HomeStreet(HMST) - 2022 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS The report presents unaudited consolidated financial statements for the periods ending June 30, 2022, including key statements and notes Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $8,582,886 | $7,204,091 | | Loans held for investment, net | $6,722,382 | $5,495,726 | | Investment securities | $1,237,957 | $1,006,691 | | Total Liabilities | $8,002,119 | $6,488,752 | | Deposits | $6,183,299 | $6,146,509 | | Borrowings | $1,458,000 | $41,000 | | Total Shareholders' Equity | $580,767 | $715,339 | Consolidated Income Statement Summary (in thousands) | Metric | Q2 2022 | Q2 2021 | 6 Months 2022 | 6 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $60,056 | $57,972 | $114,602 | $112,489 | | Provision for credit losses | $0 | $(4,000) | $(9,000) | $(4,000) | | Noninterest Income | $13,013 | $28,224 | $28,571 | $67,057 | | Noninterest Expense | $50,637 | $52,815 | $105,110 | $109,423 | | Net Income | $17,721 | $29,157 | $37,672 | $58,820 | | Diluted EPS | $0.94 | $1.37 | $1.95 | $2.72 | Consolidated Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $145,131 | $55,175 | | Net cash provided by (used in) investing activities | $(1,574,720) | $44,412 | | Net cash provided by (used in) financing activities | $1,439,652 | $(69,165) | | Net increase in cash and cash equivalents | $10,063 | $30,422 | - The company adopted ASU No 2022-02 regarding Troubled Debt Restructurings (TDRs) as of January 1, 2022, which eliminated TDR accounting guidance and enhanced disclosure requirements for certain loan modifications, with no material impact[24] - On July 28, 2022, the Board authorized a dividend of $0.35 per share, and on July 29, 2022, the company closed the sale of five retail deposit branches for an estimated gain of $4 million[118] ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial results, noting lower net income due to reduced mortgage banking income amid rising interest rates - Q2 2022 vs Q1 2022: Net income decreased from $20.0 million to $17.7 million, driven by a lower recovery of the allowance for credit losses and a $3.0 million decrease in gain on loan origination and sale activities[136][146] - 6M 2022 vs 6M 2021: Net income fell from $58.8 million to $37.7 million, primarily due to a $41.2 million drop in gain on loan origination and sale activities as rising interest rates reduced single-family mortgage volumes and margins[148][153][160][161] - Net interest margin remained constant at 3.27% from Q1 to Q2 2022, as a 14 basis point increase in asset yield was offset by a 17 basis point increase in liability cost[141] - Total assets increased by $1.4 billion in the first six months of 2022, driven by a $1.2 billion increase in loans, funded mainly by a $1.4 billion rise in borrowings[163] - Credit quality remained strong, with the nonperforming assets to total assets ratio at a low 0.13% as of June 30, 2022, and a $9 million recovery of the allowance for credit losses (ACL) in the first half of 2022[165] - The ratio of ACL to loans held for investment (LHFI) decreased from 0.88% to 0.56%, attributed to the recovery of COVID-19 reserves and a portfolio shift towards lower-risk loans[165] - At June 30, 2022, the Bank had available borrowing capacity of $809 million from the FHLB, $323 million from the FRBSF, and $1.0 billion from other financial institutions[171] - Both the Company and the Bank exceeded all minimum regulatory capital requirements and qualified as "well-capitalized," with capital conservation buffers well above the 2.5% requirement[181] Company Capital Ratios (Consolidated) | Ratio | June 30, 2022 | Minimum Requirement | | :--- | :--- | :--- | | Tier 1 leverage ratio | 8.38% | 4.0% | | Common equity Tier 1 capital ratio | 8.66% | 4.5% | | Tier 1 risk-based capital ratio | 9.51% | 6.0% | | Total risk-based capital ratio | 11.49% | 8.0% | ITEM 3 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are price and interest rate risk, with a liability-sensitive position to rising rates - The company's primary market risks are identified as price risk and interest rate risk from its financial instruments, with no material foreign currency or commodity price risk[190][191] - As of June 30, 2022, the company is liability-sensitive, a shift from year-end 2021 due to higher market interest rates and balance sheet changes[196][201] Net Interest Income Sensitivity to Interest Rate Changes (at June 30, 2022) | Change in Interest Rates (bps) | Estimated Change in Net Interest Income (1-Year) | | :--- | :--- | | +200 | (4.6)% | | +100 | (2.1)% | | -100 | 0.9% | | -200 | 5.3% | ITEM 4 Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[202] - There were no changes to the company's internal control over financial reporting during the quarter that have materially affected or are reasonably likely to materially affect it[204] PART II – OTHER INFORMATION ITEM 1 Legal Proceedings The company is involved in ordinary course legal proceedings not expected to have a material adverse financial effect - The company is subject to various legal proceedings in the ordinary course of business but does not believe any current matters will have a material adverse effect on its financial condition or results[206] ITEM 1A Risk Factors The company highlights continually evolving cybersecurity risks, elevated by geopolitics and third-party vendor reliance - The company identifies continually evolving cybersecurity risks as a key threat, which could result in the theft of confidential information, business disruption, and financial loss[209] - The risk of cyber incidents is elevated due to geopolitical events and the company's reliance on third-party vendors for critical services, which are also targets of cyber-attacks[209][213] ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds The company reports no sales of unregistered securities during the second quarter of 2022 - There were no sales of unregistered securities during the second quarter of 2022[215] Other Items (Items 3, 4, 5, 6) This section confirms no defaults, mine safety disclosures, or other required information for the quarter - The report indicates "Not applicable" for Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information[216][217][218]