UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 10-K
____________________________
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number: 001-35424
____________________________
HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
____________________________
Washington
(State or other jurisdiction of
incorporation or organization)
91-0186600
(I.R.S. Employer
Identification Number)
601 Union Street, Ste. 2000
Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 623-3050
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Trading Symbol(s)
HMST
Name of each exchange on which registered
Nasdaq Stock Market LLC
PART I
FORWARD-LOOKING STATEMENTS
ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
PART II
ITEM 5
ITEM 6
ITEM 7
ITEM 7A
ITEM 8
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
NOT APPLICABLE
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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3
4
7
17
17
17
17
18
18
19
20
41
44
2
FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K ("Form 10-K") and the documents incorporated by reference contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Generally, forward-
looking statements include the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “goal,”
“upcoming,” “outlook,” “guidance” or the negation thereof, or similar expressions. In addition, all statements that address and/
or include beliefs, assumptions, estimates, projections and expectations of our future performance, financial condition, long-
term value creation, capital management, reduction in volatility, reliability of earnings, provisions and allowances for credit
losses, cost reduction initiatives, performance of our continued operations relative to our past operations, and restructuring
activities are forward-looking statements within the meaning of the Reform Act. Forward-looking statements involve inherent
risks, uncertainties and other factors, many of which are difficult to predict and are generally beyond management’s control.
Forward-looking statements are based on the Company’s expectations at the time such statements are made and speak only as
of the date made. The Company does not assume any obligation or undertake to update any forward-looking statements after
the date of this release as a result of new information, future events or developments, except as required by federal securities or
other applicable laws, although the Company may do so from time to time. The Company does not endorse any projections
regarding future performance that may be made by third parties. For all forward-looking statements, the Company claims the
protection of the safe harbor for forward-looking statements contained in the Reform Act.
We caution readers that actual results may differ materially from those expressed in or implied by the Company’s forward-
looking statements. Rather, more important factors could affect the Company’s future results, including but not limited to the
following: (1) the continued impact of COVID-19 on the U.S. and global economies, including business disruptions, reductions
in employment and an increase in business failures, specifically among our clients; (2) the continued impact of COVID-19 on
our employees and our ability to provide services to our customers and respond to their needs as more cases of COVID-19 may
arise in our primary markets; (3) the timing and occurrence or non-occurrence of events may be subject to circumstances
beyond our control; (4) there may be increases in competitive pressure among financial institutions or from non-financial
institutions; (5) changes in the interest rate environment may reduce interest margins; (6) changes in deposit flows, loan
demand or real estate values may adversely affect the business of our primary subsidiary, the Bank, through which substantially
all of our operations are carried out; (7) our ability to control operating costs and expenses; (8) our credit quality and the effect
of credit quality on our credit losses expense and allowance for credit losses; (9) the adequacy of our allowance for credit
losses; (10) changes in accounting principles, policies or guidelines may cause our financial condition to be perceived
differently; (11) legislative or regulatory changes that may adversely affect our business or financial condition, including,
without limitation, changes in corporate and/or individual income tax laws and policies, changes in privacy laws, and changes
in regulatory capital or other rules, and the availability of resources to address or respond to such changes; (12) general
economic conditions, either nationally or locally in some or all areas in which we conduct business, or conditions in the
securities markets or banking industry, may be less favorable than what we currently anticipate; (13) challenges our customers
may face in meeting current underwriting standards may adversely impact all or a substantial portion of the value of our rate-
lock loan activity we recognize; (14) technological changes may be more difficult or expensive than what we anticipate; (15) a
failure in or breach of our operational or security systems or information technology infrastructure, or those of our third-party
providers and vendors, including due to cyber-attacks; (16) success or consummation of new business initiatives may be more
difficult or expensive than what we anticipate; (17) our ability to grow efficiently both organically and through acquisitions and
to manage our growth and integration costs; (18) our ability to attract and retain key members of our senior management team;
(19) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our work force
and potential associated charges; (20) litigation or other matters before regulatory agencies, whether currently existing or
commencing in the future, may delay the occurrence or non-occurrence of events longer than what we anticipate; and (21) our
ability to obtain regulatory approvals or non-objection to take various capital actions, including the payment of dividends by us
or the Bank, or repurchases of our common stock. A discussion of the factors, risks and uncertainties that could affect our
financial results, business goals and operational and financial objectives cited in this release, other releases, public statements
and/or filings with the Securities and Exchange Commission (“SEC”) is also contained in the “Risk Factors” section of this
Form 10-K. We strongly recommend readers review those disclosures in conjunction with the discussions herein.
All future written and oral forward-looking statements attributable to the Company or any person acting on its behalf are
expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties
arise from time to time, and factors that the Company currently deems immaterial may become material, and it is impossible for
the Company to predict these events or how they may affect the Company.
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ITEM 1.
BUSINESS
Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to "we," "our," and
“us” refer to HomeStreet, Inc., a Washington corporation, ("HomeStreet," or the "Company,") and its consolidated
subsidiaries, HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation ("Capital").
Overview
We are a diversified financial services company with offices in Washington, Oregon, California, Hawaii, Arizona, Utah and
Idaho serving customers throughout the western United States. We were founded in 1921 and are headquartered in Seattle,
Washington. We provide commercial banking products and services to small and medium sized businesses, real estate investors
and professional firms and consumer banking products and services to individuals. As of December 31, 2021, we had $7.2
billion of total assets, $5.7 billion of loans and $6.1 billion of deposits.
With the exception of the updates provided below, the information required under Part I. Item 1. – “Business” is incorporated
by reference to Part I, Item 1, "Business" in our Annual Report on Form 10-K for the year ended December 31, 2020.
Human Capital Management
Employee Headcount
As of December 31, 2021, the Company employed 984 employees across our geographic footprint, including 934 employees
classified as full-time employees and 50 employees classified as part-time. Our employee turnover rate was 24% during the
year ended December 31, 2021, with a voluntary turnover rate of 21%.
Company Culture
As a financial institution, HomeStreet Bank occupies a position of trust in the community, among its customers and employees,
and with its regulators. We have earned that trust by developing a reputation for fairness, honesty, integrity and community
service- since the Company’s inception in 1921. Our reputation is directly tied to the individual decisions, actions, and sense of
business ethics of each and every one of our employees. We believe a high level of trust gives us a competitive advantage in an
environment that is increasingly sensitive to business ethics. It is our belief that employees and customers are attracted to work
for, and do business with, a company that prides itself on maintaining the highest ethical standards. For all of these reasons, a
commitment to fairness, honesty, integrity and community service are core values of the Company.
As part of this commitment to our core values, HomeStreet holds regular meetings of a diverse group of employees who make
up our Culture Committee. That Committee has identified five key values built on specific behaviors that bring our values to
life: a focus on customers, collaboration as one team, delivering excellence, embodying a spirit to serve the communities that
we are in, and being engaged in our work in a manner that can be described as “all in." In 2021, the Culture Committee
launched an employee sentiment survey and developed tools to allow for all employees to take advantage of mentorship
through a new mentor-mentee program. Further, the Committee launched a program to support employee resource groups.
Diversity, Equity and Inclusion
HomeStreet is an equal opportunity employer committed to a diverse workplace with employees from a wide range of
backgrounds. We recognize that diverse organizations are more likely to have employees with increased job satisfaction, higher
levels of trust and greater engagement, which in turn translates to a greater capacity for customer service. We focus on
recruiting, retaining and promoting employees from diverse backgrounds and who are representative of the people in our
communities. By doing so, we believe we are better able to serve our customers and understand their financial needs and goals.
We have a Diversity Committee made up of employees from a variety of ethnic backgrounds, job functions, and titles to
identify ways to increase and promote opportunities for all employees within the Company. This Committee works with
management to identify and promote practices that will help us achieve these diversity goals. We also promote policies and
practices to combat harassment, discrimination, retaliation, or disrespectful or other unprofessional conduct based on an
individual’s identity, including sex, gender, sexual orientation, race, religion, color, ancestry, physical disability, mental
disability, age, marital status and more.
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Compensation of Employees
As part of our goal of providing high-quality banking and financial services to our customers while creating a positive impact in
the local communities in which we do business, we designed our compensation program with the intention of attracting and
retaining highly qualified employees. We use a mix of base salary, cash-based short-term incentive plans and defined
contributions to the 401(k) plans for participating employees to incentivize our employees classified as exempt employees, and
provide equity-based long-term incentive compensation for members of the management team who are senior vice president
and above. Employee performance is considered, evaluated and discussed through quarterly performance check-ins between
manager and direct report, while those employees eligible for short-term annual incentives also have an annual performance
review. Our non-exempt employees are paid hourly wages with benefits of working overtime along with defined contributions
to the 401(k) plan for participating employees.
We have a variety of group benefit programs designed to provide our employees with health and wellness benefits, financial
benefits in the event of planned or unplanned expenses, or losses relating to illness, disability or death; programs and benefits to
help plan for retirement; and programs to deal with job-related or personal problems.
Employee Training and Development
As part of our employee development program, we provide a variety of training and educational opportunities to help our
employees stay current on regulatory compliance issues and develop their professional skills. We use an online learning
management system to create, assign, and track compliance and professional development learning programs across many
topical areas such as banking, mortgage and regulatory education, technology training, public speaking and proactive
communication, development of strong customer relationship and customer service skills.
Employee Safety; Response to COVID-19
Employee safety is a priority, and we promote workplace safety in many ways. Early in the pandemic, we designed and adopted
HomeStreet’s Social Distancing Policy and COVID-19 Sanitation Measures which were based on US Department of Labor
Occupational Safety and Health Administration Guidance on Preparing Workplaces for COVID-19, the Center for Disease
Control ("CDC") guidance, the President’s Coronavirus Guidelines for America and orders and guidance from state and local
authorities. The Department of Homeland Security has designated the financial services sector as a Critical Infrastructure
Sector, and, as a bank, HomeStreet continued to carry out its responsibilities and provide financial services to our customers
and communities. In doing so, we have made the safety of our employees, customers and communities where we serve, one of
our key priorities. Our policy applies to all HomeStreet locations in the several states where we do business.
The COVID-19 pandemic threat continued throughout 2021 while federal, state and local governments implemented or
attempted to implement manifold policy changes around indoor, outdoor, and workplace safety. We enhanced protections for
our employees in the form of masks, gloves, deep cleanings, paid COVID time off, and at-home COVID test kits, as we
continued to encourage employees to stay home when not feeling well. We also continued to facilitate work from home
capabilities for a large portion of our workforce and supported a hybrid or fully-remote working model for those whose jobs
were not dependent on being customer-facing. We continued the use of barriers and specialized safety protocols to limit
exposure for our employees who work face-to-face with customers. To encourage and then monitor the variable around
vaccination and booster shot status, we implemented a tracking process within our Human Resources Information System to
enable employees to voluntarily enter their status. HomeStreet offered wellness credits as an incentive to vaccinate and
achieved a vaccination status of greater than 80%. Our crisis management team continued to meet regularly to discuss changes
to and maintain ongoing specialized safety standards and protocols as part of our social distancing and a phased return to work
plan.
Employee Community Involvement
HomeStreet is committed to our communities, and as part of that commitment we support the active involvement of our
employees in supporting their communities. Employees are given time off to volunteer for community organizations, and where
employees make a substantial commitment of time to a particular organization, HomeStreet offers an additional financial
contribution to those organizations in recognition of the commitment of our employees. We also create active partnerships with
hundreds of local organizations, and our employees provide leadership, educational support, hands-on service, expertise, and
financial support to those organizations. We focus primarily on organizations within the scope of the Community Reinvestment
Act ("CRA") – those that provide support for housing, basic needs, and economic development for those of low and moderate
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income. Our senior management also helps to educate our employees on the importance of our community responsibility focus
and strategies.
Environmental, Social and Governance Matters
In 2021, we amended the charter of the Human Resources and Corporate Governance Committee (the “HRCG Committee”) of
the Board to include within the HRCG Committee’s purpose, duties and responsibilities oversight of our environmental, social
and governance (“ESG”) programs, policies and practices. The HRCG Committee’s specific duties and responsibilities in this
regard include monitoring and evaluating the Company’s programs, policies and practices relating to ESG issues and making
recommendations to the Board of Directors regarding the Company’s overall strategy with respect to ESG matters. In addition,
in 2021, we established an ESG Management Steering Committee comprised of senior management members and included
ESG as part of our strategic planning process. The purpose of the ESG Management Steering Committee is to assist the HRCG
Committee in fulfilling its oversight responsibilities with respect to ESG matters.
Locations
We operate 60 full service bank branches in Washington, in Northern and Southern California, in the Portland, Oregon area and
in Hawaii, as well as five primary stand-alone commercial lending centers located in Central Washington, Oregon, Southern
California, Idaho and Utah.
Where You Can Obtain Additional Information
We file annual, quarterly, current and other reports with the Securities and Exchange Commission (the "SEC"). We make
available free of charge on or through our website http://www.homestreet.com all of these reports (and all amendments thereto),
as soon as reasonably practicable after we file these materials with the SEC. Please note that the contents of our website do not
constitute a part of our reports, and those contents are not incorporated by reference into this Form 10-K or any of our other
securities filings. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information
that we file or furnish electronically with the SEC.
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ITEM 1A
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the
risks faced by us described below and elsewhere in this Annual Report.
Risks Related to the COVID-19 Pandemic
Our customers may be negatively impacted by the COVID-19 pandemic, which may result in adverse impacts to our
financial position and results of operations.
Since March 2020, the communities where we do business have been under varying degrees of restrictions on social gatherings
and retail operations due to the COVID-19 global pandemic. These restrictions, combined with related changes in consumer
behavior and significant increases in unemployment, have resulted in extreme financial hardship for certain industries,
especially travel, energy, hotel, food and beverage service and retail. While some governmental programs have provided
assistance to unemployed consumers and certain businesses that have been especially hard hit, these programs are of limited
scope and duration, and the ultimate impact of those programs is not yet known.
It is not clear when the economic impacts of the pandemic will subside or what the overall effect will be on our customers.
Some of our customers may be unable to meet their debt obligations to us in a timely manner, or at all, and we may continue to
experience a heightened number of requests from customers for forbearances on loans, especially as government programs
subside. Federal, state and local moratoriums on evictions for non-payment of rent during this time may also negatively impact
the ability of some borrowers to make payments on loans made for multifamily housing. In addition, while current laws and
regulatory guidance allow us to presume that certain borrowers are not experiencing financial difficulties at the time of a
modification for purposes of determining if a loan is a troubled debt restructuring ("TDR") if it is in response to the COVID-19
pandemic, in the long run a meaningful number of the loans in our portfolio may ultimately need additional forbearance or
significant modification and migrate to an adverse risk rating because of lingering impacts of an economic recession.
In 2020, we substantially increased our allowance for credit losses in response to the negative economic impacts of the
COVID-19 pandemic to adjust the expected historic loss rates for current and forecasted conditions as some of the economic
conditions created by the pandemic are not incorporated into the historical loss information. In 2021, due partially to an
improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recovered a significant portion of the 2020
increase. However, we cannot be sure that our allowance for credit losses will be adequate or that additional increases to the
allowance for credit losses will not be needed in subsequent periods. The actual and full economic impact of the pandemic is
still undetermined, and if our allowance is not adequate, future net charge-offs may be in excess of current expected losses,
which would create the need for more provisioning and have a negative impact on our financial condition, results of operations
and capital position.
Our business operations may be negatively impacted by the COVID-19 pandemic.
Most of our employees have been working from home during the pandemic and many will continue to do so as we move to a
hybrid remote-work model. We face risks associated with having a significant portion of our employees continue working from
home as we may have less oversight over certain internal controls and the confidentiality requirements of our compliance and
contractual obligations may be more challenging to meet as confidential information is being accessed from a wider range of
locations and there may be more opportunity for inadvertent disclosure or malicious interception. Many of our vendors are also
allowing their workforce to work primarily from home, which may create similar issues if our confidential information is being
accessed by employees of those vendors in connection with their performance of services for us. While we have not identified
any significant concerns to date with our internal controls, compliance obligations or confidentiality requirements, the change in
work environment, team dynamics and job responsibilities for us and our vendors could increase our risk of failure in these
areas, which could have a negative impact on our financial reporting, compliance risk, operational risk and reputational risk.
Risks Related to Operations
We rely on third party purchasers to buy our loans in the secondary market, and changes to their policies and practices may
significantly impact our financial results.
We originate a substantial portion of our single family mortgage loans for sale to third party investors, including government-
sponsored enterprises ("GSE") such as Fannie Mae, Freddie Mac and Ginnie Mae. Changes in the types of loans purchased by
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these GSEs or the program requirements for those entities could adversely impact our ability to sell certain of the loans we
originate for sale, leaving us unable to find a buyer on similar terms. Similarly, changes in the fee structures by any of our third
party loan purchasers, including the GSEs, may increase our costs of doing business, the cost of loans to our customers, and the
cost of selling loans to third party loan purchasers, all of which could in turn decrease our margin and negatively impact our
profitability. In addition, significant changes in the underwriting criteria of third party loan purchasers could increase our costs
or decrease our ability to sell into the secondary markets. Any of these changes can have a negative impact on our liquidity,
financial condition, results of operations and capital position.
We are bound by representations or warranties we make to third party purchasers of our loans or mortgage servicing rights
("MSRs") and may be liable for certain costs and damages if those representations are breached.
We make certain representations and warranties to third party purchasers of our loans, including GSEs, about the loans and the
manner in which they were originated, including adherence to strict origination guidelines for loans originated for sale to GSEs.
Our sale agreements generally require us to either repurchase loans if we have breached any of these representations or
warranties, which may result in recording a loss and/or bearing any subsequent loss on the loan, or pay monetary penalties. We
may not be able to recover our losses from a borrower or other third party in the event of such a breach of representation or
warranty due to a lack of remedies or lack of financial resources of the borrower, and may be required to bear the full amount of
the related loss. Similarly, we have sold significant amounts of our MSRs in recent years, and the agreements governing those
sales also have representations and warranties relating to the documentation and collectability of those MSRs; a breach of those
representations and warranties could also require us to either pay monetary damages or, in some cases, repurchase the defective
MSRs.
We also originate, purchase, sell and service loans insured by the Federal Housing Administration (“FHA”) and U.S.
Department of Housing and Urban Development (“HUD”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”),
and certify that such loans have met their requirements and guidelines. We are subject to audits of our processes, procedures
and documentation of such loans, and any violations of the guidelines can result in monetary penalties, which could be
significant if there are systemic violations, as well as indemnification requirements or restrictions on participation in the
program.
If we experience increased repurchase and indemnity demands on loans or MSRs that we have sold or that we sell from our
portfolios in the future, or if we are assessed significant penalties for violations of origination guidelines, our liquidity, financial
condition, results of operations and capital position may be adversely affected.
A portion of our revenue is derived from residential mortgage lending which is a market sector that experiences significant
volatility.
Residential mortgage lending is subject to substantial volatility due to changes in interest rates, a significant lack of housing
inventory in our principal markets, and other market forces beyond our control. Increases in interest rates may materially and
adversely affect our future loan origination volume and margins. Decreases in the availability of housing inventory may reduce
demand and adversely impact our future loan origination volume. Decreases in the value of the collateral securing our
outstanding loans may increase rates of borrower default which would adversely affect our financial condition, results of
operations and capital position.
Our capital management strategy may impact the value of our common stock and could negatively impact our ability to
maintain a well-capitalized position.
We actively manage our capital levels with a goal of returning excess capital to shareholders, which we currently do through
dividend and stock repurchase programs. While we have been able to sustain and even increase our dividend payments and
reinstate stock repurchases during the pandemic, a materially negative change to our business, results of operations and capital
position, could cause us to suspend those programs to preserve capital. In addition, our regulators could restrict our ability to
pay dividends or repurchase our stock, which happened to certain financial institutions larger than us during the pandemic.
While the intent of our capital management strategy is to improve the long-term value of our stock, we cannot be assured that
our stock repurchases will actually enhance long-term shareholder value. Repurchases may affect our stock price and increase
its volatility in the short term While the existence of the program may increase the price and decrease liquidity in our stock in
the short term, other market factors may cause the stock price of our common shares to fall below the price we paid for the
repurchase of our common stock. As a result, shareholders may not see an increase in the value of their holdings.
While we historically have maintained capital ratios at a level higher than the regulatory minimums to be “well-capitalized”,
our capital ratios in the future may decrease due to economic changes, utilization of capital to take advantage of growth or
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investment opportunities, or the return of additional capital to our shareholders. In the event the quality of our assets or our
economic position were to deteriorate significantly, lower capital ratios may require us to raise additional capital in the future in
order to remain compliant with capital standards. We may not be able to raise such additional capital at the time when we need
it, or on terms that are acceptable to us, especially if capital markets are especially constrained, if our financial performance
weakens, or if we need to do so at a time when many other financial institutions are competing for capital from investors in
response to changing economic conditions. An inability to raise additional capital on acceptable terms when needed could have
a material adverse effect on our business, results of operations and capital position. In addition, any capital raising alternatives
could dilute the value of our outstanding common stock held by our existing shareholders and may adversely affect the market
price of our common stock.
HomeStreet, Inc. primarily relies on dividends from the Bank, which may be limited by applicable laws and regulations.
HomeStreet, Inc. is a separate legal entity from the Bank, which is the primary source of funds available to HomeStreet Inc. to
service its debt, pay dividends to shareholders, repurchase shares and otherwise satisfy its obligations. The availability of
dividends from the Bank is limited by various statutes and regulations, capital rules regarding requirements to maintain a "well
capitalized" ratio at the Bank, as well as by our policy of retaining a significant portion of our earnings to support the Bank's
operations. For additional information on these restrictions, see "Item 1 Business" in this Annual Report. If the Bank cannot pay
dividends to HomeStreet Inc., HomeStreet, Inc. may be limited in its ability to service its debt, fund its operations, repurchase
shares and pay dividends to its shareholders.
Our business is geographically confined to certain metropolitan areas of the Western United States, and events and
conditions that disproportionately affect those areas may pose a more pronounced risk for our business.
Although we presently have retail deposit branches in four states, with lending offices in these states and two others, a
substantial majority of our revenues are derived from operations in the Puget Sound region of Washington, the Portland,
Oregon metropolitan area, the San Francisco Bay Area, and the Los Angeles, Orange County, Riverside and San Diego
metropolitan areas in Southern California. All of our markets are located in the Western United States. Each of our primary
markets is subject to various types of natural disasters, including earthquakes, wildfires, volcanic eruptions, mudslides and
floods, and many have experienced disproportionately significant economic volatility in the past, as well as more recent local
political unrest and calls to action, including calls for rent disruption, when compared to other parts of the United States.
Economic events, political unrest or natural disasters that affect the Western United States and our primary markets in that
region may have an unusually pronounced impact on our business. Because our operations are not more geographically
diversified, we may lack the ability to mitigate those impacts from operations in other regions of the United States.
The significant concentration of real estate secured loans in our portfolio has had a negative impact on our asset quality and
profitability in the past and there can be no assurance that it will not have such impact in the future.
A substantial portion of our loans are secured by real property, including a growing portfolio of commercial real estate ("CRE")
loans. Our real estate secured lending is generally sensitive to national, regional and local economic conditions, making loss
levels difficult to predict. Declines in real estate sales and prices, significant increases in interest rates, unforeseen natural
disasters and a decline in prevailing economic conditions may result in higher than expected loan delinquencies, foreclosures,
problem loans, other real estate owned ("OREO"), net charge-offs and provisions for credit and OREO losses. If real estate
market values decline significantly, as they did in the 2008 to 2011 recession, the collateral for our loans may provide less
security and reduce our ability to recover the principal, interest and costs due on defaulted loans. Such declines may have a
greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are
more diversified, and we could face reduced liquidity, constraints on capital resources, increased obligations to investors to
whom we sell mortgage loans, declining income on mortgage servicing fees and a related decrease in the value of MSRs, and
declining values on certain securities we hold in our investment portfolio.
Deficiencies in our internal controls over financial reporting or enterprise risk management framework may result in
ineffective mitigation of risk or an inability to identify and accurately report our financial results.
Our internal controls over financial reporting are intended to ensure we maintain accurate records, promote the accurate and
timely reporting of our financial information, maintain adequate control over our assets, and prevent and detect unauthorized
acquisition, use or disposition of our assets. Effective internal and disclosure controls are necessary for us to provide reliable
financial reports, effectively prevent fraud, and operate successfully as a public company. If we cannot provide reliable
financial reports or prevent fraud, our reputation and operating results may be harmed. In addition to our internal controls, we
use an enterprise risk management framework in an effort to achieve an appropriate balance between risk and return, with
established processes and procedures intended to identify, measure, monitor, report, analyze and control our primary risks,
9
including liquidity risk, credit risk, price risk, interest rate risk, operational risk, legal and compliance risk, strategic risk and
reputational risk. We also maintain a compliance program to identify, measure, assess and report on our adherence to applicable
laws, policies and procedures.
While we assess and improve these controls and programs on an ongoing basis, there can be no assurance that our controls and
programs will effectively mitigate all risk and limit losses in our business. In addition, as we make strategic shifts in our
business, we implement new systems and processes. If our change management processes are not sound and adequate resources
are not deployed to support these implementations and changes, we may experience additional internal control deficiencies that
could expose the Company to operating losses or fail to appropriately anticipate or identify new risks related to such shifts in
the business. Any failure to maintain effective controls or timely implement any necessary improvement of our internal and
disclosure controls in the future could create losses, cause us to incur additional costs or fail to meet our reporting obligations.
Failing to maintain an effective risk management framework or compliance program could also expose us to losses, adverse
impacts to our financial position, results of operations and capital position, or regulatory criticism or restrictions.
We use a variety of estimates in our accounting processes which may prove to be imprecise and result in significant changes
in valuation and inaccurate financial reporting.
We use a variety of estimates in our accounting policies and methods, including complex financial models designed to value
certain of our assets and liabilities, including our allowance for credit losses. These models are complex and use specific
judgment-based assumptions about the effect of matters that are inherently uncertain. Different assumptions in these models
could result in significant changes in valuation, which in turn could affect earnings or result in significant changes in the
recorded amount of assets and liabilities reported on the balance sheet. The assumptions used may be impacted by numerous
factors, including economic conditions, consumer behavior, changes in interest rates and changes in collateral values. A failure
to make appropriate assumptions in these models could have a negative impact on our liquidity, result of operations and capital
position.
We are subject to extensive and complex regulations which are costly to comply with and may subject us to significant
penalties for noncompliance.
Our operations are subject to extensive regulation by federal, state and local governmental authorities, including the Federal
Deposit Insurance Corporation ("FDIC"), the Washington Department of Financial Institutions and the Federal Reserve, and to
various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations.
Many of these laws are complex, especially those governing fair lending, predatory or unfair or deceptive practices, and the
complexity of those rules creates additional potential liability for us because noncompliance could result in significant
regulatory action, including restrictions on operations and fines, and could lead to class action lawsuits from shareholders,
consumers and employees. In addition, various states have their own laws and regulations, especially California, which has
heightened data privacy, employment law and consumer protection regulations, and the cost of complying with state rules that
differ from federal rules can significantly increase compliance costs.
Our consumer business, including our mortgage and other consumer lending and non-lending businesses, is also governed by
policies enacted or regulations adopted by the Consumer Financial Protection Bureau ("CFPB") which under the Dodd-Frank
Act has broad rulemaking authority over consumer financial products and services. Our regulators, including the FDIC, use
interpretations from the CFPB and relevant statutory citations in certain parts of their assessments of our regulatory compliance,
including the Real Estate Settlement Procedures Act, the Final Integrated Disclosure Rule, known as TRID, and the Home
Mortgage Disclosure Act, adding to the complexity of our regulatory requirements, increasing our data collection requirements
and increasing our costs of compliance. The laws, rules and regulations to which we are subject evolve and change frequently,
including changes that come from judicial or administrative agency interpretations of laws and regulations outside of the
legislative process that may be more difficult to anticipate, and changes to our regulatory environment are often driven by shifts
of political power in the federal government. In addition, we are subject to various examinations by our regulators during the
course of the year. Regulatory authorities who conduct these examinations have extensive discretion in their supervisory and
enforcement activities, including the authority to restrict our operations and certain corporate actions. Administrative and
judicial interpretations of the rules that apply to our business may change the way such rules are applied, which also increases
our compliance risk if the interpretation differs from our understanding or prior practice. Moreover, an increasing amount of the
regulatory authority that pertains to financial institutions is in the form of informal "guidance" such as handbooks, guidelines,
examination manuals, field interpretations by regulators or similar provisions that could affect our business or require changes
in our practices in the future even if they are not formally adopted as laws or regulations. Any such changes could adversely
affect our cost of doing business and our profitability.
10
In addition, changes in regulation of our industry have the potential to create higher costs of compliance, including short-term
costs to meet new compliance standards, limit our ability to pursue business opportunities and increase our exposure to
potential fines, penalties and litigation.
Significant legal claims or regulatory actions could subject us to substantial uninsured liabilities and reputational harm and
have a material adverse effect on our business and results of operations.
We are from time to time subject to legal claims or regulatory actions related to our operations. These legal claims or regulatory
actions could include supervisory or enforcement actions by our regulators, criminal proceedings by prosecutorial authorities,
claims by customers or by former and current employees, including class, collective and representative actions, or
environmental lawsuits stemming from property that we may hold as OREO following a foreclosure action in the course of our
business. Such actions are a substantial management distraction and could involve large monetary claims, including civil money
penalties or fines imposed by government authorities and significant defense costs.
To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe
are appropriate for our operations. However, our insurance coverage does not cover any civil monetary penalties or fines
imposed by government authorities and may not cover all other claims that might be brought against us, including certain wage
and hour class, collective and representative actions brought by customers, employees or former employees. In addition, such
insurance coverage may not continue to be available to us at a reasonable cost or at all. As a result, we may be exposed to
substantial uninsured liabilities, which could adversely affect our business, prospects, financial condition, results of operations
and capital position. Substantial legal liability or significant regulatory action against us could cause significant reputational
harm to us and/or could have a material adverse impact on our business, prospects, financial condition, results of operations and
capital position.
If we are not able to retain or attract key employees, or if we were to suffer the loss of a significant number of employees, we
could experience a disruption in our business.
As the Company has focused on efficiency in recent years, we have significantly reduced our employee headcount. However,
hiring remains competitive in certain areas of our business. We rely on a number of key employees who are highly sought after
in the industry. If a key employee or a substantial number of employees depart or become unable to perform their duties, it may
negatively impact our ability to conduct business as usual. We might then have to divert resources from other areas of our
operations, which could create additional stress for other employees, including those in key positions. The loss of qualified and
key personnel, or an inability to continue to attract, retain and motivate key personnel could adversely affect our business and
consequently impact our financial condition and results of operations.
Risk Related to Market Factors
Changes to monetary policy by the Federal Reserve could adversely impact our results of operations.
The Federal Reserve is responsible for regulating the supply of money in the United States, including open market operations
used to stabilize prices in times of economic stress, as well as setting monetary policies. These activities strongly influence our
rate of return on certain investments, our hedge effectiveness for mortgage servicing and our mortgage origination pipeline, as
well as our costs of funds for lending and investing, all of which may adversely impact our liquidity, results of operations,
financial condition and capital position.
Changes in market factors beyond our control, including fluctuation in interest rates, may adversely impact our profitability
and financial results.
Market factors outside of our control, including changing interest rate environments, regulatory decisions, increased
competition, changes in the yield curve, consumer confidence, rates of unemployment and other forces of market volatility, can
have a significant impact on our results of operations, financial condition and capital positions.
Our earnings are dependent on the difference between the interest earned on loans and investments and the interest paid on
deposits and borrowings. Changes in interest rates impact the rates earned on loans and investment securities and the rates paid
on deposits and borrowings and may negatively impact our ability to attract deposits, make loans, and achieve satisfactory
interest rate spreads. In addition, changes to market interest rates may impact the demand for loans, levels of deposits and
investments and the credit quality of existing loans. These results may adversely impact our liquidity, financial condition,
results of operations and capital position.
11
The rate of prepayment of loans, which is impacted by changes in interest rates and general economic conditions, among other
things, impacts the value of our MSRs. We actively hedge this risk with financial derivative instruments to mitigate losses, but
changes in interest rates can be difficult to predict and changes in our hedging instruments may not correlate with changes in the
values of our MSRs and LHFS.
In addition to overall fluctuations in interest rates, asymmetrical changes in interest rates, for example a greater increase in short
term rates than in long term rates, could adversely impact our net interest income because our liabilities tend to be more
sensitive to short term rates while our assets tend to be more sensitive to long term rates. In addition, it may take longer for our
assets to reprice to adjust to a new rate environment because fixed rate loans do not fluctuate with interest rate changes and
adjustable rate loans often have a specified period of reset. As a result, a flattening or an inversion of the yield curve is likely to
have a negative impact on our net interest income.
Our securities portfolio also includes securities whose value is sensitive to interest rate fluctuations. The unrealized gains or
losses in our available-for-sale portfolio are reported as a separate component of shareholders' equity until realized upon sale.
Interest rate fluctuations may impact the value of these securities and as a result, shareholders' equity, and may cause material
fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a
sale could adversely affect our operating results, financial condition and capital position.
The financial services industry is highly competitive, and as a result, our business, results of operations, financial condition
and capital position may be adversely affected,
We face pricing competition for loans and deposits, both in pricing and products, as well as in customer service and
convenience. Our most direct competition comes from other banks, credit unions, mortgage banking companies and finance
companies, and more recently has also come from companies that rely heavily on technology to provide financial services, are
moving to provide cryptocurrency products and offerings, and often target a younger customer demographic. The significant
competition in attracting and retaining deposits and making loans, as well as in providing other financial services, throughout
our market area may impact future earnings and growth. Our success depends, in part, on the ability to adapt products and
services to evolving industry standards and customer preferences and trends and provide consistent customer service while
keeping costs in line. We sometimes experience increasing pressure to provide products and services at lower prices, which
could reduce net interest income and noninterest income from fee-based products and services. New technology-driven
products and services are often introduced and adopted, including innovative ways that customers can make payments, access
products and manage accounts. We could be required to make substantial capital expenditures to modify or adapt existing
products and services or develop new products and services. We may not be successful in introducing new products and
services or those new products may not achieve market acceptance. In addition, advances in technology such as telephone, text
and online banking, e-commerce and self-service automatic teller machines and other equipment, as well as changing customer
preferences to access our products and services through digital channels, could decrease the value of our branch network and
other assets. As a result of these competitive pressures, our business, financial condition, results of operations and capital
position may be adversely affected.
Uncertainty relating to the phasing out of London Interbank Offered Rate ("LIBOR") may adversely affect our business,
financial condition and results of operations.
LIBOR is scheduled to be discontinued in June 2023. While we no longer originate loans indexed to LIBOR, trailing risk still
exists for those loans that were originated prior to December 31, 2021. We will need to transition LIBOR-based loans
originated prior to December 31, 2021 to a new index prior to June 2023. Our attempt to educate borrowers regarding the need
to transition from LIBOR, including borrowers with loans that do not have adequate fallback language, may fail if borrowers do
not comprehend the need for the change, are unresponsive to our efforts to communicate or claim a lack of transparency in the
transition process. In addition, LIBOR-based rates, at the time of transition, may be lower than the alternative indices, resulting
in an increase in rates to the borrower. Once LIBOR rates are no longer available, we may be subject to disputes or litigation
with customers and creditors over the appropriateness or the comparability to LIBOR of the alternative indices, which could
have an adverse effect on our financial condition, results of operations and capital position.
The implementation of alternative indices may require us to significantly enhance, modify, upgrade, convert or outsource our
software, IT and other tools, systems, controls, operational processes, procedures and risk or valuation models associated with
the transition to a new reference rate. This transition could be costly, require significant resources and increase the risk of error
in implementation. In addition, the use of an alternative index may result in lower interest income if the index rate is lower than
what a comparable LIBOR rate would have been. Each of these factors could have an adverse effect on our results of
operations, financial condition and capital position.
12
Uncertainties still exist regarding our other financial instruments. For loans serviced for any of the agencies, FNMA, FHMLC,
and GNMA, for loans originated prior to September 30, 2020, we are uncertain of the agencies plan to transition away from
LIBOR. The ultimate selection of the alternative index may result in significant implementation costs for our portfolio of loans
serviced for others and higher borrowing costs on our trust preferred debt.
Our outstanding debt and other financial instruments may be adversely affected by the transition from LIBOR as a
reference rate.
We have outstanding LIBOR-based trust preferred debt securities, and the trustee has not yet provided any guidance regarding
the transition from LIBOR to an alternative index. It is unclear whether the trustee will select a widely used and recognized
reliable market benchmark as an acceptable alternative to and replacement for LIBOR. Uncertainty as to the trustee’s
anticipated alternative index selection could adversely affect the value of and return on our debt and other financial instruments.
The trustee’s selection of the alternative index may result in higher borrowing costs on our LIBOR-based trust preferred debt,
as well as significant implementation costs for our portfolio of loans serviced for others. Until the trustee selects an alternative
index, any uncertainty regarding the continued use and reliability of LIBOR could have a negative impact on our debt and other
financial instruments tied to LIBOR rates.
The implementation and use of the Secured Overnight Financing Rate (“SOFR”) as an index replacement for LIBOR may
adversely impact our net interest income and create litigation exposure.
In the U.S., the Alternative Rates Reference Committee, convened in 2014 by a group of market participants to help ensure a
successful transition away from LIBOR, identified SOFR has its preferred alternative rate. SOFR is a single overnight rate,
while LIBOR includes rates of different tenors, and SOFR is considered a credit risk-free rate, while LIBOR incorporates an
evaluation of credit risk. In 2020, we transitioned to SOFR the majority of our products indexed to LIBOR.
Implementation of SOFR is intended to have a minimal economic effect on borrowers under LIBOR-indexed instruments.
Margins or spreads on new SOFR-indexed products may result in lower rates because SOFR is typically likely to be lower
when compared to LIBOR, resulting in reduced spreads and a lower net interest income. However, it is impossible to predict
whether the SOFR index could be more volatile than LIBOR, which could thereby increase loan rates and borrowing costs on
borrowing facilities previously indexed to LIBOR. Borrowers may not fully understand SOFR as an index replacement or may
be adversely impacted by implementation of SOFR. The transition to SOFR, or a transition to any other index that becomes
widely accepted in the marketplace, could also result in borrower confusion and additional operational, compliance, systems
and other related transition costs. This transition may also result in our customers challenging the determination of their interest
payments, entering into fewer transactions or postponing their financing needs, and we may be subject to disputes or litigation
with borrowers over the appropriateness or comparability of SOFR or other selected indices to LIBOR. These potential
outcomes could have an adverse effect on our financial condition, results of operations and capital position.
Further, the uncertainty regarding the transition from LIBOR to SOFR or other benchmark rates could adversely affect floating-
rate obligations, deposits, loans, derivatives and other financial instruments, including the rates we pay on our subordinated
debentures and trust preferred securities, which could, in turn, adversely affect our financial condition, results of operation and
capital position.
To support our growth, we may need to rely on funding sources in addition to growth in deposits and such funding sources
may not be adequate or may be more costly.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management,
we use a number of funding sources in addition to deposit growth and repayments and maturities of loans and investments,
including Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased, brokered certificates of
deposit and issuance of equity or debt securities. While we continue to have adequate liquidity even in the face of economic
uncertainties, changes in global markets and customer demand, adverse operating results or changes in industry conditions
could lead to difficulty or an inability to access these additional funding sources and could make our existing funds more
volatile. Our financial flexibility may be materially constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest rates. When interest rates change, the cost of our
funding may change at a different rate than our interest income, which may have a negative impact on our net interest income
and, in turn, our results of operations and capital position. If we are required to rely more heavily on more expensive funding
sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our results of
13
operations and capital position would be adversely affected. Further, the volatility inherent in some of these funding sources,
particularly brokered deposits, may increase our exposure to liquidity risk.
Risks Related to Information Technology
HomeStreet’s operational systems and networks, and those of our third-party vendors, have been, and will continue to be,
subject to continually evolving cybersecurity risks that could result in the theft, loss, misuse or disclosure of confidential
client or customer information or otherwise disrupt or adversely affect our business.
As a financial institution, we are susceptible to fraudulent activity, operational and informational security breaches and
cybersecurity incidents that may be committed against us or our customers, employees, third-party vendors and others, which
may result in financial losses or increased costs, disclosure or misuse of our information or customer information,
misappropriation of assets, data privacy breaches, litigation or reputational damage. Related risks for financial institutions have
increased in recent years in part because of proliferation and use of new and existing technologies to conduct financial
transactions and transmit data, as well as the increased sophistication and unlawful or clandestine activities of organized crime,
state-sponsored and other hackers, terrorists, activists, and other malicious external parties to engage in fraudulent activity such
as phishing or check, electronic or wire fraud, unauthorized access to our controls and systems, denial or degradation of service
attacks, malware and other dishonest acts. Within the financial services industry, the commercial banking sector has generally
experienced, and will continue to experience, increased electronic fraudulent activity, security breaches and cybersecurity-
related incidents. The nature of our industry sector exposes us to these risks because our business and operations include the
protection and storage of confidential and proprietary corporate and personal information, including sensitive financial and
other personal data, and any breach thereof could result in identity theft, account or credit card fraud or other fraudulent activity
that could involve their accounts and business with us.The risk to our organization may be further elevated over the near term
because of recent geopolitical events in Eastern Europe, which may result in increased attacks against U.S. critical
infrastructure, including financial institutions.
Our computer systems, software and networks are subject to ongoing cyber incidents such as unauthorized access; loss or
destruction of data (including confidential client information); account takeovers; unavailability of service; computer viruses or
other malicious code; cyber-attacks; and other events. While we have experienced various forms of these cyber incidents in the
past, we have not been materially impacted by them. There can be no assurance that cyber incidents will not occur again, and
they could occur more frequently and on a more significant scale.
Our business and operations rely on the secure processing, transmission, protection and storage of confidential, private and
personal information by our computer operation systems and networks, as well as our online banking or reporting systems used
by customers to effect certain financial transactions, all of which are either managed directly by us or through our third-party
data processing vendors. The secure maintenance and transmission of confidential information, and the execution of
transactions through our systems, are critical to protecting us and our customers against fraud and security breaches and to
maintain customer confidence. To access our products and services, our customers may use personal computers, smartphones,
tablet PCs, and other mobile devices that function beyond our control systems. Although we believe we have invested in, and
plan to continue investing in, maintaining and routinely testing adequate operational and informational security procedures and
controls, we rely heavily on our third-party vendors, technologies, systems, networks and our customers' devices, all of which
may become the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information security
breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, theft or destruction of our
confidential, proprietary and other information or that of our customers, or that could disrupt our operations or those of our
customers or third parties. Even though we have taken those actions, we may fail to anticipate or sufficiently mitigate security
breaches, or we may experience data privacy breaches, that could result in losses to us or our customers, damage to our
reputation, incurrence of significant costs, business disruption, our inability to grow our business and exposure to regulatory
scrutiny or penalties, litigation and potential financial liability, any of which could adversely affect our business, financial
condition, results of operations or capital position.
Our computer systems could be vulnerable to unforeseen problems other than cybersecurity related incidents or other data
security breaches, including the potential for infrastructure damage to our systems or the systems of our vendors from fire,
power loss, telecommunications failure, physical break-ins, theft, natural disasters or similar catastrophic events. Any damage
or failure that causes interruptions in operations may compromise our ability to perform critical functions in a timely manner (or
may give rise to perceptions of such compromise) and could increase our costs of doing business, or have a material adverse
effect on our results of operations results as well as our reputation and customer or vendor relationships.
In addition, some of the technology we use in our regulatory compliance, including our mortgage loan origination technology,
as well as other critical business activities such as core systems processing, essential web hosting and deposit and processing
services, as well as security solutions, is provided by third party vendors. If those providers fail to update their systems or
14
services in a timely manner to reflect new or changing regulations, or if our personnel operate these systems in a non-compliant
manner, our ability to meet regulatory requirements may be impacted and may expose us to heightened regulatory scrutiny and
the potential for monetary penalties. These vendors could also be sources of operational and informational security risk to us,
including from interruptions or failures of their own systems, cybersecurity or ransomware attacks, capacity constraints or
failures of their own internal controls. To date, we are not aware of any system breaches at any of our third party vendors or
service providers that has also breached the integrity of our confidential customer data. However, such third parties may also be
targets of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers, ransomware attacks or information
security breaches that could compromise the confidential or proprietary information of HomeStreet and our customers.
The failure to protect our customers' confidential information, data and privacy could adversely affect our business.
We are subject to federal and state privacy regulations and confidentiality obligations, including the California Consumer
Privacy Act of 2018 and the California Privacy Rights Act of 2020, that, among other things restrict the use and dissemination
of, and access to, certain information that we produce, store or maintain in the course of our business and establishes a new
state agency to enforce these rules. We also have contractual obligations to protect certain confidential information we obtain
from our existing vendors and customers. These obligations generally include protecting such confidential information in the
same manner and to the same extent as we protect our own confidential information, and in some instances may impose
indemnity obligations on us relating to unlawful or unauthorized disclosure of any such information.
The continued development and enhancement of our information security controls, processes and practices designed to protect
customer information, our systems, computers, software, data and networks from attack, damage or unauthorized access remain
a priority for our management as we increase our online and mobile banking offerings. As cyber threats continue to evolve,
including supply chain risks, our costs to combat the cybersecurity threat may also increase. Nonetheless, our measures may be
insufficient to prevent all physical and electronic break-ins, denial of service and other cyber-attacks or security breaches.
If we do not properly comply with privacy regulations and contractual obligations that require us to protect confidential
information, or if we experience a security breach or network compromise, we could face regulatory sanctions, penalties or
fines, increased compliance costs, remedial costs such as providing credit monitoring or other services to affected customers,
litigation and damage to our reputation, which in turn could result in decreased revenues and loss of customers, any or all of
which would have a material adverse effect on our business, financial condition, results of operations and capital position.
We continually encounter technological change, and we may have fewer resources than many of our competitors to invest in
technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven
products and services to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to
provide products and services using technology that will satisfy client demands for convenience, as well as to create additional
efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as Internet banking
and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to
invest in technological improvements. However, we may not be able to effectively implement new technology-driven products
and services or be successful in marketing these products and services to our customers.
Risk Related to our $65 million senior notes due 2026, our $62 million of junior subordinated deferrable interest
debentures due in 2035, 2036 and 2037 and our $100 million subordinated notes due 2032 (collectively the “HomeStreet
Notes”).
Payments on the HomeStreet Notes will depend on receipt of dividends and distributions from our subsidiaries.
We are a bank holding company and we conduct substantially all of our operations through subsidiaries, including the Bank.
We depend on dividends, distributions and other payments from our subsidiaries to meet our obligations, including to fund
payments on the HomeStreet Notes.
Federal and state banking regulations limit dividends from our bank subsidiary to us. Generally, banks are prohibited from
paying dividends when doing so would cause them to fall below regulatory minimum capital levels. In addition, under
Washington law, the board of directors of the Bank generally may not declare a cash dividend on its capital stock in an amount
greater than its retained earnings without the approval of the Washington State Department of Financial Institutions, Division of
Banks ("WDFI"). We also have a policy of retaining a significant portion of our earnings to support the Bank’s operations.
15
In addition, federal bank regulatory agencies have the authority to prohibit the Bank from engaging in unsafe or unsound
practices in conducting its business. The payment of dividends or other transfers of funds to us, depending on the financial
condition of the Bank, could be deemed an unsafe or unsound practice.
Accordingly, we can provide no assurance that we will receive dividends or other distributions from our bank subsidiary and
our other subsidiaries in an amount sufficient to pay interest on or principal of the HomeStreet Notes.
Regulatory guidelines may restrict our ability to pay the principal of, and accrued and unpaid interest on, the Notes.
As a bank holding company, our ability to pay the principal of, and interest on, the Notes is subject to the rules and guidelines
of the Federal Reserve regarding capital adequacy. We intend to treat the Notes as “Tier 2 capital” under these rules and
guidelines. The Federal Reserve guidelines generally require us to review the effects of the cash payment of Tier 2 capital
instruments, such as the Notes, on our overall financial condition. The guidelines also require that we review our net income for
the current and past four quarters, and the amounts we have paid on Tier 2 capital instruments for those periods, as well as our
projected rate of earnings retention. Moreover, pursuant to federal law and Federal Reserve regulations, as a bank holding
company, we are required to act as a source of financial and managerial strength to the Bank and commit resources to its
support, including, without limitation, the guarantee of its capital plans if it is undercapitalized. Such support may be required at
times when we may not otherwise be inclined or able to provide it. As a result of the foregoing, we may be unable to pay
accrued interest on the Notes on one or more of the scheduled interest payment dates, or at any other time, or the principal of
the Notes at the maturity of the Notes.
If we were to be the subject of a bankruptcy proceeding under Chapter 11 of the U.S. Bankruptcy Code, then the bankruptcy
trustee would be deemed to have assumed, and would be required to cure, immediately any deficit under any commitment we
have to any of the federal banking agencies to maintain the capital of the Bank, and any other insured depository institution for
which we have such a responsibility, and any claim for breach of such obligation would generally have priority over most other
unsecured claims.
16
ITEM 1B
UNRESOLVED STAFF COMMENTS
None.
ITEM 2
PROPERTIES
We lease principal offices, which are located in downtown Seattle at 601 Union Street, Suite 2000, Seattle, WA 98101. This
lease provides sufficient space to conduct the management of our business. The Company conducts its Commercial and
Consumer Banking activities in locations in Washington, California, Oregon, Hawaii, Idaho, and Utah. As of December 31,
2021, we operated in five primary commercial lending centers, 60 retail deposit branches, and one insurance office. As of such
date, we also operated three facilities for the purpose of administrative and other functions in addition to the principal offices: a
call center and operations support facility located in Federal Way, Washington; a loan fulfillment center in Lynnwood,
Washington and an operations support center in Spokane, Washington. Of these properties, we own six of the retail deposit
branches, the call center and operations support facility in Federal Way, and we own 50% of a retail branch through a joint
venture. All facilities are in a good state of repair and appropriately designed for use as banking or administrative office
facilities.
ITEM 3
LEGAL PROCEEDINGS
Because the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with
various state and federal lending laws, we are subject to various legal proceedings in the ordinary course of our business related
to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also
subject to legal proceedings in the ordinary course of business related to employment matters. We do not expect that these
proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of
operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our
consolidated financial position, results of operation or liquidity, or for which there would be a reasonable possibility of such a
loss based on information known at this time.
ITEM 4
MINE SAFETY DISCLOSURES
Not applicable.
17
PART II
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol "HMST."
As of March 1, 2022, there were 2,258 shareholders of record of our common stock.
Dividend Policy
In January 2020, HomeStreet's Board of Directors approved a dividend policy that contemplates the payment of quarterly cash
dividends on our common stock when, if and in an amount declared by the Board after taking into consideration, among other
things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth. The payment of a dividend and
the dividend rate to be paid will be reassessed each quarter by the Board of Directors in accordance with the dividend policy.
Our ability to pay dividends to shareholders is dependent on many factors, including the Bank's ability to pay dividends to the
Company. Therefore, we cannot give assurance that we will be able to continue to pay a regular dividend in any future period.
Sales of Unregistered Securities
There were no sales of unregistered securities in the fourth quarter of 2021.
Purchases of Equity Securities by the Issuer
Shares repurchased pursuant to the common equity repurchase program during the three months ended December 31, 2021,
were as follows.
(in thousands, expect share and per share information)
October
November
December
Total
Total shares of
common stock
purchased
Average price paid
per share of common
stock
Dollar value of
remaining authorized
for repurchase (1)
—
$
— $
20,000
374,320
—
374,320
$
51.17
—
51.17
847
847
(1) Stock repurchases in November were made pursuant to a Board authorized share repurchase program approved on October 28, 2021
pursuant to which the Company could purchase up to $20 million of its issued and outstanding common stock, no par value, at prevailing
market rates at the time of such purchase. On January 27, 2022, the Board authorized an addition to our share repurchase program of $75
million while eliminating the $0.8 million outstanding under the previous plan.
18
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and
shall not be deemed to be incorporated by reference into any filing of HomeStreet, Inc. under the Securities Act of 1933, as
amended, or the Exchange Act.
The following graph shows a comparison from December 31, 2016 through December 31, 2021 of the cumulative total return
for our common stock, the Russell 2000 Index (RUT) and the KBW Regional Banking Index ("KRX"). The graph assumes that
$100 was invested at the market close on December 31, 2016 in the common stock of HomeStreet, Inc., the Russell 2000 Index,
the KBW Regional Banking Index and data for HomeStreet, Inc., the Russell 2000 Index and the KBW Regional Banking
Index assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of
future stock price performance.
ITEM 6
Reserved.
19
ITEM 7
General
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management’s discussion and analysis of results of operations and financial condition ("MD&A") is intended to assist the
reader in understanding and assessing significant changes and trends related to the results of operations and financial position of
our consolidated Company. This discussion and analysis should be read in conjunction with the consolidated financial
statements and accompanying footnotes in Part II, Item 8 of Part II of this Annual Report on Form 10-K. A comparison of the
financial results for the year ended December 31, 2020 to the year ended December 31, 2019, is included in Part II, Item 7,
"Management Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K
for the year ended December 31, 2020.
Management's Overview of 2021 Financial Performance
Recent Developments
COVID-19 Pandemic
During 2021, the economy continued to generally improve with increased vaccination rates and business activity. However,
there still remains much uncertainty around containment of the pandemic and the trajectory of the broader economic recovery,
particularly in light of the spread of the Omicron variant that has caused the number of cases to increase in the United States.
We cannot predict at this time the scope and duration of the pandemic, which will depend on a variety of factors, including but
not limited to, the extent and spread of the Omicron variant and other variants of the virus; the availability, adoption and
efficacy of vaccines and vaccine booster shots, as well as government and other actions to mitigate the spread of COVID-19,
such as stay at home orders, vaccination and mask mandates, restrictions on business activities, health and safety guidelines,
economic relief for individuals and businesses, and monetary policy measures. The economic, market and business conditions
impacted by COVID-19 may be slow to recover or may worsen if the pandemic continues for a prolonged period of time. Even
if the pandemic subsides, there may be additional variants of the virus or a resurgence of the pandemic, as we have seen
domestically and internationally. We may be subject to heightened business, operational, market, credit and other risks related
to the COVID-19 pandemic environment, which may have an adverse effect on our business, financial condition and results of
operations. (See “Risk Factors” under Part I, Item 1A of this Annual Report).
Economic and Market Conditions
Inflationary pressures can adversely impact our operations by increasing our costs, including compensation costs which we
expect to be higher in 2022. Increases in market interest rates, resulting in part from increases in the Federal Reserve target
federal funds rate, can impact our operations by increasing the yields we receive on our loans and investments and increasing
the rates by pay on our deposits and borrowings. We attempt to maintain an interest-neutral balance sheet position so that our
results are not as impacted by changes in interest rates.
Other Items
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes
initially will accrue at a rate equal to 3.50% per annum from and including the date of original issuance to, but excluding,
January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable
quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering
expenses. The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of
its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other
general corporate purposes, including support for growth of its assets.
On January 27, 2022, the Board of Directors approved a $75 million expansion of the share repurchase program, subject to the
approval or nonobjection of our regulators and a dividend of $0.35 per common share. The dividend is payable on February 23,
2022 to shareholders of record at the close of business on February 9, 2022.
As part of our capital management strategy, in 2021, we repurchased a total of 1,873,294 shares of our common stock at an
average price of $44.92 per share, representing 8.6% of the shares outstanding at December 31, 2020.
20
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial
statements and the notes thereto, which have been prepared in accordance with generally accepted accounting principles in the
United States ("GAAP") and accounting practices in the banking industry. Certain of those accounting policies are considered
critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that
could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully
collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are
made based on current information available to us regarding those economic conditions or trends or other circumstances. If
changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, these
changes could have a material adverse effect on the carrying value of assets and liabilities and on our results of operations. We
have identified two policies and estimates as being critical because they require management to make particularly difficult,
subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially
different amounts would be reported under different conditions or using different assumptions. These policies relate to the
allowance for credit losses ("ACL") and the valuation of residential mortgage servicing rights ("MSR").
Our ACL is established through a provision for credit losses charged to expense and may be reduced by a recapture of
previously established loss reserves, which are also reflected in the income statement. Loans are charged-off against the ACL
when management believes that collectability of the principal is unlikely. The CECL model requires the ACL to cover
estimated credit losses expected over the life of an exposure. This evaluation takes into consideration such factors as current
economic projections, projected payment estimates, changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and certain other factors that may affect the borrower’s ability to pay. While we use
the best information available to make this evaluation, future adjustments to our ACL may be necessary if there are significant
changes in economic or other conditions that can affect the collectability of loans in our loan portfolio.
MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or purchased. For sales of
mortgage loans, the fair value of the MSR is estimated and capitalized. Purchased MSRs are capitalized at the cost to acquire.
Initial and subsequent fair value measurements are determined using a discounted cash flow model. To determine the fair value
of the MSR, the present value of expected net future cash flows is estimated. Assumptions used include market discount rates,
anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is
periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are
also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available.
We also utilize a third party valuation firm to value our MSRs on a periodic basis, the results of which we utilize as a baseline
for our valuation modeling. Actual market conditions could vary significantly from current conditions which could result in the
estimated life of the underlying loans being different which would change the fair value of the MSR. We carry our single family
residential mortgage servicing assets at fair value and report changes in fair value through earnings. MSRs for loans other than
single family loans are adjusted to fair value if the carrying value is higher than fair value and are amortized into noninterest
income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
21
Summary Financial Data
(dollars in thousands, except per share data and FTE data)
Select Income Statement data:
Net interest income
Provision for credit losses
Noninterest income
Noninterest expense
Income:
Before income taxes
Total
Income per share - diluted
Select Performance Ratios:
Return on average equity
Return on average tangible equity (1)
Return on average assets
Efficiency ratio (1)
Net interest margin
Other Data:
Full time equivalent employees
For the Years Ended December 31,
2021
2020
$
$
227,057
(15,000)
119,975
215,343
146,689
115,422
5.46
$
$
15.9 %
16.8 %
1.58 %
61.9 %
3.38 %
991
208,662
20,469
149,364
235,663
101,894
79,990
3.47
11.3 %
12.1 %
1.10 %
61.4 %
3.13 %
1,003
(1) Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation of return on average tangible equity to
the nearest comparable GAAP financial measure and the computation of the efficiency ratio, see “Non-GAAP Financial Measures” elsewhere in this
Management's Discussion and Analysis of Financial Condition and Results of Operations.
22
Summary Financial Data (continued)
(dollars in thousands, except share and per share data)
Selected Balance Sheet Data:
Loans held for sale ("LHFS")
Loans held for investment ("LHFI"), net
ACL
Investment securities
Total assets
Deposits
Borrowings
Long-term debt
Total shareholders' equity
Other data:
Book value per share
Tangible book value per share (1)
Total equity to total assets
Tangible common equity to tangible assets (1)
Shares outstanding at period end
Loans to deposits ratio
Credit quality:
ACL to total loans (2)
ACL to nonaccrual loans
Nonaccrual loans to total loans
Nonperforming assets to total assets
Nonperforming assets
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio
Total risk-based capital
Company
Tier 1 leverage ratio
Total risk-based capital
$
As of December 31,
2021
2020
$
176,131
5,495,726
47,123
1,006,691
7,204,091
6,146,509
41,000
126,026
715,339
35.61
34.04
9.9 %
9.5 %
361,932
5,179,886
64,294
1,076,364
7,237,091
5,821,559
322,800
125,838
717,750
32.93
31.42
9.9 %
9.5 %
20,085,336
21,796,904
93.0 %
0.88 %
386.2 %
0.22 %
0.18 %
96.3 %
1.33 %
310.3 %
0.40 %
0.31 %
$
12,936
$
22,097
10.11 %
13.77 %
9.94 %
12.66 %
9.79 %
14.76 %
9.65 %
14.00 %
(1) Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest
comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Managements' Discussion and Analysis of Financial
Condition and Results of Operations.
(2) The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including Paycheck
Protection Program ("PPP") loan balances.
23
Results of Operations
2021 Compared to 2020
General: Our net income and income before income taxes were $115.4 million and $146.7 million, respectively, in 2021, as
compared to $80.0 million and $101.9 million, respectively, in 2020. The $44.8 million increase in income before taxes was
due to higher net interest income, a lower provision for credit losses and lower noninterest expense, partially offset by lower
noninterest income.
Income Taxes: Our effective tax rate during 2021 was 21.3% as compared to 21.5% in 2020 and a statutory rate of 23.3%. Our
effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments.
Net Interest Income: The following table presents, for the periods indicated, information regarding (i) the total dollar amount of
interest income earned from interest-earning assets and the weighted average yields on those assets; (ii) the total dollar amount
of interest expense paid on interest-bearing liabilities and the weighted average costs of those liabilities; (iii) net interest
income; (iv) net interest rate spread; and (v) net yield on interest-earning assets:
(dollars in thousands)
Assets:
Interest-earning assets
Loans (1)
Investment securities (1)
FHLB Stock, Fed Funds and other
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities
Deposits: (2)
Demand deposits
Money market and savings
Certificates of deposit
Total deposits
Borrowings:
Borrowings
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing liabilities
Demand deposits (2)
Other liabilities
Total liabilities
Shareholders' equity
Total liabilities and shareholders’ equity
Net interest income
Net interest rate spread
Net yield on interest-earning assets
Years Ended December 31,
Average
Balance
2021
Interest
Average
Yield/Cost
Average
Balance
2020
Interest
Average
Yield/Cost
$ 5,653,930 $ 222,909
3.91 % $ 5,544,847 $ 229,813
1,020,530
96,303
24,262
569
2.38 % 1,086,415
0.59 %
63,443
24,507
1,227
6,770,763
247,740
3.63 % 6,694,705
255,547
4.10 %
2.26 %
1.90 %
3.78 %
547,742
$ 7,318,505
$ 525,836 $
2,996,757
1,048,218
4,570,811
109,513
125,925
4,806,249
1,596,653
189,801
6,592,703
725,802
$ 7,318,505
555,929
$ 7,250,634
0.14 % $ 435,830 $
929
0.15 % 2,661,996
0.59 % 1,245,513
726
4,449
6,236
11,411
0.25 % 4,343,339
394
5,433
17,238
0.36 %
604,278
4.30 %
125,737
0.36 % 5,073,354
1,276,780
194,340
6,544,474
706,160
$ 7,250,634
12,086
20,782
33,797
3,773
5,780
43,350
$ 230,502
$ 212,197
3.27 %
3.38 %
0.21 %
0.45 %
1.67 %
0.78 %
0.62 %
4.58 %
0.85 %
2.93 %
3.13 %
(1)
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $3.4 million and $3.5 million for 2021
and 2020, respectively. The estimated federal statutory tax rate was 21% for both 2021 and 2020.
(2) Cost of all deposits, including noninterest-bearing demand deposits, was 0.18% and 0.60% for 2021 and 2020, respectively.
24
Rate and Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the volume of our interest-earning
assets and interest-bearing liabilities have affected our interest income and interest expense, excluding interest income from
nonaccrual loans. Information is provided in each category with respect to: (1) changes attributable to changes in volume,
(2) changes attributable to changes in rate and (3) the net change.
(in thousands)
Assets:
Interest-earning assets
Loans
Investment securities
FHLB stock, Fed Funds and other
Total interest-earning assets
Liabilities:
Deposits
Demand deposits
Money market and savings
Certificates of deposit
Total interest-bearing deposits
Borrowings:
Borrowings
Long-term debt
Total interest-bearing liabilities
Total changes in net interest income
2021 vs. 2020
Increase (Decrease) Due to
Rate
Volume
Total Change
$
$
(11,113) $
1,283
(1,092)
(10,922)
(370)
(8,987)
(11,673)
(21,030)
(1,149)
(356)
(22,535)
11,613
$
4,209 $
(1,528)
434
3,115
167
1,350
(2,873)
(1,356)
(2,230)
9
(3,577)
6,692 $
(6,904)
(245)
(658)
(7,807)
(203)
(7,637)
(14,546)
(22,386)
(3,379)
(347)
(26,112)
18,305
Net interest income was higher in 2021 as compared to 2020 primarily due to an increase in our net interest margin from 3.13%
in the 2020 to 3.38% in 2021. The increase in our net interest margin was due to a 34 basis point increase in our net interest rate
spread as decreases in the rates paid on interest-bearing liabilities were greater than the decreases in yields on our interest-
earning assets. The 15 basis point decrease in yield on interest-earning assets was due to the origination of loans and purchases
of securities at current market rates which were below our portfolio rates, the repricing down of variable rate loans and the
prepayment and paydown of higher yielding loans and investments in our portfolios. Our cost of interest-bearing liabilities
decreased from 0.85% in 2020 to 0.36% in 2021 due to a decrease in market interest rates which allowed us to reprice our
deposits and borrowings at lower rates.
Provision for Credit Losses: As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming
assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $15.0 million
recovery of our allowance for credit losses in 2021. Due to adverse economic conditions related to the COVID-19 pandemic, in
2020, we recorded a $20.5 million provision for credit losses as an estimate of the potential adverse impact of those conditions
on our loan portfolio.
25
Noninterest income consisted of the following:
(in thousands)
Noninterest income
Gain on loan origination and sale activities (1)
Single family
CRE, multifamily and SBA
Loan servicing income
Deposit fees
Other
Total noninterest income
(1) Includes loans originated as held for investment.
Loan servicing income, a component of noninterest income, consisted of the following:
(in thousands)
Single family servicing income (loss), net:
Servicing fees and other
Changes - amortization (1)
Subtotal
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
Net gain (loss) from derivatives hedging
Subtotal
Total
Commercial loan servicing income:
Servicing fees and other
Amortization of capitalized MSRs
Total
Total loan servicing income
Years Ended December 31,
2021
2020
66,850 $
25,468
7,233
8,068
12,356
119,975 $
100,795
21,769
9,491
7,083
10,226
149,364
Years Ended December 31,
2021
2020
$
15,658
(19,669)
(4,011)
7,379
(8,238)
(859)
(4,870)
19,684
(7,581)
12,103
7,233
$
$
$
17,477
(17,754)
(277)
(19,955)
20,820
865
588
14,560
(5,657)
8,903
9,491
$
$
$
$
$
$
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest
rates.
The decrease in noninterest income for 2021 as compared to 2020 was due to decreases in gain on loan origination and sale
activities and loan servicing income, which was partially offset by higher deposit fees and higher other income. The $30.2
million decrease in gain on loan origination and sale activities was due to a $33.9 million decrease in single family gain on loan
origination and sale activities which was partially offset by a $3.7 million increase in CRE and commercial gain on loan
origination and sale activities. The decrease in single family gain on loan origination and sale activities was due primarily to a
30% decrease in rate locks. The increase in CRE and commercial gain on loan origination and sale activities was due to a 17%
increase in the realized gain on sale which was partially offset by a 15% decrease in the volume of loans sold. The $2.3 million
decrease in loan servicing income was due to a $5.5 million decrease in single family servicing income which was partially
offset by a $3.2 million increase in commercial loan servicing income. The decrease in single family servicing income was due
primarily to a decline in the servicing portfolio balance due to high levels of prepayments and a $1.7 million decrease in risk
management results. The increase in commercial loan servicing income was primarily due to higher levels of prepayment fees.
The higher deposit fees were due to higher demand deposit balances and increased customer activity levels. The $2.1 million
increase in other income was due to higher income from investments and a gain on sale of OREO realized in 2021.
26
Noninterest expense consisted of the following:
(in thousands)
Noninterest expense
Compensation and benefits
Information services
Occupancy
General, administrative and other
Total noninterest expense
Years Ended December 31,
2021
2020
$
$
132,015
27,913
23,832
31,583
215,343
$
$
136,826
30,004
35,323
33,510
235,663
The $20.3 million decrease in noninterest expense in 2021 as compared to 2020 was due to lower compensation and benefit
costs, information services expense, occupancy expense and general, administrative and other expenses. The $4.8 million
decrease in compensation and benefits expense is primarily due to lower levels of staffing. The $2.1 million decrease in
information services costs is primarily due to lower core processing costs related to a renegotiation of our contract which
became effective at the beginning of 2021. The occupancy expenses in 2020 included $10.2 million of impairments related to
ongoing restructuring of our facilities and staffing, with no similar charges in 2021. The remaining decrease in occupancy costs
relates to a reduction in leased space. The decrease in general, administrative and other costs was due to charges related to our
efficiency improvement initiatives incurred in 2020 and lower FDIC fees, which were partially offset by higher marketing costs
in 2021.
27
Review of Financial Condition – December 31, 2021 compared to December 31, 2020
During 2021, total assets decreased by $33 million due to decreases in investment securities and other assets, partially offset
by a $316 million increase in LHFI. LHFI increased due to $3.3 billion of originations, which were partially offset by
prepayments and scheduled payments of $2.6 billion and transfer of loans to LHFS of $393 million. The $282 million
decrease in borrowings reflects the reduced need of wholesale funding resulting from a $325 million increase in deposits. The
growth in deposits was due to new customers and increases in existing customer balances.
Investment Securities
The fair values of our investment securities available for sale ("AFS") are as follows:
(in thousands)
Investment securities AFS:
Mortgage-backed securities:
Residential
Commercial
Collateralized mortgage obligations:
Residential
Commercial
Municipal bonds
Corporate debt securities
U.S. Treasury securities
Agency debentures
Total
Loans
At December 31,
2021
Fair Value
2020
Fair Value
$
32,963 $
62,792
187,394
136,659
539,923
19,616
23,175
—
$
1,002,522 $
51,046
45,184
234,909
159,183
564,703
15,222
—
1,846
1,072,093
The following table details the composition of our LHFI portfolio by dollar amount:
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family (1)
Home equity and other
Total
Total LHFI
ACL
At December 31,
2021
2020
$
705,359 $
2,415,359
496,144
3,616,862
457,706
401,872
859,578
763,331
303,078
1,066,409
5,542,849
(47,123)
5,495,726 $
829,538
1,428,092
553,695
2,811,325
467,256
645,723
1,112,979
915,123
404,753
1,319,876
5,244,180
(64,294)
5,179,886
Total LHFI less ACL
$
(1)
Includes $7.3 million and $7.1 million of loans at December 31, 2021 and 2020, respectively, where a fair value option election was made at the time
of origination and; therefore, are carried at fair value with changes recognized in the consolidated income statements.
28
The following tables show the contractual maturity of our loan portfolio by loan type:
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total LHFI
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total LHFI
Loan Roll-forward
(in thousands)
Loans - beginning balance January 1,
Originations and advances
Transfers to LHFS
Payoffs, paydowns and other
Charge-offs and transfers to OREO
Loans - ending balance December 31,
December 31, 2021
After
one year
through
five years
After
five
years
Within one
year
Loans due after one year
by rate characteristic
Total
Fixed-
rate
Adjustable-
rate
$
21,514 $
17,826
418,649
457,989
150,110 $
50,693
77,495
278,298
533,735 $
705,359 $
2,346,840
—
2,880,575
2,415,359
496,144
3,616,862
87,050 $
5,028
31,654
123,732
596,795
2,392,505
45,841
3,035,141
11,481
77,268
88,749
94,284
184,279
278,563
351,941
140,325
492,266
457,706
401,872
859,578
120,047
120,077
240,124
326,178
204,527
530,705
206
33
239
546,977 $
$
503
34
537
762,622
303,011
1,065,633
763,331
303,078
1,066,409
557,398 $ 4,438,474 $ 5,542,849 $
444,369
318,756
296,136
6,909
740,505
325,665
689,521 $ 4,306,351
December 31, 2020
After
one year
through
five years
After
five
years
Within one
year
Loans due after one year
by rate characteristic
Total
Fixed-
rate
Adjustable-
rate
659,324 $
829,538 $
$
9,600 $
8,035
505,218
522,853
160,614 $
42,416
47,877
250,907
2,904
59,780
62,684
53,265
408,029
461,294
1,377,641
600
2,037,565
411,087
177,914
589,001
2,238
28
2,266
587,803 $
$
1,235
65
1,300
911,650
404,660
1,316,310
713,501 $ 3,942,876 $ 5,244,180 $
1,428,092
553,695
2,811,325
467,256
645,723
1,112,979
915,123
404,753
1,319,876
119,032 $
14,416
17,917
151,365
700,906
1,405,641
30,560
2,137,107
135,111
371,123
506,234
329,241
214,820
544,061
656,370
256,515
378,376
26,349
282,864
1,034,746
940,463 $ 3,715,914
2021
2020
$
$
5,244,180 $
3,279,593
(392,555)
(2,586,525)
(1,844)
5,542,849 $
5,114,556
2,846,270
(569,534)
(2,145,893)
(1,219)
5,244,180
29
Loan Originations and Advances
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total
Production Volumes for Sale to the Secondary Market
(in thousands)
Loan originations
Single family loans
Commercial and industrial and CRE loans
Loans sold
Single family loans
Commercial and industrial and CRE loans (1)
Net gain on loan origination and sale activities
Single family loans
Commercial and industrial and CRE loans (1)
Total
(1) May include loans originated as held for investment.
Years Ended December 31,
2021
2020
$
86,167 $
1,600,133
721,059
2,407,359
81,066
334,315
415,381
340,363
116,490
456,853
3,279,593 $
82,975
1,097,555
621,591
1,802,121
58,689
484,903
543,592
371,484
129,073
500,557
2,846,270
Years Ended December 31,
2021
2020
1,961,298 $
295,366
2,046,811
773,378
66,850
25,468
92,318 $
2,079,094
414,550
1,985,944
908,776
100,795
21,769
122,564
$
$
$
30
Capitalized Mortgage Servicing Rights ("MSRs")
(in thousands)
Single Family MSRs
Beginning balance
Additions and amortization:
Originations
Amortization (1)
Net additions and amortization
Change in fair value due to assumptions (2)
Ending balance
Ratio to related loans serviced for others
Multifamily and SBA MSRs
Beginning balance
Originations
Amortization
Ending balance
Ratio to related loans serviced for others
Years Ended December 31,
2021
2020
$
49,966
$
68,109
23,908
(19,669)
4,239
7,379
61,584
1.11 %
35,774
11,222
(7,581)
39,415
1.94 %
$
$
$
19,424
(17,754)
1,670
(19,813)
49,966
0.85 %
29,494
11,587
(5,307)
35,774
1.99 %
$
$
$
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage
interest rates.
31
Deposits
Deposit balances and weighted average rates were as follows for the periods indicated:
(in thousands)
Deposits by product:
Noninterest-bearing demand deposits
Interest-bearing transaction and savings deposits:
Interest-bearing demand deposits
Savings accounts
Money market accounts
Total interest-bearing transaction and savings deposits
Total transaction and savings deposits
Certificates of deposit
Noninterest-bearing accounts - other
Total
At December 31,
2021
2020
Amount
Weighted
Average Rate
Amount
Weighted
Average Rate
$
1,433,566
— % $
1,092,735
— %
513,810
302,389
2,806,313
3,622,512
5,056,078
906,928
183,503
6,146,509
$
0.10 %
0.06 %
0.15 %
0.08 %
0.51 %
— %
0.15 % $
484,265
264,024
2,596,453
3,344,742
4,437,477
1,139,807
244,275
5,821,559
0.10 %
0.07 %
0.21 %
0.10 %
0.93 %
— %
0.29 %
The following table presents the schedule of maturities of certificates of deposit as of December 31, 2021:
(in thousands)
Time deposits of $250,000 or less
Time deposits of $250,000 or more
Total
Three Months
or Less
Over Three
Months to
Twelve Months
Over One
Year through
Three Years
Over Three
Years
Total
$
$
207,025 $
28,650
235,675 $
428,470 $
54,693
483,163 $
157,676 $
23,831
181,507 $
5,912 $
671
6,583 $
799,083
107,845
906,928
32
Credit Risk Management: Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
As of December 31, 2021, our ratio of nonperforming assets to total assets remained low at 0.18% while our ratio of total
loans delinquent over 30 days to total loans was 0.38%. The Company recorded a recovery of our allowance for credit losses
of $15.0 million in 2021, and the ACL for loans decreased by $17.2 million, as a result of the favorable performance of our
loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on
our loan portfolio.
Delinquent loans by loan type consisted of the following:
Past Due and Still Accruing
At December 31, 2021
30-59 days
60-89 days
90 days or
more
Nonaccrual
Total past
due and
nonaccrual (3)
Current
Total loans
(in thousands)
CRE
Non- owner occupied CRE
$
Multifamily
Construction and land
development
Multifamily construction
CRE construction
Single family construction
Single family construction to
permanent
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total loans
%
$
—
—
—
—
—
—
—
—
198
198
892
118
—
—
—
—
—
—
—
—
—
—
820
74
894
894
$
—
—
—
—
—
—
—
—
—
—
6,717
(2)
—
6,717
$
—
—
—
—
—
—
—
3,568
5,023
8,591
2,802
808
3,610
$
—
—
—
—
—
—
—
$ 705,359
$ 705,359
2,415,359
2,415,359
37,861
14,172
37,861
14,172
296,027
296,027
148,084
148,084
3,616,862
3,616,862
3,568
5,221
8,789
11,231
1,000
454,138
396,651
850,789
752,100
302,078
457,706
401,872
859,578
(1)
763,331
303,078
12,231
1,054,178
1,066,409
$ 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 %
1,010
$ 1,208
$
(1) Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with
changes recognized in our consolidated income statements.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have
little to no risk of loss.
(3) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million.
33
Past Due and Still Accruing
At December 31, 2020
30-59 days
60-89 days
90 days or
more
Nonaccrual
Total past
due and
nonaccrual (3)
Current
Total loans
(in thousands)
CRE
$
—
$
—
—
—
—
—
—
—
—
—
—
Non- owner occupied CRE
$
Multifamily
Construction and land
development
Multifamily construction
CRE construction
Single family construction
Single family construction to
permanent
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total loans
%
—
—
—
—
—
—
—
418
135
553
553
2,161
228
2,389
$ 2,389
$
11,476
(2)
—
11,476
$ 11,476
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
4,922
9,183
14,105
4,883
1,734
6,617
$
—
—
—
—
—
—
—
$ 829,538
$ 829,538
1,428,092
1,428,092
115,329
27,285
259,170
115,329
27,285
259,170
151,911
151,911
2,811,325
2,811,325
4,922
9,183
462,334
636,540
467,256
645,723
14,105
1,098,874
1,112,979
18,938
2,097
896,185
402,656
915,123
(1)
404,753
21,035
1,298,841
1,319,876
$ 20,722
$
35,140
$ 5,209,040
$ 5,244,180
0.05 %
0.01 %
0.22 %
0.40 %
0.67 %
99.33 %
100.00 %
(1)
Includes $7.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with
changes recognized in our consolidated income statements.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have
little to no risk of loss.
Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $14.7 million.
(3)
As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of
these forbearances as of December 31, 2021 is as follows:
(in thousands)
Loan type:
Commercial and CRE
Commercial business
CRE owner occupied
CRE nonowner occupied
Total
Single family and consumer (1)
Single family
Home equity and other
Total
Forbearances Approved (2)
Total
Expired
Outstanding
Number of
loans
Amount
Number of
loans
Amount
Number of
loans
Amount
100 $
26
51,674
65,984
59,327
14
140 $ 176,985
100 $
26
51,674
65,984
45,289
13
139 $ 162,947
— $
—
1
1 $
—
—
14,038
14,038
24 $
12,068
16
40 $
1,898
13,966
(1) Does not include any single family loans that are guaranteed by Ginnie Mae.
(2) Does not include constructions loans that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up
periods. Each of these loans continued to perform under the existing or modified payment terms. At December 31, 2021, two of these loans with $2
million in balances were still operating under the terms of their modifications.
34
The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a
period of three months while the forbearances for single family, home equity and consumer loans were generally for a
period of three to six months. As of December 31, 2021, excluding the loans with forbearances still in place, 99% of the
commercial and CRE loans approved for a forbearance have completed their forbearance period and have resumed
payments. The forbearance periods for the majority of single family and consumer loans that were not completed as of
December 31, 2021 are scheduled to be completed in the first quarter of 2022.
The following table presents the ACL by product type at the dates indicated:
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Multifamily construction
CRE construction
Single family construction
Single family construction to permanent
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total ACL
December 31, 2021
December 31, 2020
Amount
Rate (1)
Amount
Rate (1)
$
7,509
5,854
507
150
6,411
1,055
21,486
5,006
12,273
17,279
4,394
3,964
8,358
$
47,123
1.06 % $
0.24 %
1.34 %
1.06 %
2.16 %
0.71 %
0.59 %
1.10 %
3.39 %
2.11 %
0.68 %
1.31 %
0.88 %
0.88 % $
8,845
6,072
4,903
1,670
5,130
1,315
27,935
4,994
17,043
22,037
6,906
7,416
14,322
64,294
1.07 %
0.43 %
4.25 %
6.12 %
1.98 %
0.87 %
0.99 %
1.08 %
4.72 %
2.67 %
0.85 %
1.83 %
1.18 %
1.33 %
(1) The rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.
35
Liquidity and Sources of Funds
Liquidity risk management is primarily intended to ensure we are able to maintain sources of cash to adequately fund operations
and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and
cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the
composition of the balance sheet and risk tolerance levels. The Company has established liquidity guidelines and operating
plans that detail the sources and uses of cash and liquidity.
The Company's primary sources of liquidity include deposits, loan payments and investment securities payments, both principal
and interest, borrowings, and proceeds from the sale of loans and investment securities. Borrowings include advances from the
FHLB, federal funds purchased and borrowing from other financial institutions. Additionally, the Company may sell stock or
issue long-term debt to raise funds. While scheduled principal repayments on loans and investment securities are a relatively
predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly
influenced by interest rates, economic conditions and competition.
The Company’s contractual cash flow obligations include the maturity of certificates of deposit, short term and long term
borrowings, interest on certificates of deposit and borrowings, operating leases and fees for information technology related
services and professional services. Obligations for certificates of deposit and short term borrowings are typically satisfied
through the renewal of these instruments or the generation of new deposits or use of available short term borrowings. Interest
payments and obligations related to leases and services are typically met by cash generated from our operations. The Company
does not have any obligation to repay long term debt within the next four years.
At December 31, 2021, the Bank had available borrowing capacity of $1.8 billion from the FHLB, $274 million from the
FRBSF and $1.0 billion under borrowing lines established with other financial institutions. We believe that our current
unrestricted cash and cash equivalents, cash flows from operations and borrowing capacity will be sufficient to meet our
liquidity needs for at least the next 12 months. We are currently not aware of any other trends or demands, commitments, events
or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material
way that will impact our liquidity needs during or beyond the next 12 months.
Cash Flows
For 2021 and 2020, cash and cash equivalents increased $7.2 million and $0.2 million, respectively. As a banking institution,
the Company has extensive access to liquidity. As excess liquidity can reduce the Company’s earnings and returns, the
Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of
cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows
during these periods.
Cash flows from operating activities
The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of
mortgage loans. For 2021, $173 million of cash was provided by operating activities, primarily from cash proceeds from the
sale of loans exceeding cash used to fund LHFS. For 2020, cash of $26 million was used in operating activities, primarily to
fund an increase in our LHFS which was partially offset by cash generated from our operations.
Cash flows from investing activities
The Company's investing activities are primarily related to investment securities and LHFI. For 2021, cash of $126 million was
used in investing activities for the origination of LHFI and the purchase of investment securities, partially offset by principal
repayments and the proceeds from the sale of LHFI and investment securities. For 2020, cash of $233 million was used in
investing activities for the origination of LHFI and the purchase of investment securities, which were partially offset by
principal payments and the proceeds from sale of LHFI and investment securities.
36
Cash flows from financing activities
The Company's financing activities are primarily related to deposits, net proceeds from borrowings and equity transactions. For
2021, cash of $40 million was used in financing activities from net repayment of short-term borrowings, repurchases of and
dividends paid on our common stock, partially offset by growth in deposits. For 2020, cash of $258 million as provided by
financing activities from growth in deposits, which was partially offset by net repayment of short-term borrowings, repurchases
of our common stock and the payment of dividends on our common stock.
Capital Resources and Dividends
The capital rules applicable to United States based bank holding companies and federally insured depository institutions
("Capital Rules") require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital
adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to
their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt
corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories
on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly
undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine
that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the
one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater
operating restrictions and increased regulatory supervision by its federal bank regulatory agency.
The following tables set forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank
as of the dates indicated below, as compared to the respective regulatory requirements applicable to them:
At December 31, 2021
Actual
For Minimum Capital
Adequacy Purposes
To Be Categorized As
"Well Capitalized"
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
HomeStreet Bank
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
$ 723,232
9.94 % $ 291,098
663,232
723,232
774,695
10.84 %
275,281
11.82 %
367,041
12.66 %
489,388
4.0 %
4.5 %
6.0 %
8.0 %
NA
NA
NA
NA
NA
NA
NA
NA
$ 727,753
10.11 % $ 287,990
4.0 % $ 359,988
5.0 %
727,753
727,753
778,723
12.87 %
254,442
4.5 %
367,527
12.87 %
339,256
6.0 %
452,341
13.77 %
452,341
8.0 %
565,426
6.5 %
8.0 %
10.0 %
37
At December 31, 2020
Actual
For Minimum Capital
Adequacy Purposes
To Be Categorized As
"Well Capitalized"
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
HomeStreet Bank
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
$ 709,655
9.65 % $ 294,211
649,655
709,655
779,254
11.67 %
12.75 %
14.00 %
250,537
334,050
445,400
4.0 %
4.5 %
6.0 %
8.0 %
NA
NA
NA
NA
NA
NA
NA
NA
$ 712,533
9.79 % $ 291,114
4.0 % $ 363,893
5.0 %
712,533
712,533
778,479
13.51 %
237,307
4.5 %
342,777
13.51 %
316,410
6.0 %
421,880
14.76 %
421,880
8.0 %
527,350
6.5 %
8.0 %
10.0 %
At each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and
the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the
prompt corrective action regulations. In addition to the minimum capital ratios, both the Company and the Bank are required to
maintain a "conservation buffer" consisting of additional Common Equity Tier 1 Capital which is at least 2.5% above the
required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’
additional capital conservation buffer, though each of the Company and the Bank maintained capital ratios necessary to satisfy
the capital conservation buffer requirements as of the dates indicated. At December 31, 2021, capital conservation buffers for
the Company and the Bank were 4.66% and 5.77%, respectively.
The Company paid a quarterly cash dividend of $0.25 per common share in each of the four quarters of 2021. It is our current
intention to continue to pay quarterly dividends and the Company has declared a cash dividend of $0.35 per common share
payable on February 23, 2022. The amount and declaration of future cash dividends are subject to approval by our Board of
Directors and certain statutory requirements and regulatory restrictions.
We had no material commitments for capital expenditures as of December 31, 2021. However, we intend to take advantage of
opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring
complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to
obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these
purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling
additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and
other factors outside of our control, as well as our future results of operations.
Accounting Developments
See Financial Statements and Supplementary Data - Note 1, Summary of Significant Accounting Policies for a discussion of
accounting developments.
38
Non-GAAP Financial Measures
To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain
non-GAAP measures of financial performance.
In this annual report on Form 10-K, we use (i) tangible common equity and tangible assets as we believe this information is
consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios;
and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income,
excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes
are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results
to those companies whose operations are in states where assessed taxes on business are classified as income taxes. For the
purposes of computing returns on tangible common equity, we exclude from earnings the amortization of intangible assets.
These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided
by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP.
Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes
amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in
accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other
applicable requirement.
We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures,
provide meaningful supplemental information regarding our performance by providing additional information used by
management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that
investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning,
forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance
to prior periods. We believe these measures are frequently used by securities analysts, investors and other interested parties in
the evaluation of companies in our industry. However, these non-GAAP financial measures should be considered in addition to,
not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have
provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used
in this annual report on Form 10-K, or a reconciliation of the non-GAAP calculation of the financial measure.
39
Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
(in thousands, except ratio)
Return on average tangible equity (annualized)
Average shareholders' equity
Less: Average goodwill and other intangibles
Average tangible equity
Net income
Adjustments (tax effected):
Amortization on core deposit intangibles
Tangible income applicable to shareholders
Ratio
Efficiency ratio
Noninterest expense
Total
Adjustments:
Restructuring related charges
Legal fees recovery
Prepayment fee on FHLB advances
State of Washington taxes
Adjusted total
Total revenues
Net interest income
Noninterest income
Adjustments:
Contingent payout
Adjusted total
Ratio
(in thousands, except share data)
Tangible book value per share
Shareholders' equity
Less: goodwill and other intangibles
Tangible shareholder's equity
Common shares outstanding
Computed amount
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
Tangible assets
Total assets
Less: Goodwill and other intangibles
Net
Ratio
For the Year Ended
2021
2020
$
725,802
(32,337)
693,465
115,422
$
923
116,345
$
706,160
(33,613)
672,547
79,990
1,082
81,072
16.8 %
12.1 %
215,343
$
235,663
—
1,900
—
(2,423)
214,820
$
227,057
$
119,975
—
347,032
$
(11,837)
—
(1,492)
(2,920)
219,414
208,662
149,364
(566)
357,460
61.9 %
61.4 %
December 31, 2021
December 31, 2020
As of
715,339
(31,709)
683,630
$
$
717,750
(32,880)
684,870
20,085,336
21,796,904
34.04
$
31.42
683,630
7,204,091
(31,709)
7,172,382
$
$
$
684,870
7,237,091
(32,880)
7,204,211
9.5 %
9.5 %
$
$
$
$
$
$
$
$
$
$
$
$
$
40
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign
currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks to which we are
exposed are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from
changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk
is defined as risk to current or anticipated earnings or capital arising from movements in interest rates.
For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes loans,
mortgage servicing rights, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due
to the nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate
loan portfolio is subject to risks associated with the local economies of our various markets and, in particular, the regional
economy of the western United States, including Hawaii.
The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts
of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates (interest rate risk)
are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship
between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive
risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return.
The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.
We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model
that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of
prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in
our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their
repricing characteristics during the periods of changes in market interest rates. Effective interest rate risk management seeks to
ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of
interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate
sensitivity gaps.
41
The following table presents sensitivity gaps for these different intervals.
3 Mos.
or Less
More Than
3 Mos.
to 6 Mos.
More Than
6 Mos.
to 12 Mos.
More Than
12 Mos.
to 3 Yrs.
More Than
3 Yrs.
to 5 Yrs.
More Than
5 to 15 Yrs.
More Than
15 Yrs.
Non-Rate-
Sensitive
Total
December 31, 2021
(dollars in thousands)
Interest-earning assets
Cash & cash
equivalents
$
65,214
$
FHLB Stock
Investment securities (1)
LHFS
LHFI1)
1,733
126,141
176,131
$
—
—
$
—
—
$
—
—
$
—
—
—
—
8,628
$
—
$
— $
65,214
16,768
41,320
118,437
125,501
450,335
128,189
—
—
—
—
—
—
—
—
—
10,361
1,006,691
176,131
1,254,743
623,888
496,227
1,145,132
1,178,980
824,525
19,354
—
5,542,849
Total
1,623,962
640,656
537,547
1,263,569
1,304,481
1,274,860
156,171
—
6,801,246
Noninterest-earning
assets
—
—
—
—
—
—
—
402,845
402,845
Total assets
$ 1,623,962
$ 640,656
$ 537,547
$ 1,263,569
$ 1,304,481
$ 1,274,860
$ 156,171
$ 402,845 $ 7,204,091
Interest-bearing liabilities
Demand deposit
accounts (2)
$ 513,810
$
Savings accounts (2)
Money market
accounts (2)
302,389
2,806,313
$
—
—
—
$
—
—
—
$
—
—
—
$
—
—
—
Certificates of deposit
235,675
181,599
301,564
181,507
6,583
FHLB advances
Borrowings
Long-term debt (3)
41,000
—
61,026
—
—
—
—
—
—
—
—
—
—
—
65,000
Total
3,960,213
181,599
301,564
181,507
71,583
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $ 513,810
—
302,389
—
2,806,313
—
—
—
—
906,928
41,000
—
126,026
—
4,696,466
1,792,286
1,792,286
715,339
715,339
$ 3,960,213
$ 181,599
$ 301,564
$ 181,507
$ 71,583
$
—
$
—
$ 2,507,625 $ 7,204,091
$ (2,336,251)
$ 459,057
$ 235,983
$ 1,082,062
$ 1,232,898
$ 1,274,860
$ 156,171
Noninterest-bearing
liabilities
Shareholders' Equity
Total liabilities and
shareholders’ equity
Interest sensitivity
gap
Cumulative interest rate sensitivity gap
Total
$ (2,336,251)
$ (1,877,194) $ (1,641,211)
$ (559,149)
$ 673,749
$ 1,948,609
$ 2,104,780
As a % of total assets
(32) %
(26) %
(23) %
(8) %
9 %
27 %
29 %
As a % of cumulative
interest-bearing
liabilities
41 %
55 %
63 %
88 %
114 %
141 %
145 %
(1)
(2)
(3)
Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.
Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.
Based on contractual maturity.
As of December 31, 2021, the Company is considered liability-sensitive as exhibited by the gap table but our net interest
income sensitivity analysis shows positive results in the increasing interest rate scenarios. This is because of the impact of our
historical deposit repricing betas which result in an assumed delay in repricing of deposits in an increasing interest rate scenario
and a lower magnitude of repricing compared to the repricing of loans and other interest-earning assets. Net interest income
would be expected to rise in the long term if interest rates were to rise due to the Bank’s cumulative asset-sensitive position.
Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest
margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding
42
liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby
impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create
unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis.
These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity
gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.
The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of
December 31, 2021 and 2020 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an
instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.
Change in Interest Rates
(basis points) (1)
December 31, 2021
December 31, 2020
Percentage Change
Net Interest Income (2)
Net Portfolio Value (3)
Net Interest Income (2)
Net Portfolio Value (3)
+200
+100
-100
-200
7.8 %
3.5 %
(1.3) %
(2.5) %
(5.0) %
(2.8) %
1.9 %
(4.9) %
3.5 %
1.2
(3.8)
(4.7) %
(9.3) %
(4.3) %
(3.7) %
(5.7) %
(1) For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a
low rate environment like the one we are currently experiencing.
(2) This percentage change represents the impact to net interest income for a one-year period, assuming there is no change in the structure of the balance
sheet.
(3) This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.
At December 31, 2021 and 2020 we believe our net interest income sensitivity did not exhibit a strong bias to either an increase
in interest rates or a decline in interest rates. The changes in interest rate sensitivity between December 31, 2021 and 2020
reflected the impact of higher market interest rates, a steeper yield curve and changes to overall balance sheet composition.
Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will
occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios
may result in negative rates that may cause the modeling results to be inherently unreliable. In addition, the simulation model
does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest
rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.
43
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of HomeStreet, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HomeStreet, Inc. and subsidiaries (the "Company") as of
December 31, 2021 and 2020, and the related consolidated income statements, statements of comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 4, 2022, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate.
Allowance for Credit Losses for Loans Held for Investment — Economic Values and Management Overlay Qualitative
Factors — Refer to Notes 1 and 3 to the financial statements
Critical Audit Matter Description
The Company accounts for its allowance for credit losses (“ACL”) for loans held for investment in accordance with Accounting
Standards Update No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments, which requires the measurement of the current expected credit losses for financial assets held at the reporting date.
The ACL is a valuation account that is deducted from the amortized cost basis to present the net amount expected to be
collected on the loans. Management estimates the ACL balance using relevant available information from internal and external
sources relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses.
The Company's ACL model uses statistical analysis to determine life of loan default rates for the quantitative component and
analyzes qualitative factors (Q-Factors) that assess the current loan portfolio and forecasted economic environment and
management overlay values. The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are
44
not provided for in the historical loss information. The significant qualitative adjustments relate to the economic and
management overlay values Q-Factors.
We identified the estimate of the current conditions and reasonable and supportable forecast within the economic value Q-
Factor and the estimate of the management overlay Q-Factor as a critical audit matter because of the significant judgment
applied by management in determining the respective qualitative adjustments. Auditing the Company’s qualitative adjustments
for economic and management overlay Q-Factors required a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the portion of the ACL attributable to the economic and management overlay Q-Factors
included the following:
• We tested the effectiveness of controls over Q-Factor adjustments within the ACL model, including management’s
review of the economic and management overlay value Q-Factors.
• We assessed the appropriateness of the framework for the Q-Factor adjustments.
• We tested the mathematical accuracy of Q-Factor adjustments within the ACL model.
• We evaluated management’s forecasts used in its qualitative adjustments by comparing the forecasts to relevant
external data.
• We tested management’s process to evaluate the relationship between changes in economic and management overlay
value data and historical credit losses and to determine qualitative adjustments attributable to the economic and
management overlay Q-Factors by evaluating whether, and to what extent, the current and forecasted conditions
warranted a qualitative adjustment.
Single Family Mortgage Servicing Rights (“MSRs”) — Projected Prepayment Speed and Discount Rate Assumptions —
Refer to Notes 1, 9, and 14 to the financial statements
Critical Audit Matter Description
The Company initially records, and subsequently measures, single family MSRs at fair value and categorizes its single family
MSRs as “Level 3” financial instruments. Management uses a valuation model that calculates the present value of estimated
future net servicing cash flows to estimate the fair value of single family MSRs. Changes in the fair value of single family
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 estimate the fair value of
single family MSRs include assumptions regarding projected prepayment speeds and discount rates. The Company's
methodology for estimating the fair value of single family MSRs is highly sensitive to changes in these assumptions.
We identified the prepayment speed and discount rate assumptions used in the single family MSRs valuation as a critical audit
matter because of the significant judgment applied by management in determining these assumptions. Auditing the Company’s
single family MSRs valuation required a high degree of auditor judgment and an increased extent of effort, including the need
to involve our fair value specialists to evaluate the reasonableness of management’s assumptions related to the selection of
prepayment speeds and discount rates used in the valuation of the single family MSRs.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the reasonableness of prepayment speed and discount rate assumptions used in the valuation of
the single family MSRs included the following:
• We tested the effectiveness of controls over the fair value of single family MSRs, including controls over
management’s review of the prepayment speeds and discount rates.
• We compared management’s estimate of fair value for selected pools of single family MSRs to a fair value estimate
independently determined by our fair value specialists using prepayment speeds and discount rates obtained from
market survey data.
• We compared management’s single-family MSR fair value estimate and prepayment speed and discount rate
assumptions to a third-party valuation report for the same portfolio.
• We performed analytical procedures to compare changes in certain interest and mortgage rates to changes in single
family MSR values and prepayment speeds.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 4, 2022
We have served as the Company’s auditor since 2013.
45
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Cash and cash equivalents
Investment securities
ASSETS
Loans held for sale ("LHFS")
Loans held for investment ("LHFI") (net of allowance for credit losses of $47,123 and $64,294)
Mortgage servicing rights ("MSRs")
Premises and equipment, net
Other real estate owned ("OREO")
Goodwill and other intangible assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Borrowings
Long-term debt
Accounts payable and other liabilities
Total liabilities
Commitments and contingencies (Note 10)
Shareholders' equity:
Common stock, no par value, authorized 160,000,000 shares; issued and outstanding, 20,085,336
shares and 21,796,904 shares
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
At December 31,
2021
2020
$
65,214 $
58,049
1,006,691
176,131
5,495,726
100,999
58,154
735
31,709
268,732
1,076,364
361,932
5,179,886
85,740
65,102
1,375
32,880
375,763
$
7,204,091 $
7,237,091
$
6,146,509 $
41,000
126,026
175,217
6,488,752
5,821,559
322,800
125,838
249,144
6,519,341
249,856
444,343
21,140
715,339
278,505
403,888
35,357
717,750
Total liabilities and shareholders' equity
$
7,204,091 $
7,237,091
See accompanying notes to consolidated financial statements.
46
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands, except share and per share data)
Years Ended December 31,
2021
2020
2019
Interest income:
Loans
Investment securities
Cash, Fed Funds and other
Total interest income
Interest expense:
Deposits
Borrowings
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Net gain on loan origination and sale activities
Loan servicing income
Deposit fees
Other
Total noninterest income
Noninterest expense:
Compensation and benefits
Information services
Occupancy
General, administrative and other
Total noninterest expense
Income from continuing operations before income taxes
Income taxes for continuing operations
Income from continuing operations
Loss from discontinued operations before income taxes
Income tax benefit for discontinued operations
Loss from discontinued operations
Net income
Net income (loss) per share
Basic:
Income from continuing operations
Loss from discontinued operations
Total
Diluted:
Income from continuing operations
Loss from discontinued operations
Total
Weighted average shares outstanding:
Basic
Diluted
$
222,166 $
21,560
569
244,295
228,999 $
21,786
1,227
252,012
11,411
5,827
17,238
227,057
(15,000)
242,057
92,318
7,233
8,068
12,356
119,975
132,015
27,913
23,832
31,583
215,343
146,689
31,267
115,422
—
33,797
9,553
43,350
208,662
20,469
188,193
122,564
9,491
7,083
10,226
149,364
136,826
30,004
35,323
33,510
235,663
101,894
21,904
79,990
—
—
—
115,422 $
—
—
79,990 $
5.53 $
—
5.53 $
5.46 $
—
5.46 $
3.50 $
—
3.50 $
3.47 $
—
3.47 $
$
$
$
$
$
256,043
20,531
1,032
277,606
70,389
17,827
88,216
189,390
(500)
189,890
44,122
9,785
7,926
12,599
74,432
124,354
31,603
27,119
32,538
215,614
48,708
7,988
40,720
(28,285)
(5,077)
(23,208)
17,512
1.57
(0.91)
0.66
1.55
(0.90)
0.65
20,885,509
21,143,414
22,867,268
23,076,822
25,573,488
25,770,783
See accompanying notes to consolidated financial statements.
47
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
Years Ended December 31,
2021
2020
2019
$
115,422 $
79,990 $
17,512
Unrealized gain (loss) on investment securities available for sale ("AFS")
Reclassification for net (gains) losses included in income
Other comprehensive income (loss) before tax
Income tax impact of:
Unrealized gain (loss) on investment securities AFS
Reclassification for net (gains) losses included in income
Total
Other comprehensive income (loss)
(17,934)
(62)
(17,996)
(3,766)
(13)
(3,779)
(14,217)
39,627
(341)
39,286
8,322
(72)
8,250
31,036
Total comprehensive income
$
101,205 $
111,026 $
27,490
7
27,497
5,656
1
5,657
21,840
39,352
See accompanying notes to consolidated financial statements.
48
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Number
of shares
Common
stock
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
temporary
equity
Total
permanent
equity
Balance, December 31, 2018
26,995,348 $ 342,950 $ 412,009 $
(15,439) $
— $ 739,520
Net income
Share-based compensation expense
Common stock issued - Option exercise; stock
grants
Cumulative effect of adoption of new
accounting standards
Other comprehensive income
—
—
104,080
—
—
—
(163)
105
—
—
17,512
—
—
1,532
—
—
—
—
(2,080)
21,840
—
—
—
—
—
17,512
(163)
105
(548)
21,840
Common stock repurchased
(3,208,573)
(20,287)
(25,521)
Reclassification to temporary equity
—
(21,876)
(30,859)
—
—
(52,735)
(98,543)
52,735
—
Balance, December 31, 2019
23,890,855
300,729
374,673
4,321
Net income
Share-based compensation expense
Common stock issued - Option exercise; stock
grants
Cumulative effect of adoption of new
accounting standards
Other comprehensive income
Dividends declared ($0.60 per share)
—
—
—
79,990
2,693
140,386
782
—
—
—
—
—
—
—
31,036
Common stock repurchased
(2,234,337)
(25,699)
(33,170)
Balance, December 31, 2020
21,796,904
278,505
403,888
35,357
Net income
Share-based compensation expense
Common stock issued - Option exercise; stock
grants
Other comprehensive income (loss)
Dividends declared ($1.00 per share)
—
—
—
115,422
3,398
260,267
2,418
—
—
—
—
Common stock repurchased
(1,971,835)
(34,465)
(53,629)
—
—
(3,740)
(13,865)
—
—
—
(21,338)
—
—
—
—
—
—
—
—
—
(14,217)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
679,723
79,990
2,693
782
(3,740)
31,036
(13,865)
(58,869)
717,750
115,422
3,398
2,418
(14,217)
(21,338)
(88,094)
Balance, December 31, 2021
20,085,336 $ 249,856 $ 444,343 $
21,140 $
— $ 715,339
See accompanying notes to consolidated financial statements.
49
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Years Ended December 31,
2021
2020
2019
$
115,422 $
79,990 $
17,512
Provision for credit losses
Depreciation and amortization, premises and equipment
Amortization of premiums and discounts: securities, deposits, debt
Operating leases: excess of payments over amortization
Amortization of finance leases
Amortization of core deposit intangibles
Amortization of deferred loan fees and costs
Share-based compensation expense
Lease impairment costs
Deferred income tax expense (benefit)
Loss on debt extinguishment
Origination of LHFS
Proceeds from sale of LHFS
Net fair value adjustment and gain on sale of LHFS
Origination of MSRs
Net gain on sale of loans originated as LHFI
Change in fair value of MSRs
Amortization of servicing rights
Gain on sale of MSRs
(Increase) decrease in other assets
Increase (decrease) in accounts payable and other liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
Proceeds from sale of investment securities
Principal payments on investment securities
Proceeds from sale of OREO
Proceeds from sale of loans originated as LHFI
Purchase of LHFI
Proceeds from sale of MSRs
Net cash provided by disposal of discontinued operations
Net increase in LHFI
Proceeds from sale of premises and equipment
Purchases of premises and equipment
Net cash used for acquisitions
Proceeds from sale of Federal Home Loan Bank stock
Purchases of Federal Home Loan Bank stock
Net cash provided by (used in) investing activities
(15,000)
9,908
6,002
(4,029)
1,066
1,171
(8,569)
3,398
—
7,884
—
(2,251,090)
2,379,116
(42,358)
(34,445)
(11,377)
12,290
7,581
—
(5,796)
1,861
173,035
20,469
9,438
9,013
(3,488)
1,277
1,372
1,195
2,693
10,873
(10,065)
1,492
(2,453,110)
2,407,287
(81,439)
(31,012)
(6,895)
37,567
5,657
—
(39,069)
11,210
(25,545)
(500)
10,769
7,655
(2,597)
2,029
1,636
1,643
(163)
16,619
(29,903)
—
(3,757,549)
4,097,511
(78,994)
(34,606)
(9,534)
35,902
5,214
(6,206)
14,939
(32,547)
258,830
(179,398)
(373,264)
(330,532)
28,187
197,253
541
504,584
—
—
—
(683,822)
—
(2,941)
—
109,484
(99,526)
(125,638)
62,378
208,610
650
576,388
(20,124)
—
2,800
(690,302)
1,460
(3,298)
—
145,801
(143,721)
(232,622)
184,871
145,771
1,138
769,354
—
3,255
182,189
(822,474)
—
(2,257)
(47,389)
161,254
(138,156)
107,024
50
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net
Changes in short-term borrowings, net
Proceeds from other long-term borrowings
Repayment of other long-term borrowings
Repayment of finance lease principal
Repurchases of common stock
Proceeds from exercise of stock options
Dividends paid on common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
Federal and state income taxes
Non-cash activities:
LHFI foreclosed and transferred to OREO
Loans transferred from LHFI to LHFS, net
Ginnie Mae loans recognized with the right to repurchase, net
Ginnie Mae loans derecognized with the right to repurchase, net
Repurchase of common stock - award shares
Receivable from sale of MSRs
Acquisition:
Assets acquired
Liabilities assumed
Goodwill
Years Ended December 31,
2021
2020
2019
$
347,867 $
481,464 $
213,572
(281,800)
(143,200)
(424,000)
50,000
(50,000)
(1,070)
(84,154)
263
(21,338)
(40,232)
7,165
58,049
—
(7,082)
(1,209)
(58,009)
237
(13,865)
258,336
169
57,880
$
65,214 $
58,049 $
$
17,303 $
44,466 $
34,429
20,992
—
392,555
—
89,408
3,940
—
—
—
—
370
569,534
92,366
—
860
—
—
—
—
—
(56,000)
(1,694)
(98,543)
105
—
(366,560)
(706)
58,586
57,880
93,325
33,625
915
907,778
—
28,281
—
2,117
116,402
74,941
5,928
See accompanying notes to consolidated financial statements.
51
HomeStreet, Inc. and Subsidiaries
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 and Union Street Holdings LLC. The Company is principally engaged in commercial
banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States.
The Bank, the Company’s principal operating subsidiary, is engaged in commercial banking, mortgage banking and consumer/
retail banking activities. The Bank was incorporated in the State of Washington in 1986, and as a state-chartered non-member
commercial bank is subject to examination by the State of Washington Department of Financial Institutions and the Federal
Deposit Insurance Corporation ("FDIC").
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in
consolidation. The Company allocates resources and assesses financial performance on a consolidated basis and therefore has
one reporting segment. In preparing the consolidated financial statements, management is required to make estimates and
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.
Discontinued Operations
During 2019, the Company's Board of Directors (the "Board") adopted a Resolution of Exit or Disposal of Home Loan Center
("HLC") Based Mortgage Banking Operations to sell or abandon the assets and transfer or terminate the personnel associated
with the Company's high-volume HLC-based mortgage origination business and related servicing. The Company also
successfully closed and settled two separate sales of the rights to service $14.3 billion in total unpaid principal balance of single
family mortgage loans serviced for others. At the end of the second quarter 2019, we also entered into a non-binding letter of
interest to sell our ownership interest in WMS LLC. In accordance with Accounting Standards Codification (ASC) 205-20, the
Company determined that the Board's decision to sell or abandon the assets and personnel associated with the Company's HLC-
based mortgage business, the related mortgage servicing rights ("MSR") sales and the sale of WMS LLC met the criteria to be
classified as discontinued operations and its operating results and financial condition are presented as discontinued operations in
the consolidated financial statements for 2019. These discontinued operations activities, including the exit or disposal of the
former Mortgage Banking Segment, were concluded by December 31, 2019. Consequently, we ceased discontinued operations
accounting effective January 1, 2020. Unless otherwise indicated, information included in these notes to the consolidated
financial statements for 2019 are presented on a consolidated operations basis, which includes results from both continuing and
discontinued operations.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks, certificates of deposits with
original maturities of less than ninety days, investment securities with original maturities of less than ninety days and federal
funds sold. The Bank maintains most of its excess cash at the Federal Reserve Bank of San Francisco ("FRBSF"), with well-
capitalized correspondent banks or with other depository institutions at amounts less than the FDIC insured limits. Restricted
cash of $8.1 million and $6.6 million at December 31, 2021 and 2020, respectively, is included in cash and cash equivalents.
52
Investment Securities
Investment securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Investments not classified as trading securities nor as held-to-maturity ("HTM") securities are classified as AFS securities and
recorded at fair value. Unrealized gains or losses on AFS securities are excluded from net income and reported net of taxes as a
separate component of other comprehensive income included in shareholders’ equity. Purchase premiums and discounts are
recognized in interest income using the effective interest method over the life of the securities. Purchase premiums or discounts
related to mortgage-backed securities are amortized or accreted using projected prepayment speeds. Gains and losses on the sale
of AFS securities are recorded on the trade date and are determined using the specific identification method.
The Company evaluates AFS securities in an unrealized loss position, using a qualitative approach, at the end of each quarter to
determine whether the decline in value is temporary or permanent. An unrealized loss exists when the fair value of an individual
security is less than its amortized cost basis. When qualitative factors indicate that a credit loss may exist, the Company
compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the
security. The Company recognizes an ACL if a loss is considered to exist, measured as the difference between the present value
of expected cash flows and the amortized cost basis of the security, limited by the amount that the security’s fair value is less
than its amortized cost basis. The Company does not believe any of these securities that were in an unrealized loss position at
December 31, 2021 have a credit loss impairment.
The Company evaluates HTM securities at the end of each quarter to determine if any expected credit losses exist. No ACL for
HTM securities was recorded as of December 31, 2021 and 2020.
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 in earnings.
Multifamily and Small Business Administration ("SBA") LHFS are accounted for at the lower of amortized cost or fair value
("LOCOM"). LOCOM valuations are performed quarterly or at the time of transfer to or from LHFS. Related gains and losses
are recognized in net gain on mortgage loan origination and sale activities. Direct loan origination costs and fees for
multifamily and SBA loans classified as held for sale are deferred at origination and recognized in earnings at the time of sale.
LHFI
LHFI are reported at the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for loans
accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and unamortized
premiums or discounts on purchased loans. When a loan is designated as held for investment, the intent is to hold these loans
for the foreseeable future or until maturity or pay-off. If subsequent changes occur as part of the balance sheet management
process, the Company may change its intent to hold these loans. Once a determination has been made to sell such loans, they
are transferred to LHFS and carried at the lower of amortized cost or fair value. Interest on loans is recognized at the contractual
rate of interest and is only accrued if deemed collectible. Deferred fees and costs and premiums and discounts are amortized
over the contractual terms of the underlying loans using the constant effective yield (the interest method) or straight-line
method.
53
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") or guaranteed by the Department of Veterans' Affairs ("VA") are maintained on accrual status
even if 90 days or more past due.
Troubled Debt Restructurings
We sometimes modify or restructure loans when the borrower is experiencing financial difficulties by making a concession to
the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only
payments and, in limited cases, concessions to the outstanding loan balances. These loans are classified as TDRs. TDRs are
loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition or cash flows. A
workout plan between us and the borrower is designed to provide a bridge for borrower cash flow shortfalls in the near term. A
TDR loan may be returned to accrual status when the loan is brought current, has performed in accordance with the contractual
restructured terms for a time frame of at least six months, and the ultimate collectability of the total contractual restructured
principal and interest is reasonably assured.
ACL for LHFI
The ACL for LHFI is a valuation account that is deducted from the loans amortized cost basis to present the net amount
expected to be collected on the loans. Loan balances are charged off against the ACL when management believes the non-
collectability of a loan balance is confirmed. Recoveries are recorded as an increase to the ACL for LHFI to the extent they do
not exceed the related charge-off amounts. The ACL for LHFI, as reported in our consolidated balance sheets, is adjusted by a
provision for credit losses and reduced by the charge-offs of loan amounts, net of recoveries.
Management estimates the ACL balance using relevant available information from internal and external sources relating to past
events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the
estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific
risk characteristics such as differences in underwriting standards, portfolio mix or delinquency levels or other relevant factors.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of its two loan
portfolios, the consumer loan portfolio and the commercial loan portfolio. These two portfolios are further disaggregated into
loan pools, the level at which credit risk is monitored. When computing ACL levels, credit loss assumptions are estimated using
a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics,
including current conditions and reasonable and supportable forecasts. Determining the appropriateness of the ACL is complex
and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of
the overall loan portfolio, based on the factors and forecasts then prevailing, may result in material changes in the ACL and
provision for credit losses in those future periods.
Credit Loss Measurement
The ACL level is influenced by current conditions related to loan volumes, loan asset quality ratings ("AQR") migration or
delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and
supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses has two
basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk
characteristics and second an asset-specific component involving individual loans that do not share risk 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.
54
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:
55
Qualitative Factor
Financial Instruments - Credit Losses
The borrower's financial condition, credit rating, credit score, asset quality or business prospects
Portfolio Credit Quality
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 time to maturity and the timing and extent of payments on the financial assets
The remaining payment terms of 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
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
Credit Culture
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
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
Business Environment
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.
56
Additional details describing the model by portfolio are below:
Consumer Loan Portfolio
The consumer loan portfolio is comprised of the single family and home equity loan classes, which are underwritten after
evaluating a borrower's capacity, credit and collateral. Other consumer loans are grouped with home equity loans. Capacity
refers to a borrower's ability to make payments on the loan. Several factors are considered when assessing a borrower's
capacity, including the borrower's employment, income, current debt, assets and level of equity in the property. Credit refers to
how well a borrower manages current and prior debts as documented by a credit report that provides credit scores and current
and past information about the borrower's credit history. Collateral refers to the type and use of property, occupancy and market
value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan
amount and lien position are considered in assessing whether to originate a loan. These borrowers are particularly susceptible to
downturns in economic trends such as conditions that negatively affect housing prices, demand for housing and levels of
unemployment.
Consumer Loan Portfolio Loss Rate Model
Under CECL, the Bank utilizes pools of loans that are grouped by similar risk characteristics: Single Family and Home Equity
Loans. Sub-Pools are established at a more granular level for the calculation of PDs, incorporating delinquency status, original
FICO and original LTV.
Consumer portfolio cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are
established, the loans in the cohort are tracked moving forward for default events.
The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the
historical loss information. For Single Family loans all Q-Factors noted above are evaluated. For the Home Equity loans,
collateral values are not evaluated as the Bank has determined the FICO score trends are a more relevant predictor of default
than current collateral value for those types of loans. These factors are evaluated based on current conditions and forecasts (as
applicable), using a seven-point scale ranging from significant improvement to significant deterioration.
Commercial Loan Portfolio
The commercial loan portfolio is comprised of the non-owner occupied commercial real estate ("CRE"), multifamily,
construction and land development, owner occupied CRE and commercial business loan classes, whose underwriting standards
consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's
and associated guarantors or other related party’s financial position. These other factors include assessing liquidity, net worth,
leverage, other outstanding indebtedness of the borrower, the quality and reliability of cash expected to flow through the
borrower (including the outflow to other lenders) and prior known experiences with the borrower.
This information is used to assess financial capacity, profitability and experience. Ultimate repayment of these loans is sensitive
to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
Commercial Loan Portfolio Loss Rate Model
The Bank has subdivided the commercial loan portfolio into the following ACL reporting pools to more accurately group risk
characteristics: Commercial Business, Owner Occupied CRE, Multifamily, Multifamily Construction, CRE, CRE
Construction, Single Family Construction to Permanent, and Single Family Construction, which includes lot, land and
acquisition and development loans. ACL sub-pools are established at a more granular level for the calculation of PDs, utilizing
risk rating.
As outlined in the Bank’s policies, commercial loans pools are non-homogenous and are regularly assessed for credit quality.
For purposes of CECL, loans are sub-pooled according to the following AQR Ratings:
•
•
•
1-6: These loans meet the definition of “Pass" assets. They are well protected by the current net worth and paying
capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell in a timely manner,
of any underlying collateral. The Bank further uses the available AQR ratings for components of the sub-pools.
7: These loans meet the regulatory definition of “Special Mention.” They contain potential weaknesses, that if
uncorrected may result in deterioration of the likelihood of repayment or in the Bank’s credit position.
8: These loans meet the regulatory definition of “Substandard.” They are inadequately protected by the current
sound worth and paying capacity of the borrower or of the collateral pledged, if any. They have well-defined
weaknesses and have unsatisfactory characteristics causing unacceptable levels of risk.
57
Commercial portfolio cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are
established, the loans in the cohort are tracked moving forward for default events. The Q-Factors adjust the expected historic
loss rates for current and forecasted conditions that are not provided for in the historical loss information. All the Q-Factors
noted above are evaluated for Commercial portfolio loans except for Commercial Business and Owner Occupied CRE loans
which exclude the collateral values Q-Factor. The Company has determined that these loans are primarily underwritten by
evaluating the cash flow of the business and not the underlying collateral. Factors above are evaluated based on current
conditions and forecasts (as applicable), using a seven-point scale ranging from significant improvement to significant
deterioration.
Loans That Do Not Share Risk Characteristics with Other Loans
For a loan that does not share risk characteristics with other loans, expected credit loss is measured on net realizable value that
is the difference between the discounted value of the expected future cash flows, based on the original effective interest rate and
the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net
realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred
loan fees and costs), except when the loan is collateral dependent, which is when the borrower is experiencing financial
difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases,
expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the
collateral. The fair value of the collateral is adjusted for the estimated costs to sell if repayment or satisfaction of a loan is
dependent on the sale (rather than only on the operation) of the collateral.
The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, collateral
values for collateral dependent loans are updated every twelve months, either from external third parties or in-house certified
appraisers. A third-party appraisal is required at least annually for substandard loans and OREO. For performing consumer
loans secured by real estate that are classified as collateral dependent, the Bank determines the fair value estimates quarterly
using automated valuation services. Once the expected credit loss amount is determined, an ACL is recorded equal to the
expected credit loss and included in the ACL. If the expected credit loss is determined to be permanent or not recoverable, the
expected credit loss will be charged off. Factors considered by management in determining if the expected credit loss is
permanent or not recoverable include whether management judges the loan to be uncollectible, repayment is deemed to be
protracted beyond reasonable time frames, or the loss becomes evident owing to the borrower's lack of assets or, for single
family loans, the loan is 180 days or more past due unless both well-secured and in the process of collection.
ACL for Off-Balance Sheet Credit Exposures
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to risk via a contractual
obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. Reserves are required for off-
balance sheet credit exposures that are not unconditionally cancellable. The ACL on unfunded loan commitments is based on an
estimate of unfunded commitment utilization over the life of the loan, applying the EL to the estimated utilization balance as of
the reporting period end date. Q-factors are not included in the calculation of expected credit losses for off-balance sheet credit
exposures.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are recorded at net realizable value (fair value of
collateral less estimated costs to sell). At the time of possession, an appraisal is obtained and any excess of the loan balance
over the net realizable value is charged against the ACL. After foreclosure, valuations are periodically performed by
management. Any subsequent declines in fair value are recorded as a charge to current period earnings with a corresponding
write-down to the asset. All legal fees and direct costs, including foreclosure and other related costs are expensed as incurred.
Mortgage Servicing Rights
MSRs are recognized as separate assets on our consolidated balance sheets upon purchase of the rights or when we retain the
right to service loans that we have sold. We initially record all MSRs at fair value. For subsequent measurements, single family
MSRs are accounted for at fair value, with changes in fair value recorded through current period earnings, while multifamily
and SBA MSRs are accounted for at the lower of amortized cost or fair value.
Subsequent fair value measurements of MSRs are determined by considering the present value of estimated future net servicing
cash flows. Changes in the fair value of MSRs result from changes in (1) model inputs and assumptions and (2) modeled
amortization, representing the collection and realization of expected cash flows and curtailments over time. The significant
58
model inputs used to measure the fair value of MSRs include assumptions regarding market interest rates, projected prepayment
speeds, discount rates, estimated costs of servicing and other income and additional expenses associated with the collection of
delinquent loans.
For single family MSRs, loan servicing income includes fees earned for servicing the loans and the changes in fair value over
the reporting period of both our MSRs and the derivatives used to economically hedge our MSRs. For other MSRs, loan
servicing income includes fees earned for servicing the loans less the amortization of the related MSRs and any impairment
adjustments.
Revenue Recognition
Descriptions of our primary revenue-generating activities that fall within the scope of ASC Topic 606 Revenue Recognition and
are presented in our consolidated income statements as follows:
Depositor and other retail and banking fees
Depositor and other retail banking fees consist of monthly service fees, check orders, and other deposit account related fees.
The Company's performance obligation for these fees is generally satisfied, and the related revenue recognized, over the period
in which the service is provided.
Commission Income
Commission income primarily consists of revenue received on insurance policies and monthly investment management fees
earned where the Company has acted as an intermediary between customers and the insurance carriers or investment advisers.
The Company's performance obligation for commissions is generally satisfied, and the related revenue generally recognized,
over the course of the policy or over the period in which the services are provided, generally monthly.
Credit Card Fees
The Company offers credit cards to its customers through a third party and earns a fee on each transaction and a fee for each
new account activation on a net basis. Revenue is recognized when the services are performed.
Sale of Other Real Estate Owned
A gain or loss, the difference between the cost basis of the property and its sale price, on other real estate owned is recognized
when the performance obligation is met, which is at the time the property title is transferred to the buyer. To record a sale of
OREO, the Company evaluates if: (a) a commitment on the buyer’s part exists, (b) collection is probable in circumstances
where the initial investment is minimal and (c) the buyer has obtained control of the asset, including the significant risks and
rewards of ownership. If there is no commitment on the buyer’s part, collection is not probable or the buyer has not obtained
control of the asset, then a gain cannot be recognized.
Other Noninterest Income
Other noninterest income includes revenue related to mortgage servicing activities and gains on sales of loans, which are not
subject to the requirements of ASC Topic 606.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 20 years.
The cost of leasehold improvements is amortized using the straight-line method over the shorter of the estimated useful life of
the asset or the term of the related leases. The Company periodically evaluates premises and equipment for impairment.
59
Leases
We determine if an arrangement is a lease at inception. Operating and finance leases are included in lease right-of-use ("ROU")
assets, and lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the
lease term and lease liabilities represent our obligation to make lease payments arising from the lease. The lease liability is
recognized at commencement date based on the present value of lease payments over the lease term. The right-of-use asset is
based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as prepaid rent, lease
incentives and deferred rent. As the rate implicit in most of our leases are not readily determinable, we generally use our
incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease
contract at commencement date. We have lease agreements with lease and non-lease components, which are generally
accounted for separately for real estate leases.
Certain of our lease agreements include rental payments that adjust periodically based on changes in the Consumer Price Index
("CPI"). Subsequent increases in the CPI are treated as variable lease payments and recognized in the period in which the
obligation for those payments is incurred. The ROU assets and lease liabilities are not re-measured as a result of changes in the
CPI.
Lease expense for operating leases is recognized on a straight-line basis over the lease term. Lease expense for our financing
leases is comprised of the amortization of the right-of-use asset and interest expense recognized based on the effective interest
method.
We use the long-lived assets impairment guidance under ASC Topic 360-10-35, "Property, Plant and Equipment," to determine
whether an ROU asset is impaired, and if impaired, the amount of loss to recognize. Long-lived assets are tested for
recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These
could include vacating the leased space, obsolescence, or physical damage to a facility. If an impairment loss is recognized for a
ROU asset, the adjusted carrying amount of the ROU asset would be its new accounting basis. The remaining ROU asset (after
the impairment write-down) is amortized on a straight-line basis over the remaining lease term.
Goodwill and Other Intangible Assets
Goodwill is recorded upon completion of a business combination as the excess of the fair value of the consideration transferred,
plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities
assumed as of the acquisition date. Goodwill has been determined to have an indefinite useful life and is not amortized, but
tested for impairment at least annually or more frequently if events and circumstances occur that indicate it is more likely than
not the fair value of the reporting unit is less than its carrying value necessitating an impairment test. The Company typically
performs its annual impairment testing in the second or third quarter.
Intangible assets with definite useful lives, such as core deposit intangible assets arising from bank acquisitions, are amortized
over their estimated useful lives.
On March 25, 2019, the Company completed its acquisition of a branch and its related deposits and loans in San Diego County
from Silvergate Bank, along with its business lending team. The application of the acquisition method of accounting resulted in
recording goodwill of $5.9 million and core deposit intangibles of $1.9 million.
Securities Sold Under Agreements to Repurchase
From time to time, the Company may enter into sales of securities under agreements to repurchase ("repurchase agreements").
Repurchase agreements are accounted for as financing arrangements with the obligation to repurchase securities sold reflected
as a liability on the consolidated balance sheets. The securities underlying the repurchase agreements continue to be recognized
as AFS securities in the consolidated balance sheet.
Income Taxes
Our income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and
liabilities.
Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. Deferred tax
assets and tax carryforwards are only recognized if, in the opinion of management, it is more likely than not that the deferred
60
tax assets will be 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
hedging or non-hedging activities. For derivative instruments designated as non-hedging activities (also referred to as economic
hedges), the change in fair value is recognized currently in earnings. Gains and losses on derivative contracts utilized for
economically hedging the mortgage pipeline are recognized as part of the net gain on mortgage loan origination and sale
activities within noninterest income. Gains and losses on derivative contracts utilized for economically hedging our single
family MSRs are recognized as part of loan servicing income within noninterest income.
For derivative instruments designated as hedging activities, a qualitative analysis is performed at inception to determine if the
derivative instrument is highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged
risk during the period that the hedge is designated. Subsequently, a qualitative assessment of a hedge’s effectiveness is
performed on a quarterly basis. All derivative instruments that qualify and are designated for hedge accounting are recorded at
fair value and classified as either a hedge of the fair value of a recognized asset or liability ("fair value hedge") or a hedge of a
forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow
hedge"). Changes in the fair value of a derivative that is highly effective and designated as a fair value hedge is recognized in
earnings and the change in fair value on the hedged item attributable to the hedged risk adjusts the carrying amount of the
hedged item and is recognized currently in earnings. Changes in the fair value of a derivative that is highly effective and
designated as a cash flow hedge are recorded in other comprehensive income (loss) until cash flows of the hedged item are
realized. All amounts recognized in earnings are presented in the same income statement line item as the earnings effect of the
hedged item.
If a derivative designated as a cash flow hedge is terminated or ceases to be highly effective, the gain or loss in other
comprehensive income (loss) is amortized to earnings over the period the forecasted hedged transactions impact earnings. If a
hedged forecasted transaction is no longer probable, hedge accounting is ceased and any gain or loss included in other
comprehensive income (loss) is reported in earnings immediately, unless the forecasted transaction is at least reasonably
possible of occurring, whereby the amounts remain within other comprehensive income (loss).
Derivative instruments expose us to credit risk in the event of nonperformance by counterparties. This risk consists primarily of
the termination value of agreements where the Company is in a favorable position. The Company minimizes counterparty credit
risk through credit approvals, limits, monitoring procedures, and obtaining collateral, as appropriate.
The Company also executes interest rate swaps with commercial banking customers to facilitate their respective risk
management strategies. These interest rate swaps are economically hedged by simultaneously entering into an offsetting interest
rate swap that the Company executes with a third party, such that the Company minimizes its net risk exposure.
61
Share-Based Compensation
The Company issues various forms of stock-based compensation awards annually, including restricted stock units ("RSUs") and
performance stock units ("PSUs"). Compensation expense related to RSUs is based on the fair value of the underlying stock on
the award date and is recognized over the period in which an employee is required to provide services in exchange for the
award, generally the vesting period. PSUs are subject to market-based vesting criteria in addition to a requisite service period
and cliff vest based on those conditions at the end of three years. The grant date fair value of PSUs is determined through the
use of an independent third party which employs the use of a Monte Carlo simulation. The Monte Carlo simulation estimates
grant date fair value using input assumptions similar to those used in the Black-Scholes model, however, it also incorporates
into the grant date fair value calculation the probability that the performance targets will be achieved. The Black-Scholes model
uses certain assumptions to determine grant-date fair value such as: expected volatility, expected term of the option, expected
risk-free rate of interest and expected dividend yield on the Company’s common stock. Forfeitures of stock-based awards are
recognized when they occur.
Fair Value Measurement
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value is an exit price, representing the amount that would be received to sell an asset or
transfer a liability in an orderly transaction between market participants. Fair value estimates involve uncertainties and matters
of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Fair value measures are classified according to a three-tier fair value hierarchy, which is based on
the observability of inputs used to measure fair value. Changes in assumptions or in market conditions could significantly affect
these estimates.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over
transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before
their maturity.
Contingencies
Contingent liabilities, including those that exist as a result of a guarantee or indemnification, are recognized when it becomes
probable that a loss has been incurred and the amount of the loss is reasonably estimable. For indemnifications provided in sales
agreements, a portion of the sale proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise
result from the transaction. For these indemnifications, the initial liability is amortized to income as the Company's risk is
reduced or when the indemnification expires.
Earnings per Share
Earnings per share of common stock is calculated on both a basic and diluted basis, based on the weighted average number of
common and common equivalent shares outstanding. Basic earnings per share excludes potential dilution from common
equivalent shares, such as those associated with stock-based compensation awards, and is computed by dividing net income
allocated to common stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as
common equivalent shares associated with stock-based compensation awards, were exercised or converted into common stock
that would then share in the net earnings of the Company. Potential dilution from common equivalent shares is determined
using the treasury stock method, reflecting the potential settlement of stock-based compensation awards resulting in the
issuance of additional shares of the Company’s common stock. Stock-based compensation awards that would have an anti-
dilutive effect have been excluded from the determination of diluted earnings per share.
62
Marketing Costs
The Company expenses marketing costs, including advertising, in the period incurred. We incurred $4.1 million, $2.3 million
and $5.9 million in marketing costs during 2021, 2020 and 2019, respectively.
Recent Accounting Developments
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12
removes certain exceptions to the general principles in Topic 740 in GAAP. ASU 2019-12 is effective for public entities for
fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this ASU on January 1,
2021 and it did not have a material effect on the Company’s financial position, results of operations or financial statement
disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional
expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR rates expected to
be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform
(Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge
accounting applied to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as
of March 12, 2020 through December 31, 2022. These ASUs are not expected to have a material impact on the Company’s
financial position or results of operations.
63
NOTE 2–INVESTMENT SECURITIES:
The following tables set forth certain information regarding the amortized cost and fair values of our investment securities AFS
and held-to-maturity ("HTM"):
(in thousands)
AFS
Mortgage-backed securities ("MBS"):
Residential
Commercial
Collateralized mortgage obligations ("CMOs")
Residential
Commercial
Municipal bonds
Corporate debt securities
U.S. Treasury securities
Total
HTM
Municipal bonds
(in thousands)
AFS
MBS:
Residential
Commercial
CMOs:
Residential
Commercial
Municipal bonds
Corporate debt securities
Agency debentures
Total
HTM
Municipal bonds
Amortized
cost
At December 31, 2021
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
32,905 $
62,094
186,703
135,102
516,693
18,918
23,348
396 $
933
(338) $
(235)
32,963
62,792
2,012
1,890
24,154
699
—
(1,321)
(333)
(924)
(1)
(173)
187,394
136,659
539,923
19,616
23,175
$
$
975,763 $
30,084 $
(3,325) $
1,002,522
4,169 $
136 $
— $
4,305
Amortized
cost
At December 31, 2020
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
$
50,001 $
1,237 $
(192) $
43,061
2,131
228,685
155,645
533,719
14,381
1,846
6,319
3,719
31,321
841
—
(8)
(95)
(181)
(337)
—
—
51,046
45,184
234,909
159,183
564,703
15,222
1,846
$
$
1,027,338 $
45,568 $
(813) $
1,072,093
4,271 $
236 $
— $
4,507
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 corporations. As of December 31,
2021 and 2020, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based
upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as
defined by Standard and Poor’s Rating Services or Moody's Investors Services.
64
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:
(in thousands)
MBS:
Residential
Commercial
CMOs:
Residential
Commercial
Municipal bonds
Corporate debt securities
U.S. Treasury securities
Less than 12 months
Gross
unrealized
losses
Fair
value
At December 31, 2021
12 months or more
Gross
unrealized
losses
Fair
value
Total
Gross
unrealized
losses
Fair
value
$
(38) $
5,324 $
(300) $
2,406 $
(338) $
(235)
18,127
—
—
(235)
(1,007)
(135)
(914)
(1)
(173)
53,068
14,806
64,237
3,164
23,175
(314)
(198)
(10)
—
—
7,116
5,132
1,058
—
—
(1,321)
(333)
(924)
(1)
(173)
7,730
18,127
60,184
19,938
65,295
3,164
23,175
Total
$
(2,503) $
181,901 $
(822) $
15,712 $
(3,325) $
197,613
Less than 12 months
Gross
unrealized
losses
Fair
value
At December 31, 2020
12 months or more
Gross
unrealized
losses
Fair
value
Total
Gross
unrealized
losses
Fair
value
(in thousands)
MBS:
Residential
Commercial
CMOs:
Residential
Commercial
Municipal bonds
$
(7) $
1,196 $
(185) $
1,432 $
(192) $
(8)
925
—
(95)
(39)
(337)
7,391
6,687
10,512
—
(142)
—
—
—
15,358
—
(8)
(95)
(181)
(337)
2,628
925
7,391
22,045
10,512
43,501
Total
$
(486) $
26,711 $
(327) $
16,790 $
(813) $
There were no HTM securities in an unrealized loss position at December 31, 2021 and 2020.
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, 2021 and 2020. In addition, as of December 31, 2021 and 2020, 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.
65
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, 2021
Within one year
After one year
through five years
After five years
through ten years
After
ten years
Total
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
$ 4,933
3.79 % $ 14,366
3.26 % $ 68,025
3.60 % $ 452,599
3.23 % $ 539,923
3.28 %
—
—
— %
6,563
3.60 % 13,053
5.03 %
— %
—
— % 23,175
1.27 %
—
—
— % 19,616
4.55 %
— % 23,175
1.27 %
(dollars in thousands)
AFS
Municipal bonds
Corporate debt
securities
U.S. Treasury
securities
Total
$ 4,933
3.79 % $ 20,929
3.37 % $ 104,253
3.23 % $ 452,599
3.23 % $ 582,714
3.24 %
HTM
Municipal bonds
$ 1,684
2.86 % $ 2,621
2.12 % $ —
— % $ —
— % $ 4,305
2.42 %
At December 31, 2020
Within one year
After one year
through five years
After five years
through ten years
After
ten years
Total
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
$ 4,024
3.19 % $ 14,978
3.82 % $ 59,496
3.26 % $ 486,205
3.29 % $ 564,703
3.30 %
183
—
4.27 %
7,059
3.74 %
7,980
4.78 %
—
— % 15,222
4.30 %
— %
—
— %
—
— %
1,846
2.68 %
1,846
2.68 %
(dollars in thousands)
AFS
Municipal bonds
Corporate debt
securities
Agency debentures
Total
$ 4,207
3.24 % $ 22,037
3.80 % $ 67,476
3.45 % $ 488,051
3.29 % $ 581,771
3.33 %
HTM
Municipal bonds
$ —
— % $ 4,507
2.47 % $ —
— % $ —
— % $ 4,507
2.47 %
The weighted-average 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, 2021 and 2020 was 1.82% and 1.92%, respectively.
Sales of AFS investment securities were as follows for the periods indicated:
(in thousands)
Proceeds
Gross gains
Gross losses
Years Ended December 31,
2021
2020
2019
$
28,187 $
62,378 $
184,871
288
(226)
1,334
(993)
894
(901)
66
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.
(in thousands)
At December 31,
2021
2020
Washington, Oregon and California State to secure public deposits
Other securities pledged
Total securities pledged as collateral
$
$
206,153 $
5,258
211,411 $
171,471
3,391
174,862
The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these
arrangements have little credit risk. There were no securities pledged under repurchase agreements at December 31, 2021 and
2020.
Tax-exempt interest income on AFS securities was $10.2 million, $10.7 million and $10.2 million for 2021, 2020 and 2019,
respectively.
NOTE 3-LOANS AND CREDIT QUALITY:
The Company's LHFI is divided into 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:
single family and home equity and other loans within the consumer loan portfolio and non-owner occupied CRE, multifamily,
construction and land development, owner occupied CRE and commercial business loans within the commercial loan portfolio.
LHFI consists of the following:
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family (1)
Home equity and other
Total (1)
Total LHFI
ACL
Total LHFI less ACL
At December 31,
2021
2020
$
705,359 $
2,415,359
496,144
3,616,862
457,706
401,872
859,578
763,331
303,078
1,066,409
5,542,849
(47,123)
$
5,495,726 $
829,538
1,428,092
553,695
2,811,325
467,256
645,723
1,112,979
915,123
404,753
1,319,876
5,244,180
(64,294)
5,179,886
(1)
Includes $7.3 million and $7.1 million at December 31, 2021 and 2020, respectively, of loans where a fair value option election was made at the time of
origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.
Loans totaling $2.8 billion and $1.4 billion at December 31, 2021 and 2020, respectively, were pledged to secure borrowings
from the FHLB and loans totaling $419 million and $569 million at December 31, 2021 and 2020, respectively, were pledged to
secure borrowings from the FRBSF.
It is the Company's policy to make loans to officers, directors and their associates in the ordinary course of business on
substantially the same terms as those prevailing at the time for comparable transactions with other persons. The following is a
67
summary of activity during the year ended December 2021 with respect to such aggregate loans to these related parties and their
associates:
(in thousands)
Beginning balance
New loans and advances, net of principal repayments
Ending balance
Credit Risk Concentrations
Year Ended December 31, 2021
$
$
73
1,475
1,548
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the
same geographic region, or when they have similar economic features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions.
LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At December 31, 2021 and
2020, multifamily loans in the state of California represented 33% and 19% of the total LHFI portfolio, respectively.
Credit Quality
Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI
portfolio as of December 31, 2021. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of
the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.
During 2021, the historical expected loss rates decreased from December 31, 2020 due to minimal losses, stable portfolio credit
distribution and favorable product mix risk composition. During 2021, the Qualitative Factors decreased significantly due to the
improvement in economic conditions, continued favorable performance and outlook of the impact of the COVID-19 pandemic
of our loan portfolio. As of December 31, 2021, the Bank expects that the markets in which it operates will have stable
collateral values and economic outlook over the two-year forecast period.
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 $2.4 million and $1.6 million at December 31, 2021 and 2020, respectively.
The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was
$17.8 million and $21.2 million at December 31, 2021 and 2020, respectively and was reported in other assets in the
consolidated balance sheets.
68
Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows:
(in thousands)
ACL for LHFI
Beginning balance
Provision for credit losses
Net (charge-offs) recoveries
Impact of ASC 326 adoption
Ending balance
Allowance for unfunded commitments
Beginning balance
Provision for credit losses
Impact of ASC 326 adoption
Ending balance
Provision for credit losses:
Allowance for credit losses-loans
Allowance for unfunded commitments
Total
Years Ended December 31,
2021
2020
2019
$
$
$
$
$
$
64,294 $
(15,816)
(1,355)
—
47,123 $
1,588 $
816
—
2,404 $
(15,816) $
816
(15,000) $
41,772 $
21,843
(1,164)
1,843
64,294 $
1,065 $
(1,374)
1,897
1,588 $
21,843 $
(1,374)
20,469 $
41,470
(122)
424
—
41,772
1,443
(378)
—
1,065
(122)
(378)
(500)
Activity in the ACL by loan portfolio and loan sub-class was as follows.
(in thousands)
CRE
Non-owner occupied CRE
Multifamily
Construction/land development
Multifamily construction
CRE construction
Single family construction
Single family construction to permanent
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Year Ended December 31, 2021
Beginning
balance
Charge-offs
Recoveries
Provision
Ending
balance
$
8,845 $
6,072
— $
—
— $
—
(1,336) $
(218)
4,903
1,670
5,130
1,315
27,935
4,994
17,043
22,037
6,906
7,416
14,322
—
—
—
—
—
(1,739)
(1,739)
(127)
(483)
(610)
—
—
—
—
—
—
146
146
291
557
848
(4,396)
(1,520)
1,281
(260)
(6,449)
12
(3,177)
(3,165)
(2,676)
(3,526)
(6,202)
7,509
5,854
—
507
150
6,411
1,055
21,486
5,006
12,273
17,279
4,394
3,964
8,358
Total ACL
$
64,294 $
(2,349) $
994 $
(15,816) $
47,123
69
(in thousands)
CRE
Year Ended December 31, 2020
Prior to
adoption of
ASC 326
Impact of
ASC 326
adoption
Charge-offs
Recoveries
Provision
Ending
balance
Non-owner occupied CRE
$
7,245 $
(3,392) $
— $
— $
4,992 $
Multifamily
Construction/land development
Multifamily construction
CRE construction
Single family construction
Single family construction to permanent
7,015
(2,977)
2,848
624
3,800
1,003
693
(115)
4,280
200
Total
22,535
(1,311)
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
3,639
2,915
6,554
6,450
6,233
12,683
(2,459)
510
(1,949)
468
4,635
5,103
—
—
—
—
—
—
(896)
(640)
(1,536)
(17)
(456)
(473)
—
2,034
—
—
163
—
163
—
110
110
187
385
572
1,362
1,161
(3,113)
112
6,548
4,710
14,148
18,858
(182)
(3,381)
(3,563)
8,845
6,072
4,903
1,670
5,130
1,315
27,935
4,994
17,043
22,037
6,906
7,416
14,322
Total ACL
$
41,772 $
1,843 $
(2,009) $
845 $
21,843 $
64,294
(in thousands)
CRE
Year Ended December 31, 2019
Beginning
balance
Charge-offs
Recoveries
Provision
Ending
balance
Non-owner occupied CRE
$
5,495 $
— $
— $
1,750 $
Multifamily
Construction/land development
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
5,754
9,001
20,250
3,278
2,875
6,153
8,217
6,850
15,067
—
—
(315)
(315)
—
(272)
(272)
—
215
215
—
147
147
145
504
649
1,261
(941)
2,070
361
208
569
(1,912)
(849)
(2,761)
Total ACL
$
41,470 $
(587) $
1,011 $
(122) $
7,245
7,015
8,275
22,535
3,639
2,915
6,554
6,450
6,233
12,683
41,772
Credit Quality Indicators
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan
classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk
ratings ranging from 1 to 10, where a higher rating represents higher risk. The risk rating of 9 is not used.
Per the Company's policies, most commercial loans pools are non-homogenous and are regularly assessed for credit quality.
The rating categories can be generally described by the following groupings for non-homogeneous loans:
70
•
•
•
•
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 or modified in a
troubled debt restructuring that was an interest rate concession or payment modification with a significant balloon and the
concession period has not been completed. The risk rating classification for such loans are based on the non-homogenous
definitions noted above.
Residential, home equity and other loans modified in a troubled debt restructuring are considered homogeneous unless the
modification was an interest rate concession or payment modification with a significant balloon and the concession
modification period has not been completed. The risk rating classification for such loans are based on the non-homogeneous
definitions noted above.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class, risk rating and
delinquency status.
71
(in thousands)
2021
2020
2019
2018
2017
2016 and
prior
Revolving
Revolving-
term
Total
At December 31, 2021
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
1-6 Pass
$ 68,647 $ 50,571 $ 169,711 $ 130,877 $ 100,674 $ 183,024 $
963 $
892 $ 705,359
7- Special Mention
8 - Substandard
Total
—
—
68,647
—
—
—
—
—
—
50,571
—
169,711
—
130,877
—
100,674
—
183,024
Multifamily
1-6 Pass
1,315,204
561,666
286,826
60,372
26,065
165,225
7- Special Mention
8 - Substandard
—
—
—
—
—
—
—
—
—
—
—
—
Total
1,315,204
561,666
286,826
60,372
26,065
165,225
Multifamily construction
1-6 Pass
7,825
22,863
7,173
7- Special Mention
8 - Substandard
Total
—
—
7,825
—
—
22,863
—
—
7,173
CRE construction
1-6 Pass
7,694
3,960
7- Special Mention
8 - Substandard
—
—
—
—
Total
7,694
3,960
—
—
—
—
Single family construction
1-6 Pass
146,595
35,640
14,509
7- Special Mention
8 - Substandard
—
—
—
—
—
—
Total
146,595
35,640
14,509
Single family construction to permanent
—
—
—
—
1,962
—
—
1,962
—
—
—
—
Current
Past due:
30-59 days
60-89 days
90+ days
90,311
42,636
13,362
1,775
—
—
—
—
—
—
—
—
—
—
—
—
Total
90,311
42,636
13,362
1,775
Owner occupied CRE
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
556
—
—
556
77
—
—
77
—
—
—
—
—
1-6 Pass
70,902
47,536
57,423
47,716
67,042
106,659
7- Special Mention
8 - Substandard
—
—
—
—
—
2,196
6,019
145
18,665
1,111
10,151
18,444
Total
70,902
47,536
76,088
51,023
83,212
125,248
Commercial business
—
—
963
1
—
—
1
—
—
—
—
—
—
—
—
99,206
—
—
99,206
—
—
—
—
—
798
—
—
798
—
—
892
—
—
705,359
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,415,359
—
—
2,415,359
37,861
—
—
37,861
14,172
—
—
14,172
296,027
—
—
296,027
—
148,084
—
—
—
—
—
—
—
148,084
2,839
400,915
60
—
8,420
48,371
2,899
457,706
1-6 Pass
88,139
51,453
44,882
24,711
11,859
21,258
112,759
2,104
357,165
7- Special Mention
8 - Substandard
—
9,716
—
3,399
7,396
1,667
—
5,928
4,396
1,096
—
1,328
5,613
3,932
134
102
17,539
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
72
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
(in thousands)
2021
2020
2019
2018
2017
2016 and
prior
Revolving
Revolving-
term
Total
At December 31, 2021
CONSUMER PORTFOLIO
Single family
Current
Past due:
30-59 days
60-89 days
90+ days
Total (1)
Home equity and other
$ 176,110 $ 156,360 $ 62,369 $ 66,063 $ 95,988 $ 204,229 $
— $
— $ 761,119
—
—
—
—
—
—
291
—
561
—
—
452
—
314
—
—
471
123
176,110
156,360
63,221
66,515
96,302
204,823
—
—
—
—
—
—
—
—
291
785
1,136
763,331
Current
Past due:
30-59 days
60-89 days
90+ days
Total
Total consumer
portfolio
2,005
474
393
532
516
2,609
290,512
5,273
302,314
—
—
3
2,008
3
—
—
477
—
—
—
393
—
—
—
532
—
—
—
94
—
6
40
12
544
—
62
—
137
74
553
516
2,709
291,108
5,335
303,078
$ 178,118 $ 156,837 $ 63,614 $ 67,047 $ 96,818 $ 207,532 $ 291,108 $
5,335 $ 1,066,409
Total LHFI
$ 1,983,151 $ 976,561 $ 685,228 $ 343,695 $ 324,120 $ 704,248 $ 514,380 $
11,466 $ 5,542,849
(1)
Includes $7.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes
recognized in the consolidated income statements.
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class, risk rating and
delinquency status:
73
(in thousands)
2020
2019
2018
2017
2016
2015 and
prior
Revolving
Revolving-
term
Total
At December 31, 2020
COMMERCIAL PORTFOLIO
Non-owner occupied CRE
1-6 Pass
$ 53,782 $ 176,556 $ 165,268 $ 147,719 $ 150,221 $ 131,935 $
796 $
1,031 $ 827,308
7- Special Mention
—
—
—
—
—
2,230
8 - Substandard
Total
—
53,782
—
176,556
—
165,268
—
147,719
—
150,221
—
134,165
Multifamily
1-6 Pass
711,009
324,246
100,572
32,693
166,937
92,255
7- Special Mention
8 - Substandard
—
—
—
—
—
—
—
—
—
—
—
—
Total
711,009
324,246
100,572
32,693
166,937
92,255
Multifamily construction
1-6 Pass
12,182
21,366
45,256
11,823
—
7- Special Mention
8 - Substandard
Total
CRE construction
1-6 Pass
7- Special Mention
8 - Substandard
Total
Single family construction
—
—
12,182
3,963
—
—
3,963
—
—
—
24,702
—
21,366
—
45,256
—
11,823
—
24,702
—
—
—
—
2,104
14,721
—
—
—
—
2,104
14,721
1-6 Pass
121,233
47,539
14,055
7- Special Mention
8 - Substandard
—
—
—
—
—
—
Total
121,233
47,539
14,055
—
—
—
—
Single family construction to permanent
Current
Past due:
30-59 days
60-89 days
90+ days
62,955
72,825
15,443
688
—
—
—
—
—
—
—
—
—
—
—
—
Total
62,955
72,825
15,443
688
Owner occupied CRE
—
—
—
—
614
—
—
614
600
—
—
600
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
796
380
—
—
380
—
—
—
—
5,883
—
—
5,883
75,743
—
—
75,743
—
—
—
—
—
—
—
—
—
—
—
1,031
2,230
—
829,538
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,428,092
—
—
1,428,092
90,627
24,702
—
115,329
27,285
—
—
27,285
259,170
—
—
259,170
—
151,911
—
—
—
—
—
—
—
151,911
4,354
406,372
69
—
9,575
51,309
4,423
467,256
1-6 Pass
48,647
60,872
58,582
85,275
98,046
50,596
7- Special Mention
8 - Substandard
—
—
—
5,977
3,529
—
—
19,407
1,111
10,750
17,122
2,919
Total
48,647
80,279
65,670
99,554
115,168
53,515
Commercial business
1-6 Pass
345,540
63,020
47,710
22,556
18,411
14,972
76,218
2,577
591,004
7- Special Mention
8 - Substandard
—
—
10,837
2,058
5,923
11,327
6,653
2,338
—
—
1,891
1,001
3,975
8,438
166
112
23,689
31,030
Total
345,540
79,780
61,095
31,547
20,302
15,973
88,631
2,855
645,723
Total commercial
portfolio
$ 1,359,311 $ 802,591 $ 469,463 $ 338,745 $ 477,330 $ 297,122 $ 171,433 $
8,309 $ 3,924,304
74
The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
(in thousands)
2020
2019
2018
2017
2016
2015 and
prior
Revolving
Revolving-
term
Total
At December 31, 2020
CONSUMER PORTFOLIO
Single family
Current
Past due:
30-59 days
60-89 days
90+ days
Total (1)
Home equity and other
$ 174,994 $ 111,143 $ 154,757 $ 168,412 $ 59,161 $ 242,444 $
— $
— $ 910,911
—
—
824
570
—
335
—
—
405
318
—
386
—
—
—
390
—
984
175,818
112,048
155,162
169,116
59,161
243,818
—
—
—
—
—
—
—
—
1,278
—
2,934
915,123
Current
Past due:
30-59 days
60-89 days
90+ days
Total
Total consumer
portfolio
1,878
1,230
1,311
1,363
431
5,126
384,005
8,147
403,491
98
—
—
22
13
9
—
—
—
—
—
—
1,976
1,274
1,311
1,363
—
—
275
706
11
—
24
66
129
584
31
—
—
228
142
892
5,161
384,784
8,178
404,753
$ 177,794 $ 113,322 $ 156,473 $ 170,479 $ 59,867 $ 248,979 $ 384,784 $
8,178 $ 1,319,876
Total LHFI
$ 1,537,105 $ 915,913 $ 625,936 $ 509,224 $ 537,197 $ 546,101 $ 556,217 $
16,487 $ 5,244,180
(1)
Includes $7.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes
recognized in the consolidated income statements.
75
Collateral Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:
(in thousands)
Land
1-4 Family
At December 31, 2021
Non-
residential real
estate
Other non-real
estate
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity loans and other
Total
$
1,111 $
362
1,473
—
—
—
—
27
27
1,598
19
1,617
$
2,456 $
— $
562
3,018
—
—
—
286
286
—
—
—
Total collateral-dependent loans
$
1,473 $
1,644
$
3,018 $
286 $
3,567
1,237
4,804
1,598
19
1,617
6,421
(in thousands)
Land
1-4 Family
At December 31, 2020
Non-
residential real
estate
Other non-real
estate
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Total
$
1,789 $
— $
3,133 $
— $
4,922
1,787
3,576
—
—
545
545
2,457
2,457
—
3,133
—
—
2,882
2,882
—
—
5,214
10,136
2,457
2,457
Total collateral-dependent loans
$
3,576 $
3,002 $
3,133 $
2,882 $
12,593
Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans:
(in thousands)
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
At December 31, 2021
At December 31, 2020
Nonaccrual with
no related ACL
Total Nonaccrual
Nonaccrual with
no related ACL
Total Nonaccrual
$
3,568 $
1,210
4,778
1,324
23
1,347
$
3,568
5,023
8,591
2,802
808
3,610
4,922 $
3,100
8,022
2,173
2
2,175
4,922
9,183
14,105
4,883
1,734
6,617
Total nonaccrual loans
$
6,125 $
12,201
$
10,197 $
20,722
The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:
76
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
198
198
892
118
—
—
—
—
—
—
—
—
Past Due and Still Accruing
At December 31, 2021
30-59 days
60-89 days
90 days or
more
Nonaccrual
Total past
due and
nonaccrual (3)
Current
Total
loans
(in thousands)
CRE
Non-owner occupied CRE
$ —
$ —
$ —
$ —
$
—
—
—
—
—
—
—
$ 705,359
$ 705,359
2,415,359
2,415,359
37,861
14,172
296,027
37,861
14,172
296,027
148,084
3,616,862
148,084
3,616,862
—
—
—
—
—
—
—
—
—
—
820
74
894
894
—
—
—
—
—
—
—
—
6,717
—
6,717
$ 6,717
Multifamily
Construction/land development
Multifamily construction
CRE construction
Single family construction
Single family construction
to permanent
Total
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total loans
%
(in thousands)
CRE
3,568
5,023
8,591
(2)
2,802
808
3,568
5,221
8,789
11,231
1,000
454,138
396,651
850,789
752,100
302,078
457,706
401,872
859,578
(1)
763,331
303,078
3,610
12,231
1,054,178
1,066,409
$ 12,201
$ 21,020
$ 5,521,829
$ 5,542,849
1,010
$ 1,208
$
0.02 %
0.02 %
0.12 %
0.22 %
0.38 %
99.62 %
100.00 %
Past Due and Still Accruing
At December 31, 2020
30-59 days
60-89 days
90 days or
more
Nonaccrual
Total past
due and
nonaccrual (3)
Current
Total
loans
Non-owner occupied CRE
$ —
$ —
$ —
$ —
$
Multifamily
—
—
—
Construction and land development
Multifamily construction
CRE construction
Single family construction
Single family construction
to permanent
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 829,538
$ 829,538
1,428,092
1,428,092
115,329
27,285
259,170
115,329
27,285
259,170
151,911
151,911
2,811,325
2,811,325
Commercial and industrial loans
Owner occupied CRE
Commercial business
Total
Consumer loans
Single family
Home equity and other
Total
Total loans
%
—
—
—
—
—
4,922
9,183
14,105
4,922
9,183
462,334
636,540
467,256
645,723
14,105
1,098,874
1,112,979
2,161
228
2,389
418
135
553
11,476
—
11,476
(2) 4,883
1,734
18,938
2,097
896,185
402,656
(1)
915,123
404,753
6,617
21,035
1,298,841
1,319,876
$ 2,389
$ 553
$ 11,476
$ 20,722
$
35,140
$ 5,209,040
$ 5,244,180
0.05 %
0.01 %
0.22 %
0.40 %
0.67 %
99.33 %
100.00 %
77
(1)
Includes $7.3 million and $7.1 million of loans at December 31, 2021 and 2020, respectively, where a fair value option election was made at the time of
origination and, therefore, are carried at fair value with changes recognized in our consolidated income statements.
(2) FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have
(3)
little to no risk of loss.
Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $8.4 million and $14.7 million at December 31, 2021 and
2020, respectively.
The following tables present information about troubled debt restructuring ("TDR") activity for the periods indicated:
(dollars in thousands)
Consumer loans
Single family
Interest rate reduction
Payment restructure
Total
Total loans
Interest rate reduction
Payment restructure
Total
(dollars in thousands)
Commercial and industrial loans
Owner occupied CRE
Payment restructure
Commercial business
Payment restructure
Total commercial and industrial
Payment restructure
Total
Consumer loans
Single family
Total loans
Interest rate reduction
Payment restructure
Total
Interest rate reduction
Payment restructure
Total
Year Ended December 31, 2021
Number of loan
modifications
Recorded
investment
Related charge-
offs
20 $
7
27
20
7
27 $
5,482 $
2,815
8,297
5,482
2,815
8,297 $
Year Ended December 31, 2020
Number of loan
modifications
Recorded
investment
Related charge-
offs
1 $
678 $
1
2
2
27
14
41
27
16
1,125
1,803
1,803
5,979
2,695
8,674
5,979
4,498
43 $
10,477 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
78
(dollars in thousands)
CRE
Construction and land development
Payment restructure
Total
Commercial and industrial loans
Owner occupied CRE
Payment restructure
Commercial business
Payment restructure
Total commercial and industrial
Payment restructure
Total
Consumer loans
Single family
Interest rate reduction
Payment restructure
Home equity and other
Payment restructure
Total consumer
Total loans
Interest rate reduction
Payment restructure
Total
Interest rate reduction
Payment restructure
Total
Year Ended December 31, 2019
Number of loan
modifications
Recorded
investment
Related charge-
offs
1 $
1
1
1
2
2
21
118
1
21
119
140
21
122
4,675 $
4,675
5,840
259
6,099
6,099
3,925
25,795
116
3,925
25,911
29,836
3,925
36,685
143 $
40,610 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
A TDR loan is considered re-defaulted when it becomes doubtful that the objectives of the modifications will be met, generally
when a consumer loan TDR becomes 60 days or more past due on principal or interest payments or when a commercial loan
TDR becomes 90 days or more past due on principal or interest payments. The following table presents loans that were
modified as TDRs within the previous 12 months and subsequently re-defaulted during 2021 and 2020, respectively:
(dollars in thousands)
Commercial and industrial loans-owner occupied CRE
Consumer loans-single family
Total
Years Ended December 31,
2021
2020
Number of loan
relationships that
re-defaulted
Recorded
investment
Number of loan
relationships that
re-defaulted
Recorded
investment
1 $
11
12 $
678
3,040
3,718
— $
20
20 $
—
3,809
3,809
The Coronavirus Aid, Relief and Economic Security ("CARES") Act provided temporary relief from the accounting and
disclosure requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or
indirectly, to the COVID-19 pandemic. In addition, interagency guidance issued by federal banking regulators and endorsed by
the FASB staff has indicated that borrowers who receive relief are not experiencing financial difficulty if they meet the
following qualifying criteria:
•
•
•
The modification is in response to the National Emergency related to the COVID pandemic;
The borrower was current at the time the modification program was implemented; and
The modification is short-term
79
We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible short-term modifications
and will not treat qualifying loan modifications as TDRs for accounting or disclosure purposes. Additionally, eligible short-term
loan modifications subject to the practical expedient in the interagency guidance will not be treated as TDRs for accounting or
disclosure purposes if they qualify.
As of December 31, 2021, excluding any SBA guaranteed loans for which the government was making payments as provided
for under the CARES Act, or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of
$28 million on 41 loans that were approved for forbearance under this program.
The Bank will exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely
classify credits that are affected by COVID-19. The Bank also will not designate loans with deferrals granted due to COVID-19
as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs we are offering as
a result of the COVID-19 pandemic, we expect that borrowers granted relief under these programs will generally not be
reported as nonaccrual.
NOTE 4–PREMISES AND EQUIPMENT, NET:
Premises and equipment consisted of the following:
(in thousands)
Furniture and equipment
Leasehold improvements
Land and buildings
Total
Less: accumulated depreciation
Net
NOTE 5–DEPOSITS:
At December 31,
2021
2020
$
$
54,548 $
41,426
36,121
132,095
(73,941)
58,154 $
52,761
40,801
35,594
129,156
(64,054)
65,102
Deposit balances, including their weighted average rates, were as follows:
(dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing demand accounts
Savings
Money market
Certificates of deposit
Total
At December 31, 2021
Weighted
Average Rate
At December 31, 2020
Weighted
Average Rate
$
$
1,617,069
513,810
302,389
2,806,313
906,928
6,146,509
— % $
0.10 %
0.06 %
0.15 %
0.51 %
0.15 % $
1,337,010
484,265
264,024
2,596,453
1,139,807
5,821,559
— %
0.10 %
0.07 %
0.21 %
0.93 %
0.29 %
There were $342 million and $331 million in public funds included in deposits at December 31, 2021 and 2020, respectively.
80
Certificates of deposit outstanding mature as follows:
(in thousands)
Within one year
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total
December 31, 2021
718,838
162,954
18,553
3,803
2,780
—
906,928
$
$
The aggregate amount of time deposits in denominations of more than the FDIC limit of $250,000 at December 31, 2021 and
2020 was $108 million and $130 million, respectively. There were $145 million and $210 million of brokered deposits at
December 31, 2021 and 2020, respectively.
NOTE 6– BORROWINGS:
The Company borrows funds through advances from the Des Moines FHLB. FHLB advances totaled $41 million and $302
million as of December 31, 2021 and 2020, respectively. The $41 million of FHLB advances outstanding at December 31, 2021
matured in the first quarter of 2022. Weighted-average interest rates on the advances were 0.30% and 0.32% at December 31,
2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company held $10.4 million and $20.3 million,
respectively, of FHLB stock.
At December 31, 2021 and 2020, we had no federal funds purchased and securities sold under agreements to repurchase. At
December 31, 2021 and 2020, there were zero and $20.8 million in outstanding borrowings from the FRBSF, respectively,
which bore interest of 0.25% at 2020.
NOTE 7–LONG-TERM DEBT:
At December 31, 2021 and 2020, the Company had outstanding $64 million of Senior Notes and $62 million of trust preferred
securities. The Senior Notes bear interest at a rate of 6.50% and mature in 2026.
The Company issued trust preferred securities during the period from 2005 through 2007, resulting in a debt balance of $62
million that remains outstanding at December 31, 2021. In connection with the issuance of trust preferred securities,
HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable Interest Debentures. The sole assets of
the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III, and IV.
The Subordinated Debt Securities outstanding as of December 31, 2021 and 2020 are as follows:
(dollars in thousands)
I
II
III
IV
HomeStreet Statutory Trust
Date issued
Amount
Interest rate
Maturity date
Call option (1)
June 2005
September 2005
February 2006
March 2007
$5,155
$20,619
$20,619
$15,464
3 MO LIBOR +
1.70%
3 MO LIBOR +
1.50%
3 MO LIBOR +
1.37%
3 MO LIBOR +
1.68%
June 2035
Quarterly
December 2035
March 2036
Quarterly
Quarterly
June 2037
Quarterly
(1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years after issuance.
81
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:
Carrying value on consolidated balance sheet
$
9,280 $
(in thousands)
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Futures
Total derivatives before netting
Netting adjustment/Cash collateral (1)
(in thousands)
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Futures
Total derivatives before netting
Netting adjustment/Cash collateral (1)
At December 31, 2021
Notional amount
Fair value derivatives
Asset
Liability
$
793,208 $
723 $
115,025
287,352
1,082,000
$
2,277,585
2,487
4,381
334
7,925
1,355
At December 31, 2020
Notional amount
Fair value derivatives
Asset
Liability
$
977,974 $
1,035 $
(3,714)
493,873
536,969
314,000
$
2,322,816
17,395
17,459
—
35,889
(8,250)
(640)
(3)
(4,541)
—
(5,184)
3,921
(1,263)
(3)
(20,511)
(4)
(24,232)
21,447
(2,785)
Carrying value on consolidated balance sheet
$
27,639 $
(1) Includes net cash collateral paid of $5.3 million and $13.2 million at December 31, 2021 and 2020, respectively.
The Company nets derivative assets and liabilities when a legally enforceable master netting agreement exists between the
Company and the derivative counterparty. Derivatives are reported at their respective fair values in the other assets or accounts
payable and other liabilities line items on the consolidated balance sheets, with changes in fair value reflected in current period
earnings.
The following tables present gross fair value and net carrying value information about derivative instruments:
(in thousands)
At December 31, 2021
Derivative assets
Derivative liabilities
At December 31, 2020
Derivative assets
Derivative liabilities
Gross fair value
Netting
adjustments/Cash
collateral (1)
Carrying value
$
$
7,925 $
(5,184)
1,355 $
3,921
35,889 $
(8,250) $
(24,232)
21,447
9,280
(1,263)
27,639
(2,785)
(1)
Includes net cash collateral paid of $5.3 million and $13.2 million at December 31, 2021 and 2020, respectively.
The 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
82
other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties.
Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At December 31, 2021 and
2020, the Company had liabilities of zero and $3.3 million, respectively, in cash collateral received from counterparties and
receivables of $5.3 million and $16.5 million, respectively, in cash collateral paid to counterparties.
The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in
the consolidated income statements for the periods indicated:
(in thousands)
Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)
Loan servicing income (loss) (2)
Other (3)
Years Ended December 31,
2021
2020
$
(6,057) $
(8,238)
386
(7,675)
20,820
(421)
(1) Comprised of IRLCs and forward contracts used as economic hedges of single family mortgage LHFS.
(2) Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as economic hedges of single family MSRs.
(3)
Impact of interest rate swap agreements executed with commercial banking customers.
The notional amount of open interest rate swap agreements executed with commercial banking customers at December 31, 2021
and 2020 were $287 million and $246 million, respectively.
NOTE 9–MORTGAGE BANKING OPERATIONS:
LHFS consisted of the following:
(in thousands)
Single family
CRE, multi-family and SBA
Total
Loans sold consisted of the following for the periods indicated:
At December 31,
2021
2020
$
$
128,041 $
48,090
176,131 $
194,643
167,289
361,932
(in thousands)
Single family (1)
CRE, multi-family and SBA
Total
Years Ended December 31,
2021
2020
2019
$
$
2,046,811 $
773,378
2,820,189 $
1,985,944 $
908,776
2,894,720 $
3,925,302
843,864
4,769,166
(1) 2019 includes both continuing and discontinued operations.
83
Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the
following:
(in thousands)
Single family
CRE, multifamily and SBA
Less: Amounts attributed to discontinued operations
Total
Years Ended December 31,
2021
2020
2019
$
$
66,850 $
25,468
—
92,318 $
100,795 $
21,769
—
122,564 $
86,686
17,492
(60,056)
44,122
The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS
issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows:
(in thousands)
Single family
CRE, multi-family and SBA
Total
At December 31,
2021
2020
$
$
5,539,180 $
2,031,087
7,570,267 $
5,914,592
1,844,241
7,758,833
Under the terms of the sales agreements for loans sold to GSEs and other entities, the Company has made representations and
warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or
indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting
errors and judgments, appraisal errors, early payment defaults and fraud. The total unpaid principal balance of loans sold on a
servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $5.5 billion
and $6.0 billion as of December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the Company had recorded
a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable
and other liabilities, of $1.3 million and $2.1 million, respectively.
The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses:
(in thousands)
Balance, beginning of period
Additions, net of adjustments (1)
Realized losses (2)
Balance, end of period
Years Ended December 31,
2021
2020
$
$
2,122 $
(334)
(476)
1,312 $
2,871
(281)
(468)
2,122
(1)
(2)
Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses.
The Company has agreements with investors to advance scheduled principal and interest amounts on delinquent loans.
Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable
amounts from investors or borrowers. Advances of $1.9 million and $3.0 million were recorded in other assets as of
December 31, 2021 and 2020, respectively.
When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are
more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At December 31,
2021 and 2020, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its
consolidated balance sheets totaled $12 million and $102 million, respectively. The recognition of previously sold loans does
not impact the accounting for the previously recognized MSRs.
84
Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.:
(in thousands)
Servicing income, net:
Servicing fees and other
Amortization of single family MSRs (1)
Amortization of multifamily and SBA MSRs
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)(3)
Net gain (loss) from derivatives hedging
Total
Less: Amounts attributed to discontinued operations
Years Ended December 31,
2021
2020
2019
$
35,342 $
32,037 $
(19,669)
(7,581)
8,092
7,379
(8,238)
(859)
—
(17,754)
(5,657)
8,626
(19,955)
20,820
865
—
Loan servicing income
$
7,233 $
9,491 $
39,561
(20,670)
(5,214)
13,677
(16,224)
14,435
(1,789)
(2,103)
9,785
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily reflected by changes in mortgage
interest rates.
(3)
Includes pre-tax loss of $0.9 million, net of transaction costs and prepayment reserves, resulting from the sales of single family MSRs in 2019.
The Company determines fair value of single family MSRs using a valuation model that calculates the net present value of
estimated future cash flows. Estimates of future cash flows include contractual servicing fees, ancillary income and costs of
servicing, the timing of which are impacted by assumptions, primarily expected prepayment speeds and discount rates, which
relate to the underlying performance of the loans. The changes in single family MSRs measured at fair value are as follows:
(in thousands)
Beginning balance
Additions and amortization:
Originations
Sale
Amortization (1)
Net additions and amortization
Changes in fair value assumptions (2)
Years Ended December 31,
2021
2020
2019
$
49,966 $
68,109 $
252,168
23,908
—
(19,669)
4,239
7,379
19,424
—
(17,754)
1,670
(19,813)
28,788
(176,944)
(20,670)
(168,826)
(15,233)
68,109
Ending balance
$
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:
(rates per annum) (1)
Constant prepayment rate ("CPR") (2)
Discount rate
(1) Based on a weighted average.
(2) Represents the expected lifetime average CPR used in the model.
Years Ended December 31,
2021
2020
2019
8.84 %
8.23 %
11.37 %
7.82 %
18.23 %
9.31 %
85
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:
CPRs
Discount Rates
At December 31, 2021
At December 31, 2020
Range of Inputs
Average (1)
Range of Inputs
Average (1)
7.90% - 17.35%
6.94% - 13.96%
10.35 %
7.97 %
8.13%- 19.70%
6.50% -13.14%
12.81 %
8.27 %
(1) Weighted averages of all the inputs within the range.
To compute hypothetical sensitivities of the value of our single MSRs to immediate adverse changes in key assumptions, we
computed the impact of changes in CPRs and in discount rates as outlined below:
(dollars in thousands)
Fair value of single family MSRs
Expected weighted-average life (in years)
CPR
Impact on fair value of 25 basis points adverse change in interest rates
Impact on fair value of 50 basis points adverse change in interest rates
Discount rate
Impact on fair value of 100 basis points increase
Impact on fair value of 200 basis points increase
At December 31, 2021
$
$
$
$
$
61,584
5.94
(3,641)
(7,325)
(2,999)
(5,770)
Generally, increases in the CPR or the discount rate utilized in the fair value measurements of single family MSRs will result in
a decrease in fair value. Conversely, decreases in the CPR or the discount rate will result in an increase in fair value. These
sensitivities are hypothetical and subject to key assumptions of the underlying valuation model. As the table above
demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in key
assumptions. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a
variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in
reality, changes in one factor may be associated with changes in another, which may magnify or counteract the sensitivities.
Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in
time. Those assumptions may not be appropriate if they are applied to a different point in time.
In March 2019, the Company successfully closed and settled two sales of the rights to service an aggregate of $14.3 billion in
total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie Mae and Freddie Mac. These
sales resulted in a $0.9 million pre-tax loss which is included in discontinued operations for 2019.
MSRs resulting from the sale of multifamily loans are recorded at fair value and subsequently carried at the lower of amortized
cost or fair value. Multifamily MSRs are amortized in proportion to, and over, the estimated period the net servicing income
will be collected.
The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows:
(in thousands)
Beginning balance
Origination
Amortization
Ending balance
Years Ended December 31,
2021
2020
2019
$
$
35,774 $
29,494 $
11,222
(7,581)
11,587
(5,307)
39,415 $
35,774 $
28,328
5,832
(4,666)
29,494
86
At December 31, 2021, the expected weighted-average life of the Company's multifamily and SBA MSRs was 11.47 years.
Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows:
(in thousands)
2022
2023
2024
2025
2026
2027 and thereafter
Carrying value of multifamily and SBA MSRs
At December 31, 2021
$
$
5,766
5,627
5,392
5,061
4,437
13,132
39,415
The projected amortization expense of multifamily and SBA MSRs is an estimate and subject to key assumptions of the
underlying valuation model. The amortization expense for future periods was calculated by applying the same quantitative
factors, such as actual MSR prepayment experience and discount rates, which were used to determine amortization expense.
These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in interest rates may have
on expected loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the
conditions that existed at the time the calculations were performed and may not be indicative of actual amortization expense
that will be recorded in future periods.
NOTE 10–COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Commitments
In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of
its customers. In addition, the Company makes certain unfunded loan commitments as part of its lending activities that have not
been recognized in the Company's financial statements. These include commitments to extend credit made as part of the
Company's lending activities on loans the Company intends to hold in its LHFI portfolio.
These commitments include the following:
(in thousands)
Unused consumer portfolio lines
Commercial portfolio lines (1)
Commitments to fund loans
Total
At December 31,
2021
2020
$
$
405,992 $
820,131
90,852
1,316,975 $
389,122
656,065
68,345
1,113,532
(1) Includes undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments of $584
million and $395 million at December 31, 2021 and 2020, respectively.
The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements in that
commitments may expire without being drawn upon. The Company has recorded an ACL on unfunded loan commitments,
included in accounts payable and other liabilities on the consolidated balance sheets of $2.4 million and $1.6 million at
December 31, 2021 and 2020, respectively.
The Company has entered into certain agreements to invest in qualifying small businesses and small enterprises and a tax
exempt bond partnership that have not been recognized in the Company's financial statements. At December 31, 2021 and 2020
we had $15.2 million and $19.2 million, respectively, of future commitments to invest in these enterprises.
87
Guarantees
In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and
Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie
Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the
Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third
of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this
program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of
December 31, 2021 and 2020, the total unpaid principal balance of loans sold under this program was $1.9 billion and $1.8
billion, respectively. The Company's reserve liability related to this arrangement totaled $0.6 million and $2.1 million at
December 31, 2021 and 2020, respectively. There were no actual losses incurred under this arrangement during 2021, 2020 or
2019.
Contingencies
In the normal course of business, the Company may have various legal claims and other similar contingent matters outstanding
for which a loss may be realized. For these claims, the Company establishes a liability for contingent losses when it is probable
that a loss has been incurred and the amount of loss can be reasonably estimated. For claims determined to be reasonably
possible but not probable of resulting in a loss, there may be a range of possible losses in excess of the established liability. The
Company did not have any material amounts reserved for legal claims as of December 31, 2021.
NOTE 11–INCOME TAXES:
Income tax expense from continuing operations consisted of the following:
(in thousands)
Current expense
Federal
State and local
Deferred (benefit) expense
Federal
State and local
Tax credit investment amortization
Total
Years Ended December 31,
2021
2020
2019
$
$
20,074 $
3,191
27,166 $
4,804
32,738
5,153
4,325
511
3,166
31,267 $
(11,076)
(1,596)
2,606
21,904 $
(28,313)
(4,292)
2,702
7,988
Income tax expense from continuing operations differed from amounts computed at the federal income tax statutory rate as
follows:
(in thousands, except rate)
Income before taxes
2021
2020
2019
Rate
Amount
Rate
Amount
Rate
Amount
Years Ended December 31,
$
146,689
$
101,894
$
48,708
Federal tax statutory rate
State tax - net of federal tax benefit
Tax-exempt interest benefit
Stock-based compensation expense
Other
Total
21.00 %
2.20 %
(1.40) %
(0.77) %
0.29 %
30,805
3,220
(2,049)
(1,132)
423
21.00 %
2.54 %
(1.81) %
(0.16) %
(0.07) %
21,398
2,587
(1,849)
(159)
(73)
21.00 %
10,229
(0.45) %
(2.85) %
(0.25) %
(1.05) %
(217)
(1,388)
(123)
(513)
21.32 % $
31,267
21.50 % $
21,904
16.40 % $
7,988
88
The following is a summary of the Company's deferred tax assets and liabilities:
(in thousands)
Deferred taxes assets
Provision for credit losses
Federal and state net operating loss carryforwards
Accrued liabilities
Other investments
Lease liabilities
Nonaccrual interest
Stock options
Loan valuation
Other
Total
Deferred taxes liabilities
Mortgage servicing rights
Deferred loan fees and costs
Lease right-of-use assets
Unrealized gain on investment AFS securities
Premises and equipment
Intangibles
Other
Total
Net deferred tax liability
At December 31,
2021
2020
$
11,477 $
628
2,268
471
12,028
213
969
289
1,744
30,087
(22,221)
(7,336)
(8,572)
(5,630)
(1,843)
(742)
(54)
$
(46,398)
(16,311) $
15,957
849
2,152
451
15,290
497
820
454
2,262
38,732
(18,663)
(10,972)
(10,435)
(9,409)
(3,620)
(829)
(171)
(54,099)
(15,367)
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be
generated to utilize the existing deferred tax assets. As of December 31, 2021, management determined that sufficient evidence
exists to support the future utilization of all of the Company's deferred tax assets.
Utilization of the federal and state net operating loss and tax credit carryforwards may be subject to an annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of 1986, as amended. At December 31, 2020, the Company
had federal net operating loss carryforwards of $1.0 million. The Company also has state net operating loss carryforwards of
$12.1 million as of both December 31, 2021 and 2020 that will expire at various dates from 2022 to 2038.
Retained earnings at December 31, 2021 and 2020 include approximately $12.7 million in tax basis bad debt reserves for which
no income tax liability has been recorded. This represents the balance of bad debt reserves created for tax purposes as of
December 31, 1987. These amounts are subject to recapture (i.e., included in taxable income) if certain events occur, such as in
the event HomeStreet Bank ceases to be a bank. In the event of recapture, the Company will incur both federal and state tax
liabilities on this pre-1988 bad debt reserve balance at the then prevailing corporate tax rates.
The Company had no recorded unrecognized tax position as of December 31, 2021, 2020 or 2019.
We are currently under examination, or subject to examination, by various U.S. federal and state taxing authorities. The
Company is no longer subject to federal income tax examinations for tax years prior to 2015 or state income tax examination
for tax years prior to 2017, generally.
NOTE 12–RETIREMENT BENEFIT PLAN:
The Company maintains a 401(k) Savings Plan for the benefit of its employees. Substantially all of the Company's employees
are eligible to participate in the HomeStreet, Inc. 401(k) Savings Plan (the "Plan"). The Plan provides for payment of retirement
benefits to employees pursuant to the provisions of the Plan and in conformity with Section 401(k) of the Internal Revenue
Code. Employees may elect to have a portion of their salary contributed to the Plan. Participants receive a vested employer
89
matching contribution equal to 100% of the first 3.0% and 50% of the next 2.0% of eligible compensation deferred by the
participant. Employer contributions of $3.9 million, $3.8 million and $5.5 million were incurred in 2021, 2020, and 2019,
respectively.
NOTE 13–SHARE-BASED COMPENSATION PLANS:
In May 2014, the shareholders approved the Company's 2014 Equity Incentive Plan (the "2014 EIP Plan") that provided for the
grant of stock options, shares of restricted stock, RSUs, PSUs, stock bonus awards, stock appreciation rights, performance share
awards and performance compensation awards and unrestricted stock (collectively, "Equity Incentive Awards") to the
Company’s executive officers, other key employees and directors. This plan was amended in May 2017 and allows the grant of
up to 1,875,000 shares of the Company’s common stock. For 2021 and 2020, the Company recognized stock-based
compensation cost of $2.9 million and $2.4 million, respectively. In 2019, the Company recognized a $3.1 million reversal of
previously recognized stock-based compensation costs related to PSUs that did not meet their internal performance metrics,
resulting in a net benefit of $0.4 million.
Nonqualified Stock Options
A summary of changes in stock options for 2021 is as follows:
Options outstanding at December 31, 2020
Exercised
Options outstanding at December 31, 2021
There were no options granted or forfeited during 2021.
Number
188,181
$
(188,181)
— $
Weighted
Average
Exercise Price
12.85
12.85
—
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(in thousands)
1.3 years $
3,933
— $
—
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:
Outstanding at December 31, 2020
Granted
Cancelled or forfeited
Vested
Outstanding at December 31, 2021
Number
Weighted Average
Grant Date Fair Value
295,840 $
106,372
(73,577)
(60,104)
268,531 $
24.52
33.01
28.06
24.89
26.83
The assumptions used in the Monte Carlo simulations used to determine fair market value of the PSUs granted in 2021, 2020
and 2019 are set forth in the table below:
Volatility of common stock
Average volatility of peer companies
Average correlation coefficient of peer companies
Risk-free interest rate
Expected term in years
2021
2020
2019
40.5 %
43.5 %
0.8004 %
0.2 %
3.00 years
33.9 %
34.8 %
0.7561 %
0.3 %
2.76 years
29.4 %
24.5 %
0.7272 %
2.3 %
2.69 years
90
NOTE 14–FAIR VALUE MEASUREMENT:
The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell
the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market,
the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs
and minimize the use of unobservable inputs when developing fair value measurements.
Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation
hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial
instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair
value measurement. The levels are defined as follows:
•
•
•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
can access at the measurement date. An active market for the asset or liability is a market in which transactions for
the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing
basis.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what
market participants would use in pricing the asset or liability.
The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at
the end of the reporting period.
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not
available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield
curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based
inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that
would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may
result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a
current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and
classification of the Company's assets and liabilities valued at fair value on a recurring basis.
91
Asset/Liability class
Investment securities
Valuation methodology, inputs and assumptions
Classification
Investment securities AFS
Observable market prices of identical or similar securities are used
where available.
Level 2 recurring fair value
measurement.
LHFS
Single family loans, excluding
loans transferred from held for
investment
If market prices are not readily available, value is based on
discounted cash flows using the following significant inputs:
Level 3 recurring fair value
measurement.
• Expected prepayment speeds
• Estimated credit losses
• Market liquidity adjustments
Fair value is based on observable market data, including:
Level 2 recurring fair value
measurement.
• Quoted market prices, where available
• Dealer quotes for similar loans
• Forward sale commitments
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
Derivatives
Futures
Interest rate swaps
Interest rate swaptions
Forward sale commitments
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.
Fair value is based on closing exchange prices.
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 1 recurring fair value
measurement.
Level 2 recurring fair value
measurement.
Interest rate lock commitments
The fair value considers several factors including:
Level 3 recurring fair value
measurement.
• Fair value of the underlying loan based on quoted prices in
the secondary market, when available.
• Value of servicing
• Fall-out factor
92
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:
(in thousands)
Assets:
Investment securities AFS
Mortgage backed securities:
Residential
Commercial
Collateralized mortgage obligations:
Residential
Commercial
Municipal bonds
Corporate debt securities
U.S. Treasury securities
Single family LHFS
Single family LHFI
Single family mortgage servicing rights
Derivatives
Futures
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Fair Value
Level 1
Level 2
Level 3
As of December 31, 2021
$
32,963 $
— $
30,556 $
62,792
187,394
136,659
539,923
19,616
23,175
128,041
7,287
61,584
334
723
2,487
4,381
—
—
—
—
—
—
—
—
—
334
—
—
—
62,792
187,394
136,659
539,923
19,541
23,175
128,041
—
—
—
723
—
4,381
2,407
—
—
—
—
75
—
—
7,287
61,584
—
—
2,487
—
Total assets
$
1,207,359 $
334 $
1,133,185 $
73,840
Liabilities:
Derivatives
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Total liabilities
$
$
640 $
— $
640 $
3
4,541
—
—
—
4,541
5,184 $
— $
5,181 $
—
3
—
3
93
(in thousands)
Assets:
Investment securities AFS
Mortgage backed securities:
Residential
Commercial
Collateralized mortgage obligations:
Residential
Commercial
Municipal bonds
Corporate debt securities
Agency debentures
Single family LHFS
Single family LHFI
Single family mortgage servicing rights
Derivatives
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Total assets
Liabilities:
Derivative
Futures
Forward sale commitments
Interest rate lock commitments
Interest rate swaps
Total liabilities
Fair Value
Level 1
Level 2
Level 3
As of December 31, 2020
$
51,046 $
— $
48,417 $
2,629
45,184
234,909
159,183
564,703
15,222
1,846
194,643
7,108
49,966
1,035
17,395
17,459
—
—
—
—
—
—
—
—
—
—
—
—
45,184
234,909
159,183
564,703
15,141
1,846
194,643
—
—
1,035
—
17,459
—
—
—
—
81
—
—
7,108
49,966
—
17,395
—
$
$
$
1,359,699 $
— $
1,282,520 $
77,179
4 $
4 $
— $
3,714
3
20,511
—
—
—
3,714
—
20,511
24,232 $
4 $
24,225 $
—
—
3
—
3
There were no transfers between levels of the fair value hierarchy during 2021 and 2020.
Level 3 Recurring Fair Value Measurements
The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single
family LHFI where fair value option was elected, certain single family LHFS, and interest rate lock and purchase loan
commitments ("IRCLs"), which are accounted for as derivatives. For information regarding fair value changes and activity for
single family MSRs during 2021 and 2020, see Note 9, Mortgage Banking Operations.
The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan
resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan
(referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred
to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly
dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an
individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed
and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of
servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually
specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in
market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in
value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the
fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs.
94
The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at
the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is
reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives
generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting
for estimated fall-out) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume
of single family closed loans during the reporting period.
The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from
held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable
market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied
spread is not directly observable in the market and is derived from third party pricing which is based on market information
from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held
for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair
value measurement.
The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale
loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as
the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair
value option election was made was $7.3 million and $7.1 million at December 31, 2021 and 2020, respectively.
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:
(dollars in thousands)
December 31, 2021
Fair Value
Valuation
Technique
Significant Unobservable
Input
Low
High
Weighted
Average
Investment securities AFS
$
2,482
Income approach
Single family LHFI
7,287
Income approach
Implied spread to benchmark
interest rate curve
Implied spread to benchmark
interest rate curve
2.00%
2.00%
2.00%
2.39%
7.96%
3.56%
Interest rate lock commitments,
net
December 31, 2020
2,484
Income approach
Fall-out factor
0.15%
21.93%
8.44%
Value of servicing
0.35%
1.46%
1.15%
Investment securities AFS
$
2,710
Income approach
Single family LHFI
7,108
Income approach
Implied spread to benchmark
interest rate curve
Implied spread to benchmark
interest rate curve
Interest rate lock commitments,
net
17,392
Income approach
Fall-out factor
Value of servicing
2.00%
2.00%
2.00%
3.96%
10.64%
6.23%
1.97%
0.41%
38.38%
1.44%
15.53%
0.97%
We had no LHFS where the fair value was not derived with significant observable inputs at December 31, 2021 or 2020.
The following table presents fair value changes and activity for certain Level 3 assets:
(in thousands)
Year Ended December 31, 2021
Investment securities AFS
Single family LHFI
Year Ended December 31, 2020
Investment securities AFS
Single family LHFI
Beginning
balance
Additions
Transfers
Payoffs/Sales
Change in mark
to market (1)
Ending
balance
$
$
2,710 $
7,108
— $
4,051
1,952 $
3,468
985 $
6,088
— $
—
— $
—
(192) $
(4,279)
(435) $
(2,409)
(36) $
407
208 $
(39)
2,482
7,287
2,710
7,108
(1) Changes in fair value for singe family LHFI are recorded in other noninterest income on the consolidated income statement.
95
The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments:
(in thousands)
Beginning balance, net
Total realized/unrealized gains
Settlements
Ending balance, net
Nonrecurring Fair Value Measurements
Years Ended December 31,
2021
2020
$
$
17,392 $
11,888
(26,796)
2,484 $
2,223
55,911
(40,742)
17,392
Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis.
These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less
the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and
appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure
related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis.
The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable
properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the
general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair
value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by
real estate.
The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that
are not collateralized by real estate and to the appraisal value of OREO.
Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value
include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.
These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or
decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and
income producing potential of each individual property. The quality and volume of market information available at the time of
the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable
inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair
value will increase or decrease from period to period.
The following tables present assets classified as Level 3 assets that had changes in their recorded fair value during 2021 and
2020 and what we still held at the end of the respective reporting period:
(in thousands)
As of or for the year ended December 31, 2021
LHFI (1)
As of or for the year ended December 31, 2020
LHFI (1)
Fair Value
Total Gains (Losses)
$
$
1,214
3,651
$
$
(43)
(1,700)
(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.
96
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:
(in thousands)
Assets:
Cash and cash equivalents
Investment securities HTM
LHFI
LHFS – multifamily and SBA
Mortgage servicing rights – multifamily
and SBA
Federal Home Loan Bank stock
Other assets - GNMA EBO loans
Liabilities:
Certificates of deposit
Borrowings
Long-term debt
$
$
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
At December 31, 2021
65,214 $
4,169
5,488,439
48,090
65,214 $
4,305
5,588,719
48,425
65,214 $
—
—
—
39,415
10,361
12,342
43,199
10,361
12,342
—
—
—
— $
4,305
—
48,425
—
10,361
—
—
—
5,588,719
—
43,199
—
12,342
906,928 $
41,000
126,026
906,064 $
41,000
116,845
— $
—
—
906,064 $
41,000
116,845
—
—
—
(in thousands)
Assets:
Cash and cash equivalents
Investment securities HTM
LHFI
LHFS multifamily and other
Mortgage servicing rights – multifamily
Federal Home Loan Bank stock
Other assets - GNMA EBO loans
Liabilities:
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
At December 31, 2020
$
58,049 $
58,049 $
58,049 $
— $
4,271
5,172,778
167,289
35,774
20,319
101,750
4,507
5,327,711
167,289
38,423
20,319
101,750
—
—
—
—
—
—
4,507
—
167,289
—
20,319
—
Certificates of deposit
$
1,139,807 $
1,143,747 $
— $
1,143,747 $
Borrowings
Long-term debt
Fair Value Option
322,800
125,838
322,876
116,893
—
—
322,876
116,893
—
—
5,327,711
—
38,423
—
101,750
—
—
—
Single family loans held for sale accounted under the fair value option are measured initially at fair value with subsequent
changes in fair value recognized in earnings. Gains and losses from such changes in fair value are recognized in net gain on
mortgage loan origination and sale activities within noninterest income. The change in fair value of loans held for sale is
primarily driven by changes in interest rates subsequent to loan funding and changes in fair value of the related servicing asset,
resulting in revaluations adjustments to the recorded fair value. The use of the fair value option allows the change in the fair
97
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:
(in thousands)
Fair Value
At December 31, 2021
Aggregate Unpaid
Principal Balance
Fair Value Less
Aggregated Unpaid
Principal Balance
At December 31, 2020
Fair Value
Aggregate Unpaid
Principal Balance
Fair Value Less
Aggregated Unpaid
Principal Balance
Single family LHFS
$ 128,041 $
124,933 $
3,108 $ 194,643 $
185,832 $
8,811
NOTE 15–REGULATORY CAPITAL REQUIREMENTS:
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a material effect on the Company's operations and financial statements. Under capital
adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators about risk components, asset risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as defined) to assets (as defined). Management believes, as of December 31,
2021 that the Company and the Bank met all capital adequacy requirements. The following table presents the capital and capital
ratios of the Company (on a consolidated basis) and the Bank (on a stand-alone basis) as of the respective dates and as
compared to the respective regulatory requirements applicable to them:
(dollars in thousands)
HomeStreet, Inc.
At December 31, 2021
Actual
For Minimum Capital
Adequacy Purposes
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
$
723,232
9.94 % $
291,098
663,232
10.84 %
275,281
Tier 1 risk-based capital (to risk-weighted assets)
723,232
11.82 %
367,041
774,695
12.66 %
489,388
4.0 %
4.5 %
6.0 %
8.0 %
NA
NA
NA
NA
Total risk-based capital (to risk-weighted assets)
HomeStreet Bank
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
$
727,753
10.11 % $
287,990
4.0 % $
359,988
727,753
12.87 %
254,442
4.5 %
367,527
NA
NA
NA
NA
5.0 %
6.5 %
8.0 %
10.0 %
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
727,753
778,723
12.87 %
339,256
6.0 %
452,341
13.77 %
452,341
8.0 %
565,426
98
NA
NA
NA
NA
5.0 %
6.5 %
8.0 %
(dollars in thousands)
HomeStreet, Inc.
At December 31, 2020
Actual
For Minimum Capital
Adequacy Purposes
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
$
709,655
9.65 % $
294,211
649,655
11.67 %
250,537
Tier 1 risk-based capital (to risk-weighted assets)
709,655
12.75 %
334,050
779,254
14.00 %
445,400
4.0 %
4.5 %
6.0 %
8.0 %
NA
NA
NA
NA
Total risk-based capital (to risk-weighted assets)
HomeStreet Bank
Tier 1 leverage capital (to average assets)
Common equity tier 1 capital (to risk-weighted
assets)
$
712,533
9.79 % $
291,114
4.0 % $
363,893
712,533
13.51 %
237,307
4.5 %
342,777
Tier 1 risk-based capital (to risk-weighted assets)
712,533
13.51 %
316,410
6.0 %
421,880
Total risk-based capital (to risk-weighted assets)
778,479
14.76 %
421,880
8.0 %
527,350
10.0 %
As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it
and Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the
prompt corrective action regulations. No conditions or events have occurred since December 31, 2021 that we believe have
changed the Company’s or the Bank’s capital adequacy classifications from those set forth in the above table.
In addition to the minimum capital ratios, both the Company and the Bank are required to maintain a “conservation buffer"
consisting of additional Common Equity Tier 1 Capital which is at 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, 2021, capital conservation buffers for the Company and the Bank were 4.66% and 5.77%,
respectively. The following table sets forth the minimum capital ratios plus the applicable increment of the capital conservation
buffer:
CET-1 to risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
7.00 %
8.50 %
10.50 %
99
NOTE 16–EARNINGS PER SHARE:
The following table summarizes the calculation of earnings per share:
(in thousands, except share and per share data)
EPS numerator:
Income from continuing operations
Earnings allocated to share repurchase
Income from continuing operations available to common shareholders
Loss from discontinued operations
Net income available to common shareholders
EPS denominator:
Weighted average shares:
Years Ended December 31,
2021
2020
2019
$
115,422 $
79,990 $
40,720
—
115,422
—
—
79,990
—
(650)
40,070
(23,208)
$
115,422 $
79,990 $
16,862
Basic weighted-average number of common shares outstanding
20,885,509
22,867,268
25,573,488
Dilutive effect of outstanding common stock equivalents
257,905
209,554
197,295
Diluted weighted-average number of common shares outstanding
21,143,414
23,076,822
25,770,783
Net income (loss) per share
Basic:
Income from continuing operations
Loss from discontinued operations
Total
Diluted:
Income from continuing operations
Loss from discontinued operations
Total
$
$
$
$
5.53 $
3.50 $
—
—
5.53 $
3.50 $
5.46 $
3.47 $
—
—
5.46 $
3.47 $
1.57
(0.91)
0.66
1.55
(0.90)
0.65
100
NOTE 17–LEASES:
We have operating and finance leases for certain office space and finance leases for certain equipment. Our leases have
remaining lease terms of up to 14 years.
The Company, as sublessor, subleases certain office and retail space in which the terms of the subleases end by May 2029.
Under all of our executed sublease arrangements, the sublessees are obligated to pay the Company sublease payments of $5.7
million in 2022, $4.4 million in 2023, $2.8 million in 2024, $2.3 million in 2025, $2.3 million in 2026 and $2.3 million
thereafter. For 2020 and 2019 we incurred $2.5 million and $5.0 million in impairment charges on lease right-of-use assets,
respectively.
The components of lease expense were as follows:
(in thousands)
Operating lease cost
Short-term leases
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Variable lease costs and nonlease components
Sublease income
Total
Years Ended December 31,
2021
2020
2019
$
9,610 $
11,989 $
—
1,066
22
3,716
—
1,277
151
5,502
$
(3,449)
10,965 $
(6,662)
12,257 $
Supplemental cash flow information related to leases were as follows:
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained
Operating leases
Finance leases
Other changes in right-of-use assets (1)
Operating leases
Finance leases
$
$
$
Years Ended December 31,
2021
2020
2019
13,647 $
15,452 $
151
1,209
5,666 $
—
22
1,070
1,894 $
707
(460) $
(2)
(39,924) $
(29)
(13,605)
(1,172)
(1) Change in 2020 primarily relates to changes in assumptions regarding the exercise of renewal options available under real estate lease agreements.
101
14,538
28
2,030
340
6,627
(4,378)
19,185
17,054
340
1,694
5,800
139
Supplemental information related to leases was as follows:
(in thousands, except lease term and discount rate)
Operating lease right-of-use assets, included in other assets
Operating lease liabilities, included in accounts payable and other liabilities
Finance lease right-of-use assets, included in other assets
Finance lease liabilities, included in accounts payable and other liabilities
Weighted Average Remaining lease term in years
Operating leases
Finance leases
Weighted Average Discount Rate
Operating leases
Finance leases
$
$
At December 31,
2021
2020
$
$
38,010
49,574
777
787
5.87
0.96
1.71 %
1.43 %
45,560
62,563
1,081
1,097
6.09
1.52
1.71 %
3.12 %
Maturities of lease liabilities and obligations under leases classified as nonlease components were as follows:
Lease Liabilities
Operating Leases
Finance Leases
Nonlease Components
(in thousands)
Year ended December 31,
2022
2023
2024
2025
2026
2027 and thereafter
Total lease payments
Less imputed interest
$
12,969 $
10,558
8,487
6,908
5,896
9,855
54,673
5,099
521 $
281
—
—
—
—
802 $
15
787
5,306
4,842
4,413
4,245
4,355
4,417
27,578
Total
$
49,574 $
102
NOTE 18–PARENT COMPANY FINANCIAL STATEMENTS (UNAUDITED):
Condensed financial information for HomeStreet, Inc. is as follows:
Condensed Balance Sheets
(in thousands)
Assets:
Cash and cash equivalents
Other assets
Investment in stock of HomeStreet Bank
Investment in stock of other subsidiaries
Total assets
Liabilities:
Other liabilities
Long-term debt
Total liabilities
Shareholders' Equity:
Common stock, no par value
Retained earnings
Accumulated other comprehensive income
Total shareholder's equity
Total liabilities and shareholder's equity
Condensed Income Statements
(in thousands)
Noninterest income
Dividend income from HomeStreet Bank
Equity in undistributed income from subsidiaries
Distributions in excess of income from subsidiaries
Other noninterest income
Total revenues
Expenses
Interest expense-net
Noninterest expense
Total expenses
Income before income taxes (benefit)
Income taxes (benefit)
Net income
At December 31,
2021
2020
$
$
$
12,756 $
5,082
779,851
45,175
842,864 $
1,499 $
126,026
127,525
249,856
444,343
21,140
715,339
$
842,864 $
20,021
7,686
780,531
36,381
844,619
1,031
125,838
126,869
278,505
403,888
35,357
717,750
844,619
Years Ended December 31,
2021
2020
2019
$
$
109,000 $
10,801
—
1,838
121,639
4,576
2,939
7,515
114,124
(1,298)
115,422 $
82,909 $
3,374
—
1,773
88,056
5,731
4,136
9,867
78,189
(1,801)
79,990 $
110,000
—
(84,146)
2,293
28,147
4,821
8,437
13,258
14,889
(2,623)
17,512
103
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Undistributed earnings from investment in subsidiaries
Distributions in excess or earnings from investment in subsidiaries
Other
Net cash provided by operating activities
Cash flows from investing activities:
AFS securities: Principal collections net of purchases
Net cash provided by investing activities
Cash flows from financing activities:
Repurchases of common stock
Proceeds from stock issuance, net
Dividends paid on common stock
Net cash used in financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
NOTE 19–DISCONTINUED OPERATIONS:
Years Ended December 31,
2021
2020
2019
$
115,422 $
79,990 $
17,512
(10,801)
—
(8,669)
95,952
(3,374)
—
(4,483)
72,133
—
84,146
(30)
101,628
2,012
2,012
2,886
2,886
1,049
1,049
(84,154)
263
(21,338)
(105,229)
(7,265)
20,021
(58,009)
238
(13,865)
(71,636)
3,383
16,638
(98,543)
105
—
(98,438)
4,239
12,399
$
12,756 $
20,021 $
16,638
On March 31, 2019, the Board adopted a Resolution of Exit or Disposal of HLC Based Mortgage Banking Operations to sell or
abandon the assets and related personnel associated with those operations. The assets that were sold or abandoned largely
represented the Company's former Mortgage Banking segment, the activities of which related to originating, servicing,
underwriting, funding and selling single family residential mortgage loans.
The Company determined that the above actions constituted commitment to a plan of exit or disposal of certain long-lived
assets (through sale or abandonment) and termination of employees. Further, the Company determined that the shift from a
large-scale HLC based originator and servicer to a branch-focused product offering represented a strategic shift. As a result, the
HLC-related mortgage banking operations are reported separately from the continuing operations as discontinued operations. In
addition, the former Mortgage Banking operating segment and reporting unit were eliminated. This has resulted in a recast of
the financial statements in 2019 and prior.
In the first quarter of 2019, the Company successfully closed and settled two sales of the rights to service $14.3 billion in total
unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Freddie Mac and Ginnie Mae. These sales
resulted in a $0.9 million pre-tax loss from discontinued operations during 2019.
In June 2019 the Company completed the sale of the HLC based mortgage originations business assets and transfer of personnel
to Homebridge Financial Services, Inc. ("Homebridge"). This sale included 47 stand-alone HLCs and the transfer of certain
related mortgage personnel. These HLCs, along with certain other mortgage banking related assets and liabilities are classified
as discontinued operations in the accompanying consolidated balance sheets and consolidated income statements. HLCs that
were not sold were closed during the second quarter of 2019. Certain bank location-based components of the Company's former
Mortgage Banking segment, including MSRs on certain mortgage loans that were not part of the sales and right-of-use assets
and lease liabilities where we did not obtain full landlord release have been classified as continuing operations.
In November 2019, we sold our ownership interest in WMS LLC at our basis.
104
These discontinued operations activities were concluded by December 31, 2019. Consequently, we ceased discontinued
operations accounting effective January 1, 2020. The following table summarizes the calculation of the net gain (loss) on
disposal of discontinued operations for 2019:
(in thousands)
Proceeds from asset sales
Book value of assets sold
Gain on assets sold
Transaction costs
Compensation expense related to the transactions
Facility and IT related costs
Total costs
Net loss on disposal
$
$
186,692
181,243
5,449
8,770
4,636
13,660
27,066
(21,617)
The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the following at
December 31, 2019:
$
$
$
$
$
$
26,123
2,505
28,628
2,603
5,858
63,713
97,856
(28,285)
(5,077)
(23,208)
238,212
185,458
(in thousands)
Assets of discontinued operations
LHFS at fair value
Other assets
Total
Liabilities of discontinued operations
Account payable and other liabilities
Income Statement of Discontinued Operations for 2019:
(in thousands)
Net interest income
Noninterest income
Noninterest expense
Loss before income taxes
Income tax (benefit) expense
Loss from discontinued operations
Cash Flows from Discontinued Operations for 2019:
(in thousands)
Net cash provided by operating activities
Net cash provided by investing activities
105
NOTE 20–RESTRUCTURING:
In addition to the disposal of our HLC Based Mortgage Banking Operations, we have taken the following restructuring
activities to improve our productivity and reduce expenses:
•
•
In 2019, we implemented a restructuring plan under which we incurred costs to:
◦
Reduce our staffing levels through consolidation of job functions and elimination of management
redundancy;
Renegotiate our technology contracts;
Eliminate excess occupancy costs;
Eliminate redundant or unnecessary systems and services;
Engage consultants to assist with the above processes.
◦
◦
◦
◦
In 2020, we concluded the restructuring plan started in 2019, and took additional steps to consolidate our facilities and
incurred charges to reflect the vacating of certain office space.
The costs incurred include severance, retention, facility related charges and consulting fees.
The following table summarizes the restructuring charges and the liability for restructuring costs still to be paid in the periods
indicated:
(in thousands)
2021 Activity
Restructuring charges
Costs paid or otherwise settled
Balance, December 31, 2021
2020 Activity
Restructuring charges
Costs paid or otherwise settled
Balance, December 31, 2020
2019 Activity
Restructuring charges
Costs paid or otherwise settled
Balance, December 31, 2019
Facility-related costs
Personnel-related
costs
Other costs
Total
$
$
$
$
$
$
— $
(1,029)
1,834 $
10,188 $
(8,560)
2,863 $
1,373 $
(138)
1,235 $
—
$
(154)
—
$
339
$
(695)
154
$
1,836
$
(1,326)
510
$
— $
(116)
— $
1,266 $
(1,309)
116 $
1,302 $
(1,143)
159 $
—
(1,299)
1,834
11,793
(10,564)
3,133
4,511
(2,607)
1,904
106
NOTE 21–SUBSEQUENT EVENTS:
On January 19, 2022, we completed a $100 million subordinated notes offering due in 2032 (the “Notes”). Interest on the Notes
initially will accrue at a rate equal to 3.5% per annum from and including the date of original issuance to, but excluding,
January 30, 2027, payable semiannually in arrears. From and including January 30, 2027, to, but excluding, the maturity date
or the date of earlier redemption, the Notes will bear interest equal to the three-month term SOFR plus 215 basis points, payable
quarterly in arrears. Net proceeds to the Company were $98 million, after deducting underwriting discounts and offering
expenses. The Company intends to use a significant portion of the net proceeds from the Notes offering to repurchase shares of
its common stock through open market purchases, with the remainder of the net proceeds used for working capital and other
general corporate purposes, including support for growth of its total assets.
On January 27, 2022 the Board of Directors authorized a dividend of $0.35 per share, payable on February 23, 2022 to
shareholders of record on February 09, 2022. In addition, the Board authorized an expansion of our share repurchase program
for the additional repurchase of up to $75 million in aggregate amount of shares of the Company’s common stock.
107
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disclosure required pursuant to Item 304 of Regulation S-K.
ITEM 9A
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management conducted an evaluation, under the supervision and with the participation of its Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) at December 31, 2021. The Company's
disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company's
management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based upon
the evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective at
December 31, 2021.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Exchange Act) for the Company. The Company's internal control over financial reporting is a process
designed under the supervision of the Company's CEO and CFO to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company's financial statements for external purposes in accordance with U.S.
GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive review, evaluation, and assessment of the Company's internal control over financial
reporting at December 31, 2021. In making its assessment of internal control over financial reporting, management utilized the
framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
Control - Integrated Framework. Based on that assessment, management concluded that, at December 31, 2021, the Company's
internal control over financial reporting was effective.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial statements at,
and for, the year ended December 31, 2021, has issued an audit report on the effectiveness of the Company's internal control
over financial reporting at December 31, 2021, which report is included below in this Item 9A.
Changes in Internal Control Over Financial Reporting
As required by Rule 13a-15(d), our management, including our CEO and CFO, also conducted an evaluation of our internal
control over financial reporting to determine whether any changes occurred during the quarter ended December 31, 2021 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were
no changes to our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
108
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and Board of Directors of HomeStreet, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of HomeStreet, Inc. and subsidiaries (the “Company”) as of
December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Because management’s assessment and our audit were
conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act
(FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls
over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the
Federal Financial Institutions Examinations Council Instructions for Consolidated Reports of Condition and Income for
Schedules RC, RI, and RI-A. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013)
issued by COSO.
We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management’s
statement referring to compliance with laws and regulations.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our
report dated March 4, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 4, 2022
109
ITEM 9B
OTHER INFORMATION
None.
ITEM 9C
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including
our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our
website at http://ir.homestreet.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
provision of this Code of Business Conduct and Ethics by posting such information on our corporate website, at the address and
location specified above and, to the extent required by the listing standards of the Nasdaq Global Select Market, by filing a
Current Report on Form 8-K with the SEC, disclosing such information.
The information required by this item with respect to our directors, our executive officers, our Audit Committee and its
members, and audit committee financial expert will be set forth in our definitive proxy statement for the 2022 annual meeting of
stockholders (the “2022 Proxy Statement”) under the captions “Election of Directors” and” “Executive Officers,” which
information is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this item will be set forth in the 2022 Proxy Statement under the captions “Executive
Compensation,” “2021 Executive Compensation Program,” “Other Practices, Policies and Guidelines,” “Human Resources and
Corporate Governance Committee Report,” “2021 Summary Compensation Table,” “Potential Payments Upon Termination or
Change in Control,” and “Corporate Governance - Human Resources and Corporate Governance Committee Interlocks and
Insider Participation,” which information is incorporated herein by reference.
110
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans as of December 31, 2021 under the HomeStreet, Inc. 2014 Equity
Incentive Plan (the "2014 Plan").
Plan Category
Plans approved by shareholders
Plans not approved by shareholders
Total
(a) Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(b) Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights
(c) Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a)
351,642
(1)
—
351,642
$
$
(2)
—
—
—
1,018,599
(3)
—
1,018,599
(1) Consists of 114,855 shares subject to Restricted Stock Units, including 6,273 RSUs granted to certain directors as part of their
director compensation which are fully vested and pursuant to which shares will be issued upon the director’s departure from the
Board, awarded under the 2014 Plan and 230,514 shares issuable under Performance Share Units awarded under the 2014 Plan,
assuming maximum performance goals are met under such awards, resulting in the issuance of the maximum number of shares
allowed under those awards.
(2) Shares issued on vesting of Restricted Stock Units and Performance Share Units under the 2014 Plan are done without payment by
the participant of any additional consideration and therefore have been excluded from this calculation.
(3) Consists of shares remaining available for issuance under the 2014 Plan.
Except as disclosed above, the information required by this item will be set forth in the 2022 Proxy Statement under the caption
"Principal Shareholders" which information is incorporated herein by reference.
111
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item will be set forth in the 2022 Proxy Statement under the caption "Certain Relationships
and Related Transactions," and "Corporate Governance" which information is incorporated herein by reference.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the 2022 Proxy Statement under the caption "Advisory (Non-Binding)
Ratification of Appointment of Independent Registered Public Accounting Firm," which information is incorporated herein by
reference.
Information about aggregate fees billed to us by our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34) will be
presented under the caption “Audit Committee Matters — Principal Accounting Firm Fees” in our Proxy Statement and is
incorporated herein by reference.
112
PART IV
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Financial Statements and Financial Statement Schedules
(i)
Financial Statements
The following consolidated financial statements of the registrant and its subsidiaries are included in Part II Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Income Statements for the three years ended December 31, 2021
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2021
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2021
Consolidated Statements of Cash Flows for the three years ended December 31, 2021
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
II—Valuation and Qualifying Accounts
All financial statement schedules for the Company have been included in the consolidated financial statements or the related
footnotes, or are either inapplicable or not required.
(iii) Exhibits
Exhibit
Number
3.1 (1)
3.2 (1)
4.1 (2)
4.2 (3) ††
4.3 (4)
10.1 (6) *
10.2 (6) *
10.3 (4) *
10.4 (8) *
10.5 (15) *
10.6 (8) *
10.7 (5)
10.8 (5)
10.9 (5)
EXHIBIT INDEX
Description
Amended and Restated Bylaws of HomeStreet, Inc.
Restated Articles of Incorporation of HomeStreet, Inc.
Form of Common Stock Certificate
Indenture dated as of May 20, 2016 between HomeStreet, Inc. and Wells Fargo Bank, National Association,
as Trustee
Description of Securities
Amended and Restated HomeStreet, Inc. 2014 Equity Incentive Plan
Standard Form of Restricted Stock Unit Agreement under the 2014 Plan
Amended and Restated Standard Form of Performance Share Unit Agreement under the 2014 Plan
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Mark Mason, dated January 25,
2018
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and William Endresen, dated
February 26, 2021
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Godfrey Evans, dated January
25, 2018
Form of Officer Indemnification Agreement for HomeStreet, Inc.
Form of Director Indemnification Agreement for HomeStreet, Inc.
Form of 2011 Director and Officer Indemnification for HomeStreet, Inc.
113
10.10 (4) †
10.11 (10)
10.12 (7)
10.13 (9)
10.14 (5)
10.15 (4) †
10.16 (5)
10.17 (5)
10.18 (12) *
10.19 (11)
10.20 (13) *
10.21 (14) *
10.22 (14) *
21
23.1
24.1
31.1
31.2
32 (16)
101
Office Lease, dated March 5, 1992, between Continental, Inc. and One Union Square Venture ("Office
Lease"), as amended by Supplemental Lease Agreement dated August 25, 1992, Second Amendment to
Lease dated May 6, 1998, Third Amendment to Lease dated June 17, 1998, Fourth Amendment to Lease
dated February 15, 2000, Fifth Amendment to Lease dated July 30, 2001, Sixth Amendment to Lease dated
March 5, 2002, Seventh Amendment to Lease dated May 19, 2004, Eighth Amendment to Lease dated
August 31, 2004, Ninth Amendment to Lease dated April 19, 2006, Tenth Amendment to Lease dated July
20, 2006, Eleventh Amendment to Lease dated December 27, 2006, Twelfth Amendment to Lease dated
October 1, 2007, Thirteenth Amendment to Lease dated January 26, 2010, Fourteenth Amendment to Lease
dated January 19, 2012, Fifteenth Amendment to Lease dated May 24, 2012, Sixteenth Amendment to Lease
dated September 12, 2012, Seventeenth Amendment to Lease dated November 8, 2012, Eighteenth
Amendment to Lease dated May 3, 2013, Nineteenth Amendment to Lease dated May 28, 2013 and
Twentieth Amendment to Lease dated June 19, 2013.
Twenty-First Amendment to Office Lease dated December 24, 2014.
Advances, Security and Deposit Agreement, dated as of June 1, 2015, between HomeStreet Bank and the
Federal Home Loan Bank of Des Moines
Letter Agreement, dated January 15, 2013, by HomeStreet Bank to Federal Reserve Bank of San Francisco
Master Custodial Agreement for Custody of Single Family MBS Pool Mortgage Loans, dated October 2009,
between HomeStreet Bank, Federal National Mortgage Association, and U.S. Bank, N.A.
Master Agreement ML 02783 between HomeStreet Bank and Fannie Mae, dated March 15, 2010, amended
by Letter Agreement dated March 15, 2011
Master Agreement, dated as of June 17, 2010, between HomeStreet Bank and Freddie Mac
Cash Pledge Agreement, dated as of June 1, 2010, between HomeStreet Bank and Federal Home Loan
Mortgage Corporation
HomeStreet Bank 2017 Performance-Based Award Incentive Compensation Plan
Master Agreement between HomeStreet Bank and Government National Mortgage Association effective
January 3, 2011
Executive Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and John M. Michel,
effective May 11, 2020
Amendment to Employment Agreement, between HomeStreet, Inc., HomeStreet Bank, and Mark K. Mason,
dated July 29, 2020
Amendment to Employment Agreement, between HomeStreet, Inc., HomeStreet Bank, and Godfrey B.
Evans, dated July 29, 2020
Subsidiaries of HomeStreet, Inc.
Consent of Deloitte & Touche LLP
Powers of Attorney. Contained in the signature page of this Annual Report on Form 10-K and incorporated
herein by reference.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed
herewith.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
The following financial information included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2021 formatted in Inline XBRL (eXtensible Business Reporting Language) and
contained in Exhibit 101: (i) the Consolidated Balance Sheets as of December 31, 2021 and December 31,
2020; (ii) the Consolidated Income Statements for the three years ended December 31, 2021, (iii) the
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2021; (iv) the
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2021, (v) the
Consolidated Statements of Cash Flows for the three years ended December 31, 2021, and (vi) the Notes to
Consolidated Financial Statements.
104
The cover page from the Company's Annual Report on Form 10-K for the year ended December 31, 2021,
formatted in Inline XBRL and contained in Exhibit 101.
114
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
†
††
*
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on July 31,
2019, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 5 to Registration Statement on Form S-1 (SEC File
No. 333-173980) filed on August 9, 2011, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on May 20,
2016, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6,
2020 and incorporated herein by reference
Filed as an exhibit to HomeStreet, Inc.'s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No.
333-173980) filed on May 19, 2011, and incorporated herein by reference.
Amended in the fourth quarter of 2018 to make administrative revisions that were not material and did not require
shareholder approval. An updated version was filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC
File No. 001-35424) filed on March 6, 2019, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 11,
2016, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6,
2018 and incorporated herein by reference
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 17,
2014, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 25,
2015, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File
No. 333-173980) filed on June 21, 2011, and incorporated herein by reference.
Filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2019,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on May 8,
2020, and incorporated herein by reference.
Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 10-Q (SEC File No. 001-35424) filed on November
6, 2020, and incorporated herein by reference.
Filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 12, 2021,
and incorporated herein by reference.
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934.
Certain portions of this exhibit constitute confidential information and have been redacted in accordance with
Regulation S-K, Item 601(b)(10).
Instruments with respect to any other long-term debt of HomeStreet, Inc. and its consolidated subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount of securities authorized thereunder does not
exceed 10 percent of the total assets of HomeStreet, Inc. and its subsidiaries on a consolidated basis. HomeStreet, Inc.
hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
Management contract or compensation plan or arrangement.
Item 16 Form 10-K Summary
None.
115
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on
March 4, 2022.
SIGNATURES
HomeStreet, Inc.
By:
/s/ Mark K. Mason
Mark K. Mason
President and Chief Executive Officer
HomeStreet, Inc.
By:
/s/ John M. Michel
John M. Michel
Executive Vice President and Chief Financial Officer (Principal
Financial Officer and Accounting Officer)
116
POWERS OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Mark K. Mason and John M. Michel, and each of them his "or her" attorney-in-fact, with the power of substitution, for
him "or her" in any and all capacities, to sign any amendment to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his "or her" substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Mark K. Mason
Mark K. Mason, Chairman
Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date
March 4, 2022
March 4, 2022
/s/John M. Michel
John M. Michel
/s/ Donald R. Voss
Donald R. Voss
/s/ Scott M. Boggs
Scott M. Boggs
/s/ Sandra A. Cavanaugh
Sandra A. Cavanaugh
/s/ Jeffrey D. Green
Jeffrey D. Green
/s/ James R. Mitchell Jr.
James R. Mitchell Jr.
/s/ Mark R. Patterson
Mark R. Patterson
/s/ Nancy D. Pellegrino
Nancy D. Pellegrino
/s/ Douglas I. Smith
Douglas I. Smith
/s/ Joanne Harrell
Joanne Harrell
Executive Vice President, Chief Financial Officer
and Principal Accounting Officer (Principal
Financial and Accounting Officer)
Lead Independent Director
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
Director
Director
Director
Director
Director
Director
Director
Director
117