HomeStreet(HMST) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS This section presents HomeStreet, Inc.'s unaudited consolidated financial statements for Q3 and the first nine months of 2022, reflecting significant asset growth and net income of $20.4 million for the quarter Consolidated Balance Sheets Total assets increased to $9.07 billion by September 30, 2022, driven by growth in loans held for investment, while shareholders' equity decreased to $552.8 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $57,256 | $65,214 | | Loans held for investment, net | $7,175,881 | $5,495,726 | | Investment securities | $1,311,941 | $1,006,691 | | Total assets | $9,072,887 | $7,204,091 | | Liabilities & Equity | | | | Deposits | $6,610,231 | $6,146,509 | | Borrowings | $1,569,000 | $41,000 | | Total liabilities | $8,520,098 | $6,488,752 | | Total shareholders' equity | $552,789 | $715,339 | | Total liabilities and shareholders' equity | $9,072,887 | $7,204,091 | Consolidated Income Statements Net income for Q3 2022 was $20.4 million, a decrease from Q3 2021, primarily due to a significant decline in noninterest income from loan origination and sale activities Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $63,018 | $57,484 | $177,620 | $169,973 | | Provision for credit losses | — | $(5,000) | $(9,000) | $(9,000) | | Total noninterest income | $13,322 | $24,298 | $41,893 | $91,355 | | Total noninterest expense | $49,889 | $51,949 | $154,999 | $161,372 | | Net income | $20,367 | $27,170 | $58,039 | $85,990 | | Diluted EPS | $1.08 | $1.31 | $3.03 | $4.03 | Consolidated Statements of Comprehensive Income The company reported a total comprehensive loss of $22.3 million for Q3 2022, primarily due to unrealized losses on available-for-sale investment securities Comprehensive Income (Loss) (in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $20,367 | $27,170 | $58,039 | $85,990 | | Other comprehensive income (loss) | $(42,668) | $(5,753) | $(127,071) | $(13,264) | | Total comprehensive income (loss) | $(22,301) | $21,417 | $(69,032) | $72,726 | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $552.8 million by September 30, 2022, primarily due to other comprehensive loss and common stock repurchases - Total shareholders' equity decreased by $162.5 million during the first nine months of 2022[17] Changes in Shareholders' Equity (Nine Months Ended Sep 30, 2022, in thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (Dec 31, 2021) | $715,339 | | Net Income | $58,039 | | Other comprehensive loss | $(127,071) | | Dividends declared | $(20,435) | | Common stock repurchased | $(76,322) | | Ending Balance (Sep 30, 2022) | $552,789 | Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $8.0 million for the first nine months of 2022, with significant investing outflows funded by financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Category | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $209,455 | $182,474 | | Net cash used in investing activities | $(2,378,854) | $(155,370) | | Net cash provided by financing activities | $2,161,441 | $133,509 | | Net (decrease) increase in cash | $(7,958) | $160,613 | Notes to Consolidated Financial Statements This section provides detailed disclosures on accounting policies, investment and loan portfolios, deposits, debt, mortgage banking, and fair value measurements - In July 2022, the company closed the sale of five retail deposit branches in eastern Washington, transferring $191 million of deposits, selling $43 million of loans, and recognizing a gain of $4.3 million[26] - The company adopted ASU No. 2022-02 regarding Troubled Debt Restructurings (TDRs) prospectively as of January 1, 2022, which did not have a material impact[29] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting strategic loan portfolio growth, declining noninterest income from mortgage banking, strong credit quality, and robust capital and liquidity Critical Accounting Estimates Critical accounting estimates include the Allowance for Credit Losses (ACL) and Mortgage Servicing Rights (MSRs) valuation, involving subjective judgments - The two most critical accounting estimates are the Allowance for Credit Losses (ACL) and the valuation of Mortgage Servicing Rights (MSRs)[128] - A hypothetical downgrade of one grade in the projected unemployment rate would increase the ACL by approximately $14 million as of September 30, 2022[130] Current Developments The company focuses on loan portfolio growth for stable net interest income and is optimizing its branch network by selling and acquiring locations - The company is focusing on growing its loan portfolio to generate more stable net interest income, reducing reliance on gain on loan sale activities[137] - The company is optimizing its branch network by selling 5 branches in eastern Washington and acquiring 3 in southern California, focusing on major metropolitan areas in the western U.S.[138] Management's Overview of Financial Performance Q3 2022 net income increased to $20.4 million sequentially, but year-to-date net income decreased to $58.0 million due to lower mortgage banking gains - Q3 2022 net income rose to $20.4 million from $17.7 million in Q2 2022, helped by higher net interest income and a $4.3 million gain on the sale of branches[139][148] - Net income for the first nine months of 2022 decreased to $58.0 million from $86.0 million in the prior year period, mainly due to a $56.0 million decline in gain on loan origination and sale activities[150][160] - Net interest margin compressed to 3.00% in Q3 2022 from 3.27% in Q2 2022, as the cost of interest-bearing liabilities rose faster than the yield on interest-earning assets[143] Financial Condition Total assets grew by $1.9 billion to $9.1 billion in the first nine months of 2022, driven by loan portfolio expansion funded by borrowings and deposits Balance Sheet Changes (First Nine Months of 2022, in billions) | Account | Change | | :--- | :--- | | Total Assets | +$1.9 | | Loans Held for Investment | +$1.7 | | Investment Securities | +$0.3 | | Borrowings | +$1.5 | | Deposits | +$0.5 | Credit Risk Management Credit risk is well-managed with nonperforming assets at 0.15% of total assets, and a $9 million ACL recovery reduced the ACL to LHFI ratio to 0.53% - Nonperforming assets to total assets remained low at 0.15% as of September 30, 2022[164] - A $9 million recovery of the allowance for credit losses was recorded in the first nine months of 2022 due to favorable loan performance and improved economic outlook[164] ACL to LHFI Ratio | Date | ACL to LHFI Ratio | | :--- | :--- | | September 30, 2022 | 0.53% | | December 31, 2021 | 0.88% | Liquidity and Sources of Funds The company maintains strong liquidity, with $1.0 billion available from FHLB, and financing activities largely funded $2.4 billion in investing outflows - Primary sources of liquidity include deposits, loan payments, investment security payments, and borrowings[167] Available Borrowing Capacity (as of Sep 30, 2022) | Source | Capacity | | :--- | :--- | | FHLB | $1.0 billion | | FRBSF | $337 million | | Other financial institutions | $1.2 billion | Capital Resources and Dividend Policy HomeStreet, Inc. and HomeStreet Bank exceeded all minimum regulatory capital requirements, with the Bank categorized as 'well-capitalized', and continued quarterly dividends - The company and the Bank exceeded all minimum required capital ratios and were compliant with the capital conservation buffer requirements as of September 30, 2022[179] Company Capital Ratios (as of Sep 30, 2022) | Ratio | Actual | Minimum Requirement | | :--- | :--- | :--- | | Tier 1 leverage ratio | 7.61% | 4.0% | | Common equity Tier 1 capital ratio | 8.66% | 4.5% | | Total risk-based capital ratio | 11.43% | 8.0% | - A quarterly cash dividend of $0.35 per common share was paid in Q3 2022, and another was declared for payment in November 2022[180] Non-GAAP Financial Measures The company utilizes non-GAAP measures like tangible common equity and an adjusted efficiency ratio to provide supplemental performance insights and facilitate comparisons Key Non-GAAP Reconciliations (as of Sep 30, 2022) | Metric | Value | | :--- | :--- | | Tangible book value per share | $27.92 | | Tangible common equity to tangible assets | 5.8% | | Return on average tangible equity (annualized, Q3) | 14.2% | | Efficiency ratio (Q3) | 68.4% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are price and interest rate risk, with a liability-sensitive position as of September 30, 2022, projecting a 5.1% decrease in net interest income from a 100 bps rate increase - The company's primary market risks are price risk and interest rate risk, with no material exposure to foreign currency or commodity price risk[187][188] - As of September 30, 2022, the company is liability-sensitive, meaning net interest income is expected to be negatively impacted by rising interest rates[193] Net Interest Income Sensitivity to Interest Rate Changes | Change in Interest Rates (bps) | Estimated % Change in NII (as of Sep 30, 2022) | Estimated % Change in NII (as of Dec 31, 2021) | | :--- | :--- | :--- | | +200 | (9.9)% | 7.8% | | +100 | (5.1)% | 3.5% | | -100 | 3.3% | (1.3)% | Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2022[199] - No material changes to internal control over financial reporting occurred during the third quarter of 2022[201] PART II – OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business, none of which are expected to have a material adverse effect - The company is subject to various legal proceedings in the ordinary course of business, but none are expected to have a material adverse effect[203] Risk Factors This section refers to risk factors detailed in the company's 2021 Form 10-K and Q2 2022 Form 10-Q - For a discussion of risk factors, the report refers to the 2021 Form 10-K and the Q2 2022 Form 10-Q[205] Unregistered Sales of Equity Securities and Use of Proceeds No sales of unregistered equity securities occurred during the third quarter of 2022 - There were no sales of unregistered securities during the third quarter of 2022[206] Defaults Upon Senior Securities This section is not applicable Mine Safety Disclosures This section is not applicable Other Information This section is not applicable Exhibits This section provides an index of exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes required certifications from the CEO and CFO (Exhibits 31 and 32) and XBRL data files[211] Signatures The report is duly signed and authorized by the President and CEO, and Executive Vice President and CFO, on November 4, 2022 - The Form 10-Q was signed on November 4, 2022, by Mark K. Mason (CEO) and John M. Michel (CFO)[214][216][217]