Notes to Consolidated Financial Statements
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
HomeStreet, Inc., a State 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, Union Street Holdings LLC and HomeStreet Mortgage Depositor, Inc. 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 assumptions 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.
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 $6.7 million and $8.1 million at December 31, 2022 and 2021, 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 contractual 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.
Trading securities, consisting of US Treasury notes, are used as economic hedges of our mortgage servicing rights, which are carried at fair value and included as investment securities on the balance sheet. Net gain or loss on trading securities, are included in loan servicing income in the consolidated income statements.
The Company evaluates AFS securities in an unrealized loss position 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 allowance for credit loss ("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, 2022 or 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. The Company does not believe any expected credit losses exist for these securities as of December 31, 2022 and 2021.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of Des Moines ("FHLB"), and as such, is required to own a certain amount of FHLB stock 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 in 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 as noninterest expenses.
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 for 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"), guaranteed by the Department of Veterans' Affairs ("VA") or Ginnie Mae ("GNMA") are maintained on accrual status even if 90 days or more past due.
Modifications for Financially Distressed Borrowers ("MFDB")
The Company provides MFDBs which may include other than insignificant delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications for the year ended December 31, 2022 did not have a material impact on the ACL.
When a borrower experiences financial difficulty, we sometimes modify or restructure loans, which may include delays in payment of amounts due, extension of the terms of the notes or a reduction in the interest rates on the notes. These loans are classified as MFDBs. MFDBs 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.
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, may result in material changes in the ACL and provision for credit losses.
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 characteristics 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 may be 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 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 no credit loss is expected to occur, then no ACL is recognized for this loan. 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 rate 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.
Mortgage servicing assets for multifamily and SBA MSRs are evaluated periodically for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by comparing the fair value of the portfolio based on predominant risk characteristic loan type, to amortized cost. Impairment is recognized to the extent that fair value is less than the capitalized amount of the portfolio.
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 Accounting Standards Committee ("ASC") Topic 606 Revenue Recognition and are presented in our consolidated income statements as follows:
Depositor and other retail banking fees (in Deposit Fees)
Depositor and other retail banking fees consist of monthly service fees 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 (in Other Income)
Commission income primarily consists of revenue received on insurance policies. The Company's performance obligation for commissions is generally satisfied, and the related revenue generally recognized, over the course of the policy.
Credit Card Fees (in Other Income)
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 (in General, Administrative and Other)
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.
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. Historically, the Company performed its annual impairment testing at June 30. In 2022, we moved the annual impairment testing date to August 31 and based on that testing determined goodwill was not impaired. The change in impairment measurement date did not have a material effect on the valuation results.
Intangible assets with definite useful lives, such as core deposit intangible assets arising from bank acquisitions, are amortized over their estimated useful lives.
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
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 fully realized. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We are subject to federal income tax and also state income taxes in a number 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 hedge accounting or non-hedge accounting activities. For derivative instruments designated as non-hedge accounting 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 hedge accounting 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 hedge 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 certain input assumptions such as: expected volatility, award term, expected risk-free rate of interest and expected dividend yield on the Company’s common stock and also incorporates into the grant date fair value calculation the probability that the performance targets will be achieved. 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.
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 $6.2 million, $4.1 million and $2.3 million in marketing costs during 2022, 2021 and 2020, respectively.
Recent Accounting Developments
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 London Interbank Offered Rate ("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. In December 2022, the FASB issued ASU No. 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848," which defers the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The adoption of these ASUs is not expected to have a material impact on the Company’s financial position or results of operations.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326). The amendments in this ASU eliminate the accounting guidance for Troubled Debt Restructuring ("TDRs") by creditors, while enhancing disclosure
requirements for certain loan refinancing and restructurings by creditors when a borrower experiences financial difficulty. In addition, the amendments require that an entity disclose current period gross charge-offs by year of origination in a vintage table. We prospectively adopted the portion of ASU No. 2022-02 with respect to amendments about TDRs and related disclosure enhancements as of January 1, 2022. This adoption did not have a material impact on the Company’s financial position or results of operations. As the change is disclosure only in nature, we do not expect the vintage table disclosure requirement of ASU 2022-02 to have a material impact on the Company's financial position or results of operations when adopted.
NOTE 2–INVESTMENT SECURITIES:
The following tables set forth certain information regarding the amortized cost and fair values of our investment securities AFS and HTM: | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
(in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | |
AFS | | | | | | | |
Mortgage-backed securities ("MBS"): | | | | | | | |
Residential | $ | 207,445 | | | $ | — | | | $ | (10,183) | | | $ | 197,262 | |
Commercial | 65,411 | | | — | | | (9,362) | | | 56,049 | |
Collateralized mortgage obligations ("CMOs") | | | | | | | |
Residential | 592,449 | | | 12 | | | (39,422) | | | 553,039 | |
Commercial | 77,909 | | | — | | | (7,390) | | | 70,519 | |
Municipal bonds | 469,346 | | | 41 | | | (57,839) | | | 411,548 | |
Corporate debt securities | 46,672 | | | 74 | | | (3,801) | | | 42,945 | |
U.S. Treasury securities | 23,005 | | | — | | | (3,071) | | | 19,934 | |
Agency debentures | 27,499 | | | 8 | | | (29) | | | 27,478 | |
Total | $ | 1,509,736 | | | $ | 135 | | | $ | (131,097) | | | $ | 1,378,774 | |
HTM | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Municipal bonds | $ | 2,441 | | | $ | — | | | $ | (56) | | | $ | 2,385 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
(in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | |
AFS | | | | | | | |
MBS: | | | | | | | |
Residential | $ | 32,905 | | | $ | 396 | | | $ | (338) | | | $ | 32,963 | |
Commercial | 62,094 | | | 933 | | | (235) | | | 62,792 | |
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 | |
| | | | | | | |
The Company held $19.0 million of trading securities which are used as economic hedges of our mortgage servicing rights and are not included in the above tables. Net trading losses of $7.0 million were recorded in servicing income in the consolidated income statements in 2022.
MBS and CMOs represent securities primarily issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities 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 organizations. As of December 31, 2022 and 2021, 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, 2022 |
| 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 |
| | | | | | | | | | | |
AFS | | | | | | | | | | | |
MBS: | | | | | | | | | | | |
Residential | $ | (8,845) | | | $ | 191,398 | | | $ | (1,338) | | | $ | 5,763 | | | $ | (10,183) | | | $ | 197,161 | |
Commercial | (5,729) | | | 41,416 | | | (3,633) | | | 14,619 | | | (9,362) | | | 56,035 | |
CMOs: | | | | | | | | | | | |
Residential | (27,789) | | | 498,333 | | | (11,633) | | | 45,689 | | | (39,422) | | | 544,022 | |
Commercial | (4,787) | | | 56,671 | | | (2,603) | | | 13,848 | | | (7,390) | | | 70,519 | |
Municipal bonds | (44,513) | | | 350,918 | | | (13,326) | | | 46,377 | | | (57,839) | | | 397,295 | |
Corporate debt securities | (3,801) | | | 32,871 | | | — | | | — | | | (3,801) | | | 32,871 | |
U.S. Treasury securities | — | | | — | | | (3,071) | | | 19,934 | | | (3,071) | | | 19,934 | |
Agency debentures | (29) | | | 15,970 | | | — | | | — | | | (29) | | | 15,970 | |
Total | $ | (95,493) | | | $ | 1,187,577 | | | $ | (35,604) | | | $ | 146,230 | | | $ | (131,097) | | | $ | 1,333,807 | |
HTM | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Municipal bonds | $ | (56) | | | $ | 2,385 | | | $ | — | | | $ | — | | | $ | (56) | | | $ | 2,385 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company has evaluated AFS securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change 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 as of December 31, 2022 and 2021. In addition, as of December 31, 2022 and 2021, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.
The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| 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 | $ | — | | | — | % | | $ | 3,644 | | | 1.96 | % | | $ | 38,977 | | | 3.04 | % | | $ | 368,927 | | | 2.83 | % | | $ | 411,548 | | | 2.84 | % |
Corporate debt securities | — | | | — | % | | 15,342 | | | 5.13 | % | | 27,603 | | | 4.25 | % | | — | | | — | % | | 42,945 | | | 4.54 | % |
U.S. Treasury securities | — | | | — | % | | — | | | — | % | | 19,934 | | | 1.11 | % | | — | | | — | % | | 19,934 | | | 1.11 | % |
Agency debentures | 10,485 | | | 4.74 | % | | 16,993 | | | 4.94 | % | | — | | | — | % | | — | | | — | % | | 27,478 | | | 4.86 | % |
Total | $ | 10,485 | | | 4.74 | % | | $ | 35,979 | | | 4.69 | % | | $ | 86,514 | | | 2.97 | % | | $ | 368,927 | | | 2.83 | % | | $ | 501,905 | | | 3.01 | % |
| | | | | | | | | | | | | | | | | | | |
HTM | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Municipal bonds | $ | — | | | — | % | | $ | 2,385 | | | 2.04 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 2,385 | | | 2.04 | % |
| | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | | | | | | | | | | | | | | | | | |
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Municipal bonds | $ | 1,684 | | | 2.86 | % | | $ | 2,621 | | | 2.12 | % | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 4,305 | | | 2.42 | % |
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| | | | | | | | | | | | | | | | | | | |
The weighted-average yield is computed using the contractual coupon for each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis. MBS and CMOs are excluded from 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, 2022 and 2021 was 3.08% and 1.82%, respectively.
Sales of AFS investment securities were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Proceeds | $ | 98,915 | | | $ | 28,187 | | | $ | 62,378 | |
Gross gains | 1,585 | | | 288 | | | 1,334 | |
Gross losses | (1,561) | | | (226) | | | (993) | |
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) | 2022 | | 2021 |
| | | |
| | | |
Washington, Oregon and California State to secure public deposits | $ | 212,806 | | | $ | 206,153 | |
| | | |
Other securities pledged | 2,011 | | | 5,258 | |
Total securities pledged as collateral | $ | 214,817 | | | $ | 211,411 | |
The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk.
Tax-exempt interest income on AFS securities was $11.9 million, $10.2 million and $10.7 million for 2022, 2021 and 2020, respectively.
.NOTE 3-LOANS AND CREDIT QUALITY:
The Company's LHFI is divided into two 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: non-owner occupied commercial real estate ("CRE"), multifamily, construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio segment and single family and home equity and other loans within the consumer loan portfolio segment. LHFI consists of the following:
| | | | | | | | | | | |
| At December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
CRE | | | |
Non-owner occupied CRE | $ | 658,085 | | | $ | 705,359 | |
Multifamily | 3,975,754 | | | 2,415,359 | |
Construction/land development | 627,663 | | | 496,144 | |
Total | 5,261,502 | | | 3,616,862 | |
Commercial and industrial loans | | | |
Owner occupied CRE | 443,363 | | | 457,706 | |
Commercial business | 359,747 | | | 401,872 | |
Total | 803,110 | | | 859,578 | |
Consumer loans | | | |
Single family | 1,009,001 | | | 763,331 | |
Home equity and other | 352,707 | | | 303,078 | |
Total (1) | 1,361,708 | | | 1,066,409 | |
Total LHFI | 7,426,320 | | | 5,542,849 | |
ACL | (41,500) | | | (47,123) | |
Total LHFI less ACL | $ | 7,384,820 | | | $ | 5,495,726 | |
(1) Includes $5.9 million and $7.3 million at December 31, 2022 and 2021, 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 $5.2 billion and $2.8 billion at December 31, 2022 and 2021, respectively, were pledged to secure borrowings from the FHLB and loans totaling $497 million and $419 million at December 31, 2022 and 2021, 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 years ended December 2022 and 2021 with respect to such aggregate loans to these related parties and their associates:
| | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Beginning balance | $ | 1,548 | | | $ | 73 | |
New loans and advances, net of principal repayments | 430 | | | 1,475 | |
Ending balance | $ | 1,978 | | | $ | 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, 2022 and 2021, multifamily loans in the state of California represented 36% and 33% 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, 2022. 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 2022, the historical expected loss rates decreased from December 31, 2021 due to minimal charge-offs and favorable product mix risk composition. Additionally, the Qualitative Factors decreased significantly due to the continued favorable performance or our loan portfolio and the improved outlook of the estimated impact of the COVID-19 pandemic on our loan portfolio. As of December 31, 2022, the Bank expects deterioration in collateral values and economic conditions over the two-year forecast period in the markets in which it operates.
In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $2.2 million and $2.4 million at December 31, 2022 and 2021, respectively.
The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $26.9 million and $17.8 million at December 31, 2022 and 2021, respectively and was reported in other assets on the consolidated balance sheets.
Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
(in thousands) | | | | | 2022 | | 2021 | | 2020 |
| | | | | | | | | |
| | | | | | | | | |
Beginning balance | | | | | $ | 47,123 | | | $ | 64,294 | | | $ | 41,772 | |
Provision for credit losses | | | | | (4,995) | | | (15,816) | | | 21,843 | |
Net (charge-offs) recoveries | | | | | (628) | | | (1,355) | | | (1,164) | |
Impact of ASC 326 adoption | | | | | — | | | — | | | 1,843 | |
Ending balance | | | | | $ | 41,500 | | | $ | 47,123 | | | $ | 64,294 | |
| | | | | | | | | |
Allowance for unfunded commitments | | | | | | | | | |
Beginning balance | | | | | $ | 2,404 | | | $ | 1,588 | | | $ | 1,065 | |
Provision for credit losses | | | | | (207) | | | 816 | | | (1,374) | |
Impact of ASC 326 adoption | | | | | — | | | — | | | 1,897 | |
Ending balance | | | | | $ | 2,197 | | | $ | 2,404 | | | $ | 1,588 | |
| | | | | | | | | |
Provision for credit losses: | | | | | | | | | |
Allowance for credit losses-loans | | | | | $ | (4,995) | | | $ | (15,816) | | | $ | 21,843 | |
Allowance for unfunded commitments | | | | | (207) | | | 816 | | | (1,374) | |
Total | | | | | $ | (5,202) | | | $ | (15,000) | | | $ | 20,469 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Activity in the ACL by loan portfolio and loan sub-class was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
(in thousands) | Beginning balance | | Charge-offs | | Recoveries | | Provision | | Ending balance |
| | | | | | | | | |
CRE | | | | | | | | | |
Non-owner occupied CRE | $ | 7,509 | | | $ | — | | | $ | — | | | $ | (5,407) | | | $ | 2,102 | |
Multifamily | 5,854 | | | — | | | — | | | 5,120 | | | 10,974 | |
Construction/land development | | | | | | | | | |
Multifamily construction | 507 | | | — | | | — | | | 491 | | | 998 | |
CRE construction | 150 | | | — | | | — | | | 46 | | | 196 | |
Single family construction | 6,411 | | | — | | | — | | | 6,007 | | | 12,418 | |
Single family construction to permanent | 1,055 | | | — | | | — | | | 116 | | | 1,171 | |
Total | 21,486 | | | — | | | — | | | 6,373 | | | 27,859 | |
Commercial and industrial loans | | | | | | | | | |
Owner occupied CRE | 5,006 | | | — | | | — | | | (3,976) | | | 1,030 | |
Commercial business | 12,273 | | | (1,098) | | | 163 | | | (8,091) | | | 3,247 | |
Total | 17,279 | | | (1,098) | | | 163 | | | (12,067) | | | 4,277 | |
Consumer loans | | | | | | | | | |
Single family | 4,394 | | | — | | | 143 | | | 1,073 | | | 5,610 | |
Home equity and other | 3,964 | | | (168) | | | 332 | | | (374) | | | 3,754 | |
Total | 8,358 | | | (168) | | | 475 | | | 699 | | | 9,364 | |
Total ACL | $ | 47,123 | | | $ | (1,266) | | | $ | 638 | | | $ | (4,995) | | | $ | 41,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | — | | | — | | | 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 | |
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.
The risk rating categories can be generally described by the following groupings for homogeneous loans:
•1-6: These loans meet the definition of "Pass" assets. A homogenous "Pass" loan is typically risk rated based on payment performance.
•7: These loans meet the regulatory definition of “Special Mention.” A homogeneous special mention loan, risk rated 7, is less than 90 days past due from the required payment date at month-end.
•8: These loans meet the regulatory definition 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 the portion of these loans classified as loss, are generally charged-off in the month in which the applicable past due period elapses.
Small balance commercial loans are generally considered homogenous unless 30 days or more past due. The risk rating classification for such loans are based on the non-homogenous definitions noted above.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2022 |
(in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and prior | | Revolving | | Revolving-term | | Total |
| | | | | | | | | | | | | | | | | | |
COMMERCIAL PORTFOLIO | | | | | | | | | | | | |
Non-owner occupied CRE | | | | | | | | | | | | | | |
Pass | | $ | 68,301 | | | $ | 68,356 | | | $ | 42,181 | | | $ | 139,760 | | | $ | 87,197 | | | $ | 242,544 | | | $ | 2,016 | | | $ | 786 | | | $ | 651,141 | |
Special Mention | | — | | | — | | | — | | | — | | | 2,702 | | | 4,242 | | | — | | | — | | | 6,944 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 68,301 | | | 68,356 | | | 42,181 | | | 139,760 | | | 89,899 | | | 246,786 | | | 2,016 | | | 786 | | | 658,085 | |
Multifamily | | | | | | | | | | | | | | | | | | |
Pass | | 1,828,568 | | | 1,165,434 | | | 528,077 | | | 221,974 | | | 59,340 | | | 140,126 | | | — | | | — | | | 3,943,519 | |
Special Mention | | — | | | — | | | 4,893 | | | 19,834 | | | — | | | 7,508 | | | — | | | — | | | 32,235 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 1,828,568 | | | 1,165,434 | | | 532,970 | | | 241,808 | | | 59,340 | | | 147,634 | | | — | | | — | | | 3,975,754 | |
Multifamily construction | | | | | | | | | | | | |
Pass | | 18,110 | | | 63,394 | | | 13,613 | | | — | | | — | | | — | | | — | | | — | | | 95,117 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 18,110 | | | 63,394 | | | 13,613 | | | — | | | — | | | — | | | — | | | — | | | 95,117 | |
CRE construction | | | | | | | | | | | | |
Pass | | 341 | | | 14,348 | | | 3,960 | | | — | | | — | | | 305 | | | — | | | — | | | 18,954 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 341 | | | 14,348 | | | 3,960 | | | — | | | — | | | 305 | | | — | | | — | | | 18,954 | |
Single family construction | | | | | | | | | | | | |
Pass | | 149,133 | | | 50,936 | | | 24,807 | | | 519 | | | — | | | 74 | | | 123,303 | | | — | | | 348,772 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | 6,782 | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,782 | |
Total | | 149,133 | | | 57,718 | | | 24,807 | | | 519 | | | — | | | 74 | | | 123,303 | | | — | | | 355,554 | |
Single family construction to permanent | | | | | | | | | | | | |
Current | | 66,034 | | | 76,814 | | | 11,128 | | | 3,268 | | | 794 | | | — | | | — | | | — | | | 158,038 | |
Past due: | | | | | | | | | | | | | | | | | | |
30-59 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
60-89 days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
90+ days | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 66,034 | | | 76,814 | | | 11,128 | | | 3,268 | | | 794 | | | — | | | — | | | — | | | 158,038 | |
Owner occupied CRE | | | | | | | | | | | | |
Pass | | 70,192 | | | 51,919 | | | 44,778 | | | 71,652 | | | 36,457 | | | 139,691 | | | 3 | | | 1,104 | | | 415,796 | |
Special Mention | | — | | | 743 | | | — | | | — | | | 6,179 | | | 13,485 | | | — | | | — | | | 20,407 | |
Substandard | | — | | | — | | | — | | | — | | | 2,149 | | | 5,011 | | | — | | | — | | | 7,160 | |
Total | | 70,192 | | | 52,662 | | | 44,778 | | | 71,652 | | | 44,785 | | | 158,187 | | | 3 | | | 1,104 | | | 443,363 | |
Commercial business | | | | | | | | | | | | | | | | | | |
Pass | | 65,566 | | | 42,921 | | | 45,940 | | | 18,594 | | | 13,548 | | | 18,779 | | | 130,427 | | | 2,041 | | | 337,816 | |
Special Mention | | — | | | 612 | | | — | | | 3,577 | | | 9 | | | 3,444 | | | 403 | | | — | | | 8,045 | |
Substandard | | — | | | 338 | | | 2,638 | | | 4,449 | | | 2,591 | | | 2,206 | | | 1,563 | | | 101 | | | 13,886 | |
Total | | 65,566 | | | 43,871 | | | 48,578 | | | 26,620 | | | 16,148 | | | 24,429 | | | 132,393 | | | 2,142 | | | 359,747 | |
Total commercial portfolio | | $ | 2,266,245 | | | $ | 1,542,597 | | | $ | 722,015 | | | $ | 483,627 | | | $ | 210,966 | | | $ | 577,415 | | | $ | 257,715 | | | $ | 4,032 | | | $ | 6,064,612 | |
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2022 | | | | | | | | | | | | | | |
(in thousands) | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 and prior | | Revolving | | Revolving-term | | Total | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSUMER PORTFOLIO | | | | | | | | | | | | | | | | | | | | | | | | | | |
Single family | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 273,786 | | | $ | 253,937 | | | $ | 152,773 | | | $ | 49,302 | | | $ | 43,511 | | | $ | 231,277 | | | $ | — | | | $ | — | | | $ | 1,004,586 | | | | | | | | | | | | | | | |
Past due: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
30-59 days | | — | | | — | | | — | | | — | | | 340 | | | 2,113 | | | — | | | — | | | 2,453 | | | | | | | | | | | | | | | |
60-89 days | | — | | | — | | | — | | | — | | | — | | | 258 | | | — | | | — | | | 258 | | | | | | | | | | | | | | | |
90+ days | | — | | | — | | | — | | | 290 | | | 273 | | | 1,141 | | | — | | | — | | | 1,704 | | | | | | | | | | | | | | | |
Total (1) | | 273,786 | | | 253,937 | | | 152,773 | | | 49,592 | | | 44,124 | | | 234,789 | | | — | | | — | | | 1,009,001 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home equity and other | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | 4,156 | | | 692 | | | 220 | | | 150 | | | 72 | | | 1,593 | | | 340,567 | | | 4,017 | | | 351,467 | | | | | | | | | | | | | | | |
Past due: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
30-59 days | | — | | | 6 | | | — | | | — | | | — | | | 9 | | | 446 | | | — | | | 461 | | | | | | | | | | | | | | | |
60-89 days | | 6 | | | 24 | | | — | | | — | | | — | | | 48 | | | 517 | | | — | | | 595 | | | | | | | | | | | | | | | |
90+ days | | — | | | — | | | — | | | — | | | — | | | 151 | | | 33 | | | — | | | 184 | | | | | | | | | | | | | | | |
Total | | 4,162 | | | 722 | | | 220 | | | 150 | | | 72 | | | 1,801 | | | 341,563 | | | 4,017 | | | 352,707 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consumer portfolio | | $ | 277,948 | | | $ | 254,659 | | | $ | 152,993 | | | $ | 49,742 | | | $ | 44,196 | | | $ | 236,590 | | | $ | 341,563 | | | $ | 4,017 | | | $ | 1,361,708 | | | | | | | | | | | | | | | |
Total LHFI | | $ | 2,544,193 | | | $ | 1,797,256 | | | $ | 875,008 | | | $ | 533,369 | | | $ | 255,162 | | | $ | 814,005 | | | $ | 599,278 | | | $ | 8,049 | | | $ | 7,426,320 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Includes $5.9 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or 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 | | | | | | | | | | | | | | |
Pass | | $ | 68,647 | | | $ | 50,571 | | | $ | 169,711 | | | $ | 130,877 | | | $ | 100,674 | | | $ | 183,024 | | | $ | 963 | | | $ | 892 | | | $ | 705,359 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 68,647 | | | 50,571 | | | 169,711 | | | 130,877 | | | 100,674 | | | 183,024 | | | 963 | | | 892 | | | 705,359 | |
Multifamily | | | | | | | | | | | | | | | | | | |
Pass | | 1,315,204 | | | 561,666 | | | 286,826 | | | 60,372 | | | 26,065 | | | 165,225 | | | 1 | | | — | | | 2,415,359 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 1,315,204 | | | 561,666 | | | 286,826 | | | 60,372 | | | 26,065 | | | 165,225 | | | 1 | | | — | | | 2,415,359 | |
Multifamily construction | | | | | | | | | | | | |
Pass | | 7,825 | | | 22,863 | | | 7,173 | | | — | | | — | | | — | | | — | | | — | | | 37,861 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 7,825 | | | 22,863 | | | 7,173 | | | — | | | — | | | — | | | — | | | — | | | 37,861 | |
CRE construction | | | | | | | | | | | | |
Pass | | 7,694 | | | 3,960 | | | — | | | 1,962 | | | — | | | 556 | | | — | | | — | | | 14,172 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Total | | 7,694 | | | 3,960 | | | — | | | 1,962 | | | — | | | 556 | | | — | | | — | | | 14,172 | |
Single family construction | | | | | | | | | | | | |
Pass | | 146,595 | | | 35,640 | | | 14,509 | | | — | | | — | | | 77 | | | 99,206 | | | — | | | 296,027 | |
Special Mention | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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 | | | | | | | | | | | | |
Pass | | 70,902 | | | 47,536 | | | 57,423 | | | 47,716 | | | 67,042 | | | 106,659 | | | 798 | | | 2,839 | | | 400,915 | |
Special Mention | | — | | | — | | | — | | | 2,196 | | | 6,019 | | | 145 | | | — | | | 60 | | | 8,420 | |
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 | | | | | | | | | | | | | | | | | | |
Pass | | 88,139 | | | 51,453 | | | 44,882 | | | 24,711 | | | 11,859 | | | 21,258 | | | 112,759 | | | 2,104 | | | 357,165 | |
Special Mention | | — | | | — | | | 7,396 | | | — | | | 4,396 | | | — | | | 5,613 | | | 134 | | | 17,539 | |
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.
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, 2022 |
(in thousands) | | Land | | 1-4 Family | | | | Non-residential real estate | | Other non-real estate | | Total |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Commercial and industrial loans | | | | | | | | | | | | |
Owner occupied CRE | | $ | 1,111 | | | $ | — | | | | | $ | 1,410 | | | $ | — | | | $ | 2,521 | |
Commercial business | | 62 | | | 3,186 | | | | | 562 | | | — | | | 3,810 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total collateral-dependent loans | | $ | 1,173 | | | $ | 3,186 | | | | | $ | 1,972 | | | $ | — | | | $ | 6,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2022 | | At December 31, 2021 |
(in thousands) | | Nonaccrual with no related ACL | | Total Nonaccrual | | Nonaccrual with no related ACL | | Total Nonaccrual |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Commercial and industrial loans | | | | | | | | |
Owner occupied CRE | | $ | 2,521 | | | $ | 2,521 | | | $ | 3,568 | | | $ | 3,568 | |
Commercial business | | 785 | | | 4,269 | | | 1,210 | | | 5,023 | |
Total | | 3,306 | | | 6,790 | | | 4,778 | | | 8,591 | |
Consumer loans | | | | | | | | |
Single family | | 332 | | | 2,584 | | | 1,324 | | | 2,802 | |
Home equity and other | | 3 | | | 681 | | | 23 | | | 808 | |
Total | | 335 | | | 3,265 | | | 1,347 | | | 3,610 | |
Total nonaccrual loans | | $ | 3,641 | | | $ | 10,055 | | | $ | 6,125 | | | $ | 12,201 | |
The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 | |
| Past Due and Still Accruing | | | | | | | | | |
(in thousands) | 30-59 days | | 60-89 days | | 90 days or more | | Nonaccrual | | Total past due and nonaccrual (1) | | Current | | Total loans | |
| | | | | | | | | | | | | | |
CRE | | | | | | | | | | | | | | |
Non-owner occupied CRE | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 658,085 | | | $ | 658,085 | | |
Multifamily | — | | | — | | | — | | | — | | | — | | | 3,975,754 | | | 3,975,754 | | |
Construction/land development | | | | | | | | | | | | | |
Multifamily construction | — | | | — | | | — | | | — | | | — | | | 95,117 | | | 95,117 | | |
CRE construction | — | | | — | | | — | | | — | | | — | | | 18,954 | | | 18,954 | | |
Single family construction | — | | | — | | | — | | | — | | | — | | | 355,554 | | | 355,554 | | |
Single family construction to permanent | — | | | — | | | — | | | — | | | — | | | 158,038 | | | 158,038 | | |
Total | — | | | — | | | — | | | — | | | — | | | 5,261,502 | | | 5,261,502 | | |
Commercial and industrial loans | | | | | | | | | | | | | | |
Owner occupied CRE | — | | | — | | | — | | | 2,521 | | | 2,521 | | | 440,842 | | | 443,363 | | |
Commercial business | — | | | — | | | — | | | 4,269 | | | 4,269 | | | 355,478 | | | 359,747 | | |
Total | — | | | — | | | — | | | 6,790 | | | 6,790 | | | 796,320 | | | 803,110 | | |
Consumer loans | | | | | | | | | | | | | | |
Single family | 4,556 | | | 1,724 | | | 4,372 | | (2) | 2,584 | | | 13,236 | | | 995,765 | | | 1,009,001 | | (3) | |
Home equity and other | 267 | | | 296 | | | — | | | 681 | | | 1,244 | | | 351,463 | | | 352,707 | | |
Total | 4,823 | | | 2,020 | | | 4,372 | | | 3,265 | | | 14,480 | | | 1,347,228 | | | 1,361,708 | | |
Total loans | $ | 4,823 | | | $ | 2,020 | | | $ | 4,372 | | | $ | 10,055 | | | $ | 21,270 | | | $ | 7,405,050 | | | $ | 7,426,320 | | |
% | 0.06 | % | | 0.03 | % | | 0.06 | % | | 0.14 | % | | 0.29 | % | | 99.71 | % | | 100.00 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 (1) | | 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 | | (3) | |
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 loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $10.6 million and $8.4 million at December 31, 2022 and 2021, respectively.
(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3)Includes $5.9 million and $7.3 million of loans at December 31, 2022 and 2021, 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.
Loan Modifications
The Company provides MFDBs which may include other than insignificant delays in payment of amounts due, extension of the terms of the notes or reduction in the interest rates on the notes. In certain instances, the Company may grant more than one type of modification. The granting of modifications for the year ended December 31, 2022 did not have a material impact on the ACL. The following tables provide information related to MFDBs during the year ended December 31, 2022, disaggregated by class of financing receivable and type of concession granted:
| | | | | | | | | | | | | | | | | | |
| | | | | | Significant Payment Delay |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Single family | | | | | | $ | 1,377 | | | 0.14 | % |
Home equity and other | | | | | | 69 | | | 0.02 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Term Extension |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Commercial business | | | | | | $ | 1,562 | | | 0.43 | % |
Single family | | | | | | 269 | | | 0.03 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Interest Rate Reduction and Significant Payment Delay |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Commercial business | | | | | | $ | 459 | | | 0.13 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Interest Rate Reduction and Term Extension |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Single family | | | | | | $ | 814 | | | 0.08 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | Significant Payment Delay and Term Extension |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Single family | | | | | | $ | 13,742 | | | 1.36 | % |
Home equity and other | | | | | | 51 | | | 0.01 | % |
| | | | | | | | | | | | | | | | | | |
| | | | | | Interest Rate Reduction, Significant Payment Delay and Term Extension |
| | | | Year Ended December 31, 2022 |
(in thousands) | | | | | | Amortized Cost Basis at Period End | | % of Total Class of Financing Receivable |
Single family | | | | | | $ | 6,500 | | | 0.64 | % |
The following table describes the financial effect of the MFDBs:
| | | | | | | | |
| | | | |
| | | | Interest Rate Reduction |
| | | | Year Ended December 31, 2022 |
Commercial business | | | | Reduced weighted-average contractual interest rate from 5.72% to 4.00%. |
Single family | | | | Reduced weighted-average contractual interest rate from 4.25% to 3.31%. |
| | | | |
| | | | Significant Payment Delay |
| | | | Year Ended December 31, 2022 |
Single family | | | | Provided payment deferrals to borrowers. A weighted average 0.22% of loan balances were capitalized and added to the remaining term of the loan. |
Home equity and other | | | | Provided payment deferrals to borrowers. A weighted average 3.47% of loan balances were capitalized and added to the remaining term of the loan. |
| | | | |
| | | | Term Extension |
| | | | Year Ended December 31, 2022 |
Commercial business | | | | Added a weighted average 0.8 years to the life of loans, which reduced the monthly payment amounts to the borrowers. |
Single family | | | | Added a weighted average 4.4 years to the life of loans, which reduced the monthly payment amounts to the borrowers. |
Home equity and other | | | | Added a weighted average 16.1 years to the life of loans, which reduced the monthly payment amounts to the borrowers. |
| | | | |
| | | | |
Upon determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
The following table depicts the payment status of loans that were modified to borrowers experiencing financial difficulties on or after January 1, 2022, the date we adopted ASU 2022-02, through September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Payment Status (Amortized Cost Basis) at December 31, 2022 |
(in thousands) | Current | | 30-89 Days Past Due | | 90+ Days Past Due |
Commercial business | $ | 2,021 | | | $ | — | | | $ | — | |
Single family | 19,908 | | | 1,831 | | | 198 | |
Home equity and other | 120 | | | — | | | — | |
Total | $ | 22,049 | | | $ | 1,831 | | | $ | 198 | |
The following tables provide the amortized cost basis as of December 31, 2022 of MFDBs, on or after January 1, 2022, the date we adopted ASU 2022-02 through September 30, 2022 and subsequently had a payment default.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Amortized Cost Basis of Modified Loans That Subsequently Defaulted Year Ended December 31, 2022 |
(in thousands) | | Significant Payment Delay | | Term Extension | | Interest Rate Reduction and Term Extension | | Significant Payment Delay and Term Extension | | Interest Rate Reduction, Significant Payment Delay and Term Extension |
Single family | | $ | 340 | | | $ | — | | | $ | — | | | $ | 1,198 | | | $ | 764 | |
| | | | | | | | | | |
| | | | | | | | | | |
NOTE 4–PREMISES AND EQUIPMENT, NET:
Premises and equipment consisted of the following:
| | | | | | | | | | | |
| At December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Furniture and equipment | $ | 55,539 | | | $ | 54,548 | |
Leasehold improvements | 40,970 | | | 41,426 | |
Land and buildings | 35,898 | | | 36,121 | |
Total | 132,407 | | | 132,095 | |
Less: accumulated depreciation | (81,235) | | | (73,941) | |
Net | $ | 51,172 | | | $ | 58,154 | |
NOTE 5–DEPOSITS:
Deposit balances, including their weighted average rates, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(dollars in thousands) | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| | | | | | | |
Noninterest-bearing demand deposits | $ | 1,399,912 | | | — | % | | $ | 1,617,069 | | | — | % |
Interest bearing: | | | | | | | |
Interest-bearing demand deposits | 466,490 | | | 0.10 | % | | 513,810 | | | 0.10 | % |
Savings | 258,977 | | | 0.06 | % | | 302,389 | | | 0.06 | % |
Money market | 2,383,209 | | | 1.22 | % | | 2,806,313 | | | 0.15 | % |
Certificates of deposit | 2,943,331 | | | 3.07 | % | | 906,928 | | | 0.51 | % |
Total interest bearing deposits | 6,052,007 | | | 1.98 | % | | 4,529,440 | | | 0.21 | % |
Total deposits | $ | 7,451,919 | | | 1.61 | % | | $ | 6,146,509 | | | 0.15 | % |
There were $351 million and $342 million in public funds included in deposits at December 31, 2022 and 2021, respectively.
Certificates of deposit outstanding mature as follows:
| | | | | |
(in thousands) | December 31, 2022 |
| |
Within one year | $ | 2,375,310 | |
One to two years | 557,307 | |
Two to three years | 6,329 | |
Three to four years | 1,998 | |
Four to five years | 1,940 | |
Thereafter | 447 | |
Total | $ | 2,943,331 | |
The aggregate amount of time deposits in denominations of more than the FDIC limit of $250,000 at December 31, 2022 and 2021 was $189 million and $108 million, respectively. There were $1.4 billion and $145 million of brokered deposits at December 31, 2022 and 2021, respectively.
NOTE 6– BORROWINGS:
The Company borrows funds through advances from the Des Moines FHLB. The balances, maturity and rate of the outstanding FHLB advances were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, |
| 2022 | | 2021 |
(dollars in thousands) | Amount | | Weighted Average Rate | | Amount | | Weighted Average Rate |
| | | | | | | |
Within one year | $ | 16,000 | | | 4.60 | % | | $ | 41,000 | | | 0.30 | % |
One to three years | 450,000 | | | 4.31 | % | | — | | | — | % |
Three through five years | 550,000 | | | 4.35 | % | | — | | | — | % |
| | | | | | | |
Total | $ | 1,016,000 | | | 4.33 | % | | $ | 41,000 | | | 0.30 | % |
As of December 31, 2022 and 2021, the Company held $49.3 million and $10.4 million, respectively, of FHLB stock.
NOTE 7–LONG-TERM DEBT:
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 Secured Overnight Financing Rate ("SOFR") plus 215 basis points, payable quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting fees and offering expenses, all of which were still outstanding at December 31, 2022.
At December 31, 2022 and 2021, the Company had outstanding $64 million of Senior Notes which bear interest at a rate of 6.50% and mature in 2026.
The Company issued trust preferred securities ("TRUPS") during the period from 2005 through 2007, resulting in a debt balance of $62 million that remains outstanding at December 31, 2022 and 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 TRUPS outstanding as of December 31, 2022 and 2021 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.
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, 2022 |
| Notional amount | | Fair value derivatives |
(in thousands) | | | Asset | | Liability |
| | | | | |
Forward sale commitments | $ | 51,252 | | | $ | 293 | | | $ | (151) | |
| | | | | |
Interest rate lock commitments | 17,463 | | | 141 | | | (36) | |
Interest rate swaps | 236,533 | | | 13,093 | | | (13,093) | |
Futures | 23,000 | | | 18 | | | — | |
Options | 14,000 | | | 218 | | | — | |
Total derivatives before netting | $ | 342,248 | | | $ | 13,763 | | | $ | (13,280) | |
Netting adjustment/Cash collateral (1) | | | (12,870) | | | 101 | |
Carrying value on consolidated balance sheet | | | $ | 893 | | | $ | (13,179) | |
| | | | | | | | | | | | | | | | | |
| 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 | 139,900 | | | 334 | | | — | |
Total derivatives before netting | $ | 1,335,485 | | | 7,925 | | | (5,184) | |
Netting adjustment/Cash collateral (1) | | | 1,355 | | | 3,921 | |
Carrying value on consolidated balance sheet | | | $ | 9,280 | | | $ | (1,263) | |
(1) Includes net cash collateral received of $12.8 million and paid of $5.3 million at December 31, 2022 and 2021, 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, 2022 | | | | | | | | | | | |
Derivative assets | $ | 13,763 | | | $ | (12,870) | | | $ | 893 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Derivative liabilities | (13,280) | | | 101 | | | (13,179) | | | | | | | |
At December 31, 2021 | | | | | | | | | | | |
Derivative assets | $ | 7,925 | | | $ | 1,355 | | | $ | 9,280 | | | | | | | |
Derivative liabilities | (5,184) | | | 3,921 | | | (1,263) | | | | | | | |
(1) Includes net cash collateral received of $12.8 million and paid of $5.3 million at December 31, 2022 and 2021, 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 amounts paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At December 31, 2022 and 2021, the Company had liabilities of $12.8 million and zero, respectively, in cash collateral received from counterparties and receivables of $0.03 million and $5.3 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) | 2022 | | 2021 | | 2020 | | |
| | | | | | | |
Recognized in noninterest income: | | | | | | | |
Net gain (loss) on loan origination and sale activities (1) | $ | 8,587 | | | $ | (6,057) | | | $ | (7,675) | | | |
Loan servicing income (loss) (2) | (11,769) | | | (8,238) | | | 20,820 | | | |
Other (3) | 160 | | | 386 | | | (421) | | | |
| | | | | | | |
(1)Comprised of interest rate lock commitments (" IRLCs") and forward contracts used as economic hedges of single family mortgage LHFS.
(2)Comprised of interest rate swaps, interest rate swaptions, futures, US Treasury options 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, 2022 and 2021 were $237 million and $287 million, respectively.
NOTE 9–MORTGAGE BANKING OPERATIONS:
LHFS consisted of the following:
| | | | | | | | | | | |
| At December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Single family | $ | 14,075 | | | $ | 128,041 | |
CRE, multifamily and SBA | 3,252 | | | 48,090 | |
Total | $ | 17,327 | | | $ | 176,131 | |
Loans sold consisted of the following for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Single family | $ | 693,348 | | | $ | 2,046,811 | | | $ | 1,985,944 | |
CRE, multifamily and SBA | 145,622 | | | 773,378 | | | 908,776 | |
Total | $ | 838,970 | | | $ | 2,820,189 | | | $ | 2,894,720 | |
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) | 2022 | | 2021 | | 2020 |
| | | | | |
Single family | $ | 13,054 | | | $ | 66,850 | | | $ | 100,795 | |
CRE, multifamily and SBA | 4,647 | | | 25,468 | | | 21,769 | |
Total | $ | 17,701 | | | $ | 92,318 | | | $ | 122,564 | |
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) | 2022 | | 2021 |
| | | |
Single family | $ | 5,436,899 | | | $ | 5,539,180 | |
CRE, multifamily and SBA | 1,938,484 | | | 2,031,087 | |
Total | $ | 7,375,383 | | | $ | 7,570,267 | |
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 $5.4 billion and $5.5 billion as of December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, 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 $2.2 million and $1.3 million, respectively.
The following is a summary of changes in the Company's liability for estimated single family mortgage repurchase losses:
| | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | |
| | | | |
Balance, beginning of period | $ | 1,312 | | | $ | 2,122 | | |
Additions, net of adjustments (1) | 1,629 | | | (334) | | |
Realized losses (2) | (709) | | | (476) | | |
Balance, end of period | $ | 2,232 | | | $ | 1,312 | | |
(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 $1.6 million and $1.9 million were recorded in other assets as of December 31, 2022 and 2021, 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, 2022 and 2021, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its
consolidated balance sheets totaled $6.9 million and $12.3 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) | 2022 | | 2021 | | 2020 |
| | | | | |
Servicing income, net: | | | | | |
Servicing fees and other | $ | 32,082 | | | $ | 35,342 | | | $ | 32,037 | |
Amortization of single family MSRs (1) | (9,951) | | | (19,669) | | | (17,754) | |
Amortization of multifamily and SBA MSRs | (7,692) | | | (7,581) | | | (5,657) | |
| 14,439 | | | 8,092 | | | 8,626 | |
Risk management, single family MSRs: | | | | | |
Changes in fair value of MSRs due to assumptions (2) | 16,739 | | | 7,379 | | | (19,955) | |
Net gain (loss) from economic hedging | (18,790) | | | (8,238) | | | 20,820 | |
Total | (2,051) | | | (859) | | | 865 | |
Loan servicing income | $ | 12,388 | | | $ | 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 reflected by changes in mortgage interest rates.
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) | 2022 | | 2021 | | 2020 |
| | | | | |
Beginning balance | $ | 61,584 | | | $ | 49,966 | | | $ | 68,109 | |
Additions and amortization: | | | | | |
Originations | 8,245 | | | 23,908 | | | 19,424 | |
| | | | | |
| | | | | |
Amortization (1) | (9,951) | | | (19,669) | | | (17,754) | |
Net additions and amortization | (1,706) | | | 4,239 | | | 1,670 | |
Changes in fair value assumptions (2) | 16,739 | | | 7,379 | | | (19,813) | |
Ending balance | $ | 76,617 | | | $ | 61,584 | | | $ | 49,966 | |
(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) | 2022 | | 2021 | | 2020 |
| | | | | |
Constant prepayment rate ("CPR") (2) | 10.91 | % | | 8.84 | % | | 11.37 | % |
Discount rate | 9.35 | % | | 8.23 | % | | 7.82 | % |
(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, 2022 | | At December 31, 2021 |
| | | | | | | |
| Range of Inputs | | Average (1) | | Range of Inputs | | Average (1) |
CPRs | 6.01% - 11.10% | | 8.19 | % | | 7.90%- 17.35% | | 10.35 | % |
Discount Rates | 9.74% - 16.88% | | 10.66 | % | | 6.94% -13.96% | | 7.97 | % |
(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, 2022 |
| |
Fair value of single family MSRs | $ | 76,617 | |
Expected weighted-average life (in years) | 7.77 |
CPR | |
Impact on fair value of 25 basis points adverse change in interest rates | $ | (447) | |
Impact on fair value of 50 basis points adverse change in interest rates | $ | (1,045) | |
Discount rate | |
Impact on fair value of 100 basis points increase | $ | (3,150) | |
Impact on fair value of 200 basis points increase | $ | (6,062) | |
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.
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 LOCOM or fair value were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Beginning balance | $ | 39,415 | | | $ | 35,774 | | | $ | 29,494 | |
Origination | 3,533 | | | 11,222 | | | 11,587 | |
Amortization | (7,692) | | | (7,581) | | | (5,307) | |
Ending balance | $ | 35,256 | | | $ | 39,415 | | | $ | 35,774 | |
At December 31, 2022, the expected weighted-average life of the Company's multifamily and SBA MSRs was 11.58 years. Projected amortization expense for the gross carrying value of multifamily and SBA MSRs is estimated as follows:
| | | | | |
(in thousands) | At December 31, 2022 |
| |
2023 | $ | 5,483 | |
2024 | 5,309 | |
2025 | 5,068 | |
2026 | 4,582 | |
2027 | 3,868 | |
2028 and thereafter | 10,946 | |
Carrying value of multifamily and SBA MSRs | $ | 35,256 | |
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) | 2022 | | 2021 |
| | | |
Unused consumer portfolio lines | $ | 531,784 | | | $ | 405,992 | |
Commercial portfolio lines (1) | 788,108 | | | 820,131 | |
Commitments to fund loans | 46,067 | | | 90,852 | |
Total | $ | 1,365,959 | | | $ | 1,316,975 | |
(1) Includes undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments of $525 million and $584 million at December 31, 2022 and 2021, 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 $2.2 million and $2.4 million at December 31, 2022 and 2021, 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, 2022 and 2021 we had $11.8 million and $15.2 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, 2022 and 2021, the total unpaid principal balance of loans sold under this program was $1.8 billion and $1.9 billion, respectively. The Company's reserve liability related to this arrangement totaled $0.6 million at both December 31, 2022 and 2021. There were no actual losses incurred under this arrangement during 2022, 2021 or 2020.
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, 2022.
NOTE 11–INCOME TAXES:
Income tax expense consisted of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Current expense | | | | | |
Federal | $ | 2,829 | | | $ | 20,074 | | | $ | 27,166 | |
State and local | 1,633 | | | 3,191 | | | 4,804 | |
Deferred (benefit) expense | | | | | |
Federal | 7,304 | | | 4,325 | | | (11,076) | |
| | | | | |
State and local | 1,545 | | | 511 | | | (1,596) | |
Tax credit investment amortization | 4,809 | | | 3,166 | | | 2,606 | |
Total | $ | 18,120 | | | $ | 31,267 | | | $ | 21,904 | |
Income tax expense differed from amounts computed at the federal income tax statutory rate as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
(in thousands, except rate) | Rate | | Amount | | Rate | | Amount | | Rate | | Amount |
| | | | | | | | | | | |
Income before taxes | | | $ | 84,660 | | | | | $ | 146,689 | | | | | $ | 101,894 | |
| | | | | | | | | | | |
Federal tax statutory rate | 21.00 | % | | 17,779 | | | 21.00 | % | | 30,805 | | | 21.00 | % | | 21,398 | |
State tax - net of federal tax benefit | 3.44 | % | | 2,912 | | | 2.20 | % | | 3,220 | | | 2.54 | % | | 2,587 | |
Tax-exempt investments | (4.62) | % | | (3,908) | | | (1.40) | % | | (2,049) | | | (1.81) | % | | (1,849) | |
Stock-based compensation expense | 0.14 | % | | 121 | | | (0.77) | % | | (1,132) | | | (0.16) | % | | (159) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other | 1.44 | % | | 1,216 | | | 0.29 | % | | 423 | | | (0.07) | % | | (73) | |
Total | 21.40 | % | | $ | 18,120 | | | 21.32 | % | | $ | 31,267 | | | 21.50 | % | | $ | 21,904 | |
The following is a summary of the Company's deferred tax assets and liabilities:
| | | | | | | | | | | |
| At December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Deferred tax assets | | | |
Provision for credit losses | $ | 10,501 | | | $ | 11,477 | |
Unrealized loss on investments AFS | 31,431 | | | — | |
Federal and state net operating loss carryforwards | 628 | | | 628 | |
Accrued liabilities | 2,536 | | | 2,268 | |
Other investments | 572 | | | 471 | |
Lease liabilities | 10,877 | | | 12,028 | |
Nonaccrual interest | 513 | | | 213 | |
Stock based compensation | 737 | | | 969 | |
Loan valuation | 311 | | | 289 | |
Other | 694 | | | 1,744 | |
Total | 58,800 | | | 30,087 | |
| | | |
Deferred tax liabilities | | | |
Mortgage servicing rights | (25,725) | | | (22,221) | |
Deferred loan fees and costs | (9,565) | | | (7,336) | |
Lease right-of-use assets | (8,415) | | | (8,572) | |
Unrealized gain on investments AFS | — | | | (5,630) | |
Premises and equipment | (2,486) | | | (1,843) | |
Intangibles | (694) | | | (742) | |
Other | (14) | | | (54) | |
Total | (46,899) | | | (46,398) | |
Net deferred tax asset (liability) | $ | 11,901 | | | $ | (16,311) | |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to fully utilize the existing deferred tax assets. As of December 31, 2022, management determined that sufficient evidence exists to support the future utilization of all of the Company's deferred tax assets.
The Company has state net operating loss carryforwards of $7.5 million and $12.1 million as of December 31, 2022 and 2021 that will expire at various dates from 2027 to 2036. Utilization of net operating loss carryforwards may be subject to an annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended.
Retained earnings at December 31, 2022 and 2021 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, 2022 or 2021.
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 2019 or state income tax examination for tax years prior to 2018, 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 $4.0 million, $3.9 million and $3.8 million were incurred in 2022, 2021, and 2020, respectively.
NOTE 13–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 | | | | |
Trading securities | | Fair Value is based on quoted prices in an active market. | | Level 1 recurring fair value measurement. |
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 and Options | | Fair value is based on closing exchange prices. | | Level 1 recurring fair value measurement. |
Forward sale commitments Interest rate swaps | | 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, 2022 |
(in thousands) | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
Assets: | | | | | | | |
Trading securities - U.S. Treasury securities | $ | 18,997 | | | $ | 18,997 | | | $ | — | | | $ | — | |
Investment securities AFS | | | | | | | |
Mortgage backed securities: | | | | | | | |
Residential | 197,262 | | | — | | | 195,321 | | | 1,941 | |
Commercial | 56,049 | | | — | | | 56,049 | | | — | |
Collateralized mortgage obligations: | | | | | | | |
Residential | 553,039 | | | — | | | 553,039 | | | — | |
Commercial | 70,519 | | | — | | | 70,519 | | | — | |
Municipal bonds | 411,548 | | | — | | | 411,548 | | | — | |
Corporate debt securities | 42,945 | | | — | | | 42,877 | | | 68 | |
U.S. Treasury securities | 19,934 | | | — | | | 19,934 | | | — | |
Agency debentures | 27,478 | | | — | | | 27,478 | | | — | |
Single family LHFS | 14,075 | | | — | | | 14,075 | | | — | |
Single family LHFI | 5,868 | | | — | | | — | | | 5,868 | |
Single family mortgage servicing rights | 76,617 | | | — | | | — | | | 76,617 | |
Derivatives | | | | | | | |
Futures | 18 | | | 18 | | | — | | | — | |
Options | 218 | | | 218 | | | — | | | |
Forward sale commitments | 293 | | | — | | | 293 | | | — | |
| | | | | | | |
Interest rate lock commitments | 141 | | | — | | | — | | | 141 | |
Interest rate swaps | 13,093 | | | — | | | 13,093 | | | — | |
Total assets | $ | 1,508,094 | | | $ | 19,233 | | | $ | 1,404,226 | | | $ | 84,635 | |
Liabilities: | | | | | | | |
Derivatives | | | | | | | |
| | | | | | | |
Forward sale commitments | $ | 151 | | | $ | — | | | $ | 151 | | | $ | — | |
| | | | | | | |
Interest rate lock commitments | 36 | | | — | | | — | | | 36 | |
Interest rate swaps | 13,093 | | | — | | | 13,093 | | | — | |
Total liabilities | $ | 13,280 | | | $ | — | | | $ | 13,244 | | | $ | 36 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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: | | | | | | | |
Derivative | | | | | | | |
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 | |
There were no transfers between levels of the fair value hierarchy during 2022 and 2021.
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 IRCLs, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during 2022 and 2021, 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 the 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 $5.9 million and $7.3 million at December 31, 2022 and 2021, 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, 2022 | | | | | | | | | | | |
Investment securities AFS | $ | 2,009 | | | Income approach | | Implied spread to benchmark interest rate curve | | 2.00% | | 2.00% | | 2.00% |
Single family LHFI | 5,868 | | | Income approach | | Implied spread to benchmark interest rate curve | | 2.87% | | 5.15% | | 4.14% |
Interest rate lock commitments, net | 105 | | | Income approach | | Fall-out factor | | 0.10% | | 17.50% | | 6.43% |
| | | | | Value of servicing | | 0.54% | | 1.11% | | 0.95% |
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% |
We had no LHFS where the fair value was not derived with significant observable inputs at December 31, 2022 or 2021.
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, 2022 | | | | | | | | | | | | |
Investment securities AFS | | $ | 2,482 | | | $ | — | | | $ | — | | | $ | (193) | | | $ | (280) | | | $ | 2,009 | |
Single family LHFI | | 7,287 | | | — | | | — | | | — | | | (1,419) | | | 5,868 | |
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 | |
(1) Changes in fair value for singe family LHFI are recorded in other noninterest income on the consolidated income statements.
The following table presents fair value changes and activity for Level 3 interest rate lock commitments:
| | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Beginning balance, net | $ | 2,484 | | | $ | 17,392 | |
Total realized/unrealized gains | 68 | | | 11,888 | |
Settlements | (2,447) | | | (26,796) | |
Ending balance, net | $ | 105 | | | $ | 2,484 | |
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 presents assets classified as Level 3 assets that had changes in their recorded fair value during 2022 and 2021 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, 2022 | | | |
LHFI (1) | $ | 3,186 | | | $ | (385) | |
As of or for the year ended December 31, 2021 | | | |
| | | |
LHFI (1) | $ | 1,214 | | | $ | (43) | |
| | | |
| | | |
(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, 2022 |
(in thousands) | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 72,828 | | | $ | 72,828 | | | $ | 72,828 | | | $ | — | | | $ | — | |
Investment securities HTM | 2,441 | | | 2,385 | | | — | | | 2,385 | | | — | |
LHFI | 7,378,952 | | | 6,988,363 | | | — | | | — | | | 6,988,363 | |
| | | | | | | | | |
LHFS – multifamily and other | 3,252 | | | 3,291 | | | — | | | 3,291 | | | — | |
Mortgage servicing rights – multifamily and SBA | 35,256 | | | 39,792 | | | — | | | — | | | 39,792 | |
Federal Home Loan Bank stock | 49,305 | | | 49,305 | | | — | | | 49,305 | | | — | |
Other assets - GNMA EBO loans | 6,918 | | | 6,918 | | | — | | | — | | | 6,918 | |
Liabilities: | | | | | | | | | |
Certificates of deposit | $ | 2,943,331 | | | $ | 2,910,301 | | | $ | — | | | $ | 2,910,301 | | | $ | — | |
Borrowings | 1,016,000 | | | 1,014,973 | | | — | | | 1,014,973 | | | — | |
Long-term debt | 224,404 | | | 202,338 | | | — | | | 202,338 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 other | 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 | | | — | |
Fair Value Option
Single family loans held for sale accounted for 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, 2022 | | At December 31, 2021 |
(in thousands) | Fair Value | | Aggregate Unpaid Principal Balance | | Fair Value Less Aggregate Unpaid Principal Balance | | Fair Value | | Aggregate Unpaid Principal Balance | | Fair Value Less Aggregate Unpaid Principal Balance |
| | | | | | | | | | | |
Single family LHFS | $ | 14,075 | | | $ | 13,914 | | | $ | 161 | | | $ | 128,041 | | | $ | 124,933 | | | $ | 3,108 | |
NOTE 14–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, 2022 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, 2022 |
| 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) | $ | 693,112 | | | 7.25 | % | | $ | 382,467 | | | 4.0 | % | | NA | | NA |
Common equity tier 1 capital (to risk-weighted assets) | 633,112 | | | 8.72 | % | | 326,876 | | | 4.5 | % | | NA | | NA |
Tier 1 risk-based capital (to risk-weighted assets) | 693,112 | | | 9.54 | % | | 435,834 | | | 6.0 | % | | NA | | NA |
Total risk-based capital (to risk-weighted assets) | 837,828 | | | 11.53 | % | | 581,112 | | | 8.0 | % | | NA | | NA |
HomeStreet Bank | | | | | | | | | | | |
Tier 1 leverage capital (to average assets) | $ | 822,891 | | | 8.63 | % | | $ | 381,506 | | | 4.0 | % | | $ | 476,883 | | | 5.0 | % |
Common equity tier 1 capital (to risk-weighted assets) | 822,891 | | | 11.92 | % | | 310,582 | | | 4.5 | % | | 448,618 | | | 6.5 | % |
Tier 1 risk-based capital (to risk-weighted assets) | 822,891 | | | 11.92 | % | | 414,109 | | | 6.0 | % | | 552,146 | | | 8.0 | % |
Total risk-based capital (to risk-weighted assets) | 868,993 | | | 12.59 | % | | 552,146 | | | 8.0 | % | | 690,182 | | | 10.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | % |
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, 2022 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 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 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, 2022, capital conservation buffers for the Company and the Bank were 3.53% and 4.59%, respectively. The following table sets forth the minimum capital ratios plus the applicable increment of the capital conservation buffer:
| | | | | | | | |
Common equity to Tier-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 15–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) | | 2022 | | 2021 | | 2020 |
| | | | | | |
Net income | | $ | 66,540 | | | $ | 115,422 | | | $ | 79,990 | |
| | | | | | |
Weighted average shares: | | | | | | |
Basic weighted-average number of common shares outstanding | | 18,931,107 | | | 20,885,509 | | | 22,867,268 | |
Dilutive effect of outstanding common stock equivalents (1) | | 110,004 | | | 257,905 | | | 209,554 | |
Diluted weighted-average number of common shares outstanding | | 19,041,111 | | | 21,143,414 | | | 23,076,822 | |
Net income per share | | | | | | |
Basic earnings per share | | $ | 3.51 | | | $ | 5.53 | | | $ | 3.50 | |
Diluted earnings per share | | 3.49 | | | 5.46 | | | 3.47 | |
(1) Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the years ended December 31, 2022, 2021 and 2020 were certain unvested RSUs and PSUs. The aggregate number of common stock unvested restricted shares, which could potentially be dilutive in future periods, was 176,259, zero and 201 at December 31, 2022, 2021 and 2020, respectively.
NOTE 16–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 13 years.
The Company, as sublessor, subleases certain office and retail space in which the terms of any significant subleases end by 2027. Under all of our executed sublease arrangements, the sublessees are obligated to pay the Company sublease payments of $4.9 million in 2023, $3.3 million in 2024, $2.8 million in 2025, $2.9 million in 2026 and $2.7 million in 2027. For 2020 we incurred $2.5 million in impairment charges on lease right-of-use assets.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
(in thousands) | | | | | 2022 | | 2021 | | 2020 | |
| | | | | | | | | | |
Operating lease cost | | | | | $ | 8,762 | | | $ | 9,610 | | | $ | 11,989 | | |
| | | | | | | | | | |
Finance lease cost: | | | | | | | | | | |
Amortization of right-of-use assets | | | | | 580 | | | 1,066 | | | 1,277 | | |
Interest on lease liabilities | | | | | 19 | | | 22 | | | 151 | | |
Variable lease costs and nonlease components | | | | | 3,123 | | | 3,716 | | | 5,502 | | |
Sublease income | | | | | (2,565) | | | (3,449) | | | (6,662) | | |
Total | | | | | $ | 9,919 | | | $ | 10,965 | | | $ | 12,257 | | |
Supplemental cash flow information related to leases were as follows: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
(in thousands) | | | | | 2022 | | 2021 | | 2020 | |
| | | | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | |
Operating cash flows from operating leases | | | | | $ | 12,845 | | | $ | 13,647 | | | $ | 15,452 | | |
Operating cash flows from finance leases | | | | | 19 | | | 22 | | | 151 | | |
Financing cash flows from finance leases | | | | | 589 | | | 1,070 | | | 1,209 | | |
Right-of-use assets obtained | | | | | | | | | | |
Operating leases | | | | | $ | 6,347 | | | $ | 1,894 | | | $ | 5,666 | | |
Finance leases | | | | | 145 | | | 707 | | | — | | |
Other changes in right-of-use assets (1) | | | | | | | | | | |
Operating leases | | | | | $ | — | | | $ | (460) | | | $ | (39,924) | | |
Finance leases | | | | | — | | | (2) | | | (29) | | |
(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) | | | 2022 | | 2021 |
| | | | | |
Operating lease right-of-use assets, included in other assets | | | $ | 34,070 | | $ | 38,010 |
| | | | | |
Operating lease liabilities, included in accounts payable and other liabilities | | | 42,848 | | 49,574 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Finance lease right-of-use assets, included in other assets | | | $ | 359 | | $ | 777 |
Finance lease liabilities, included in accounts payable and other liabilities | | | 359 | | 787 |
| | | | | |
| | | | | |
Weighted Average Remaining lease term in years | | | | | |
Operating leases | | | 5.07 | | 5.87 |
Finance leases | | | 0.88 | | 0.96 |
Weighted Average Discount Rate | | | | | |
Operating leases | | | 1.91% | | 1.71% |
Finance leases | | | 3.50% | | 1.43% |
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, | | | | | | |
2023 | | $ | 11,098 | | | $ | 360 | | | $ | 4,846 | |
2024 | | 9,492 | | | 8 | | | 4,490 | |
2025 | | 7,976 | | | — | | | 4,357 | |
2026 | | 6,862 | | | — | | | 4,454 | |
2027 | | 6,137 | | | — | | | 3,850 | |
2028 and thereafter | | 3,546 | | | — | | | 123 | |
Total lease payments | | 45,111 | | | 368 | | | $ | 22,120 | |
Less imputed interest | | 2,263 | | | 9 | | | |
Total | | $ | 42,848 | | | $ | 359 | | | |
NOTE 17–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 2022, 2021, and 2020, the Company recognized stock-based compensation cost of $3.3 million, $2.9 million and $2.4 million, respectively.
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, 2021 | 268,531 | | $ | 26.83 | |
Granted | 91,942 | | 51.55 | |
Cancelled or forfeited | (11,921) | | 33.58 | |
Vested | (121,477) | | 27.90 | |
Outstanding at December 31, 2022 | 227,075 | | | $ | 33.95 | |
The assumptions used in the Monte Carlo simulations used to determine fair market value of the PSUs granted in 2022, 2021 and 2020 are set forth in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
Volatility of common stock | | 40.3 | % | | 40.5 | % | | 33.9 | % |
Average volatility of peer companies | | 44.2 | % | | 43.5 | % | | 34.8 | % |
Average correlation coefficient of peer companies | | 0.8079 | % | | 0.8004 | % | | 0.7561 | % |
Risk-free interest rate | | 1.0 | % | | 0.2 | % | | 0.3 | % |
Expected term in years | | 3.00 years | | 3.00 years | | 2.76 years |
| | | | | | |
NOTE 18–PARENT COMPANY FINANCIAL STATEMENTS (UNAUDITED):
Condensed financial information for HomeStreet, Inc. is as follows:
| | | | | | | | | | | |
Condensed Balance Sheets | At December 31, |
(in thousands) | 2022 | | 2021 |
| | | |
Assets: | | | |
Cash and cash equivalents | $ | 5,804 | | | $ | 12,756 | |
Other assets | 4,601 | | | 5,082 | |
Investment in stock of HomeStreet Bank | 752,211 | | | 779,851 | |
Investment in stock of other subsidiaries | 26,954 | | | 45,175 | |
Total assets | $ | 789,570 | | | $ | 842,864 | |
Liabilities: | | | |
Other liabilities | $ | 3,019 | | | $ | 1,499 | |
Long-term debt | 224,404 | | | 126,026 | |
Total liabilities | 227,423 | | | 127,525 | |
Shareholders' Equity: | | | |
| | | |
Common stock, no par value | 226,592 | | | 249,856 | |
Retained earnings | 435,085 | | | 444,343 | |
Accumulated other comprehensive income (loss) | (99,530) | | | 21,140 | |
Total shareholder's equity | 562,147 | | | 715,339 | |
Total liabilities and shareholders' equity | $ | 789,570 | | | $ | 842,864 | |
| | | | | | | | | | | | | | | | | |
Condensed Income Statements | Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Noninterest income | | | | | |
Dividend income | $ | 51,000 | | | $ | 109,000 | | | $ | 82,909 | |
| | | | | |
Equity in undistributed income from subsidiaries | 24,898 | | | 10,801 | | | 3,374 | |
| | | | | |
Other noninterest income | 2,053 | | | 1,838 | | | 1,773 | |
Total revenues | 77,951 | | | 121,639 | | | 88,056 | |
Expenses | | | | | |
Interest expense-net | 8,315 | | | 4,576 | | | 5,731 | |
Noninterest expense | 6,123 | | | 2,939 | | | 4,136 | |
Total expenses | 14,438 | | | 7,515 | | | 9,867 | |
Income before income taxes (benefit) | 63,513 | | | 114,124 | | | 78,189 | |
Income taxes (benefit) | (3,027) | | | (1,298) | | | (1,801) | |
Net income | $ | 66,540 | | | $ | 115,422 | | | $ | 79,990 | |
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Condensed Statements of Cash Flows | Years Ended December 31, |
(in thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Cash flows from operating activities | | | | | |
Net income | $ | 66,540 | | | $ | 115,422 | | | $ | 79,990 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities | | | | | |
Undistributed earnings from investment in subsidiaries | (24,898) | | | (10,801) | | | (3,374) | |
| | | | | |
Other | 6,386 | | | (8,669) | | | (4,483) | |
Net cash provided by operating activities | 48,028 | | | 95,952 | | | 72,133 | |
| | | | | |
Cash flows from investing activities: | | | | | |
AFS securities: Principal collections net of purchases | 831 | | | 2,012 | | | 2,886 | |
Investments in subsidiaries | (52,000) | | | — | | | — | |
Net cash provided by (used in) investing activities | (51,169) | | | 2,012 | | | 2,886 | |
| | | | | |
Cash flows from financing activities: | | | | | |
Repurchases of common stock | (75,000) | | | (84,154) | | | (58,009) | |
Proceeds from exercise of stock options | — | | | 263 | | | 238 | |
Proceeds from issuance of long-term debt | 98,036 | | | — | | | — | |
| | | | | |
Dividends paid on common stock | (26,847) | | | (21,338) | | | (13,865) | |
| | | | | |
| | | | | |
Net cash used in financing activities | (3,811) | | | (105,229) | | | (71,636) | |
Net (decrease) increase in cash and cash equivalents | (6,952) | | | (7,265) | | | 3,383 | |
Cash and cash equivalents, beginning of year | 12,756 | | | 20,021 | | | 16,638 | |
Cash and cash equivalents, end of year | $ | 5,804 | | | $ | 12,756 | | | $ | 20,021 | |
NOTE 19–SUBSEQUENT EVENTS:
In February 2023, we completed an acquisition of three branches in southern California whereby we assumed $373 million in deposits and purchased $22 million in loans.
On January 26, 2023 the Board of Directors authorized a dividend of $0.35 per share, payable on February 22, 2023 to shareholders of record on February 8, 2023.