loan Portfolio Loss Rate Model
Under CECL, the Bank utilizes pools of loans that are grouped by similar risk characteristics: Single Family and Home Equity Loans. Sub-Pools are established at a more granular level for the calculation of PDs, incorporating delinquency status, original FICO and original LTV.
Consumer portfolio cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events.
The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. For Single Family loans all Q-Factors noted above are evaluated. For the Home Equity loans, collateral values are not evaluated as the Bank has determined the FICO score trends are a more relevant predictor of default than current collateral value for those types of loans. These factors are evaluated based on current conditions and forecasts (as applicable), using a seven-point scale ranging from significant improvement to significant deterioration.
Commercial Loan Portfolio
The commercial loan portfolio is comprised of the non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party’s financial position. These other factors include assessing liquidity, net worth, leverage, other outstanding indebtedness of the borrower, the quality and reliability of cash expected to flow through the borrower (including the outflow to other lenders) and prior known experiences with the borrower.
This information is used to assess financial capacity, profitability and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
Commercial Loan Portfolio Loss Rate Model
The Bank has subdivided the commercial loan portfolio into the following ACL reporting pools to more accurately group risk characteristics: Commercial Business, Owner Occupied CRE, Multifamily, Multifamily Construction, CRE, CRE Construction, Single Family Construction to Permanent, and Single Family Construction, which includes lot, land and acquisition and development loans. ACL sub-pools are established at a more granular level for the calculation of PDs, utilizing risk rating.
As outlined in the Bank’s policies, commercial loans pools are non-homogenous and are regularly assessed for credit quality. For purposes of CECL, loans are sub-pooled according to the following AQR Ratings:
•1-6: These loans meet the definition of “Pass" assets. They are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell in a timely manner, of any underlying collateral. The Bank further uses the available AQR ratings for components of the sub-pools.
•7: These loans meet the regulatory definition of “Special Mention.” They contain potential weaknesses, that if uncorrected may result in deterioration of the likelihood of repayment or in the Bank’s credit position.
•8: These loans meet the regulatory definition of “Substandard.” They are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. They have well-defined weaknesses and have unsatisfactory characteristics causing unacceptable levels of risk.
Commercial portfolio cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events. The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. All the Q-Factors noted above are evaluated for Commercial portfolio loans except for Commercial Business and Owner Occupied CRE loans which exclude the collateral values Q-Factor. The Company has determined that these loans are primarily underwritten by evaluating the cash flow of the business and not the underlying collateral. Factors above are evaluated based on current conditions and forecasts (as applicable), using a seven-point scale ranging from significant improvement to significant deterioration.
Loans That Do Not Share Risk Characteristics with Other Loans
For a loan that does not share risk characteristics with other loans, expected credit loss is measured on net realizable value that is the difference between the discounted value of the expected future cash flows, based on the original effective interest rate and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, which is when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated costs to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, collateral values for collateral dependent loans are updated every twelve months, either from external third parties or in-house certified appraisers. A third-party appraisal is required at least annually for substandard loans and OREO. For performing consumer loans secured by real estate that are classified as collateral dependent, the Bank determines the fair value estimates quarterly using automated valuation services. Once the expected credit loss amount is determined, an ACL is recorded equal to the expected credit loss and included in the ACL. If the expected credit loss is determined to be permanent or not recoverable, the expected credit loss will be charged off. Factors considered by management in determining if the expected credit loss is permanent or not recoverable include whether management judges the loan to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames, or the loss becomes evident owing to the borrower's lack of assets or, for single family loans, the loan is 180 days or more past due unless both well-secured and in the process of collection.
ACL for Off-Balance Sheet Credit Exposures
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. Reserves are required for off-balance sheet credit exposures that are not unconditionally cancellable. The ACL on unfunded loan commitments is based on an estimate of unfunded commitment utilization over the life of the loan, applying the EL to the estimated utilization balance as of the reporting period end date. Q-factors are not included in the calculation of expected credit losses for off-balance sheet credit exposures.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at net realizable value (fair value of collateral less estimated costs to sell). At the time of possession, an appraisal is obtained and any excess of the loan balance over the net realizable value is charged against the ACL. After foreclosure, valuations are periodically performed by management. Any subsequent declines in fair value are recorded as a charge to current period earnings with a corresponding write-down to the asset. All legal fees and direct costs, including foreclosure and other related costs are expensed as incurred.
Mortgage Servicing Rights
MSRs are recognized as separate assets on our consolidated balance sheets upon purchase of the rights or when we retain the right to service loans that we have sold. We initially record all MSRs at fair value. For subsequent measurements, single family MSRs are accounted for at fair value, with changes in fair value recorded through current period earnings, while multifamily and SBA MSRs are accounted for at the lower of amortized cost or fair value.
Subsequent fair value measurements of MSRs are determined by considering the present value of estimated future net servicing cash flows. Changes in the fair value of MSRs result from changes in (1) model inputs and assumptions and (2) modeled amortization, representing the collection and realization of expected cash flows and curtailments over time. The significant
model inputs used to measure the fair value of MSRs include assumptions regarding market interest rates, projected prepayment speeds, discount rates, estimated costs of servicing and other income and additional expenses associated with the collection of delinquent loans.
For single family MSRs, loan servicing income includes fees earned for servicing the loans and the changes in fair value over the reporting period of both our MSRs and the derivatives used to economically hedge our MSRs. For other MSRs, loan servicing income includes fees earned for servicing the loans less the amortization of the related MSRs and any impairment adjustments.
Revenue Recognition
Descriptions of our primary revenue-generating activities that fall within the scope of ASC Topic 606 Revenue Recognition and are presented in our consolidated income statements as follows:
Depositor and other retail and banking fees
Depositor and other retail banking fees consist of monthly service fees, check orders, and other deposit account related fees. The Company's performance obligation for these fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.
Commission Income
Commission income primarily consists of revenue received on insurance policies and monthly investment management fees earned where the Company has acted as an intermediary between customers and the insurance carriers or investment advisers.
The Company's performance obligation for commissions is generally satisfied, and the related revenue generally recognized, over the course of the policy or over the period in which the services are provided, generally monthly.
Credit Card Fees
The Company offers credit cards to its customers through a third party and earns a fee on each transaction and a fee for each new account activation on a net basis. Revenue is recognized when the services are performed.
Sale of Other Real Estate Owned
A gain or loss, the difference between the cost basis of the property and its sale price, on other real estate owned is recognized when the performance obligation is met, which is at the time the property title is transferred to the buyer. To record a sale of OREO, the Company evaluates if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and rewards of ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained control of the asset, then a gain cannot be recognized.
Other Noninterest Income
Other noninterest income includes revenue related to mortgage servicing activities and gains on sales of loans, which are not subject to the requirements of ASC Topic 606.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 20 years. The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the related leases. The Company periodically evaluates premises and equipment for impairment.
Leases
We determine if an arrangement is a lease at inception. Operating and finance leases are included in lease right-of-use ("ROU") assets, and lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The lease liability is recognized at commencement date based on the present value of lease payments over the lease term. The right-of-use asset is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent, lease incentives and deferred rent. As the rate implicit in most of our leases are not readily determinable, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease contract at commencement date. We have lease agreements with lease and non-lease components, which are generally accounted for separately for real estate leases.
Certain of our lease agreements include rental payments that adjust periodically based on changes in the Consumer Price Index ("CPI"). Subsequent increases in the CPI are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes in the CPI.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for our financing leases is comprised of the amortization of the right-of-use asset and interest expense recognized based on the effective interest method.
We use the long-lived assets impairment guidance under ASC Topic 360-10-35, "Property, Plant and Equipment," to determine whether an ROU asset is impaired, and if impaired, the amount of loss to recognize. Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These could include vacating the leased space, obsolescence, or physical damage to a facility. If an impairment loss is recognized for a ROU asset, the adjusted carrying amount of the ROU asset would be its new accounting basis. The remaining ROU asset (after the impairment write-down) is amortized on a straight-line basis over the remaining lease term.
Goodwill and Other Intangible Assets
Goodwill is recorded upon completion of a business combination as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill has been determined to have an indefinite useful life and is not amortized, but tested for impairment at least annually or more frequently if events and circumstances occur that indicate it is more likely than not the fair value of the reporting unit is less than its carrying value necessitating an impairment test. The Company typically performs its annual impairment testing in the second or third quarter.
Intangible assets with definite useful lives, such as core deposit intangible assets arising from bank acquisitions, are amortized over their estimated useful lives.
On March 25, 2019, the Company completed its acquisition of a branch and its related deposits and loans in San Diego County from Silvergate Bank, along with its business lending team. The application of the acquisition method of accounting resulted in recording goodwill of $5.9 million and core deposit intangibles of $1.9 million.
Securities Sold Under Agreements to Repurchase
From time to time, the Company may enter into sales of securities under agreements to repurchase ("repurchase agreements"). Repurchase agreements are accounted for as financing arrangements with the obligation to repurchase securities sold reflected as a liability on the consolidated balance sheets. The securities underlying the repurchase agreements continue to be recognized as AFS securities in the consolidated balance sheet.
Income Taxes
Our income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Deferred tax assets and tax carryforwards are only recognized if, in the opinion of management, it is more likely than not that the deferred
tax assets will be realized. The effect on deferred taxes of a change in tax rates is recognizedcontrol in incomecertain circumstances. For more information, please see “Long-Term Incentives” on page 25 of this Amendment No. 1, and “Potential Payments upon Termination or Change in the period that includes the enactment date. We are subject to federal income tax and also state income taxes in a numberControl” on page 31 of different states.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and penalties related to income tax matters in income tax expense.
Derivatives and Hedging Activities
In the ordinary course of business, the Company enters into derivative transactions to manage various risks and to accommodate the business requirements of its customers. The fair value of derivative instruments are recognized as either assets or liabilities on the consolidated balance sheet. All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging activities. For derivative instruments designated as non-hedging activities (also referred to as economic hedges), the change in fair value is recognized currently in earnings. Gains and losses on derivative contracts utilized for economically hedging the mortgage pipeline are recognized as part of the net gain on mortgage loan origination and sale activities within noninterest income. Gains and losses on derivative contracts utilized for economically hedging our single family MSRs are recognized as part of loan servicing income within noninterest income.
For derivative instruments designated as hedging activities, a qualitative analysis is performed at inception to determine if the derivative instrument is highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk during the period that the hedge is designated. Subsequently, a qualitative assessment of a hedge’s effectiveness is performed on a quarterly basis. All derivative instruments that qualify and are designated for hedge accounting are recorded at fair value and classified as either a hedge of the fair value of a recognized asset or liability ("fair value hedge") or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). Changes in the fair value of a derivative that is highly effective and designated as a fair value hedge is recognized in earnings and the change in fair value on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognized currently in earnings. Changes in the fair value of a derivative that is highly effective and designated as a cash flow hedge are recorded in other comprehensive income (loss) until cash flows of the hedged item are realized. All amounts recognized in earnings are presented in the same income statement line item as the earnings effect of the hedged item.
If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably possible of occurring, whereby the amounts remain within other comprehensive income (loss).
Derivative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, as appropriate.
The Company also executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are economically hedged by simultaneously entering into an offsetting interest rate swap that the Company executes with a third party, such that the Company minimizes its net risk exposure.
Share-Based Compensation
The Company issues various forms of stock-based compensation awards annually, including restricted stock units ("RSUs") and performance stock units ("PSUs"). Compensation expense related to RSUs is based on the fair value of the underlying stock on the award date and is recognized over the period in which an employee is required to provide services in exchange for the award, generally the vesting period. PSUs are subject to market-based vesting criteria in addition to a requisite service period and cliff vest based on those conditions at the end of three years. The grant date fair value of PSUs is determined through the use of an independent third party which employs the use of a Monte Carlo simulation. The Monte Carlo simulation estimates grant date fair value using input assumptions similar to those used in the Black-Scholes model, however, it also incorporates into the grant date fair value calculation the probability that the performance targets will be achieved. The Black-Scholes model uses certain assumptions to determine grant-date fair value such as: expected volatility, expected term of the option, expected risk-free rate of interest and expected dividend yield on the Company’s common stock. Forfeitures of stock-based awards are recognized when they occur.
Fair Value Measurement
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value is an exit price, representing the amount that would be received to sell an asset or transfer a liability in an orderly transaction between market participants. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Fair value measures are classified according to a three-tier fair value hierarchy, which is based on the observability of inputs used to measure fair value. Changes in assumptions or in market conditions could significantly affect these estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Contingencies
Contingent liabilities, including those that exist as a result of a guarantee or indemnification, are recognized when it becomes probable that a loss has been incurred and the amount of the loss is reasonably estimable. For indemnifications provided in sales agreements, a portion of the sale proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise result from the transaction. For these indemnifications, the initial liability is amortized to income as the Company's risk is reduced or when the indemnification expires.
Earnings per Share
Earnings per share of common stock is calculated on both a basic and diluted basis, based on the weighted average number of common and common equivalent shares outstanding. Basic earnings per share excludes potential dilution from common equivalent shares, such as those associated with stock-based compensation awards, and is computed by dividing net income allocated to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as common equivalent shares associated with stock-based compensation awards, were exercised or converted into common stock that would then share in the net earnings of the Company. Potential dilution from common equivalent shares is determined using the treasury stock method, reflecting the potential settlement of stock-based compensation awards resulting in the issuance of additional shares of the Company’s common stock. Stock-based compensation awards that would have an anti-dilutive effect have been excluded from the determination of diluted earnings per share.
Marketing Costs
The Company expenses marketing costs, including advertising, in the period incurred. We incurred $4.1 million, $2.3 million and $5.9 million in marketing costs during 2021, 2020 and 2019, respectively.
Recent Accounting Developments
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU")this Amendment No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in GAAP. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this ASU on January 1, 2021 and it did not have a material effect on the Company’s financial position, results of operations or financial statement disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting applied to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. These ASUs are not expected to have a material impact on the Company’s financial position or results of operations.1.
NOTE 2–INVESTMENT SECURITIES:
The following tables set forth certain information regarding the amortized costExecutive Employment Agreements and fair values of our investment securities AFS and held-to-maturity ("HTM"):
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| (in thousands) | Amortized
cost | | Gross
unrealized
gains | | Gross
unrealized
losses | | Fair
value |
| | | | | | | |
| AFS | | | | | | | |
| Mortgage-backed securities ("MBS"): | | | | | | | |
| Residential | $ | 32,905 | | | $ | 396 | | | $ | (338) | | | $ | 32,963 | |
| Commercial | 62,094 | | | 933 | | | (235) | | | 62,792 | |
| Collateralized mortgage obligations ("CMOs") | | | | | | | |
| Residential | 186,703 | | | 2,012 | | | (1,321) | | | 187,394 | |
| Commercial | 135,102 | | | 1,890 | | | (333) | | | 136,659 | |
| Municipal bonds | 516,693 | | | 24,154 | | | (924) | | | 539,923 | |
| Corporate debt securities | 18,918 | | | 699 | | | (1) | | | 19,616 | |
| U.S. Treasury securities | 23,348 | | | — | | | (173) | | | 23,175 | |
| | | | | | | |
| Total | $ | 975,763 | | | $ | 30,084 | | | $ | (3,325) | | | $ | 1,002,522 | |
| HTM | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Municipal bonds | $ | 4,169 | | | $ | 136 | | | $ | — | | | $ | 4,305 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
| (in thousands) | Amortized
cost | | Gross
unrealized
gains | | Gross
unrealized
losses | | Fair
value |
| | | | | | | |
| AFS | | | | | | | |
| MBS: | | | | | | | |
| Residential | $ | 50,001 | | | $ | 1,237 | | | $ | (192) | | | $ | 51,046 | |
| Commercial | 43,061 | | | 2,131 | | | (8) | | | 45,184 | |
| CMOs: | | | | | | | |
| Residential | 228,685 | | | 6,319 | | | (95) | | | 234,909 | |
| Commercial | 155,645 | | | 3,719 | | | (181) | | | 159,183 | |
| Municipal bonds | 533,719 | | | 31,321 | | | (337) | | | 564,703 | |
| Corporate debt securities | 14,381 | | | 841 | | | — | | | 15,222 | |
| | | | | | | |
| Agency debentures | 1,846 | | | — | | | — | | | 1,846 | |
| Total | $ | 1,027,338 | | | $ | 45,568 | | | $ | (813) | | | $ | 1,072,093 | |
| HTM | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Municipal bonds | $ | 4,271 | | | $ | 236 | | | $ | — | | | $ | 4,507 | |
| | | | | | | |
MBS and CMOs represent securities primarily issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securitiesChange in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of December 31, 2021 and 2020, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services or Moody's Investors Services.
Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| | Less than 12 months | | 12 months or more | | Total |
| (in thousands) | Gross
unrealized
losses | | Fair
value | | Gross
unrealized
losses | | Fair
value | | Gross
unrealized
losses | | Fair
value |
| | | | | | | | | | | |
| MBS: | | | | | | | | | | | |
| Residential | $ | (38) | | | $ | 5,324 | | | $ | (300) | | | $ | 2,406 | | | $ | (338) | | | $ | 7,730 | |
| Commercial | (235) | | | 18,127 | | | — | | | — | | | (235) | | | 18,127 | |
| CMOs: | | | | | | | | | | | |
| Residential | (1,007) | | | 53,068 | | | (314) | | | 7,116 | | | (1,321) | | | 60,184 | |
| Commercial | (135) | | | 14,806 | | | (198) | | | 5,132 | | | (333) | | | 19,938 | |
| Municipal bonds | (914) | | | 64,237 | | | (10) | | | 1,058 | | | (924) | | | 65,295 | |
| Corporate debt securities | (1) | | | 3,164 | | | — | | | — | | | (1) | | | 3,164 | |
| U.S. Treasury securities | (173) | | | 23,175 | | | — | | | — | | | (173) | | | 23,175 | |
| | | | | | | | | | | |
| Total | $ | (2,503) | | | $ | 181,901 | | | $ | (822) | | | $ | 15,712 | | | $ | (3,325) | | | $ | 197,613 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
| | Less than 12 months | | 12 months or more | | Total |
| (in thousands) | Gross
unrealized
losses | | Fair
value | | Gross
unrealized
losses | | Fair
value | | Gross
unrealized
losses | | Fair
value |
| | | | | | | | | | | |
| | | | | | | | | | | |
| MBS: | | | | | | | | | | | |
| Residential | $ | (7) | | | $ | 1,196 | | | $ | (185) | | | $ | 1,432 | | | $ | (192) | | | $ | 2,628 | |
| Commercial | (8) | | | 925 | | | — | | | — | | | (8) | | | 925 | |
| CMOs: | | | | | | | | | | | |
| Residential | (95) | | | 7,391 | | | — | | | — | | | (95) | | | 7,391 | |
| Commercial | (39) | | | 6,687 | | | (142) | | | 15,358 | | | (181) | | | 22,045 | |
| Municipal bonds | (337) | | | 10,512 | | | — | | | — | | | (337) | | | 10,512 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | $ | (486) | | | $ | 26,711 | | | $ | (327) | | | $ | 16,790 | | | $ | (813) | | | $ | 43,501 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
There were no HTM securities in an unrealized loss position at December 31, 2021 and 2020.Control Agreements
The Company has evaluated AFS securities that areentered into executive employment agreements with each of the NEOs, which provide for certain severance benefits in an unrealized loss positionthe event of a qualified termination with each of the NEOs. Mr. Mason’s employment agreement also provides for certain severance benefits in the event of a qualified termination in connection with a change in control event. In conjunction with and has determined thatas part of their employment agreements, each of Messrs. Michel and Endresen have entered into a CIC Agreement which provides for certain severance benefits in the declineevent of a qualified termination in valueconnection with a change in control event. Mr. Mason is temporary and is relatedalso entitled to certain severance benefits pursuant to the changeemployment agreement he has entered into with FirstSun and Sunflower Bank, FirstSun’s wholly-owned subsidiary in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities asconnection with his employment following the closing of December 31, 2021 and 2020. In addition, asthe merger of December 31, 2021 and 2020, the Company had not made a decision to sell anyand FirstSun Capital Bancorp, which severance benefits will be described in the Company’s forthcoming proxy statement for the meeting of its debt securities held, nor didshareholders of the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.for 2024.
The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield.Severance Provisions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| | Within one year | | After one year
through five years | | After five years
through ten years | | After
ten years | | Total |
| (dollars in thousands) | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield |
| | | | | | | | | | | | | | | | | | | |
| AFS | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Municipal bonds | $ | 4,933 | | | 3.79 | % | | $ | 14,366 | | | 3.26 | % | | $ | 68,025 | | | 3.60 | % | | $ | 452,599 | | | 3.23 | % | | $ | 539,923 | | | 3.28 | % |
| Corporate debt securities | — | | | — | % | | 6,563 | | | 3.60 | % | | 13,053 | | | 5.03 | % | | — | | | — | % | | 19,616 | | | 4.55 | % |
| U.S. Treasury securities | — | | | — | % | | — | | | — | % | | 23,175 | | | 1.27 | % | | — | | | — | % | | 23,175 | | | 1.27 | % |
| | | | | | | | | | | | | | | | | | | |
| Total | $ | 4,933 | | | 3.79 | % | | $ | 20,929 | | | 3.37 | % | | $ | 104,253 | | | 3.23 | % | | $ | 452,599 | | | 3.23 | % | | $ | 582,714 | | | 3.24 | % |
| | | | | | | | | | | | | | | | | | | |
| HTM | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Municipal bonds | $ | 1,684 | | | 2.86 | % | | $ | 2,621 | | | 2.12 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 4,305 | | | 2.42 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| | Within one year | | After one year
through five years | | After five years
through ten years | | After
ten years | | Total |
| (dollars in thousands) | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield | | Fair
Value | | Weighted
Average
Yield |
| | | | | | | | | | | | | | | | | | | |
| AFS | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Municipal bonds | $ | 4,024 | | | 3.19 | % | | $ | 14,978 | | | 3.82 | % | | $ | 59,496 | | | 3.26 | % | | $ | 486,205 | | | 3.29 | % | | $ | 564,703 | | | 3.30 | % |
| Corporate debt securities | 183 | | | 4.27 | % | | 7,059 | | | 3.74 | % | | 7,980 | | | 4.78 | % | | — | | | — | % | | 15,222 | | | 4.30 | % |
| | | | | | | | | | | | | | | | | | | |
| Agency debentures | — | | | — | % | | — | | | — | % | | — | | | — | % | | 1,846 | | | 2.68 | % | | 1,846 | | | 2.68 | % |
| Total | $ | 4,207 | | | 3.24 | % | | $ | 22,037 | | | 3.80 | % | | $ | 67,476 | | | 3.45 | % | | $ | 488,051 | | | 3.29 | % | | $ | 581,771 | | | 3.33 | % |
| | | | | | | | | | | | | | | | | | | |
| HTM | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Municipal bonds | $ | — | | | — | % | | $ | 4,507 | | | 2.47 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 4,507 | | | 2.47 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The weighted-average yieldemployment agreement that the Company had entered into with Mr. Mason and the CIC agreements with Messrs. Michel and Endresen also provide for certain severance benefits in the event (1) there is computed usinga change in control event (as defined in each executive’s agreement) and (2) the contractual couponexecutive is either terminated by us or the successor company without cause (as defined in each executive’s agreement) or terminates his employment for good reason (as defined in each security weightedexecutive’s agreement) within 90 days prior to or 12 months following the change in control (as defined in each executive’s agreement). The employment agreements provide for payment of severance amounts based on the fair valueexecutive’s annual salary and Annual Incentive Plan award or, in the case of Mr. Endresen, commission-based incentive payments, of two times (2.5 times for Mr. Mason) base salary and incentive payments. The employment agreement for Mr. Mason and CIC Agreements for Messrs. Michel and Endresen with the Company also provide for up to 18 months of continuing health insurance coverage for each securitysuch executive and does not include adjustmentswith respect to Mr. Mason, his dependents in the event his employment is terminated by the Company or the surviving entity without cause (or by him with good reason) in connection with a tax equivalent basis. MBSchange in control. Payments and CMOs are excludedbenefits may be delayed six months following separation from service in connection with a change in control in order to comply with Section 409A of the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of December 31, 2021 and 2020 was 1.82% and 1.92%, respectively.
Sales of AFS investment securities were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Proceeds | $ | 28,187 | | | $ | 62,378 | | | $ | 184,871 | |
| Gross gains | 288 | | | 1,334 | | | 894 | |
| Gross losses | (226) | | | (993) | | | (901) | |
The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law.
| | | | | | | | | | | |
| At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| | | |
| Washington, Oregon and California State to secure public deposits | $ | 206,153 | | | $ | 171,471 | |
| | | |
| Other securities pledged | 5,258 | | | 3,391 | |
| Total securities pledged as collateral | $ | 211,411 | | | $ | 174,862 | |
The Company assesses the creditworthinessNEO’s employment agreements contain a “better after-tax” provision, which provides that if any of the counterparties that holdpayments to the pledged collateral and has determined that these arrangements have little credit risk. There were no securities pledgedexecutive constitutes a parachute payment under repurchase agreements at December 31, 2021 and 2020.Section 280G of the Code, the payments will either be (i) reduced or (ii) provided in full to the executive, whichever results in the executive receiving the greater amount after taking into consideration the payment of all taxes, including the excise tax under Section 4999 of the Code.
Tax-exempt interest income on AFS securities was $10.2 million, $10.7 million and $10.2 million for 2021, 2020 and 2019, respectively.
NOTE 3-LOANS AND CREDIT QUALITY:
The Company's LHFI is divided into 2 portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity and other loans within the consumer loan portfolio and non-owner occupied CRE, multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio. LHFI consists of the following:
| | | | | | | | | | | | | | |
| At December 31, | |
| (in thousands) | 2021 | | 2020 | |
| | | | |
| CRE | | | | |
| Non-owner occupied CRE | $ | 705,359 | | | $ | 829,538 | | |
| Multifamily | 2,415,359 | | | 1,428,092 | | |
| Construction/land development | 496,144 | | | 553,695 | | |
| Total | 3,616,862 | | | 2,811,325 | | |
| Commercial and industrial loans | | | | |
| Owner occupied CRE | 457,706 | | | 467,256 | | |
| Commercial business | 401,872 | | | 645,723 | | |
| Total | 859,578 | | | 1,112,979 | | |
| Consumer loans | | | | |
Single family (1) | 763,331 | | | 915,123 | | |
| Home equity and other | 303,078 | | | 404,753 | | |
Total (1) | 1,066,409 | | | 1,319,876 | | |
| Total LHFI | 5,542,849 | | | 5,244,180 | | |
| ACL | (47,123) | | | (64,294) | | |
| Total LHFI less ACL | $ | 5,495,726 | | | $ | 5,179,886 | | |
(1) Includes $7.3 million and $7.1 million at December 31, 2021 and 2020, 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 recognized in the consolidated income statements.
Loans totaling $2.8 billion and $1.4 billion at December 31, 2021 and 2020, respectively, were pledged to secure borrowings from the FHLB and loans totaling $419 million and $569 million at December 31, 2021 and 2020, respectively, were pledged to secure borrowings from the FRBSF.
It is the Company's policy to make loans to officers, directors and their associates in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. The following is a
summary of activity during the year ended December 2021 with respect to such aggregate loans to these related parties and their associates:
| | | | | |
(in thousands) | Year Ended December 31, 2021 |
| |
Beginning balance | $ | 73 | |
New loans and advances, net of principal repayments | 1,475 | |
Ending balance | $ | 1,548 | |
Credit Risk Concentrations
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.
LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At December 31, 2021 and 2020, multifamily loans in the state of California represented 33% and 19% of the total LHFI portfolio, respectively.
Credit Quality
Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio as of December 31, 2021. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.
During 2021, the historical expected loss rates decreased from December 31, 2020 due to minimal losses, stable portfolio credit distribution and favorable product mix risk composition. During 2021, the Qualitative Factors decreased significantly due to the improvement in economic conditions, continued favorable performance and outlook of the impact of the COVID-19 pandemic of our loan portfolio. As of December 31, 2021, the Bank expects that the markets in which it operates will have stable collateral values and economic outlook over the two-year forecast period.Additional Severance Benefit
In addition, in the event of a termination due to total disability, Mr. Mason would receive 18 months of health insurance coverage for himself and his dependents.
Condition to Receiving Severance Benefits
As a condition to receiving any severance benefits under his employment agreement or CIC Agreement, as applicable, to which the executive would not otherwise be entitled, the executive must execute a release of all of his rights and claims relating to his employment and comply with certain post-termination restrictions, including, among other things, continuing to comply with the terms of his proprietary information and non-disclosure agreement, and for a period of six to 18 months, depending on the executive, and comply with certain non-solicitation and non-competition provisions that are set forth in each executive’s employment agreement.
2014 Plan
In addition to the ACLseverance benefits included in the employment agreements, the 2014 Plan provides that in the event of a change in control (as defined in the 2014 Plan) if the surviving entity does not assume the outstanding awards granted under the 2014 Plan or place the participants in a similar plan with no diminution in value of awards, all then outstanding equity awards will vest upon the change in control. In addition, the 2014 Plan provides that if a participant is terminated without cause (as defined in the 2014 Plan) or resigns for LHFI,good reason (as defined in the 2014 Plan) within 12 months following such change in control, his outstanding equity awards will vest upon the termination date.
2014 Plan Award Agreements
Our standard form of RSU agreement provides that RSUs vest incrementally in three equal installments on the first, second and third anniversaries from the grant date. In each case, the vesting of the award is contingent on the NEO’s employment with the Company maintainsnot having been terminated for any reason other than retirement, death or disability on the applicable vesting date. If the participant’s continuous service terminates as a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilitiesresult of death, disability, or retirement on our consolidated balance sheets. The allowance for unfunded commitments was $2.4 million and $1.6 million at December 31, 2021 and 2020, respectively.
The Bank has electedor after age 65, a pro rata portion of the RSUs will vest as of the date of such termination equal to exclude accrued interest receivablethe number of full months from the evaluationgrant date until the date of such event divided by 36, times the ACL. Accrued interest on LHFI was $17.8 million and $21.2 million at December 31, 2021 and 2020, respectively and was reported in other assets intotal number of RSUs granted, less the consolidated balance sheets.number of RSUs vested
Activityas of a previous anniversary date. The employment agreements for Messrs. Mason, Michel and Endresen provide for the pro rata vesting of any unvested RSUs through the date of termination plus in the ACLevent of death or disability an additional one-year period of vesting for LHFIMr. Mason and the allowancean additional six-month period of vesting for unfunded commitments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | | | | 2021 | | 2020 | | 2019 |
| | | | | | | | | |
| ACL for LHFI | | | | | | | | | |
| Beginning balance | | | | | $ | 64,294 | | | $ | 41,772 | | | $ | 41,470 | |
| Provision for credit losses | | | | | (15,816) | | | 21,843 | | | (122) | |
| Net (charge-offs) recoveries | | | | | (1,355) | | | (1,164) | | | 424 | |
Impact of ASC 326 adoption | | | | | — | | | 1,843 | | | — | |
| Ending balance | | | | | $ | 47,123 | | | $ | 64,294 | | | $ | 41,772 | |
| | | | | | | | | |
| Allowance for unfunded commitments | | | | | | | | | |
| Beginning balance | | | | | $ | 1,588 | | | $ | 1,065 | | | $ | 1,443 | |
| Provision for credit losses | | | | | 816 | | | (1,374) | | | (378) | |
Impact of ASC 326 adoption | | | | | — | | | 1,897 | | | — | |
| Ending balance | | | | | $ | 2,404 | | | $ | 1,588 | | | $ | 1,065 | |
| | | | | | | | | |
| Provision for credit losses: | | | | | | | | | |
| Allowance for credit losses-loans | | | | | $ | (15,816) | | | $ | 21,843 | | | $ | (122) | |
| Allowance for unfunded commitments | | | | | 816 | | | (1,374) | | | (378) | |
| Total | | | | | $ | (15,000) | | | $ | 20,469 | | | $ | (500) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Activity in the ACL by loan portfolioMessrs. Michel and loan sub-class was as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| (in thousands) | Beginning
balance | | Charge-offs | | Recoveries | | Provision | | Ending
balance |
| | | | | | | | | |
| CRE | | | | | | | | | |
| Non-owner occupied CRE | $ | 8,845 | | | $ | — | | | $ | — | | | $ | (1,336) | | | $ | 7,509 | |
| Multifamily | 6,072 | | | — | | | — | | | (218) | | | 5,854 | |
| Construction/land development | | | | | | | | | — | |
| Multifamily construction | 4,903 | | | — | | | — | | | (4,396) | | | 507 | |
| CRE construction | 1,670 | | | — | | | — | | | (1,520) | | | 150 | |
| Single family construction | 5,130 | | | — | | | — | | | 1,281 | | | 6,411 | |
| Single family construction to permanent | 1,315 | | | — | | | — | | | (260) | | | 1,055 | |
| Total | 27,935 | | | — | | | — | | | (6,449) | | | 21,486 | |
| Commercial and industrial loans | | | | | | | | | |
| Owner occupied CRE | 4,994 | | | 0 | | — | | | 12 | | | 5,006 | |
| Commercial business | 17,043 | | | (1,739) | | | 146 | | | (3,177) | | | 12,273 | |
| Total | 22,037 | | | (1,739) | | | 146 | | | (3,165) | | | 17,279 | |
| Consumer loans | | | | | | | | | |
| Single family | 6,906 | | | (127) | | | 291 | | | (2,676) | | | 4,394 | |
| Home equity and other | 7,416 | | | (483) | | | 557 | | | (3,526) | | | 3,964 | |
| Total | 14,322 | | | (610) | | | 848 | | | (6,202) | | | 8,358 | |
| Total ACL | $ | 64,294 | | | $ | (2,349) | | | $ | 994 | | | $ | (15,816) | | | $ | 47,123 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| (in thousands) | Prior to adoption of ASC 326 | | Impact of ASC 326 adoption | | Charge-offs | | Recoveries | | Provision | | Ending
balance |
| | | | | | | | | | | |
| CRE | | | | | | | | | | | |
| Non-owner occupied CRE | $ | 7,245 | | | $ | (3,392) | | | $ | — | | | $ | — | | | $ | 4,992 | | | $ | 8,845 | |
| Multifamily | 7,015 | | | (2,977) | | | — | | | — | | | 2,034 | | | 6,072 | |
| Construction/land development | | | | | | | | | | | |
| Multifamily construction | 2,848 | | | 693 | | | — | | | — | | | 1,362 | | | 4,903 | |
| CRE construction | 624 | | | (115) | | | — | | | — | | | 1,161 | | | 1,670 | |
| Single family construction | 3,800 | | | 4,280 | | | — | | | 163 | | | (3,113) | | | 5,130 | |
| Single family construction to permanent | 1,003 | | | 200 | | | — | | | — | | | 112 | | | 1,315 | |
| Total | 22,535 | | | (1,311) | | | — | | | 163 | | | 6,548 | | | 27,935 | |
| Commercial and industrial loans | | | | | | | | | | | |
| Owner occupied CRE | 3,639 | | | (2,459) | | | (896) | | | — | | | 4,710 | | | 4,994 | |
| Commercial business | 2,915 | | | 510 | | | (640) | | | 110 | | | 14,148 | | | 17,043 | |
| Total | 6,554 | | | (1,949) | | | (1,536) | | | 110 | | | 18,858 | | | 22,037 | |
| Consumer loans | | | | | | | | | | | |
| Single family | 6,450 | | | 468 | | | (17) | | | 187 | | | (182) | | | 6,906 | |
| Home equity and other | 6,233 | | | 4,635 | | | (456) | | | 385 | | | (3,381) | | | 7,416 | |
| Total | 12,683 | | | 5,103 | | | (473) | | | 572 | | | (3,563) | | | 14,322 | |
| Total ACL | $ | 41,772 | | | $ | 1,843 | | | $ | (2,009) | | | $ | 845 | | | $ | 21,843 | | | $ | 64,294 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| (in thousands) | Beginning
balance | | Charge-offs | | Recoveries | | Provision | | Ending
balance |
| | | | | | | | | |
| CRE | | | | | | | | | |
| Non-owner occupied CRE | $ | 5,495 | | | $ | — | | | $ | — | | | $ | 1,750 | | | $ | 7,245 | |
| Multifamily | 5,754 | | | — | | | — | | | 1,261 | | | 7,015 | |
| Construction/land development | 9,001 | | | 0 | | 215 | | | (941) | | | 8,275 | |
| Total | 20,250 | | | — | | | 215 | | | 2,070 | | | 22,535 | |
| Commercial and industrial loans | | | | | | | | | |
| Owner occupied CRE | 3,278 | | | 0 | | — | | | 361 | | | 3,639 | |
| Commercial business | 2,875 | | | (315) | | | 147 | | | 208 | | | 2,915 | |
| Total | 6,153 | | | (315) | | | 147 | | | 569 | | | 6,554 | |
| Consumer loans | | | | | | | | | |
| Single family | 8,217 | | | — | | | 145 | | | (1,912) | | | 6,450 | |
| Home equity and other | 6,850 | | | (272) | | | 504 | | | (849) | | | 6,233 | |
| Total | 15,067 | | | (272) | | | 649 | | | (2,761) | | | 12,683 | |
| Total ACL | $ | 41,470 | | | $ | (587) | | | $ | 1,011 | | | $ | (122) | | | $ | 41,772 | |
Credit Quality Indicators
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The risk rating of 9 is not used.
Per the Company's policies, most commercial loans pools are non-homogenous and are regularly assessed for credit quality. The rating categories can be generally described by the following groupings for non-homogeneous loans:
•1-6: These loans meet the definition of "Pass" assets. They are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell in a timely manner, of any underlying collateral.
•7: These loans meet the regulatory definition of "Special Mention." They contain potential weaknesses, that if uncorrected may result in deterioration of the likelihood of repayment or in the Bank’s credit position.
•8: These loans meet the regulatory definition of "Substandard." They are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. They have well-defined weaknesses and have unsatisfactory characteristics causing unacceptable levels of risk.
•10: A loan, or the portion of a loan determined to meet the regulatory definition of “Loss.” The amounts classified as loss have been charged-off.Endresen.
The risk rating categories can be generally described by the following groupings for homogeneous loans:
•1-6: These loans meet the definitionstandard form of "Pass" assets. A homogenous "Pass" loan is typically risk ratedPSU agreement provides that PSUs are earned and vested based on payment performance.
•7: These loans meetachieving specified company performance over the regulatory definitionthree-year performance period. In each case, the vesting of “Special Mention.” A homogeneous special mention loan, risk rated 7,the award is lessalso contingent on the participant’s employment with the Company not having been terminated for any reason other than 90 days past due fromretirement, death or disability prior to the required payment date the Compensation Committee certifies the achievement of the performance goal for the relevant performance period. If a participant’s continuous service terminates during the performance period as a result of retirement on or after age 65, the PSUs will vest for that participant at month-end.
•8: These loans meet the regulatory definitionend of “Substandard.” A homogeneous substandard loan, risk rated 8, is 90 days or more past due from the required payment date at month-end.
•10: These loans meet the regulatory definition of "Loss." A closed-end homogeneous loan not secured by real estate is risk rated 10 when past due 120 cumulative days or more from the contractual due date. Closed-end homogenous loans secured by real estate and all open-end homogenous loans are risk rated 10 when past due 180 cumulative days or more from the contractual due date. These loans, or theperformance period in a pro rata portion of these loans classifiedthe PSUs subject to achievement of the performance goal as loss, are generally charged-offif the participant’s continuous service had not terminated. The pro rata portion will be calculated by multiplying the PSUs thus vested by a fraction, the numerator of which equals the number of full months that the participant was employed during the performance period and the denominator of which equals 36. If a participant’s continuous service terminates during the performance period as a result of death or disability, a participant will vest on a pro-rata basis to the extent PSUs would be vested based on actual performance during the full quarters employed during the performance period. The pro-rata fraction will be calculated by multiplying then-vested PSUs by a fraction, the numerator of which equals the number of full months that the participant was employed during the performance period and the denominator of which equals 36. The employment agreements for Messrs. Mason, Michel, and Endresen provide for the pro rata vesting of any unvested PSUs consistent with the PSU terms, through the date of termination, plus in the month in which the applicable past dueevent of death or disability, an additional one-year period elapses.
Small balance commercial loans are generally considered homogenous unless 30 days or more past due or modified in a troubled debt restructuring that wasfor Mr. Mason and an interest rate concession or payment modification with a significant balloonadditional six-month period for Messrs. Michel and the concession period has not been completed. The risk rating classification for such loans are based on the non-homogenous definitions noted above.
Residential, home equity and other loans modified in a troubled debt restructuring are considered homogeneous unless the modification was an interest rate concession or payment modification with a significant balloon and the concession modification period has not been completed. The risk rating classification for such loans are based on the non-homogeneous definitions noted above.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class, risk rating and delinquency status.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| (in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 and prior | | Revolving | | Revolving-term | | Total |
| | | | | | | | | | | | | | | | | | |
| COMMERCIAL PORTFOLIO | | | | | | | | | | | | |
| Non-owner occupied CRE | | | | | | | | | | | | | | |
| 1-6 Pass | | $ | 68,647 | | | $ | 50,571 | | | $ | 169,711 | | | $ | 130,877 | | | $ | 100,674 | | | $ | 183,024 | | | $ | 963 | | | $ | 892 | | | $ | 705,359 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 68,647 | | | 50,571 | | | 169,711 | | | 130,877 | | | 100,674 | | | 183,024 | | | 963 | | | 892 | | | 705,359 | |
| Multifamily | | | | | | | | | | | | | | | | | | |
| 1-6 Pass | | 1,315,204 | | | 561,666 | | | 286,826 | | | 60,372 | | | 26,065 | | | 165,225 | | | 1 | | | — | | | 2,415,359 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 1,315,204 | | | 561,666 | | | 286,826 | | | 60,372 | | | 26,065 | | | 165,225 | | | 1 | | | — | | | 2,415,359 | |
| Multifamily construction | | | | | | | | | | | | |
| 1-6 Pass | | 7,825 | | | 22,863 | | | 7,173 | | | — | | | — | | | — | | | — | | | — | | | 37,861 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 7,825 | | | 22,863 | | | 7,173 | | | — | | | — | | | — | | | — | | | — | | | 37,861 | |
| CRE construction | | | | | | | | | | | | |
| 1-6 Pass | | 7,694 | | | 3,960 | | | — | | | 1,962 | | | — | | | 556 | | | — | | | — | | | 14,172 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 7,694 | | | 3,960 | | | — | | | 1,962 | | | — | | | 556 | | | — | | | — | | | 14,172 | |
| Single family construction | | | | | | | | | | | | |
| 1-6 Pass | | 146,595 | | | 35,640 | | | 14,509 | | | — | | | — | | | 77 | | | 99,206 | | | — | | | 296,027 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 146,595 | | | 35,640 | | | 14,509 | | | — | | | — | | | 77 | | | 99,206 | | | — | | | 296,027 | |
| Single family construction to permanent | | | | | | | | | | | | |
| Current | | 90,311 | | | 42,636 | | | 13,362 | | | 1,775 | | | — | | | — | | | — | | | — | | | 148,084 | |
| Past due: | | | | | | | | | | | | | | | | | | |
| 30-59 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 90+ days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 90,311 | | | 42,636 | | | 13,362 | | | 1,775 | | | — | | | — | | | — | | | — | | | 148,084 | |
| Owner occupied CRE | | | | | | | | | | | | |
| 1-6 Pass | | 70,902 | | | 47,536 | | | 57,423 | | | 47,716 | | | 67,042 | | | 106,659 | | | 798 | | | 2,839 | | | 400,915 | |
| 7- Special Mention | | — | | | — | | | — | | | 2,196 | | | 6,019 | | | 145 | | | — | | | 60 | | | 8,420 | |
| 8 - Substandard | | — | | | — | | | 18,665 | | | 1,111 | | | 10,151 | | | 18,444 | | | — | | | — | | | 48,371 | |
| Total | | 70,902 | | | 47,536 | | | 76,088 | | | 51,023 | | | 83,212 | | | 125,248 | | | 798 | | | 2,899 | | | 457,706 | |
| Commercial business | | | | | | | | | | | | | | | | | | |
| 1-6 Pass | | 88,139 | | | 51,453 | | | 44,882 | | | 24,711 | | | 11,859 | | | 21,258 | | | 112,759 | | | 2,104 | | | 357,165 | |
| 7- Special Mention | | — | | | — | | | 7,396 | | | — | | | 4,396 | | | — | | | 5,613 | | | 134 | | | 17,539 | |
| 8 - Substandard | | 9,716 | | | 3,399 | | | 1,667 | | | 5,928 | | | 1,096 | | | 1,328 | | | 3,932 | | | 102 | | | 27,168 | |
| Total | | 97,855 | | | 54,852 | | | 53,945 | | | 30,639 | | | 17,351 | | | 22,586 | | | 122,304 | | | 2,340 | | | 401,872 | |
| Total commercial portfolio | | $ | 1,805,033 | | | $ | 819,724 | | | $ | 621,614 | | | $ | 276,648 | | | $ | 227,302 | | | $ | 496,716 | | | $ | 223,272 | | | $ | 6,131 | | | $ | 4,476,440 | |
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 | | | | | | | | | | | | | | |
| (in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 and prior | | Revolving | | Revolving-term | | Total | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| CONSUMER PORTFOLIO | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Single family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | $ | 176,110 | | | $ | 156,360 | | | $ | 62,369 | | | $ | 66,063 | | | $ | 95,988 | | | $ | 204,229 | | | $ | — | | | $ | — | | | $ | 761,119 | | | | | | | | | | | | | | | |
| Past due: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 days | | — | | | — | | | 291 | | | — | | | — | | | — | | | — | | | — | | | 291 | | | | | | | | | | | | | | | |
| 60-89 days | | — | | | — | | | — | | | — | | | 314 | | | 471 | | | — | | | — | | | 785 | | | | | | | | | | | | | | | |
| 90+ days | | — | | | — | | | 561 | | | 452 | | | — | | | 123 | | | — | | | — | | | 1,136 | | | | | | | | | | | | | | | |
Total (1) | | 176,110 | | | 156,360 | | | 63,221 | | | 66,515 | | | 96,302 | | | 204,823 | | | — | | | — | | | 763,331 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Home equity and other | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current | | 2,005 | | | 474 | | | 393 | | | 532 | | | 516 | | | 2,609 | | | 290,512 | | | 5,273 | | | 302,314 | | | | | | | | | | | | | | | |
| Past due: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 days | | — | | | 3 | | | — | | | — | | | — | | | 94 | | | 40 | | | — | | | 137 | | | | | | | | | | | | | | | |
| 60-89 days | | — | | | — | | | — | | | — | | | — | | | — | | | 12 | | | 62 | | | 74 | | | | | | | | | | | | | | | |
| 90+ days | | 3 | | | — | | | — | | | — | | | — | | | 6 | | | 544 | | | — | | | 553 | | | | | | | | | | | | | | | |
| Total | | 2,008 | | | 477 | | | 393 | | | 532 | | | 516 | | | 2,709 | | | 291,108 | | | 5,335 | | | 303,078 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total consumer portfolio | | $ | 178,118 | | | $ | 156,837 | | | $ | 63,614 | | | $ | 67,047 | | | $ | 96,818 | | | $ | 207,532 | | | $ | 291,108 | | | $ | 5,335 | | | $ | 1,066,409 | | | | | | | | | | | | | | | |
| Total LHFI | | $ | 1,983,151 | | | $ | 976,561 | | | $ | 685,228 | | | $ | 343,695 | | | $ | 324,120 | | | $ | 704,248 | | | $ | 514,380 | | | $ | 11,466 | | | $ | 5,542,849 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class, risk rating and delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and prior | | Revolving | | Revolving-term | | Total |
| | | | | | | | | | | | | | | | | | |
| COMMERCIAL PORTFOLIO | | | | | | | | | | | | |
| Non-owner occupied CRE | | | | | | | | | | | | | | |
| 1-6 Pass | | $ | 53,782 | | | $ | 176,556 | | | $ | 165,268 | | | $ | 147,719 | | | $ | 150,221 | | | $ | 131,935 | | | $ | 796 | | | $ | 1,031 | | | $ | 827,308 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | 2,230 | | | — | | | — | | | 2,230 | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 53,782 | | | 176,556 | | | 165,268 | | | 147,719 | | | 150,221 | | | 134,165 | | | 796 | | | 1,031 | | | 829,538 | |
| Multifamily | | | | | | | | | | | | | | | | | | |
| 1-6 Pass | | 711,009 | | | 324,246 | | | 100,572 | | | 32,693 | | | 166,937 | | | 92,255 | | | 380 | | | — | | | 1,428,092 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 711,009 | | | 324,246 | | | 100,572 | | | 32,693 | | | 166,937 | | | 92,255 | | | 380 | | | — | | | 1,428,092 | |
| Multifamily construction | | | | | | | | | | | | |
| 1-6 Pass | | 12,182 | | | 21,366 | | | 45,256 | | | 11,823 | | | — | | | — | | | — | | | — | | | 90,627 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | 24,702 | | | — | | | — | | | — | | | 24,702 | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 12,182 | | | 21,366 | | | 45,256 | | | 11,823 | | | 24,702 | | | — | | | — | | | — | | | 115,329 | |
| CRE construction | | | | | | | | | | | | |
| 1-6 Pass | | 3,963 | | | — | | | 2,104 | | | 14,721 | | | — | | | 614 | | | 5,883 | | | — | | | 27,285 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 3,963 | | | — | | | 2,104 | | | 14,721 | | | — | | | 614 | | | 5,883 | | | — | | | 27,285 | |
| Single family construction | | | | | | | | | | | | |
| 1-6 Pass | | 121,233 | | | 47,539 | | | 14,055 | | | — | | | — | | | 600 | | | 75,743 | | | — | | | 259,170 | |
| 7- Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 8 - Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 121,233 | | | 47,539 | | | 14,055 | | | — | | | — | | | 600 | | | 75,743 | | | — | | | 259,170 | |
| Single family construction to permanent | | | | | | | | | | | | |
| Current | | 62,955 | | | 72,825 | | | 15,443 | | | 688 | | | — | | | — | | | — | | | — | | | 151,911 | |
| Past due: | | | | | | | | | | | | | | | | | | |
| 30-59 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 60-89 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 90+ days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | 62,955 | | | 72,825 | | | 15,443 | | | 688 | | | — | | | — | | | — | | | — | | | 151,911 | |
| Owner occupied CRE | | | | | | | | | | | | |
| 1-6 Pass | | 48,647 | | | 60,872 | | | 58,582 | | | 85,275 | | | 98,046 | | | 50,596 | | | — | | | 4,354 | | | 406,372 | |
| 7- Special Mention | | — | | | — | | | 5,977 | | | 3,529 | | | — | | | — | | | — | | | 69 | | | 9,575 | |
| 8 - Substandard | | — | | | 19,407 | | | 1,111 | | | 10,750 | | | 17,122 | | | 2,919 | | | — | | | — | | | 51,309 | |
| Total | | 48,647 | | | 80,279 | | | 65,670 | | | 99,554 | | | 115,168 | | | 53,515 | | | — | | | 4,423 | | | 467,256 | |
| Commercial business | | | | | | | | | | | | | | | | | | |
| 1-6 Pass | | 345,540 | | | 63,020 | | | 47,710 | | | 22,556 | | | 18,411 | | | 14,972 | | | 76,218 | | | 2,577 | | | 591,004 | |
| 7- Special Mention | | — | | | 10,837 | | | 2,058 | | | 6,653 | | | — | | | — | | | 3,975 | | | 166 | | | 23,689 | |
| 8 - Substandard | | — | | | 5,923 | | | 11,327 | | | 2,338 | | | 1,891 | | | 1,001 | | | 8,438 | | | 112 | | | 31,030 | |
| Total | | 345,540 | | | 79,780 | | | 61,095 | | | 31,547 | | | 20,302 | | | 15,973 | | | 88,631 | | | 2,855 | | | 645,723 | |
| Total commercial portfolio | | $ | 1,359,311 | | | $ | 802,591 | | | $ | 469,463 | | | $ | 338,745 | | | $ | 477,330 | | | $ | 297,122 | | | $ | 171,433 | | | $ | 8,309 | | | $ | 3,924,304 | |
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| (in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 and prior | | Revolving | | Revolving-term | | Total |
| | | | | | | | | | | | | | | | | | |
| CONSUMER PORTFOLIO | | | | | | | | | | | | |
| Single family | | | | | | | | | | | | | | | | | | |
| Current | | $ | 174,994 | | | $ | 111,143 | | | $ | 154,757 | | | $ | 168,412 | | | $ | 59,161 | | | $ | 242,444 | | | $ | — | | | $ | — | | | $ | 910,911 | |
| Past due: | | | | | | | | | | | | | | | | | | |
| 30-59 days | | — | | | 570 | | | — | | | 318 | | | — | | | 390 | | | — | | | — | | | 1,278 | |
| 60-89 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| 90+ days | | 824 | | | 335 | | | 405 | | | 386 | | | — | | | 984 | | | — | | | — | | | 2,934 | |
Total (1) | | 175,818 | | | 112,048 | | | 155,162 | | | 169,116 | | | 59,161 | | | 243,818 | | | — | | | — | | | 915,123 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Home equity and other | | | | | | | | | | | | |
| Current | | 1,878 | | | 1,230 | | | 1,311 | | | 1,363 | | | 431 | | | 5,126 | | | 384,005 | | | 8,147 | | | 403,491 | |
| Past due: | | | | | | | | | | | | | | | | | | |
| 30-59 days | | 98 | | | 22 | | | — | | | — | | | — | | | 11 | | | 66 | | | 31 | | | 228 | |
| 60-89 days | | — | | | 13 | | | — | | | — | | | — | | | — | | | 129 | | | — | | | 142 | |
| 90+ days | | — | | | 9 | | | — | | | — | | | 275 | | | 24 | | | 584 | | | — | | | 892 | |
| Total | | 1,976 | | | 1,274 | | | 1,311 | | | 1,363 | | | 706 | | | 5,161 | | | 384,784 | | | 8,178 | | | 404,753 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total consumer portfolio | | $ | 177,794 | | | $ | 113,322 | | | $ | 156,473 | | | $ | 170,479 | | | $ | 59,867 | | | $ | 248,979 | | | $ | 384,784 | | | $ | 8,178 | | | $ | 1,319,876 | |
| Total LHFI | | $ | 1,537,105 | | | $ | 915,913 | | | $ | 625,936 | | | $ | 509,224 | | | $ | 537,197 | | | $ | 546,101 | | | $ | 556,217 | | | $ | 16,487 | | | $ | 5,244,180 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
(1) Includes $7.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.
Collateral Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| (in thousands) | | Land | | 1-4 Family | | | | Non-residential real estate | | Other non-real estate | | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | |
| Owner occupied CRE | | $ | 1,111 | | | $ | — | | | | | $ | 2,456 | | | $ | — | | | $ | 3,567 | |
| Commercial business | | 362 | | | 27 | | | | | 562 | | | 286 | | | 1,237 | |
| Total | | 1,473 | | | 27 | | | | | 3,018 | | | 286 | | | 4,804 | |
| Consumer loans | | | | | | | | | | | | |
Single family | | — | | | 1,598 | | | | | — | | | — | | | 1,598 | |
| Home equity loans and other | | — | | | 19 | | | | | — | | | — | | | 19 | |
| Total | | — | | | 1,617 | | | | | — | | | — | | | 1,617 | |
| Total collateral-dependent loans | | $ | 1,473 | | | $ | 1,644 | | | | | $ | 3,018 | | | $ | 286 | | | $ | 6,421 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| (in thousands) | | Land | | 1-4 Family | | | | Non-residential real estate | | Other non-real estate | | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | |
| Owner occupied CRE | | $ | 1,789 | | | $ | — | | | | | $ | 3,133 | | | $ | — | | | $ | 4,922 | |
| Commercial business | | 1,787 | | | 545 | | | | | — | | | 2,882 | | | 5,214 | |
| Total | | 3,576 | | | 545 | | | | | 3,133 | | | 2,882 | | | 10,136 | |
| Consumer loans | | | | | | | | | | | | |
Single family | | — | | | 2,457 | | | | | — | | | — | | | 2,457 | |
| | | | | | | | | | | | |
| Total | | — | | | 2,457 | | | | | — | | | — | | | 2,457 | |
| Total collateral-dependent loans | | $ | 3,576 | | | $ | 3,002 | | | | | $ | 3,133 | | | $ | 2,882 | | | $ | 12,593 | |
Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At December 31, 2021 | | | At December 31, 2020 |
| (in thousands) | | | Nonaccrual with no related ACL | | Total Nonaccrual | | | Nonaccrual with no related ACL | | Total Nonaccrual |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | |
| Owner occupied CRE | | | $ | 3,568 | | | $ | 3,568 | | | | $ | 4,922 | | | $ | 4,922 | |
| Commercial business | | | 1,210 | | | 5,023 | | | | 3,100 | | | 9,183 | |
| Total | | | 4,778 | | | 8,591 | | | | 8,022 | | | 14,105 | |
| Consumer loans | | | | | | | | | | |
| Single family | | | 1,324 | | | 2,802 | | | | 2,173 | | | 4,883 | |
| Home equity and other | | | 23 | | | 808 | | | | 2 | | | 1,734 | |
| Total | | | 1,347 | | | 3,610 | | | | 2,175 | | | 6,617 | |
| Total nonaccrual loans | | | $ | 6,125 | | | $ | 12,201 | | | | $ | 10,197 | | | $ | 20,722 | |
The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 | |
| Past Due and Still Accruing | | | | | | | | | |
| (in thousands) |
30-59 days | |
60-89 days | |
90 days or more | | Nonaccrual | | Total past due and nonaccrual (3) | | Current | | Total
loans | |
| | | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | | |
| Non-owner occupied CRE | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 705,359 | | | $ | 705,359 | | |
| Multifamily | — | | | — | | | — | | | — | | | — | | | 2,415,359 | | | 2,415,359 | | |
| Construction/land development | | | | | | | | | | | | | |
| Multifamily construction | — | | | — | | | — | | | — | | | — | | | 37,861 | | | 37,861 | | |
| CRE construction | — | | | — | | | — | | | — | | | — | | | 14,172 | | | 14,172 | | |
| Single family construction | — | | | — | | | — | | | — | | | — | | | 296,027 | | | 296,027 | | |
| Single family construction to permanent | — | | | — | | | — | | | — | | | — | | | 148,084 | | | 148,084 | | |
| Total | — | | | — | | | — | | | — | | | — | | | 3,616,862 | | | 3,616,862 | | |
| Commercial and industrial loans | | | | | | | | | | | | | | |
| Owner occupied CRE | — | | | — | | | — | | | 3,568 | | | 3,568 | | | 454,138 | | | 457,706 | | |
| Commercial business | 198 | | | — | | | — | | | 5,023 | | | 5,221 | | | 396,651 | | | 401,872 | | |
| Total | 198 | | | — | | | — | | | 8,591 | | | 8,789 | | | 850,789 | | | 859,578 | | |
| Consumer loans | | | | | | | | | | | | | | |
| Single family | 892 | | | 820 | | | 6,717 | | (2) | 2,802 | | | 11,231 | | | 752,100 | | | 763,331 | | (1) | |
| Home equity and other | 118 | | | 74 | | | — | | | 808 | | | 1,000 | | | 302,078 | | | 303,078 | | |
| Total | 1,010 | | | 894 | | | 6,717 | | | 3,610 | | | 12,231 | | | 1,054,178 | | | 1,066,409 | | |
| Total loans | $ | 1,208 | | | $ | 894 | | | $ | 6,717 | | | $ | 12,201 | | | $ | 21,020 | | | $ | 5,521,829 | | | $ | 5,542,849 | | |
| % | 0.02 | % | | 0.02 | % | | 0.12 | % | | 0.22 | % | | 0.38 | % | | 99.62 | % | | 100.00 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 | |
| Past Due and Still Accruing | | | | | | | | | |
| (in thousands) | 30-59 days | | 60-89 days | | 90 days or more | | Nonaccrual | | Total past due and nonaccrual (3) | | Current | | Total
loans | |
| | | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | | |
| Non-owner occupied CRE | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 829,538 | | | $ | 829,538 | | |
| Multifamily | — | | | — | | | — | | | — | | | — | | | 1,428,092 | | | 1,428,092 | | |
| Construction and land development | | | | | | | | | | | | | |
| Multifamily construction | — | | | — | | | — | | | — | | | — | | | 115,329 | | | 115,329 | | |
| CRE construction | — | | | — | | | — | | | — | | | — | | | 27,285 | | | 27,285 | | |
| Single family construction | — | | | — | | | — | | | — | | | — | | | 259,170 | | | 259,170 | | |
| Single family construction to permanent | — | | | — | | | — | | | — | | | — | | | 151,911 | | | 151,911 | | |
| Total | — | | | — | | | — | | | — | | | — | | | 2,811,325 | | | 2,811,325 | | |
| Commercial and industrial loans | | | | | | | | | | | | | | |
| Owner occupied CRE | — | | | — | | | — | | | 4,922 | | | 4,922 | | | 462,334 | | | 467,256 | | |
| Commercial business | — | | | 0 | | — | | | 9,183 | | | 9,183 | | | 636,540 | | | 645,723 | | |
| Total | — | | | — | | | — | | | 14,105 | | | 14,105 | | | 1,098,874 | | | 1,112,979 | | |
| Consumer loans | | | | | | | | | | | | | | |
| Single family | 2,161 | | | 418 | | | 11,476 | | (2) | | 4,883 | | | 18,938 | | | 896,185 | | | 915,123 | | (1) | |
| Home equity and other | 228 | | | 135 | | | — | | | 1,734 | | | 2,097 | | | 402,656 | | | 404,753 | | |
| Total | 2,389 | | | 553 | | | 11,476 | | | 6,617 | | | 21,035 | | | 1,298,841 | | | 1,319,876 | | |
| Total loans | $ | 2,389 | | | $ | 553 | | | $ | 11,476 | | | $ | 20,722 | | | $ | 35,140 | | | $ | 5,209,040 | | | $ | 5,244,180 | | |
| % | 0.05 | % | | 0.01 | % | | 0.22 | % | | 0.40 | % | | 0.67 | % | | 99.33 | % | | 100.00 | % | |
(1)Includes $7.3 million and $7.1 million of loans at December 31, 2021 and 2020, 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 and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million and $14.7 million at December 31, 2021 and 2020, respectively.
The following tables present information about troubled debt restructuring ("TDR") activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, 2021 | |
| (dollars in thousands) | | | | | | | | | Number of loan
modifications | | Recorded
investment | | Related charge-
offs | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Consumer loans | | | | | | | | | | | | | | |
| Single family | | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 20 | | | $ | 5,482 | | | $ | — | | |
| Payment restructure | | | | | | | | | 7 | | | 2,815 | | | — | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total | | | | | | | | | 27 | | | 8,297 | | | — | | |
| Total loans | | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 20 | | | 5,482 | | | — | | |
| Payment restructure | | | | | | | | | 7 | | | 2,815 | | | — | | |
| Total | | | | | | | | | 27 | | $ | 8,297 | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, 2020 |
| (dollars in thousands) | | | | | | | | | Number of loan
modifications | | Recorded
investment | | Related charge-
offs |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | | |
| Owner occupied CRE | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | $ | 678 | | | $ | — | |
| Commercial business | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | 1,125 | | | — | |
| Total commercial and industrial | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 2 | | | 1,803 | | | — | |
| Total | | | | | | | | | 2 | | | 1,803 | | | — | |
| Consumer loans | | | | | | | | | | | | | |
| Single family | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 27 | | | 5,979 | | | — | |
| Payment restructure | | | | | | | | | 14 | | | 2,695 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total | | | | | | | | | 41 | | | 8,674 | | | — | |
| Total loans | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 27 | | | 5,979 | | | — | |
| Payment restructure | | | | | | | | | 16 | | | 4,498 | | | — | |
| Total | | | | | | | | | 43 | | | $ | 10,477 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, 2019 |
| (dollars in thousands) | | | | | | | | | Number of loan
modifications | | Recorded
investment | | Related charge-
offs |
| | | | | | | | | | | | | |
| CRE | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Construction and land development | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | $ | 4,675 | | | $ | — | |
| Total | | | | | | | | | 1 | | | 4,675 | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Commercial and industrial loans | | | | | | | | | | | | | |
| Owner occupied CRE | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | 5,840 | | | — | |
| Commercial business | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | 259 | | | — | |
| Total commercial and industrial | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 2 | | | 6,099 | | | — | |
| Total | | | | | | | | | 2 | | | 6,099 | | | — | |
| Consumer loans | | | | | | | | | | | | | |
| Single family | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 21 | | | 3,925 | | | — | |
| Payment restructure | | | | | | | | | 118 | | | 25,795 | | | — | |
| Home equity and other | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Payment restructure | | | | | | | | | 1 | | | 116 | | | — | |
| Total consumer | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 21 | | | 3,925 | | | — | |
| Payment restructure | | | | | | | | | 119 | | | 25,911 | | | — | |
| Total | | | | | | | | | 140 | | | 29,836 | | | — | |
| Total loans | | | | | | | | | | | | | |
| Interest rate reduction | | | | | | | | | 21 | | | 3,925 | | | — | |
| Payment restructure | | | | | | | | | 122 | | | 36,685 | | | — | |
| Total | | | | | | | | | 143 | | | $ | 40,610 | | | $ | — | |
A TDR loan is considered re-defaulted when it becomes doubtful that the objectives of the modifications will be met, generally when a consumer loan TDR becomes 60 days or more past due on principal or interest payments or when a commercial loan TDR becomes 90 days or more past due on principal or interest payments. The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during 2021 and 2020, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | |
| (dollars in thousands) | Number of loan relationships that re-defaulted | | Recorded
investment | | Number of loan relationships that re-defaulted | | Recorded
investment | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Commercial and industrial loans-owner occupied CRE | 1 | | | $ | 678 | | | — | | | $ | — | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Consumer loans-single family | 11 | | | 3,040 | | | 20 | | | 3,809 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total | 12 | | | $ | 3,718 | | | 20 | | | $ | 3,809 | | | | | |
The Coronavirus Aid, Relief and Economic Security ("CARES") Act provided temporary relief from the accounting and disclosure requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. In addition, interagency guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that borrowers who receive relief are not experiencing financial difficulty if they meet the following qualifying criteria:
•The modification is in response to the National Emergency related to the COVID pandemic;
•The borrower was current at the time the modification program was implemented; and
•The modification is short-term
We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible short-term modifications and will not treat qualifying loan modifications as TDRs for accounting or disclosure purposes. Additionally, eligible short-term loan modifications subject to the practical expedient in the interagency guidance will not be treated as TDRs for accounting or disclosure purposes if they qualify.
As of December 31, 2021, excluding any SBA guaranteed loans for which the government was making payments as provided for under the CARES Act, or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of $28 million on 41 loans that were approved for forbearance under this program.
The Bank will exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by COVID-19. The Bank also will not designate loans with deferrals granted due to COVID-19 as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs we are offering as a result of the COVID-19 pandemic, we expect that borrowers granted relief under these programs will generally not be reported as nonaccrual.
0
NOTE 4–PREMISES AND EQUIPMENT, NET:
Premises and equipment consisted of the following:
| | | | | | | | | | | |
| | At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Furniture and equipment | $ | 54,548 | | | $ | 52,761 | |
| Leasehold improvements | 41,426 | | | 40,801 | |
| Land and buildings | 36,121 | | | 35,594 | |
| Total | 132,095 | | | 129,156 | |
| Less: accumulated depreciation | (73,941) | | | (64,054) | |
| Net | $ | 58,154 | | | $ | 65,102 | |
NOTE 5–DEPOSITS:
Deposit balances, including their weighted average rates, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | At December 31, 2021 | | Weighted Average Rate | | At December 31, 2020 | | Weighted Average Rate |
| | | | | | | |
| Noninterest-bearing demand deposits | $ | 1,617,069 | | | — | % | | $ | 1,337,010 | | | — | % |
| Interest-bearing demand accounts | 513,810 | | | 0.10 | % | | 484,265 | | | 0.10 | % |
| Savings | 302,389 | | | 0.06 | % | | 264,024 | | | 0.07 | % |
| Money market | 2,806,313 | | | 0.15 | % | | 2,596,453 | | | 0.21 | % |
| Certificates of deposit | 906,928 | | | 0.51 | % | | 1,139,807 | | | 0.93 | % |
| Total | $ | 6,146,509 | | | 0.15 | % | | $ | 5,821,559 | | | 0.29 | % |
There were $342 million and $331 million in public funds included in deposits at December 31, 2021 and 2020, respectively.
Certificates of deposit outstanding mature as follows:
| | | | | |
(in thousands) | December 31, 2021 |
| |
Within one year | $ | 718,838 | |
One to two years | 162,954 | |
Two to three years | 18,553 | |
Three to four years | 3,803 | |
Four to five years | 2,780 | |
Thereafter | — | |
Total | $ | 906,928 | |
The aggregate amount of time deposits in denominations of more than the FDIC limit of $250,000 at December 31, 2021 and 2020 was $108 million and $130 million, respectively. There were $145 million and $210 million of brokered deposits at December 31, 2021 and 2020, respectively.
NOTE 6– BORROWINGS:
The Company borrows funds through advances from the Des Moines FHLB. FHLB advances totaled $41 million and $302 million as of December 31, 2021 and 2020, respectively. The $41 million of FHLB advances outstanding at December 31, 2021 matured in the first quarter of 2022. Weighted-average interest rates on the advances were 0.30% and 0.32% at December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company held $10.4 million and $20.3 million, respectively, of FHLB stock.
At December 31, 2021 and 2020, we had no federal funds purchased and securities sold under agreements to repurchase. At December 31, 2021 and 2020, there were zero and $20.8 million in outstanding borrowings from the FRBSF, respectively, which bore interest of 0.25% at 2020.
NOTE 7–LONG-TERM DEBT:
At December 31, 2021 and 2020, the Company had outstanding $64 million of Senior Notes and $62 million of trust preferred securities. The Senior Notes bear interest at a rate of 6.50% and mature in 2026.
The Company issued trust preferred securities during the period from 2005 through 2007, resulting in a debt balance of $62 million that remains outstanding at December 31, 2021. In connection with the issuance of trust preferred securities, HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable Interest Debentures. The sole assets of the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III, and IV.
The Subordinated Debt Securities outstanding as of December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| HomeStreet Statutory Trust |
| (dollars in thousands) | I | | II | | III | | IV |
| | | | | | | |
| Date issued | June 2005 | | September 2005 | | February 2006 | | March 2007 |
| Amount | $5,155 | | $20,619 | | $20,619 | | $15,464 |
| Interest rate | 3 MO LIBOR + 1.70% | | 3 MO LIBOR + 1.50% | | 3 MO LIBOR + 1.37% | | 3 MO LIBOR + 1.68% |
| Maturity date | June 2035 | | December 2035 | | March 2036 | | June 2037 |
Call option (1) | Quarterly | | Quarterly | | Quarterly | | Quarterly |
(1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years after issuance.
NOTE 8–DERIVATIVES AND HEDGING ACTIVITIES:
To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges. The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheets consist of the following:
| | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Notional amount | | Fair value derivatives |
| (in thousands) | | | Asset | | Liability |
| | | | | |
| Forward sale commitments | $ | 793,208 | | | $ | 723 | | | $ | (640) | |
| | | | | |
| Interest rate lock commitments | 115,025 | | | 2,487 | | | (3) | |
| Interest rate swaps | 287,352 | | | 4,381 | | | (4,541) | |
| Futures | 1,082,000 | | | 334 | | | — | |
| Total derivatives before netting | $ | 2,277,585 | | | 7,925 | | | (5,184) | |
Netting adjustment/Cash collateral (1) | | | 1,355 | | | 3,921 | |
| Carrying value on consolidated balance sheet | | | $ | 9,280 | | | $ | (1,263) | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
| Notional amount | | Fair value derivatives |
| (in thousands) | | | Asset | | Liability |
| | | | | |
| Forward sale commitments | $ | 977,974 | | | $ | 1,035 | | | $ | (3,714) | |
| | | | | |
| Interest rate lock commitments | 493,873 | | | 17,395 | | | (3) | |
| Interest rate swaps | 536,969 | | | 17,459 | | | (20,511) | |
| Futures | 314,000 | | | — | | | (4) | |
| Total derivatives before netting | $ | 2,322,816 | | | 35,889 | | | (24,232) | |
Netting adjustment/Cash collateral (1) | | | (8,250) | | | 21,447 | |
| Carrying value on consolidated balance sheet | | | $ | 27,639 | | | $ | (2,785) | |
(1) Includes net cash collateral paid of $5.3 million and $13.2 million at December 31, 2021 and 2020, respectively.
The Company nets derivative assets and liabilities when a legally enforceable master netting agreement exists between the Company and the derivative counterparty. Derivatives are reported at their respective fair values in the other assets or accounts payable and other liabilities line items on the consolidated balance sheets, with changes in fair value reflected in current period earnings.
The following tables present gross fair value and net carrying value information about derivative instruments:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| (in thousands) | Gross fair value | | Netting adjustments/Cash collateral (1) | | Carrying value | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| At December 31, 2021 | | | | | | | | | | | |
| Derivative assets | $ | 7,925 | | | $ | 1,355 | | | $ | 9,280 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Derivative liabilities | (5,184) | | | 3,921 | | | (1,263) | | | | | | | |
| At December 31, 2020 | | | | | | | | | | | |
| Derivative assets | $ | 35,889 | | | $ | (8,250) | | | $ | 27,639 | | | | | | | |
| Derivative liabilities | (24,232) | | | 21,447 | | | (2,785) | | | | | | | |
(1) Includes net cash collateral paid of $5.3 million and $13.2 million at December 31, 2021 and 2020, respectively.
The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and
other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At December 31, 2021 and 2020, the Company had liabilities of zero and $3.3 million, respectively, in cash collateral received from counterparties and receivables of $5.3 million and $16.5 million, respectively, in cash collateral paid to counterparties.
The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated:
| | | | | | | | | | | | | |
| | Years Ended December 31, | |
| (in thousands) | 2021 | | 2020 | | |
| | | | | |
Recognized in noninterest income: | | | | | |
Net gain (loss) on loan origination and sale activities (1) | $ | (6,057) | | | $ | (7,675) | | | |
Loan servicing income (loss) (2) | (8,238) | | | 20,820 | | | |
Other (3) | 386 | | | (421) | | | |
| | | | | |
(1)Comprised of IRLCs and forward contracts used as economic hedges of single family mortgage LHFS.
(2)Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as economic hedges of single family MSRs.
(3)Impact of interest rate swap agreements executed with commercial banking customers.
The notional amount of open interest rate swap agreements executed with commercial banking customers at December 31, 2021 and 2020 were $287 million and $246 million, respectively.
NOTE 9–MORTGAGE BANKING OPERATIONS:
LHFS consisted of the following:
| | | | | | | | | | | |
| At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Single family | $ | 128,041 | | | $ | 194,643 | |
| CRE, multi-family and SBA | 48,090 | | | 167,289 | |
| Total | $ | 176,131 | | | $ | 361,932 | |
Loans sold consisted of the following for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Single family (1) | $ | 2,046,811 | | | $ | 1,985,944 | | | $ | 3,925,302 | |
| CRE, multi-family and SBA | 773,378 | | | 908,776 | | | 843,864 | |
| Total | $ | 2,820,189 | | | $ | 2,894,720 | | | $ | 4,769,166 | |
(1) 2019 includes both continuing and discontinued operations.
Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Single family | $ | 66,850 | | | $ | 100,795 | | | $ | 86,686 | |
| CRE, multifamily and SBA | 25,468 | | | 21,769 | | | 17,492 | |
| Less: Amounts attributed to discontinued operations | — | | | — | | | (60,056) | |
| Total | $ | 92,318 | | | $ | 122,564 | | | $ | 44,122 | |
The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows:
| | | | | | | | | | | |
| At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
Single family | $ | 5,539,180 | | | $ | 5,914,592 | |
| CRE, multi-family and SBA | 2,031,087 | | | 1,844,241 | |
| Total | $ | 7,570,267 | | | $ | 7,758,833 | |
Under the terms of the sales agreements for loans sold to GSEs and other entities, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $5.5 billion and $6.0 billion as of December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities, of $1.3 million and $2.1 million, respectively.
The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses:
| | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | |
| | | | |
| Balance, beginning of period | $ | 2,122 | | | $ | 2,871 | | |
Additions, net of adjustments (1) | (334) | | | (281) | | |
Realized losses (2) | (476) | | | (468) | | |
| Balance, end of period | $ | 1,312 | | | $ | 2,122 | | |
(1)Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
(2)Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses.
The Company has agreements with investors to advance scheduled principal and interest amounts on delinquent loans.
Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $1.9 million and $3.0 million were recorded in other assets as of December 31, 2021 and 2020, respectively.
When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At December 31, 2021 and 2020, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $12 million and $102 million, respectively. The recognition of previously sold loans does not impact the accounting for the previously recognized MSRs.
Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Servicing income, net: | | | | | |
| Servicing fees and other | $ | 35,342 | | | $ | 32,037 | | | $ | 39,561 | |
Amortization of single family MSRs (1) | (19,669) | | | (17,754) | | | (20,670) | |
| Amortization of multifamily and SBA MSRs | (7,581) | | | (5,657) | | | (5,214) | |
| 8,092 | | | 8,626 | | | 13,677 | |
| Risk management, single family MSRs: | | | | | |
Changes in fair value of MSRs due to assumptions (2)(3) | 7,379 | | | (19,955) | | | (16,224) | |
| Net gain (loss) from derivatives hedging | (8,238) | | | 20,820 | | | 14,435 | |
| Total | (859) | | | 865 | | | (1,789) | |
| Less: Amounts attributed to discontinued operations | — | | | — | | | (2,103) | |
| Loan servicing income | $ | 7,233 | | | $ | 9,491 | | | $ | 9,785 | |
(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 reflected by changes in mortgage interest rates.
(3)Includes pre-tax loss of $0.9 million, net of transaction costs and prepayment reserves, resulting from the sales of single family MSRs in 2019.
The Company determines fair value of single family MSRs using a valuation model that calculates the net present value of estimated future cash flows. Estimates of future cash flows include contractual servicing fees, ancillary income and costs of servicing, the timing of which are impacted by assumptions, primarily expected prepayment speeds and discount rates, which relate to the underlying performance of the loans. The changes in single family MSRs measured at fair value are as follows:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Beginning balance | $ | 49,966 | | | $ | 68,109 | | | $ | 252,168 | |
| Additions and amortization: | | | | | |
| Originations | 23,908 | | | 19,424 | | | 28,788 | |
| | | | | |
| Sale | — | | | — | | | (176,944) | |
Amortization (1) | (19,669) | | | (17,754) | | | (20,670) | |
| Net additions and amortization | 4,239 | | | 1,670 | | | (168,826) | |
Changes in fair value assumptions (2) | 7,379 | | | (19,813) | | | (15,233) | |
| Ending balance | $ | 61,584 | | | $ | 49,966 | | | $ | 68,109 | |
(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 reflected by changes in mortgage interest rates.
Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(rates per annum) (1) | 2021 | | 2020 | | 2019 |
| | | | | |
Constant prepayment rate ("CPR") (2) | 8.84 | % | | 11.37 | % | | 18.23 | % |
| Discount rate | 8.23 | % | | 7.82 | % | | 9.31 | % |
(1)Based on a weighted average.
(2)Represents the expected lifetime average CPR used in the model.
For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 | | At December 31, 2020 |
| | | | | | | |
| Range of Inputs | | Average (1) | | Range of Inputs | | Average (1) |
| CPRs | 7.90% - 17.35% | | 10.35 | % | | 8.13%- 19.70% | | 12.81 | % |
| Discount Rates | 6.94% - 13.96% | | 7.97 | % | | 6.50% -13.14% | | 8.27 | % |
(1) Weighted averages of all the inputs within the range.
To compute hypothetical sensitivities of the value of our single MSRs to immediate adverse changes in key assumptions, we computed the impact of changes in CPRs and in discount rates as outlined below:
| | | | | |
(dollars in thousands) | At December 31, 2021 |
| |
Fair value of single family MSRs | $ | 61,584 | |
Expected weighted-average life (in years) | 5.94 |
CPR | |
Impact on fair value of 25 basis points adverse change in interest rates | $ | (3,641) | |
Impact on fair value of 50 basis points adverse change in interest rates | $ | (7,325) | |
Discount rate | |
Impact on fair value of 100 basis points increase | $ | (2,999) | |
Impact on fair value of 200 basis points increase | $ | (5,770) | |
Generally, increases in the CPR or the discount rate utilized in the fair value measurements of single family MSRs will result in a decrease in fair value. Conversely, decreases in the CPR or the discount rate will result in an increase in fair value. These sensitivities are hypothetical and subject to key assumptions of the underlying valuation model. As the table above demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in key assumptions. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another, which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
In March 2019, the Company successfully closed and settled 2 sales of the rights to service an aggregate of $14.3 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie Mae and Freddie Mac. These sales resulted in a $0.9 million pre-tax loss which is included in discontinued operations for 2019.
MSRs resulting from the sale of multifamily loans are recorded at fair value and subsequently carried at the lower of amortized cost or fair value. Multifamily MSRs are amortized in proportion to, and over, the estimated period the net servicing income will be collected.
The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Beginning balance | $ | 35,774 | | | $ | 29,494 | | | $ | 28,328 | |
| Origination | 11,222 | | | 11,587 | | | 5,832 | |
| Amortization | (7,581) | | | (5,307) | | | (4,666) | |
| Ending balance | $ | 39,415 | | | $ | 35,774 | | | $ | 29,494 | |
At December 31, 2021, the expected weighted-average life of the Company's multifamily and SBA MSRs was 11.47 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows:
| | | | | |
| (in thousands) | At December 31, 2021 |
| |
| 2022 | $ | 5,766 | |
| 2023 | 5,627 | |
| 2024 | 5,392 | |
| 2025 | 5,061 | |
| 2026 | 4,437 | |
| 2027 and thereafter | 13,132 | |
| Carrying value of multifamily and SBA MSRs | $ | 39,415 | |
The projected amortization expense of multifamily and SBA MSRs is an estimate and subject to key assumptions of the underlying valuation model. The amortization expense for future periods was calculated by applying the same quantitative factors, such as actual MSR prepayment experience and discount rates, which were used to determine amortization expense. These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in interest rates may have on expected loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the conditions that existed at the time the calculations were performed and may not be indicative of actual amortization expense that will be recorded in future periods.
NOTE 10–COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Commitments
In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. In addition, the Company makes certain unfunded loan commitments as part of its lending activities that have not been recognized in the Company's financial statements. These include commitments to extend credit made as part of the Company's lending activities on loans the Company intends to hold in its LHFI portfolio.
These commitments include the following:
| | | | | | | | | | | |
| At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Unused consumer portfolio lines | $ | 405,992 | | | $ | 389,122 | |
Commercial portfolio lines (1) | 820,131 | | | 656,065 | |
| Commitments to fund loans | 90,852 | | | 68,345 | |
| Total | $ | 1,316,975 | | | $ | 1,113,532 | |
(1) Includes undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments of $584 million and $395 million at December 31, 2021 and 2020, respectively.
The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements in that commitments may expire without being drawn upon. The Company has recorded an ACL on unfunded loan commitments, included in accounts payable and other liabilities on the consolidated balance sheets of $2.4 million and $1.6 million at December 31, 2021 and 2020, respectively.
The Company has entered into certain agreements to invest in qualifying small businesses and small enterprises and a tax exempt bond partnership that have not been recognized in the Company's financial statements. At December 31, 2021 and 2020 we had $15.2 million and $19.2 million, respectively, of future commitments to invest in these enterprises.
Guarantees
In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of December 31, 2021 and 2020, the total unpaid principal balance of loans sold under this program was $1.9 billion and $1.8 billion, respectively. The Company's reserve liability related to this arrangement totaled $0.6 million and $2.1 million at December 31, 2021 and 2020, respectively. There were no actual losses incurred under this arrangement during 2021, 2020 or 2019.
Contingencies
In the normal course of business, the Company may have various legal claims and other similar contingent matters outstanding for which a loss may be realized. For these claims, the Company establishes a liability for contingent losses when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. For claims determined to be reasonably possible but not probable of resulting in a loss, there may be a range of possible losses in excess of the established liability. The Company did not have any material amounts reserved for legal claims as of December 31, 2021.
NOTE 11–INCOME TAXES:
Income tax expense from continuing operations consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Current expense | | | | | |
| Federal | $ | 20,074 | | | $ | 27,166 | | | $ | 32,738 | |
| State and local | 3,191 | | | 4,804 | | | 5,153 | |
| Deferred (benefit) expense | | | | | |
| Federal | 4,325 | | | (11,076) | | | (28,313) | |
| | | | | |
| State and local | 511 | | | (1,596) | | | (4,292) | |
| Tax credit investment amortization | 3,166 | | | 2,606 | | | 2,702 | |
| Total | $ | 31,267 | | | $ | 21,904 | | | $ | 7,988 | |
Income tax expense from continuing operations differed from amounts computed at the federal income tax statutory rate as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands, except rate) | Rate | | Amount | | Rate | | Amount | | Rate | | Amount |
| | | | | | | | | | | |
| Income before taxes | | | $ | 146,689 | | | | | $ | 101,894 | | | | | $ | 48,708 | |
| | | | | | | | | | | |
| Federal tax statutory rate | 21.00 | % | | 30,805 | | | 21.00 | % | | 21,398 | | | 21.00 | % | | 10,229 | |
| State tax - net of federal tax benefit | 2.20 | % | | 3,220 | | | 2.54 | % | | 2,587 | | | (0.45) | % | | (217) | |
| Tax-exempt interest benefit | (1.40) | % | | (2,049) | | | (1.81) | % | | (1,849) | | | (2.85) | % | | (1,388) | |
| Stock-based compensation expense | (0.77) | % | | (1,132) | | | (0.16) | % | | (159) | | | (0.25) | % | | (123) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Other | 0.29 | % | | 423 | | | (0.07) | % | | (73) | | | (1.05) | % | | (513) | |
| Total | 21.32 | % | | $ | 31,267 | | | 21.50 | % | | $ | 21,904 | | | 16.40 | % | | $ | 7,988 | |
The following is a summary of the Company's deferred tax assets and liabilities:
| | | | | | | | | | | |
| At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Deferred taxes assets | | | |
| Provision for credit losses | $ | 11,477 | | | $ | 15,957 | |
| Federal and state net operating loss carryforwards | 628 | | | 849 | |
| Accrued liabilities | 2,268 | | | 2,152 | |
| Other investments | 471 | | | 451 | |
| Lease liabilities | 12,028 | | | 15,290 | |
| Nonaccrual interest | 213 | | | 497 | |
| Stock options | 969 | | | 820 | |
| Loan valuation | 289 | | | 454 | |
| Other | 1,744 | | | 2,262 | |
| Total | 30,087 | | | 38,732 | |
| | | |
| Deferred taxes liabilities | | | |
| Mortgage servicing rights | (22,221) | | | (18,663) | |
| Deferred loan fees and costs | (7,336) | | | (10,972) | |
| Lease right-of-use assets | (8,572) | | | (10,435) | |
| Unrealized gain on investment AFS securities | (5,630) | | | (9,409) | |
| Premises and equipment | (1,843) | | | (3,620) | |
| Intangibles | (742) | | | (829) | |
| Other | (54) | | | (171) | |
| Total | (46,398) | | | (54,099) | |
| Net deferred tax liability | $ | (16,311) | | | $ | (15,367) | |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. As of December 31, 2021, management determined that sufficient evidence exists to support the future utilization of all of the Company's deferred tax assets.
Utilization of the federal and state net operating loss and tax credit carryforwards may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended. At December 31, 2020, the Company had federal net operating loss carryforwards of $1.0 million. The Company also has state net operating loss carryforwards of $12.1 million as of both December 31, 2021 and 2020 that will expire at various dates from 2022 to 2038.
Retained earnings at December 31, 2021 and 2020 include approximately $12.7 million in tax basis bad debt reserves for which no income tax liability has been recorded. This represents the balance of bad debt reserves created for tax purposes as of December 31, 1987. These amounts are subject to recapture (i.e., included in taxable income) if certain events occur, such as in the event HomeStreet Bank ceases to be a bank. In the event of recapture, the Company will incur both federal and state tax liabilities on this pre-1988 bad debt reserve balance at the then prevailing corporate tax rates.
The Company had no recorded unrecognized tax position as of December 31, 2021, 2020 or 2019.
We are currently under examination, or subject to examination, by various U.S. federal and state taxing authorities. The Company is no longer subject to federal income tax examinations for tax years prior to 2015 or state income tax examination for tax years prior to 2017, generally.
NOTE 12–RETIREMENT BENEFIT PLAN:
The Company maintains a 401(k) Savings Plan for the benefit of its employees. Substantially all of the Company's employees are eligible to participate in the HomeStreet, Inc. 401(k) Savings Plan (the "Plan"). The Plan provides for payment of retirement benefits to employees pursuant to the provisions of the Plan and in conformity with Section 401(k) of the Internal Revenue Code. Employees may elect to have a portion of their salary contributed to the Plan. Participants receive a vested employer
matching contribution equal to 100% of the first 3.0% and 50% of the next 2.0% of eligible compensation deferred by the participant. Employer contributions of $3.9 million, $3.8 million and $5.5 million were incurred in 2021, 2020, and 2019, respectively.
NOTE 13–SHARE-BASED COMPENSATION PLANS:
In May 2014, the shareholders approved the Company's 2014 Equity Incentive Plan (the "2014 EIP Plan") that provided for the grant of stock options, shares of restricted stock, RSUs, PSUs, stock bonus awards, stock appreciation rights, performance share awards and performance compensation awards and unrestricted stock(collectively, "Equity Incentive Awards") to the Company’s executive officers, other key employees and directors. This plan was amended in May 2017 and allows the grant of up to 1,875,000 shares of the Company’s common stock. For 2021 and 2020, the Company recognized stock-based compensation cost of $2.9 million and $2.4 million, respectively. In 2019, the Company recognized a $3.1 million reversal of previously recognized stock-based compensation costs related to PSUs that did not meet their internal performance metrics, resulting in a net benefit of $0.4 million.
Nonqualified Stock Options
A summary of changes in stock options for 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic Value
(in thousands) |
| | | | | | | |
| Options outstanding at December 31, 2020 | 188,181 | | $ | 12.85 | | | 1.3 years | | $ | 3,933 | |
| | | | | | | |
| | | | | | | |
| Exercised | (188,181) | | 12.85 | | | | | |
| Options outstanding at December 31, 2021 | — | | $ | — | | | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
There were no options granted or forfeited during 2021.
RSUs generally vest over a three year period with the fair market value of the awards determined at the grant date based on the Company's stock price. PSUs vest at the end of a three year period with the fair market value of the awards determined using a Monte Carlo simulation technique. A summary of the status of the combined RSUs and PSUs is as follows:
| | | | | | | | | | | |
| Number | | Weighted Average
Grant Date Fair Value |
| | | |
| Outstanding at December 31, 2020 | 295,840 | | $ | 24.52 | |
| Granted | 106,372 | | 33.01 | |
| Cancelled or forfeited | (73,577) | | 28.06 | |
| Vested | (60,104) | | 24.89 | |
| Outstanding at December 31, 2021 | 268,531 | | | $ | 26.83 | |
| | | |
The assumptions used in the Monte Carlo simulations used to determine fair market value of the PSUs granted in 2021, 2020 and 2019 are set forth in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
| | | | | | |
| Volatility of common stock | | 40.5 | % | | 33.9 | % | | 29.4 | % |
| Average volatility of peer companies | | 43.5 | % | | 34.8 | % | | 24.5 | % |
| Average correlation coefficient of peer companies | | 0.8004 | % | | 0.7561 | % | | 0.7272 | % |
| Risk-free interest rate | | 0.2 | % | | 0.3 | % | | 2.3 | % |
| Expected term in years | | 3.00 years | | 2.76 years | | 2.69 years |
| | | | | | |
NOTE 14–FAIR VALUE MEASUREMENT:
The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.
Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:
•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
•Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what market participants would use in pricing the asset or liability.
The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period.
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and classification of the Company's assets and liabilities valued at fair value on a recurring basis.
| | | | | | | | | | | | | | |
Asset/Liability class | | Valuation methodology, inputs and assumptions | | Classification |
Investment securities | | | | |
Investment securities AFS | | Observable market prices of identical or similar securities are used where available.
| | Level 2 recurring fair value measurement. |
| | If market prices are not readily available, value is based on discounted cash flows using the following significant inputs:
• Expected prepayment speeds
• Estimated credit losses
• Market liquidity adjustments | | Level 3 recurring fair value measurement. |
LHFS | | | | |
Single family loans, excluding loans transferred from held for investment | | Fair value is based on observable market data, including:
• Quoted market prices, where available
• Dealer quotes for similar loans
• Forward sale commitments | | Level 2 recurring fair value measurement. |
| | When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs:
• Benchmark yield curve
• Estimated discount spread to the benchmark yield curve
• Expected prepayment speeds | | Estimated fair value classified as Level 3. |
Mortgage servicing rights | | | | |
Single family MSRs | | For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 9, Mortgage Banking Operations.
| | Level 3 recurring fair value measurement. |
Derivatives | | | | |
Futures | | Fair value is based on closing exchange prices. | | Level 1 recurring fair value measurement. |
Interest rate swaps
Interest rate swaptions
Forward sale commitments | | Fair value is based on quoted prices for identical or similar instruments when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs, including:
• Forward interest rates
• Interest rate volatilities | | Level 2 recurring fair value measurement. |
Interest rate lock commitments | | The fair value considers several factors including:
• Fair value of the underlying loan based on quoted prices in the secondary market, when available.
• Value of servicing
• Fall-out factor
| | Level 3 recurring fair value measurement. |
The following tables present the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| (in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| Assets: | | | | | | | |
| Investment securities AFS | | | | | | | |
| Mortgage backed securities: | | | | | | | |
| Residential | $ | 32,963 | | | $ | — | | | $ | 30,556 | | | $ | 2,407 | |
| Commercial | 62,792 | | | — | | | 62,792 | | | — | |
| Collateralized mortgage obligations: | | | | | | | |
| Residential | 187,394 | | | — | | | 187,394 | | | — | |
| Commercial | 136,659 | | | — | | | 136,659 | | | — | |
| Municipal bonds | 539,923 | | | — | | | 539,923 | | | — | |
| Corporate debt securities | 19,616 | | | — | | | 19,541 | | | 75 | |
| U.S. Treasury securities | 23,175 | | | — | | | 23,175 | | | — | |
| | | | | | | |
| Single family LHFS | 128,041 | | | — | | | 128,041 | | | — | |
| Single family LHFI | 7,287 | | | — | | | — | | | 7,287 | |
| Single family mortgage servicing rights | 61,584 | | | — | | | — | | | 61,584 | |
| Derivatives | | | | | | | |
| Futures | 334 | | | 334 | | | — | | | — | |
| Forward sale commitments | 723 | | | — | | | 723 | | | — | |
| | | | | | | |
| Interest rate lock commitments | 2,487 | | | — | | | — | | | 2,487 | |
| Interest rate swaps | 4,381 | | | — | | | 4,381 | | | — | |
| Total assets | $ | 1,207,359 | | | $ | 334 | | | $ | 1,133,185 | | | $ | 73,840 | |
| Liabilities: | | | | | | | |
| Derivatives | | | | | | | |
| | | | | | | |
| Forward sale commitments | $ | 640 | | | $ | — | | | $ | 640 | | | $ | — | |
| | | | | | | |
| Interest rate lock commitments | 3 | | | — | | | — | | | 3 | |
| Interest rate swaps | 4,541 | | | — | | | 4,541 | | | — | |
| Total liabilities | $ | 5,184 | | | $ | — | | | $ | 5,181 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| (in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| Assets: | | | | | | | |
| Investment securities AFS | | | | | | | |
| Mortgage backed securities: | | | | | | | |
| Residential | $ | 51,046 | | | $ | — | | | $ | 48,417 | | | $ | 2,629 | |
| Commercial | 45,184 | | | — | | | 45,184 | | | — | |
| Collateralized mortgage obligations: | | | | | | | |
| Residential | 234,909 | | | — | | | 234,909 | | | — | |
| Commercial | 159,183 | | | — | | | 159,183 | | | — | |
| Municipal bonds | 564,703 | | | — | | | 564,703 | | | — | |
| Corporate debt securities | 15,222 | | | — | | | 15,141 | | | 81 | |
| | | | | | | |
| Agency debentures | 1,846 | | | — | | | 1,846 | | | — | |
| Single family LHFS | 194,643 | | | — | | | 194,643 | | | — | |
| Single family LHFI | 7,108 | | | — | | | — | | | 7,108 | |
| Single family mortgage servicing rights | 49,966 | | | — | | | — | | | 49,966 | |
| Derivatives | | | | | | | |
| | | | | | | |
| Forward sale commitments | 1,035 | | | — | | | 1,035 | | | — | |
| | | | | | | |
| Interest rate lock commitments | 17,395 | | | — | | | — | | | 17,395 | |
| Interest rate swaps | 17,459 | | | — | | | 17,459 | | | — | |
| Total assets | $ | 1,359,699 | | | $ | — | | | $ | 1,282,520 | | | $ | 77,179 | |
| Liabilities: | | | | | | | |
| Derivative | | | | | | | |
| Futures | $ | 4 | | | $ | 4 | | | $ | — | | | $ | — | |
| Forward sale commitments | 3,714 | | | — | | | 3,714 | | | — | |
| | | | | | | |
| Interest rate lock commitments | 3 | | | — | | | — | | | 3 | |
| Interest rate swaps | 20,511 | | | — | | | 20,511 | | | — | |
| Total liabilities | $ | 24,232 | | | $ | 4 | | | $ | 24,225 | | | $ | 3 | |
There were no transfers between levels of the fair value hierarchy during 2021 and 2020.
Level 3 Recurring Fair Value Measurements
The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS, and interest rate lock and purchase loan commitments ("IRCLs"), which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during 2021 and 2020, see Note 9, Mortgage Banking Operations.
The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs.
The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fall-out) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period.
The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement.
The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $7.3 million and $7.1 million at December 31, 2021 and 2020, respectively.
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | Fair Value | | Valuation
Technique | | Significant Unobservable
Input | | Low | | High | | Weighted Average |
| | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | |
| Investment securities AFS | $ | 2,482 | | | Income approach | | Implied spread to benchmark interest rate curve | | 2.00% | | 2.00% | | 2.00% |
| Single family LHFI | 7,287 | | | Income approach | | Implied spread to benchmark interest rate curve | | 2.39% | | 7.96% | | 3.56% |
| Interest rate lock commitments, net | 2,484 | | | Income approach | | Fall-out factor | | 0.15% | | 21.93% | | 8.44% |
| | | | | Value of servicing | | 0.35% | | 1.46% | | 1.15% |
| December 31, 2020 | | | | | | | | | | | |
| Investment securities AFS | $ | 2,710 | | | Income approach | | Implied spread to benchmark interest rate curve | | 2.00% | | 2.00% | | 2.00% |
| Single family LHFI | 7,108 | | | Income approach | | Implied spread to benchmark interest rate curve | | 3.96% | | 10.64% | | 6.23% |
| Interest rate lock commitments, net | 17,392 | | | Income approach | | Fall-out factor | | 1.97% | | 38.38% | | 15.53% |
| | | | | Value of servicing | | 0.41% | | 1.44% | | 0.97% |
We had no LHFS where the fair value was not derived with significant observable inputs at December 31, 2021 or 2020.
The following table presents fair value changes and activity for certain Level 3 assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Beginning balance | | Additions | | Transfers | | Payoffs/Sales | | Change in mark to market (1) | | Ending balance |
| | | | | | | | | | | | |
| Year Ended December 31, 2021 | | | | | | | | | | | | |
| Investment securities AFS | | $ | 2,710 | | | $ | — | | | $ | — | | | $ | (192) | | | $ | (36) | | | $ | 2,482 | |
| Single family LHFI | | 7,108 | | | 4,051 | | | — | | | (4,279) | | | 407 | | | 7,287 | |
| Year Ended December 31, 2020 | | | | | | | | | | | | |
| Investment securities AFS | | $ | 1,952 | | | $ | 985 | | | $ | — | | | $ | (435) | | | $ | 208 | | | $ | 2,710 | |
| | | | | | | | | | | | |
| Single family LHFI | | 3,468 | | | 6,088 | | | — | | | (2,409) | | | (39) | | | 7,108 | |
(1) Changes in fair value for singe family LHFI are recorded in other noninterest income on the consolidated income statement.
The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments:
| | | | | | | | | | | |
| Years Ended December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Beginning balance, net | $ | 17,392 | | | $ | 2,223 | |
| Total realized/unrealized gains | 11,888 | | | 55,911 | |
| Settlements | (26,796) | | | (40,742) | |
| Ending balance, net | $ | 2,484 | | | $ | 17,392 | |
Nonrecurring Fair Value Measurements
Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis.
The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by real estate.
The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that are not collateralized by real estate and to the appraisal value of OREO.
Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.
These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period.
The following tables present assets classified as Level 3 assets that had changes in their recorded fair value during 2021 and 2020 and what we still held at the end of the respective reporting period:
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | Fair Value | | | | | | | | Total Gains (Losses) |
| | | | | | | | | |
| As of or for the year ended December 31, 2021 | | | | | | | | | |
LHFI (1) | $ | 1,214 | | | | | | | | | $ | (43) | |
| As of or for the year ended December 31, 2020 | | | | | | | | | |
| | | | | |
LHFI (1) | $ | 3,651 | | | | | | | | | $ | (1,700) | |
| | | | | | | | | |
| | | | | | | | | |
(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.
Fair Value of Financial Instruments
The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2021 |
| (in thousands) | Carrying
Value | | Fair
Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | |
| Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 65,214 | | | $ | 65,214 | | | $ | 65,214 | | | $ | — | | | $ | — | |
| Investment securities HTM | 4,169 | | | 4,305 | | | — | | | 4,305 | | | — | |
| LHFI | 5,488,439 | | | 5,588,719 | | | — | | | — | | | 5,588,719 | |
| | | | | | | | | |
| LHFS – multifamily and SBA | 48,090 | | | 48,425 | | | — | | | 48,425 | | | — | |
| Mortgage servicing rights – multifamily and SBA | 39,415 | | | 43,199 | | | — | | | — | | | 43,199 | |
| Federal Home Loan Bank stock | 10,361 | | | 10,361 | | | — | | | 10,361 | | | — | |
| Other assets - GNMA EBO loans | 12,342 | | | 12,342 | | | — | | | — | | | 12,342 | |
| Liabilities: | | | | | | | | | |
| Certificates of deposit | $ | 906,928 | | | $ | 906,064 | | | $ | — | | | $ | 906,064 | | | $ | — | |
| Borrowings | 41,000 | | | 41,000 | | | — | | | 41,000 | | | — | |
| | | | | | | | | |
| Long-term debt | 126,026 | | | 116,845 | | | — | | | 116,845 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2020 |
| (in thousands) | Carrying
Value | | Fair
Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | |
| Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 58,049 | | | $ | 58,049 | | | $ | 58,049 | | | $ | — | | | $ | — | |
| Investment securities HTM | 4,271 | | | 4,507 | | | — | | | 4,507 | | | — | |
| LHFI | 5,172,778 | | | 5,327,711 | | | — | | | — | | | 5,327,711 | |
| | | | | | | | | |
| LHFS multifamily and other | 167,289 | | | 167,289 | | | — | | | 167,289 | | | — | |
| Mortgage servicing rights – multifamily | 35,774 | | | 38,423 | | | — | | | — | | | 38,423 | |
| Federal Home Loan Bank stock | 20,319 | | | 20,319 | | | — | | | 20,319 | | | — | |
| Other assets - GNMA EBO loans | 101,750 | | | 101,750 | | | — | | | — | | | 101,750 | |
| Liabilities: | | | | | | | | | |
| Certificates of deposit | $ | 1,139,807 | | | $ | 1,143,747 | | | $ | — | | | $ | 1,143,747 | | | $ | — | |
| Borrowings | 322,800 | | | 322,876 | | | — | | | 322,876 | | | — | |
| | | | | | | | | |
| Long-term debt | 125,838 | | | 116,893 | | | — | | | 116,893 | | | — | |
Fair Value Option
Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset, resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair
value of loans to more effectively offset the change in fair value of derivative instruments that are used as economic hedges of loans held for sale.
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 | | At December 31, 2020 |
| (in thousands) | Fair Value | | Aggregate Unpaid Principal Balance | | Fair Value Less Aggregated Unpaid Principal Balance | | Fair Value | | Aggregate Unpaid Principal Balance | | Fair Value Less Aggregated Unpaid Principal Balance |
| | | | | | | | | | | |
| Single family LHFS | $ | 128,041 | | | $ | 124,933 | | | $ | 3,108 | | | $ | 194,643 | | | $ | 185,832 | | | $ | 8,811 | |
NOTE 15–REGULATORY CAPITAL REQUIREMENTS:
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's operations and financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about risk components, asset risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to assets (as defined). Management believes, as of December 31, 2021 that the Company and the Bank met all capital adequacy requirements. The following table presents the capital and capital ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) as of the respective dates and as compared to the respective regulatory requirements applicable to them:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Actual | | For Minimum Capital
Adequacy Purposes | | To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions |
| (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | |
| HomeStreet, Inc. | | | | | | | | | | | |
| Tier 1 leverage capital (to average assets) | $ | 723,232 | | | 9.94 | % | | $ | 291,098 | | | 4.0 | % | | NA | | NA |
| Common equity tier 1 capital (to risk-weighted assets) | 663,232 | | | 10.84 | % | | 275,281 | | | 4.5 | % | | NA | | NA |
| Tier 1 risk-based capital (to risk-weighted assets) | 723,232 | | | 11.82 | % | | 367,041 | | | 6.0 | % | | NA | | NA |
| Total risk-based capital (to risk-weighted assets) | 774,695 | | | 12.66 | % | | 489,388 | | | 8.0 | % | | NA | | NA |
| HomeStreet Bank | | | | | | | | | | | |
| Tier 1 leverage capital (to average assets) | $ | 727,753 | | | 10.11 | % | | $ | 287,990 | | | 4.0 | % | | $ | 359,988 | | | 5.0 | % |
| Common equity tier 1 capital (to risk-weighted assets) | 727,753 | | | 12.87 | % | | 254,442 | | | 4.5 | % | | 367,527 | | | 6.5 | % |
| Tier 1 risk-based capital (to risk-weighted assets) | 727,753 | | | 12.87 | % | | 339,256 | | | 6.0 | % | | 452,341 | | | 8.0 | % |
| Total risk-based capital (to risk-weighted assets) | 778,723 | | | 13.77 | % | | 452,341 | | | 8.0 | % | | 565,426 | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2020 |
| Actual | | For Minimum Capital
Adequacy Purposes | | To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions |
| (dollars 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 | % |
As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. No conditions or events have occurred since December 31, 2021 that we believe have changed the Company’s or the Bank’s capital adequacy classifications from those set forth in the above table.
In addition to the minimum capital ratios, both the Company and the Bank are required to maintain a “conservation buffer" consisting of additional Common Equity Tier 1 Capital which is at least2.5% 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 additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At December 31, 2021, capital conservation buffers for the Company and the Bank were 4.66% and 5.77%, respectively. The following table sets forth the minimum capital ratios plus the applicable increment of the capital conservation buffer:
| | | | | | | | |
CET-1 to risk-weighted assets | | 7.00 | % |
Tier 1 capital to risk-weighted assets | | 8.50 | % |
Total capital to risk-weighted assets | | 10.50 | % |
NOTE 16–EARNINGS PER SHARE:
The following table summarizes the calculation of earnings per share:
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| (in thousands, except share and per share data) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| EPS numerator: | | | | | | |
| Income from continuing operations | | $ | 115,422 | | | $ | 79,990 | | | $ | 40,720 | |
| Earnings allocated to share repurchase | | — | | | — | | | (650) | |
| | | | | | |
| Income from continuing operations available to common shareholders | | 115,422 | | | 79,990 | | | 40,070 | |
| Loss from discontinued operations | | — | | | — | | | (23,208) | |
| Net income available to common shareholders | | $ | 115,422 | | | $ | 79,990 | | | $ | 16,862 | |
| EPS denominator: | | | | | | |
| Weighted average shares: | | | | | | |
| Basic weighted-average number of common shares outstanding | | 20,885,509 | | | 22,867,268 | | | 25,573,488 | |
| Dilutive effect of outstanding common stock equivalents | | 257,905 | | | 209,554 | | | 197,295 | |
| Diluted weighted-average number of common shares outstanding | | 21,143,414 | | | 23,076,822 | | | 25,770,783 | |
| Net income (loss) per share | | | | | | |
| Basic: | | | | | | |
| Income from continuing operations | | $ | 5.53 | | | $ | 3.50 | | | $ | 1.57 | |
| Loss from discontinued operations | | — | | | — | | | (0.91) | |
| Total | | $ | 5.53 | | | $ | 3.50 | | | $ | 0.66 | |
| Diluted: | | | | | | |
| Income from continuing operations | | $ | 5.46 | | | $ | 3.47 | | | $ | 1.55 | |
| Loss from discontinued operations | | — | | | — | | | (0.90) | |
| Total | | $ | 5.46 | | | $ | 3.47 | | | $ | 0.65 | |
| | | | | | |
| | | | | | |
NOTE 17–LEASES:
We have operating and finance leases for certain office space and finance leases for certain equipment. Our leases have remaining lease terms of up to 14 years.
The Company, as sublessor, subleases certain office and retail space in which the terms of the subleases end by May 2029. Under all of our executed sublease arrangements, the sublessees are obligated to pay the Company sublease payments of $5.7 million in 2022, $4.4 million in 2023, $2.8 million in 2024, $2.3 million in 2025, $2.3 million in 2026 and $2.3 million thereafter. For 2020 and 2019 we incurred $2.5 million and $5.0 million in impairment charges on lease right-of-use assets, respectively.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | | | | 2021 | | 2020 | | 2019 | |
| | | | | | | | | | |
| Operating lease cost | | | | | $ | 9,610 | | | $ | 11,989 | | | $ | 14,538 | | |
| Short-term leases | | | | | — | | | — | | | 28 | | |
| Finance lease cost: | | | | | | | | | | |
| Amortization of right-of-use assets | | | | | 1,066 | | | 1,277 | | | 2,030 | | |
| Interest on lease liabilities | | | | | 22 | | | 151 | | | 340 | | |
| Variable lease costs and nonlease components | | | | | 3,716 | | | 5,502 | | | 6,627 | | |
| Sublease income | | | | | (3,449) | | | (6,662) | | | (4,378) | | |
| Total | | | | | $ | 10,965 | | | $ | 12,257 | | | $ | 19,185 | | |
Supplemental cash flow information related to leases were as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Years Ended December 31, |
| (in thousands) | | | | | 2021 | | 2020 | | 2019 | |
| | | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | |
| Operating cash flows from operating leases | | | | | $ | 13,647 | | | $ | 15,452 | | | $ | 17,054 | | |
| Operating cash flows from finance leases | | | | | 22 | | | 151 | | | 340 | | |
| Financing cash flows from finance leases | | | | | 1,070 | | | 1,209 | | | 1,694 | | |
| Right-of-use assets obtained | | | | | | | | | | |
| Operating leases | | | | | $ | 1,894 | | | $ | 5,666 | | | $ | 5,800 | | |
| Finance leases | | | | | 707 | | | — | | | 139 | | |
Other changes in right-of-use assets (1) | | | | | | | | | | |
| Operating leases | | | | | $ | (460) | | | $ | (39,924) | | | $ | (13,605) | | |
| Finance leases | | | | | (2) | | | (29) | | | (1,172) | | |
(1) Change in 2020 primarily relates to changes in assumptions regarding the exercise of renewal options available under real estate lease agreements.
Supplemental information related to leases was as follows:
| | | | | | | | | | | | | | | |
| | | At December 31, |
| (in thousands, except lease term and discount rate) | | | 2021 | | 2020 |
| | | | | |
| Operating lease right-of-use assets, included in other assets | | | $ | 38,010 | | $ | 45,560 |
| | | | | |
| Operating lease liabilities, included in accounts payable and other liabilities | | | 49,574 | | 62,563 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Finance lease right-of-use assets, included in other assets | | | $ | 777 | | $ | 1,081 |
| Finance lease liabilities, included in accounts payable and other liabilities | | | 787 | | 1,097 |
| | | | | |
| | | | | |
| Weighted Average Remaining lease term in years | | | | | |
| Operating leases | | | 5.87 | | 6.09 |
| Finance leases | | | 0.96 | | 1.52 |
| Weighted Average Discount Rate | | | | | |
| Operating leases | | | 1.71% | | 1.71% |
| Finance leases | | | 1.43% | | 3.12% |
Maturities of lease liabilities and obligations under leases classified as nonlease components were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Lease Liabilities | | |
| (in thousands) | | Operating Leases | | Finance Leases | | Nonlease Components |
| | | | | | |
| Year ended December 31, | | | | | | |
| 2022 | | $ | 12,969 | | | $ | 521 | | | $ | 5,306 | |
| 2023 | | 10,558 | | | 281 | | | 4,842 | |
| 2024 | | 8,487 | | | — | | | 4,413 | |
| 2025 | | 6,908 | | | — | | | 4,245 | |
| 2026 | | 5,896 | | | — | | | 4,355 | |
| 2027 and thereafter | | 9,855 | | | — | | | 4,417 | |
| Total lease payments | | 54,673 | | | 802 | | | $ | 27,578 | |
| Less imputed interest | | 5,099 | | | 15 | | | |
| Total | | $ | 49,574 | | | $ | 787 | | | |
NOTE 18–PARENT COMPANY FINANCIAL STATEMENTS (UNAUDITED):
Condensed financial information for HomeStreet, Inc. is as follows:
| | | | | | | | | | | |
| Condensed Balance Sheets | At December 31, |
| (in thousands) | 2021 | | 2020 |
| | | |
| Assets: | | | |
| Cash and cash equivalents | $ | 12,756 | | | $ | 20,021 | |
| Other assets | 5,082 | | | 7,686 | |
| Investment in stock of HomeStreet Bank | 779,851 | | | 780,531 | |
| Investment in stock of other subsidiaries | 45,175 | | | 36,381 | |
| Total assets | $ | 842,864 | | | $ | 844,619 | |
| Liabilities: | | | |
| Other liabilities | $ | 1,499 | | | $ | 1,031 | |
| Long-term debt | 126,026 | | | 125,838 | |
| Total liabilities | 127,525 | | | 126,869 | |
| Shareholders' Equity: | | | |
| | | |
| Common stock, no par value | 249,856 | | | 278,505 | |
| Retained earnings | 444,343 | | | 403,888 | |
| Accumulated other comprehensive income | 21,140 | | | 35,357 | |
| Total shareholder's equity | 715,339 | | | 717,750 | |
| Total liabilities and shareholder's equity | $ | 842,864 | | | $ | 844,619 | |
| | | | | | | | | | | | | | | | | |
| Condensed Income Statements | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Noninterest income | | | | | |
| Dividend income from HomeStreet Bank | $ | 109,000 | | | $ | 82,909 | | | $ | 110,000 | |
| Equity in undistributed income from subsidiaries | 10,801 | | | 3,374 | | | — | |
| Distributions in excess of income from subsidiaries | — | | | — | | | (84,146) | |
| Other noninterest income | 1,838 | | | 1,773 | | | 2,293 | |
| Total revenues | 121,639 | | | 88,056 | | | 28,147 | |
| Expenses | | | | | |
| Interest expense-net | 4,576 | | | 5,731 | | | 4,821 | |
| Noninterest expense | 2,939 | | | 4,136 | | | 8,437 | |
| Total expenses | 7,515 | | | 9,867 | | | 13,258 | |
| Income before income taxes (benefit) | 114,124 | | | 78,189 | | | 14,889 | |
| Income taxes (benefit) | (1,298) | | | (1,801) | | | (2,623) | |
| Net income | $ | 115,422 | | | $ | 79,990 | | | $ | 17,512 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| Condensed Statements of Cash Flows | Years Ended December 31, |
| (in thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
| Cash flows from operating activities | | | | | |
| Net income | $ | 115,422 | | | $ | 79,990 | | | $ | 17,512 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | |
| Undistributed earnings from investment in subsidiaries | (10,801) | | | (3,374) | | | — | |
| Distributions in excess or earnings from investment in subsidiaries | — | | | — | | | 84,146 | |
| Other | (8,669) | | | (4,483) | | | (30) | |
| Net cash provided by operating activities | 95,952 | | | 72,133 | | | 101,628 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| AFS securities: Principal collections net of purchases | 2,012 | | | 2,886 | | | 1,049 | |
| | | | | |
| Net cash provided by investing activities | 2,012 | | | 2,886 | | | 1,049 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Repurchases of common stock | (84,154) | | | (58,009) | | | (98,543) | |
| Proceeds from stock issuance, net | 263 | | | 238 | | | 105 | |
| | | | | |
| | | | | |
| Dividends paid on common stock | (21,338) | | | (13,865) | | | — | |
| | | | | |
| | | | | |
| Net cash used in financing activities | (105,229) | | | (71,636) | | | (98,438) | |
| Net (decrease) increase in cash and cash equivalents | (7,265) | | | 3,383 | | | 4,239 | |
| Cash and cash equivalents, beginning of year | 20,021 | | | 16,638 | | | 12,399 | |
| Cash and cash equivalents, end of year | $ | 12,756 | | | $ | 20,021 | | | $ | 16,638 | |
NOTE 19–DISCONTINUED OPERATIONS:
On March 31, 2019, the Board adopted a Resolution of Exit or Disposal of HLC Based Mortgage Banking Operations to sell or abandon the assets and related personnel associated with those operations. The assets that were sold or abandoned largely represented the Company's former Mortgage Banking segment, the activities of which related to originating, servicing, underwriting, funding and selling single family residential mortgage loans.
The Company determined that the above actions constituted commitment to a plan of exit or disposal of certain long-lived assets (through sale or abandonment) and termination of employees. Further, the Company determined that the shift from a large-scale HLC based originator and servicer to a branch-focused product offering represented a strategic shift. As a result, the HLC-related mortgage banking operations are reported separately from the continuing operations as discontinued operations. In addition, the former Mortgage Banking operating segment and reporting unit were eliminated. This has resulted in a recast of the financial statements in 2019 and prior.
In the first quarter of 2019, the Company successfully closed and settled 2 sales of the rights to service $14.3 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Freddie Mac and Ginnie Mae. These sales resulted in a $0.9 million pre-tax loss from discontinued operations during 2019.
In June 2019 the Company completed the sale of the HLC based mortgage originations business assets and transfer of personnel to Homebridge Financial Services, Inc. ("Homebridge"). This sale included 47 stand-alone HLCs and the transfer of certain related mortgage personnel. These HLCs, along with certain other mortgage banking related assets and liabilities are classified as discontinued operations in the accompanying consolidated balance sheets and consolidated income statements. HLCs that were not sold were closed during the second quarter of 2019. Certain bank location-based components of the Company's former Mortgage Banking segment, including MSRs on certain mortgage loans that were not part of the sales and right-of-use assets and lease liabilities where we did not obtain full landlord release have been classified as continuing operations.
In November 2019, we sold our ownership interest in WMS LLC at our basis.
These discontinued operations activities were concluded by December 31, 2019. Consequently, we ceased discontinued operations accounting effective January 1, 2020. The following table summarizes the calculation of the net gain (loss) on disposal of discontinued operations for 2019:
| | | | | | | | |
(in thousands) | | |
| | |
Proceeds from asset sales | | $ | 186,692 | |
Book value of assets sold | | 181,243 | |
Gain on assets sold | | 5,449 | |
Transaction costs | | 8,770 | |
Compensation expense related to the transactions | | 4,636 | |
Facility and IT related costs | | 13,660 | |
Total costs | | 27,066 | |
| | |
Net loss on disposal | | $ | (21,617) | |
| | |
The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the following at December 31, 2019:
| | | | | | | | | |
(in thousands) | | | |
| | | |
Assets of discontinued operations | | | |
LHFS at fair value | | | $ | 26,123 | |
| | | |
| | | |
Other assets | | | 2,505 | |
Total | | | $ | 28,628 | |
Liabilities of discontinued operations | | | |
Account payable and other liabilities | | | $ | 2,603 | |
Income Statement of Discontinued Operations for 2019:
| | | | | | | | |
(in thousands) | | |
| | |
Net interest income | | $ | 5,858 | |
Noninterest income | | 63,713 | |
Noninterest expense | | 97,856 | |
Loss before income taxes | | (28,285) | |
Income tax (benefit) expense | | (5,077) | |
Loss from discontinued operations | | $ | (23,208) | |
Cash Flows from Discontinued Operations for 2019:
| | | | | | | | | | | |
(in thousands) | | | |
| | | |
Net cash provided by operating activities | | $ | 238,212 | | |
Net cash provided by investing activities | | 185,458 | | |
| | | |
NOTE 20–RESTRUCTURING:
In addition to the disposal of our HLC Based Mortgage Banking Operations, we have taken the following restructuring activities to improve our productivity and reduce expenses:
•In 2019, we implemented a restructuring plan under which we incurred costs to:
◦Reduce our staffing levels through consolidation of job functions and elimination of management redundancy;
◦Renegotiate our technology contracts;
◦Eliminate excess occupancy costs;
◦Eliminate redundant or unnecessary systems and services;
◦Engage consultants to assist with the above processes.
•In 2020, we concluded the restructuring plan started in 2019, and took additional steps to consolidate our facilities and incurred charges to reflect the vacating of certain office space.
The costs incurred include severance, retention, facility related charges and consulting fees.
The following table summarizes the restructuring charges and the liability for restructuring costs still to be paid in the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Facility-related costs | | Personnel-related costs | | Other costs | | Total |
| | | | | | | | |
| 2021 Activity | | | | | | | | |
| Restructuring charges | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Costs paid or otherwise settled | | (1,029) | | | (154) | | | (116) | | | (1,299) | |
| Balance, December 31, 2021 | | $ | 1,834 | | | $ | — | | | $ | — | | | $ | 1,834 | |
| 2020 Activity | | | | | | | | |
| Restructuring charges | | $ | 10,188 | | | $ | 339 | | | $ | 1,266 | | | $ | 11,793 | |
| Costs paid or otherwise settled | | (8,560) | | | (695) | | | (1,309) | | | (10,564) | |
| Balance, December 31, 2020 | | $ | 2,863 | | | $ | 154 | | | $ | 116 | | | $ | 3,133 | |
| 2019 Activity | | | | | | | | |
| Restructuring charges | | $ | 1,373 | | | $ | 1,836 | | | $ | 1,302 | | | $ | 4,511 | |
| Costs paid or otherwise settled | | (138) | | | (1,326) | | | (1,143) | | | (2,607) | |
| Balance, December 31, 2019 | | $ | 1,235 | | | $ | 510 | | | $ | 159 | | | $ | 1,904 | |
NOTE 21–SUBSEQUENT EVENTS:
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes initially will accrue at a rate equal to 3.5% per annum from and including the date of original issuance to, but excluding, January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering expenses. The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other general corporate purposes, including support for growth of its total assets.
On January 27, 2022 the Board of Directors authorized a dividend of $0.35 per share, payable on February 23, 2022 to shareholders of record on February 09, 2022. In addition, the Board authorized an expansion of our share repurchase program for the additional repurchase of up to $75 million in aggregate amount of shares of the Company’s common stock.
ITEM 9CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disclosure required pursuant to Item 304 of Regulation S-K.
ITEM 9ACONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management conducted an evaluation, under the supervision and with the participation of its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) at December 31, 2021. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company's management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based upon the evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective at December 31, 2021.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) for the Company. The Company's internal control over financial reporting is a process designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Management has made a comprehensive review, evaluation, and assessment of the Company's internal control over financial reporting at December 31, 2021. In making its assessment of internal control over financial reporting, management utilized the framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on that assessment, management concluded that, at December 31, 2021, the Company's internal control over financial reporting was effective.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements at, and for, the year ended December 31, 2021, has issued an audit report on the effectiveness of the Company's internal control over financial reporting at December 31, 2021, which report is included below in this Item 9A.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d), our management, including our CEO and CFO, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of HomeStreet, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of HomeStreet, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Federal Financial Institutions Examinations Council Instructions for Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management’s statement referring to compliance with laws and regulations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 4, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 4, 2022
ITEM 9B OTHER INFORMATION
None.
ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our website at http://ir.homestreet.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our corporate website, at the address and location specified above and, to the extent required by the listing standards of the Nasdaq Global Select Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
The information required by this item with respect to our directors, our executive officers, our Audit Committee and its members, and audit committee financial expert will be set forth in our definitive proxy statement for the 2022 annual meeting of stockholders (the “2022 Proxy Statement”) under the captions “Election of Directors” and” “Executive Officers,” which information is incorporated herein by reference.
ITEM 11EXECUTIVE COMPENSATION
The information required by this item will be set forth in the 2022 Proxy Statement under the captions “Executive Compensation,” “2021 ExecutiveCompensation Program,” “Other Practices, Policies and Guidelines,” “Human Resources and Corporate Governance Committee Report,” “2021 Summary Compensation Table,” “Potential Payments Upon Termination or Change in Control,” and “Corporate Governance - Human Resources and Corporate Governance Committee Interlocks and Insider Participation,” which information is incorporated herein by reference.
ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table givesprovides information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 20212023 under the HomeStreet, Inc. 2014 Equity Incentive Plan (the "2014 Plan").
| | Plan Category | Plan Category | (a) Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights | | (b) Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights | | (c) Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a) | | Plan Category | (a) Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights | | (b) Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights | | (c) Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a) | |
| | Plans approved by shareholders | Plans approved by shareholders | 351,642 | | (1) | $ | — | | (2) | 1,018,599 | | (3) |
| Plans approved by shareholders | |
| Plans approved by shareholders | | 298,375 | | (1) | $ | — | | (2) | 831,785 | | (3) |
| Plans not approved by shareholders | Plans not approved by shareholders | — | | | — | | | — | | |
| Total | Total | 351,642 | | | $ | — | | | 1,018,599 | | |
| Total | |
| Total | |
(1)Consists of 114,85596,209 shares subject to Restricted Stock Units, including 6,273 RSUs granted to certain directors as part of their director compensation which are fully vested and pursuant to which shares will be issued upon the director’s departure from the Board, awarded under the 2014 Plan and 230,514202,166 shares issuable under Performance Share Units awarded under the 2014 Plan, assuming maximum performance goals are met under such awards, resulting in the issuance of the maximum number of shares allowed under those awards.
(2)Shares issued on vesting of Restricted Stock Units and Performance Share Units under the 2014 Plan are done without payment by the participant of any additional consideration and therefore have been excluded from this calculation.
(3)Consists of shares remaining available for issuance under the 2014 Plan.
ExceptPRINCIPAL SHAREHOLDERS OF HOMESTREET
The following table sets forth the beneficial ownership of the Company common stock as disclosed above,of April 15, 2024, by:
•each of our directors and named executive officers;
•all of our directors and executive officers as a group; and
•each person known to us to be the information requiredbeneficial owner of more than 5% of any class of our securities.
The amounts and percentage of our common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. The SEC has defined “beneficial” ownership of a security to mean, generally, the possession, including shared possession, directly or indirectly, of voting power or investment power. A shareholder is also deemed to be, as of any date, the beneficial owner of all securities that such shareholder has the right to acquire within 60 days after that date through (1) the exercise of any option, warrant or right, (2) the conversion of a security, (3) the power to revoke a trust, discretionary account or similar arrangement or (4) the automatic termination of a trust, discretionary account or similar arrangement. Under these rules, more than one person may be deemed a beneficial owner of the same securities, and a person may be deemed a beneficial owner of securities as to which he or she has no economic interest. Unless otherwise indicated, the Company believes that each of the shareholders listed has sole voting and investment power with respect to their beneficially owned shares of the Company's common stock.
The percentages reflect beneficial ownership as of April 15, 2024, as determined under Rule 13d-3 under the Exchange Act and are based on 18,857,566 shares of the Company's common stock outstanding as of that date. In addition, any RSUs vesting within 60 days of April 15, 2024 are included in the beneficial ownership of the holder of such RSUs, and the percentage ownership for that holder is calculated by this item will beadding the aggregate number of RSUs vesting within 60 days of April 15, 2024 to both the number of shares held by that specific shareholder and the total number of shares outstanding. Unless otherwise set forth in the 2022 Proxy Statement underfollowing table, the caption "Principal Shareholders" which informationaddress of the listed shareholders is incorporated herein by reference.c/o HomeStreet, Inc., 601 Union Street, Suite 2000, Seattle, Washington 98101.
Unless otherwise indicated, all ownership interests or voting power referenced herein, either in percentage terms or number of shares, in respect of the Company's outstanding shares, have been calculated in accordance with Rule 13d-3 under the Exchange Act.
| | | | | | | | | | | | | | |
| Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | Percent of Class |
Fourthstone LLC (1)
575 Maryville Centre Drive, Suite 110,
St. Louis, MO 63141 | | 1,865,896 | | | 9.9 | % |
BlackRock, Inc. (2)
50 Hudson Yards,
New York, NY 10001 | | 1,540,335 | | | 8.2 | % |
Philadelphia Financial Management of San Francisco. (3)
450 Sansome Street, Suite 1500,
San Francisco, CA 94111 | | 1,021,238 | | | 5.4 | % |
The Vanguard Group (4) 100 Vanguard Blvd., Malvern, PA 19355
| | 976,964 | | | 5.2 | % |
Mark K. Mason (5) | | 188,946 | | | 1.0 | % |
Scott M. Boggs (6) | | 37,376 | | | * |
| Sandra A. Cavanaugh | | 20,593 | | | * |
Jeffrey D. Green (7) | | 18,492 | | | * |
| Joanne R. Harrell | | 14,907 | | | * |
| James R. Mitchell, Jr. | | 17,161 | | | * |
Nancy D. Pellegrino (8) | | 16,223 | | | * |
S. Craig Tompkins (9) | | 5,689 | | | |
John M. Michel (10) | | 86,409 | | | * |
William D. Endresen (11) | | 20,917 | | | * |
All executive officers and directors as a group (18 persons) (12) | | 725,804 | | | 3.8 | % |
(2)BlackRock, Inc. stated in its Schedule 13G/A filing with the SEC on January 25, 2024 (the “BlackRock 13G/A filing”) that, of the 1,540,335 shares beneficially owned at December 31, 2023, it has (a) sole voting power with respect to 1,507,922 shares, (b) shared voting power with respect to 0 shares, (c) sole power to dispose of 1,540,335 shares and (d) shared power to dispose of 0 shares. According to the BlackRock 13G/A filing, the address of Black Rock, Inc. is 50 Hudson Yards, New York, NY 10001.
(3)Based on a Schedule 13G filed with the SEC on March 19, 2024 (the “Philadelphia Financial Management13G/A filing”) stating that (1) 1,021,238 shares are held for the accounts of Philadelphia Financial Management of San Francisco, LLC (“PFM”), Boathouse Row I, L.P. (“BRI”), Boathouse Row II, L.P. (“BRII”) and Boathouse Row Offshore, Ltd. (“BRO”), (2) PFM is the investment adviser of BRO and the general partner of BRI and BRII and therefore retains voting control and dispositive power of the shares owned by each and (3) Jordan Hymowitz is the Managing Member and sole owner of PFM. According to the Philadelphia Financial Management 13G/A filing, of the 1,021,238 shares beneficially owned at March 11, 2024, each of PFM, BRI, BRII, BRO, Mr. Hymowitz and the Hymowitz 1999 Trust has (a) shared voting power with respect to 1,021,238 shares, and (b) shared power to dispose of 1,021,238 shares. According to the Philadelphia Financial Management 13G/A filing, the address of each reporting person is 450 Sansome Street, Suite 1500, San Francisco, CA 94111.
(4)The Vanguard Group stated in its Schedule 13G/A filing with the SEC on February 13, 2024 (the “Vanguard 13G/A filing”) that, of the 976,964 shares beneficially owned at December 31, 2023, it has (a) sole voting power with respect to 0 shares, (b) shared voting power with respect to 44,663 shares, (c) sole power to dispose of 925,191 shares, and shared power to dispose of 51,773 shares. According to the Vanguard 13G/A filing, the address of The Vanguard Group is 100 Vanguard Blvd., Malvern, PA 19355.
(5)Includes 3,875 shares held by Mr. Mason’s spouse. Mr. Mason disclaims beneficial ownership of his spouse’s shares except to the extent of any pecuniary interest he may have therein.
(6)Includes 7,900 shares held jointly with Mr. Boggs’s spouse. 6,400 shares are pledged as collateral in connection with a personal line of credit.
(7)Includes 3,109 shares held jointly with Mr. Green’s spouse. Also includes 785 shares held by Mr. Green’s spouse. Mr. Green disclaims beneficial ownership with respect to such shares except to the extent of any pecuniary interest he may have therein.
(8)Includes 1,000 shares held jointly with Ms. Pellegrino’s spouse.
(9)Includes 500 shares held indirectly in the Tompkins Family Trust. Mr. Tompkins, his spouse and his brother-in-law have joint control over the disposition and voting of such shares.
(10)Includes 36,409 shares held by J Michel and R Michel TTEE, The Michel family Tr U/A DTD 6/14/18; Mr. Michel and his spouse are the co-trustees and beneficiaries of the J Michel and R. Michel Tr U/A DTD 6/14/18.
(11)Includes 538 shares held through the 401(k) Plan as of the last statement date of February 29, 2024. Participants in the Company’s 401(k) Plan have the authority to direct voting of shares they hold through the 401(k) Plan.
(12)Includes shares held by our directors and NEOs as well as eight other executive officers of the Company. For these eight other executive officers, includes 7,815 shares held through the 401(k) Plan as of the last statement date of March 31, 2024. Participants in the Company’s 401(k) Plan have the authority to direct voting of shares they hold through the 401(k) Plan.
ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Director Independence
The information required by this item will be set forthBoard has determined that, with the exception of Mark K. Mason, our Chairman of the Board and CEO, all of its members are “independent directors” as that term is defined in the 2022 Proxy Statementlisting standards of Nasdaq and, where applicable, the regulations adopted under Sections 10A and 10C of the caption "CertainExchange Act. In the course of determining the independence of each nonemployee director, the Board considered the annual amount of the Company’s sales to, or purchases from, any company where a nonemployee director serves as an executive officer as well as all other relevant facts and circumstances, including the director’s commercial, accounting, legal, banking, consulting, charitable and familial relationships.
Certain Relationships and Related Transactions"
In addition to the compensation arrangements with directors and "Corporate Governance"executive officers described in “Corporate Governance and Other Matters — Director Compensation” above in Item 10 and “2023 Executive Compensation Program” in Item 11 above, the following is a description of each transaction since January 1, 2023, and each proposed transaction in which:
•The Company has been or is to be a participant;
•the amount involved exceeds or will exceed $120,000; and
•any of our directors, executive officers or beneficial holders of more than 5% of the Company's capital stock, or any immediate family member of or person sharing the household with any of these individuals (other than a tenant or employee), had or will have a direct or indirect material interest.
Other than as described below, there have not been, nor are there any currently proposed, transactions or series of similar transactions meeting these criteria to which informationthe Company has been or will be a participant.
Loans
From time to time, HomeStreet Bank makes loans to directors, executive officers, principal shareholders, and their related interests (collectively, “insiders”) in the ordinary course of business. These loans, other than loans to immediate family members not living in the director, officer or principal shareholder’s home, are subject to the Federal Reserve Board’s Regulation O, which requires that they be made in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for non-insiders. Regulation O generally defines a principal shareholder as a person that directly or indirectly or acting through or in concert with one or more other persons, owns, controls or has the power to vote more than 10% of any class of voting shares. While loans to immediate family members not living in the director, officer, or principal shareholder’s home are not subject to Regulation O, HomeStreet Bank’s Corporate Compliance department reviews these loans to ensure they meet the same qualifications listed above. All such loans originated in 2023 comply with these provisions and do not involve more than the normal risk of collectability or present other features unfavorable to us.
Home Loans to Employees, Officers, and Directors Program
As a benefit of employment, HomeStreet Bank offers reduced closing costs to certain employees under the Home Loans to Employees, Officers, & Directors program. This program is incorporated hereinoffered to all permanent Company employees working 20 hours or more (“eligible employees”) for the financing of the employee’s primary or secondary residence.
Employees may receive the closing cost credit on eligible home loan transactions once every 12 months. The amount of credit received depends upon the size and type of loan. Employee loan applications must meet HomeStreet Bank’s normal underwriting standards, and with the exception of discounted fees where applicable, the loan terms are the same as loans to members of the public. The same documentation requirements, including appraisal, credit report, and other third-party documentation, apply. The Home Loans to Employees, Officers, & Directors program is permissible under Regulation O, due to the fact that it is widely available to employees and does not give preference to the insider over other applicants.
Under HomeStreet Bank’s Related Person Transaction Policies and Procedures, if a loan to an insider or a related person has any terms or conditions not available to the general public, such as an employee discount, approval by reference.the audit
committees of the Board and HomeStreet Bank board of directors is required. If the loan amount is less than $1 million, the chair of the audit committee of the Board has the authority to pre-approve the transaction.
No loans were originated under the Home Loans to Employees, Officers, & Directors program during the year ended December 31, 2023.
Indemnification Agreements
We have entered into indemnification agreements with all of our current and former directors and certain of our current and former executive officers, including Messrs. Mason, Michel and Endresen. Subject to certain limitations, these agreements require us to indemnify these individuals to the fullest extent permitted under applicable law against liabilities that may arise by reason of their service to the Company, and to advance expenses incurred as a result of any proceedings against them as to which they could be indemnified.
ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES
Change in Independent Registered Accounting Firm
As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on October 3, 2022, the Audit Committee, after conducting a request for proposal process, approved the appointment of Crowe LLP (“Crowe”) as the Company’s new independent registered public accounting firm for the fiscal year ending December 31, 2023, and related interim periods. Deloitte & Touche LLP (“Deloitte”) continued as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2022. On March 3, 2023, Deloitte’s dismissal as the Company’s independent registered public accounting firm and the engagement of Crowe as the Company's independent registered public accounting firm for the fiscal year ending December 31, 2023 each became effective, immediately after the Company filed its Annual Report on Form 10-K for the year ended December 31, 2022 with the SEC, as reported in a Current Report on Form 8-K/A filed with the SEC on March 6, 2023.
Deloitte’s reports on the Company’s consolidated financial statements and the effectiveness of internal control over financial reporting, which were included in our Annual Reports on Form 10-K for the fiscal years ended December 31, 2022 and 2021, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through March 3, 2023, there were: (i) no disagreements within the meaning of Item 304(a)(1)(iv) of Regulation S-K between the Company and Deloitte on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Deloitte’s satisfaction, would have caused Deloitte to make reference thereto in Deloitte’s reports; and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S-K.
During the fiscal years ended December 31, 2022 and 2021, and the subsequent interim period through March 3, 2023, neither the Company nor anyone on its behalf consulted with Crowe regarding: (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided to the Company that Crowe concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K; or (iii) any “reportable event” within the meaning of Item 304(a)(1)(v) of Regulation S-K.
Independent Registered Public Accounting Firm Fees
The informationfollowing table presents fees billed for professional audit services and other services rendered to the Company by Crowe for the year ended December 31, 2023 and by Deloitte (the Company’s former auditor) for the year ended December 31, 2022. Amounts in this table are presented in thousands.
| | | | | | | | | | | | | | |
| (in 000’s) | | 2023 | | 2022 |
| | | | |
Audit Fees (1) | | $ | 1,070 | | | $ | 1,720 | |
Audit-Related Fees (2) | | 154 | | | 224 | |
Tax Fees (3) | | 71 | | | 91 | |
Other Fees (4) | | — | | | 2 | |
| Total | | $ | 1,295 | | | $ | 2,037 | |
(1)Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated financial statements included in our Annual Report on Form 10-K and for the review of our quarterly financial statements, as well as services that generally only our independent registered public accounting firm can reasonably provide, including statutory audits and services rendered in connection with SEC filings.
(2)Audit-Related Fees consist of fees billed for professional services in connection with the Company’s debt offering, which was completed in January 2022.
(3)Tax Fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning.
(4)Other Fees consist of fees billed for products and services provided by the principal accountant other than the Audit Fees, Audit-Related Fees and Tax Fees.
Pre-Approval of Audit and Non-Audit Services
It is the responsibility of the Company’s Audit Committee to pre-approve all audit and non-audit services provided by the Company’s independent registered public accounting firm. The Audit Committee has adopted a policy authorizing certain permissible audit and non-audit services to be performed by the Company’s independent registered public accounting firm with subsequent reporting and oversight required by the Audit Committee. Permissible services, not pre-approved pursuant to this item will be set forthpolicy, require specific review and approval prior to the engagement by the Audit Committee, or a designated member. All services rendered by and fees paid to the Company’s independent registered public accounting firm are reported to and monitored quarterly by the Audit Committee. The Audit Committee considers whether the provision of related audit services is compatible with maintaining the independent registered public accounting firm’s independence. To assist the Audit Committee in its oversight responsibilities, the 2022 Proxy Statement underpre-approval policy identifies the caption "Advisory (Non-Binding) Ratificationthree basic principles of Appointmentindependence with respect to services provided by the independent registered public accounting firm: (1) whether the services are consistent with applicable rules on independent registered public accounting firm independence; (2) whether the independent registered public accounting firm is best positioned to provide the services in an effective and efficient manner, taking into consideration its familiarity with the Company's business, people, culture, accounting systems, risk profile and other factors; and (3) whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. The pre-approval policy also identifies the non-audit services the independent registered public accounting firm is prohibited from providing. All services provided by Crowe and Deloitte in each of the last two fiscal years were pre-approved by the Audit Committee.
Engagement of Independent Registered Public Accounting Firm" which information is incorporated herein by reference.
Information about aggregate fees billedIn determining whether to us byengage or re-engage an audit firm, the Audit Committee annually considers, among other factors, the firm’s qualifications, performance and independence, including that of the lead partner, to determine whether the firm will serve in the best interest of the Company and its shareholders.
Based on the foregoing, the Audit Committee has retained Crowe as our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34) will be presented under the caption “Audit Committee Matters — Principal Accounting Firm Fees” in our Proxy Statement and is incorporated herein by reference.independent registered public accounting firm for fiscal year 2024.
PART IV
ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Financial Statements and Financial Statement Schedules
(i)Financial Statements
The following consolidated financial statements of the registrant and its subsidiaries are included in Part II Item 8:8 in the Original Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 20212023 and 20202022
Consolidated Income Statements for the three years ended December 31, 20212023
Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 20212023
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 20212023
Consolidated Statements of Cash Flows for the three years ended December 31, 20212023
Notes to Consolidated Financial Statements
(ii)Financial Statement Schedules
II—Valuation and Qualifying Accounts are included in the Original Form 10-K.
All other financial statement schedules for the Company have been included in the consolidated financial statements or the related footnotes in the Original Form 10-K, or are either inapplicable or not required.
(iii)Exhibits
EXHIBIT INDEX
| | | | | | | | |
Exhibit
Number | | Description |
| | |
2.1 (1)# | | |
| | |
3.1 (1)(2)# | | |
| | |
3.2 (1)(2)# | | |
| | |
| | |
4.1 (2)(3)# | | |
| | |
4.2 (3)(4) ††# | | |
| | |
4.3 (4)(5)# | | |
| | |
10.1 (6) *(7) *# | | |
| | |
10.2 (6) *(7) *# | | |
| | |
10.3 (4) *(5) *# | | |
| | |
10.4 (8) *(9) *# | | |
| | |
10.5 (15) *(17) *# | | |
| | |
10.6 (8) *(6)# | | |
10.7 (5)
| | |
| | |
10.810.7 (5)(6)#
| | |
| | |
| | | | | | | | |
10.1010.9 (4) †(5) †#
| | Office Lease, dated March 5, 1992, between Continental, Inc. and One Union Square Venture ("Office Lease"), as amended by Supplemental Lease Agreement dated August 25, 1992, Second Amendment to Lease dated May 6, 1998, Third Amendment to Lease dated June 17, 1998, Fourth Amendment to Lease dated February 15, 2000, Fifth Amendment to Lease dated July 30, 2001, Sixth Amendment to Lease dated March 5, 2002, Seventh Amendment to Lease dated May 19, 2004, Eighth Amendment to Lease dated August 31, 2004, Ninth Amendment to Lease dated April 19, 2006, Tenth Amendment to Lease dated July 20, 2006, Eleventh Amendment to Lease dated December 27, 2006, Twelfth Amendment to Lease dated October 1, 2007, Thirteenth Amendment to Lease dated January 26, 2010, Fourteenth Amendment to Lease dated January 19, 2012, Fifteenth Amendment to Lease dated May 24, 2012, Sixteenth Amendment to Lease dated September 12, 2012, Seventeenth Amendment to Lease dated November 8, 2012, Eighteenth Amendment to Lease dated May 3, 2013, Nineteenth Amendment to Lease dated May 28, 2013 and Twentieth Amendment to Lease dated June 19, 2013. |
| | |
10.1110.10 (10)(11)#
| | |
| | |
10.1210.11 (7)(8)#
| | |
| | |
10.1310.12 (9)(10)#
| | |
| | |
10.1410.13 (5)(6)#
| | |
| | |
10.1510.14 (4)(5) †#
| | |
| | |
10.1610.15 (5)(6)#
| | |
| | |
10.1710.16 (5)(6)#
| | |
| | |
10.1810.17 (12) *#
| | |
| | |
10.19 (11)
| | |
10.2010.18 (13) **#
| | |
| | |
10.2110.19 (14) **#
| | |
| | |
10.2210.20 (14) *(15) *#
| | |
| | |
10.21 (16) *# | | |
| | |
10.22 (18)*# | | |
| | |
10.23 (18)*# | | |
| | |
16.1 (19)# | | |
| | |
21# | | |
| | |
23.1# | | |
| | |
23.2# | | |
| | |
| | |
24.131.1#
| | |
| | |
31.2# | | |
| | |
31.131.3 | | |
| | | | | | | | |
31.231.4 | | |
| | |
3232.1 (16)(20) #
| | |
| | |
| | |
97.1# | | |
| | |
101# | | The following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212023 formatted in Inline XBRL (eXtensible Business Reporting Language) and contained in Exhibit 101: (i) the Consolidated Balance Sheets as of December 31, 20212023 and December 31, 2020;2022; (ii) the Consolidated Income Statements for the three years ended December 31, 2021,2023, (iii) the Consolidated Statements of Comprehensive Income for the three years ended December 31, 2021;2023; (iv) the Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2021,2023, (v) the Consolidated Statements of Cash Flows for the three years ended December 31, 2021,2023, and (vi) the Notes to Consolidated Financial Statements. |
| | |
104# | | The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2021,2023, formatted in Inline XBRL and contained in Exhibit 101. |
| | |
| | | | | |
| (1) | Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on January 19, 2024, and incorporated herein by reference. |
| (2) | Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on July 31, 2019, and incorporated herein by reference. |
(2)(3) | Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 5 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on August 9, 2011, and incorporated herein by reference. |
(3)(4) | Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on May 20, 2016, and incorporated herein by reference. |
(4)(5) | Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2020 and incorporated herein by reference |
(5)(6) | Filed as an exhibit to HomeStreet, Inc.'s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on May 19, 2011, and incorporated herein by reference. |
(6)(7) | Amended in the fourth quarter of 2018 to make administrative revisions that were not material and did not require shareholder approval. An updated version was filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2019, and incorporated herein by reference. |
(7)(8) | Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 11, 2016, and incorporated herein by reference. |
(8)(9) | Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2018 and incorporated herein by reference |
(9)(10) | Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 17, 2014, and incorporated herein by reference. |
(10)(11) | Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 25, 2015, and incorporated herein by reference. |
(11)(12) | Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on June 21, 2011, and incorporated herein by reference. |
(12) | Filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2019, and incorporated herein by reference. |
| (13) | Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on May 8, 2020, and incorporated herein by reference. |
| (14) | Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on November 6, 2020, and incorporated herein by reference. |
| (15) | (15)Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on May 6, 2022, and incorporated herein by reference. |
| (16) | Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on August 5, 2022, and incorporated herein by reference. |
| (17) | Filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 12, 2021, and incorporated herein by reference. |
| (18) | Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2023, and incorporated herein by reference. |
| (19) | (16)Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K/A (SEC File No. 001-35424) filed on March 6, 2023, and incorporated herein by reference. |
| (20) | This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
| † | Certain portions of this exhibit constitute confidential information and have been redacted in accordance with Regulation S-K, Item 601(b)(10). |
| †† | Instruments with respect to any other long-term debt of HomeStreet, Inc. and its consolidated subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of HomeStreet, Inc. and its subsidiaries on a consolidated basis. HomeStreet, Inc. hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. |
| * | Management contract or compensation plan or arrangement. |
| # | Previously filed as exhibits to the Original Form 10-K. |
Item 16 Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on March 4, 2022.April 29, 2024.
| | | | | | | | |
| HomeStreet, Inc. |
| | |
| By: | /s/ Mark K. Mason |
| | Mark K. Mason |
| | President and Chief Executive Officer |
| | | | | | | | |
| HomeStreet, Inc. |
| | |
| By: | /s/ John M. Michel |
| | John M. Michel |
| | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Accounting Officer) |
| | |
POWERS OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark K. Mason and John M. Michel, and each of them his "or her" attorney-in-fact, with the power of substitution, for him "or her" in any and all capacities, to sign any amendment to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his "or her" substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
Signature | | Title | | Date |
| | | | |
/s/ Mark K. Mason | | Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | March 4, 2022 |
Mark K. Mason, Chairman | | | |
| | | | |
/s/John M. Michel | | Executive Vice President, Chief Financial Officer and Principal Accounting Officer (Principal Financial and Accounting Officer) | | March 4, 2022 |
John M. Michel | | | |
| | | | |
/s/ Donald R. Voss | | Lead Independent Director | | March 4, 2022 |
Donald R. Voss | | | | |
| | | | |
/s/ Scott M. Boggs | | Director | | March 4, 2022 |
Scott M. Boggs | | | | |
| | | | |
/s/ Sandra A. Cavanaugh | | Director | | March 4, 2022 |
Sandra A. Cavanaugh | | | | |
| | | | |
/s/ Jeffrey D. Green | | Director | | March 4, 2022 |
Jeffrey D. Green | | | | |
| | | | |
/s/ James R. Mitchell Jr. | | Director | | March 4, 2022 |
James R. Mitchell Jr. | | | | |
| | | | |
/s/ Mark R. Patterson | | Director | | March 4, 2022 |
Mark R. Patterson | | | | |
| | | | |
| | | | |
/s/ Nancy D. Pellegrino | | Director | | March 4, 2022 |
Nancy D. Pellegrino | | | | |
| | | | |
/s/ Douglas I. Smith | | Director | | March 4, 2022 |
Douglas I. Smith | | | | |
| | | | |
/s/ Joanne Harrell | | Director | | March 4, 2022 |
Joanne Harrell | | | | |
| | | | |
| | | | |
