Mechanics Bancorp (MCHB) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management’s discussion and analysis of results of operations and financial condition ("MD&A") is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial condition 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 this Form 10-K. A comparison of the financial results for the year ended December 31, 2023 to the year ended December 31, 2022, is incorporated by reference to 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, 2023.
Management's Overview of 2024 Financial Performance
Recent Developments
In the fourth quarter of 2024, the definitive merger agreement with FirstSun Capital Bancorp was terminated by mutual agreement. We then implemented a new strategic plan, which included selling $990 million of multifamily loans in the fourth quarter, that repositioned our balance sheet and accelerated our return to profitability, which we expect to occur in the first half of 2025. We sold loans with a weighted average interest rate of 3.30% and used the proceeds to pay off Federal Home Loan Bank advances and brokered deposits with a weighted average interest rate of 4.65%. The brokered deposits were paid off in early January 2025.
Economic and Market Conditions
The current level of interest rates continues to adversely impact our results of operations as our overall cost of funds are high in relation to the yield on our earning assets, resulting in a low net interest margin. With the decrease in short term interest rates in the latter part of 2024, our cost of funds have stabilized and started to decrease. As a result of the fourth quarter loan sale, we have been able to improve our net interest margin by selling lower yielding loans and paying off higher cost wholesale funding. With the market expectation of ongoing reductions in short term interest rates by the Federal Reserve, we expect continued decreases in our funding costs and improvements in our gain on sale of loans as lower rates positively impact the volume of our loans originated and sold.
We have significant exposure in commercial real estate, primarily multifamily, and single-family loans in or near the areas affected by the wildfires in Southern California. We have been advised of losses on 8 single-family residences with additional partial damage or other impacts to 19 additional homes. Because all of these properties have current full insurance coverage, we do not expect to suffer any losses associated with these wildfires. We plan on providing forbearance and assistance to our impacted customers.
Critical Accounting 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 ("MSRs").
The ACL is calculated based on quantitative and qualitative factors to estimate credit losses over the life of a loan. The inputs used to determine quantitative factors include estimates based on historical experience of probability of default and loss given
19
default. Inputs used to determine qualitative factors include changes in current portfolio characteristics and operating environments such as current and forecasted unemployment rates, capitalization rates used to value properties securing loans, rental rates and single family pricing indexes. Qualitative factors may also include adjustments to address matters not contemplated by the model we use and to assumptions used to determine qualitative factors. Although we believe that our methodology for determining an appropriate level for the ACL adequately addresses the various components that could potentially result in credit losses, the processes and their elements include features that may be susceptible to significant change. Any unfavorable differences between the actual outcome of credit-related events and our estimates could require an additional provision for credit losses. For example, if the projected unemployment rate was downgraded one grade for all periods, the amount of the ACL at December 31, 2024 would increase by approximately $7 million. This sensitivity analysis is hypothetical and has been provided only to indicate the potential impact that changes in assumptions may have on the ACL estimate.
MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or through purchases of MSRs. 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 that is owned and operated by a third party valuation firm. 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. 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 separate third-party valuation firm to value our MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of the modeled values. 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 MSRs 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.
Summary Financial Data
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (dollars in thousands, except per share data and FTE data) | 2024 | 2023 | ||||
| Select Income Statement data: | ||||||
| Net interest income | $ | 120,087 | $ | 166,753 | ||
| Provision for credit losses | — | (441) | ||||
| Noninterest income (loss) | (44,385) | 41,921 | ||||
| Noninterest expense | 196,214 | 241,872 | ||||
| Net income (loss): | ||||||
| Before income tax (benefit) expense | (120,512) | (32,757) | ||||
| Total | (144,344) | (27,508) | ||||
| Net income (loss) per fully diluted share | $ | (7.65) | $ | (1.46) | ||
| Core net income (loss): (1) | ||||||
| Total | (20,949) | 8,284 | ||||
| Core net income (loss) per fully diluted share | $ | (1.11) | $ | 0.44 | ||
| Select Performance Ratios: | ||||||
| Return on average equity | (27.2) | % | (5.0) | % | ||
| Return on average tangible equity | ||||||
| Net income (loss) | (27.3) | % | (4.8) | % | ||
| Core (1) | (3.6) | % | 2.0 | % | ||
| Return on average assets | ||||||
| Net income (loss) | (1.56) | % | (0.29) | % | ||
| Core (1) | (0.23) | % | 0.09 | % | ||
| Efficiency ratio (1) | 116.0 | % | 95.6 | % | ||
| Net interest margin | 1.38 | % | 1.88 | % | ||
| Other Data: | ||||||
| Full time equivalent employees | 827 | 902 |
(1)Core net income (loss), core net income (loss) per fully diluted share, return on average tangible equity, core return on average tangible equity, core return on average assets and the efficiency ratio are non-GAAP financial measures. For a reconciliation of these measures to the nearest comparable GAAP financial measure or the computation of the measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
20
Summary Financial Data (continued)
| As of December 31, | ||||||
|---|---|---|---|---|---|---|
| (dollars in thousands, except share and per share data) | 2024 | 2023 | ||||
| Selected Balance Sheet Data: | ||||||
| Loans held for sale ("LHFS") | $ | 20,312 | $ | 19,637 | ||
| Loans held for investment ("LHFI"), net | 6,193,053 | 7,382,404 | ||||
| ACL | 38,743 | 40,500 | ||||
| Investment securities | 1,057,006 | 1,278,268 | ||||
| Total assets | 8,123,698 | 9,392,450 | ||||
| Deposits | 6,413,021 | 6,763,378 | ||||
| Borrowings | 1,000,000 | 1,745,000 | ||||
| Long-term debt | 225,131 | 224,766 | ||||
| Total shareholders' equity | 396,997 | 538,387 | ||||
| Other data: | ||||||
| Book value per share | $ | 21.05 | $ | 28.62 | ||
| Tangible book value per share (1) | $ | 20.67 | $ | 28.11 | ||
| Total equity to total assets | 4.9 | % | 5.7 | % | ||
| Tangible common equity to tangible assets (1) | 4.8 | % | 5.6 | % | ||
| Shares outstanding at period end | 18,857,565 | 18,810,055 | ||||
| Loans to deposits ratio (Bank) | 97.4 | % | 109.4 | % | ||
| Credit quality: | ||||||
| ACL to total loans (2) | 0.63 | % | 0.55 | % | ||
| ACL to nonaccrual loans | 70.4 | % | 103.9 | % | ||
| Nonaccrual loans to total loans | 0.88 | % | 0.53 | % | ||
| Nonperforming assets to total assets | 0.71 | % | 0.45 | % | ||
| Nonperforming assets | $ | 57,814 | $ | 42,643 | ||
| Regulatory Capital Ratios: | ||||||
| Bank | ||||||
| Tier 1 leverage ratio(3) | 7.30 | % | 8.50 | % | ||
| Total risk-based capital | 13.02 | % | 13.49 | % | ||
| Common equity Tier 1 capital | 12.27 | % | 12.79 | % | ||
| Company | ||||||
| Tier 1 leverage ratio(3) | 5.77 | % | 7.04 | % | ||
| Total risk-based capital | 12.23 | % | 12.84 | % | ||
| Common equity Tier 1 capital | 8.62 | % | 9.66 | % |
(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 Management's Discussion and Analysis of Financial Condition and Results of Operations.
(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA.
(3)Due to the timing of our loan sale at the end of December 2024, our Tier 1 leverage regulatory capital ratios, which are based on average assets for the quarter, were temporarily suppressed. If the $990 million loan sale had occurred at the beginning of the fourth quarter, average assets for the fourth quarter for the Company and the Bank would have been approximately $8.3 billion and the Tier 1 leverage ratio for the Company and the Bank as of December 31, 2024 would have been approximately 6.45% and 8.15%, respectively.
21
Results of Operations
2024 Compared to 2023
Non-core amounts: For 2024, non-core items include an $88.8 million loss on the sale of $990 million of multifamily loans, $53.3 million valuation allowance for deferred tax assets and $3.4 million of merger related expenses. During 2023, non-core items include a $39.9 million goodwill impairment charge and $1.5 million of merger related expenses.
General: Our net loss and loss before income taxes were $144.3 million and $120.5 million, respectively, in 2024, as compared to $27.5 million and $32.8 million, respectively, in 2023. Our core net loss and core loss before income taxes, which exclude the loss on the sale of multifamily loans, the impact of merger related expenses, the valuation allowance for deferred tax assets and goodwill impairment charges, were $20.9 million and $27.8 million in 2024, compared to core net income of $8.3 million and core income before taxes of $8.6 million in 2023. The $36.4 million decrease in core income before taxes was primarily due to lower net interest income and lower noninterest income, partially offset by a decrease in noninterest expense.
Income Taxes: Due to our cumulative losses over the last three years, accounting rules require us to provide a valuation allowance for the balance of our deferred tax assets. Therefore, in 2024, we recorded a $53 million valuation allowance for deferred tax assets which was recorded as income tax expense. Excluding this valuation allowance, the income tax benefit would have been $29.5 million and would have resulted in an effective tax rate of 24.5% for 2024 as compared to an effective tax rate of 16.0% for 2023. Our effective tax rate in 2023 was significantly impacted by the goodwill impairment charge, a portion of which is not deductible for tax purposes.
22
Net Interest Income: The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin:
| Years Ended December 31, | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||||||||||||||||
| (dollars in thousands) | Average Balance | Interest | Average Yield/Cost | Average Balance | Interest | Average Yield/Cost | |||||||||||||||
| Assets: | |||||||||||||||||||||
| Interest-earning assets | |||||||||||||||||||||
| Loans (1) | $ | 7,408,680 | $ | 347,367 | 4.64 | % | $ | 7,474,410 | $ | 342,152 | 4.54 | % | |||||||||
| Investment securities (1) | 1,163,597 | 43,181 | 3.71 | % | 1,382,378 | 53,346 | 3.86 | % | |||||||||||||
| FHLB Stock, Fed Funds and other | 275,956 | 16,306 | 5.87 | % | 165,568 | 8,873 | 5.33 | % | |||||||||||||
| Total interest-earning assets | 8,848,233 | 406,854 | 4.55 | % | 9,022,356 | 404,371 | 4.45 | % | |||||||||||||
| Noninterest-earning assets | 411,000 | 446,814 | |||||||||||||||||||
| Total assets | $ | 9,259,233 | $ | 9,469,170 | |||||||||||||||||
| Interest-bearing liabilities | |||||||||||||||||||||
| Interest-bearing deposits: (2) | |||||||||||||||||||||
| Demand deposits | $ | 317,657 | $ | 854 | 0.27 | % | $ | 385,276 | $ | 917 | 0.24 | % | |||||||||
| Money market and savings | 1,746,779 | 29,200 | 1.66 | % | 2,235,348 | 30,874 | 1.37 | % | |||||||||||||
| Certificates of deposit | 3,072,605 | 144,198 | 4.69 | % | 2,768,594 | 106,129 | 3.83 | % | |||||||||||||
| Total | 5,137,041 | 174,252 | 3.39 | % | 5,389,218 | 137,920 | 2.56 | % | |||||||||||||
| Borrowings: | |||||||||||||||||||||
| Borrowings | 1,981,042 | 95,883 | 4.77 | % | 1,752,454 | 82,861 | 4.68 | % | |||||||||||||
| Long-term debt | 224,950 | 12,351 | 5.46 | % | 224,574 | 12,209 | 5.41 | % | |||||||||||||
| Total interest-bearing liabilities | 7,343,033 | 282,486 | 3.82 | % | 7,366,246 | 232,990 | 3.15 | % | |||||||||||||
| Noninterest-bearing liabilities | |||||||||||||||||||||
| Demand deposits (2) | 1,284,605 | 1,430,151 | |||||||||||||||||||
| Other liabilities | 101,235 | 120,539 | |||||||||||||||||||
| Total liabilities | 8,728,873 | 8,916,936 | |||||||||||||||||||
| Shareholders' equity | 530,360 | 552,234 | |||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 9,259,233 | $ | 9,469,170 | |||||||||||||||||
| Net interest income | $ | 124,368 | $ | 171,381 | |||||||||||||||||
| Net interest rate spread | 0.73 | % | 1.30 | % | |||||||||||||||||
| Net interest margin | 1.38 | % | 1.88 | % |
(1)Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $4.3 million and $4.6 million for 2024 and 2023, respectively. The estimated federal statutory tax rate was 21% for both 2024 and 2023.
(2)Cost of all deposits, including noninterest-bearing demand deposits, was 2.71% and 2.02% for 2024 and 2023, respectively.
23
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.
| 2024 vs. 2023 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Increase (Decrease) Due to | Total Change | |||||||||
| (in thousands) | Rate | Volume | ||||||||
| Assets: | ||||||||||
| Interest-earning assets | ||||||||||
| Loans | $ | 8,032 | $ | (2,817) | $ | 5,215 | ||||
| Investment securities | (1,983) | (8,182) | (10,165) | |||||||
| FHLB stock, Fed Funds and other | 975 | 6,458 | 7,433 | |||||||
| Total interest-earning assets | 7,024 | (4,541) | 2,483 | |||||||
| Liabilities: | ||||||||||
| Deposits | ||||||||||
| Demand deposits | 110 | (173) | (63) | |||||||
| Money market and savings | 5,731 | (7,405) | (1,674) | |||||||
| Certificates of deposit | 25,556 | 12,513 | 38,069 | |||||||
| Total interest-bearing deposits | 31,397 | 4,935 | 36,332 | |||||||
| Borrowings: | ||||||||||
| Borrowings | 1,702 | 11,320 | 13,022 | |||||||
| Long-term debt | 120 | 22 | 142 | |||||||
| Total interest-bearing liabilities | 33,219 | 16,277 | 49,496 | |||||||
| Total changes in net interest income (loss) | $ | (26,195) | $ | (20,818) | $ | (47,013) |
Net interest income in 2024 decreased $46.7 million as compared to 2023 due primarily to a decrease in our net interest margin. Our net interest margin decreased from 1.88% in 2023 to 1.38% in 2024 due to a 67 basis point increase in the rates paid on interest-bearing liabilities which was partially offset by a 10 basis point increase in the yield on interest earning assets. Yields on interest-earning assets increased as yields on adjustable-rate loans increased due to increases in the indexes on which their pricing is based. The increase in the rates paid on our interest-bearing liabilities was due to an increase in the proportion of higher cost borrowings and a decrease in the proportion of noninterest-bearing deposits to the total balance of interest-bearing liabilities and higher deposit rates and higher borrowing rates. The increases in the rates paid on borrowings and deposits were due to increases in market interest rates over the prior year and the migration of noninterest-bearing and lower cost interest-bearing accounts to higher cost certificates of deposit and money market accounts.
Provision for Credit Losses: There was no provision for credit losses recognized during 2024 as compared to a $0.4 million recovery in 2023. For 2024, the benefits of the reduction in loan balances during the year were offset by specific reserves on commercial loans. In the fourth quarter, we continued to experience a minimal level of identified credit issues in our loan portfolio and a lack of significant expected credit issues arising in future periods. The recovery of provision for credit losses in 2023 reflects the stable balance of our loan portfolio and minimal level of identified credit issues in our loan portfolio.
24
Noninterest income (loss) consisted of the following:
| Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Noninterest income (loss) | ||||||
| Gain (loss) on loan origination and sale activities (1) | ||||||
| Single family | $ | 9,573 | $ | 8,500 | ||
| CRE, multifamily and SBA (2) | (86,463) | 846 | ||||
| Loan servicing income | 12,497 | 12,648 | ||||
| Deposit fees | 8,838 | 10,148 | ||||
| Other | 11,170 | 9,779 | ||||
| Total noninterest income (loss) | $ | (44,385) | $ | 41,921 |
(1) May include loans originated as held for investment.
(2) 2024 amount includes loss of $88.8 million on sale of $990 million of multifamily loans in the fourth quarter.
Loan servicing income, a component of noninterest income, consisted of the following:
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| Single family servicing income (loss), net: | |||||||
| Servicing fees and other | $ | 15,081 | $ | 15,523 | |||
| Changes - amortization (1) | (6,500) | (6,378) | |||||
| Subtotal | 8,581 | 9,145 | |||||
| Risk management, single family MSRs: | |||||||
| Changes in fair value due to assumptions (2) | 1,743 | 414 | |||||
| Net gain (loss) from economic hedging | (2,932) | (1,744) | |||||
| Subtotal | (1,189) | (1,330) | |||||
| Total | $ | 7,392 | $ | 7,815 | |||
| Commercial loan servicing income: | |||||||
| Servicing fees and other | $ | 10,717 | $ | 10,611 | |||
| Amortization of capitalized MSRs | (5,612) | (5,778) | |||||
| Total | 5,105 | 4,833 | |||||
| Total loan servicing income | $ | 12,497 | $ | 12,648 |
(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.
Noninterest income in 2024 decreased from 2023 primarily due to the $88.8 million loss on the sale of multifamily loans and lower deposit fees, partially offset by higher levels of income realized from our investments in small business investment companies.
Noninterest expense consisted of the following:
| Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Noninterest expense | ||||||
| Compensation and benefits | $ | 107,424 | $ | 111,064 | ||
| Information services | 29,872 | 29,901 | ||||
| Occupancy | 21,719 | 22,241 | ||||
| General, administrative and other | 37,199 | 38,809 | ||||
| Goodwill impairment charge | — | 39,857 | ||||
| Total noninterest expense | $ | 196,214 | $ | 241,872 |
25
The $45.7 million decrease in noninterest expense in 2024 as compared to 2023 was primarily due to a $39.9 million goodwill impairment in 2023, $3.6 million lower compensation and benefit costs and $1.6 million lower general and administrative costs, which were partially offset by $1.9 million of higher merger related expenses recognized in 2024. The decrease in compensation and benefit costs was primarily due to a 9% decrease in FTE and lower medical costs, which was partially offset by wage increases given in 2024.
Financial Condition – December 31, 2024 compared to December 31, 2023
During 2024, our total assets decreased $1.3 billion due primarily to the $990 million sale of multifamily loans and a $221 million decrease in investment securities. During 2024, we allowed our investment securities portfolio to decline through runoff. In 2024, total liabilities decreased $1.1 billion due to a $745 million decrease in borrowings and a $350 million decrease in deposits. The decrease in deposits was primarily due to a $467 million decrease in brokered certificates of deposit which was partially offset by increases in retail customer deposits. The $745 million decrease in borrowings during 2024 was primarily due to paydowns from the use of proceeds from the sale of multifamily loans.
Investment Securities
The fair values of our investment securities available for sale ("AFS") are as follows:
| At December 31, | |||||||
|---|---|---|---|---|---|---|---|
| 2024 | 2023 | ||||||
| (in thousands) | Fair Value | Fair Value | |||||
| Investment securities AFS: | |||||||
| Mortgage-backed securities: | |||||||
| Residential | $ | 167,462 | $ | 183,798 | |||
| Commercial | 47,642 | 47,756 | |||||
| Collateralized mortgage obligations: | |||||||
| Residential | 317,444 | 439,738 | |||||
| Commercial | 54,945 | 57,397 | |||||
| Municipal bonds | 378,259 | 404,874 | |||||
| Corporate debt securities | 24,944 | 38,547 | |||||
| U.S. Treasury securities | 19,987 | 20,184 | |||||
| Agency debentures | 9,276 | 58,905 | |||||
| Total | $ | 1,019,959 | $ | 1,251,199 |
26
Loans
The following table details the composition of our LHFI portfolio by dollar amount:
| At December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| CRE | ||||||
| Non-owner occupied CRE | $ | 570,750 | $ | 641,885 | ||
| Multifamily | 2,992,675 | 3,940,189 | ||||
| Construction/land development | 472,740 | 565,916 | ||||
| Total | 4,036,165 | 5,147,990 | ||||
| Commercial and industrial loans | ||||||
| Owner occupied CRE | 361,997 | 391,285 | ||||
| Commercial business | 312,004 | 359,049 | ||||
| Total | 674,001 | 750,334 | ||||
| Consumer loans | ||||||
| Single family | 1,109,095 | 1,140,279 | ||||
| Home equity and other | 412,535 | 384,301 | ||||
| Total (1) | 1,521,630 | 1,524,580 | ||||
| Total LHFI | 6,231,796 | 7,422,904 | ||||
| ACL | (38,743) | (40,500) | ||||
| Total LHFI less ACL | $ | 6,193,053 | $ | 7,382,404 |
(1)Includes $1.3 million of loans at December 31, 2024 and 2023, where a fair value option election was made at the time of origination and therefore, are carried at fair value with changes recognized in the consolidated income statements.
The following tables show the contractual maturity of our loan portfolio by loan type:
| December 31, 2024 | Loans due after one year by rate characteristic | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Within one year | After one year through five years | After five years | Total | Fixed- rate | Adjustable- rate | ||||||||||||||||
| CRE | ||||||||||||||||||||||
| Non-owner occupied CRE | $ | 100,463 | $ | 123,856 | $ | 346,431 | $ | 570,750 | $ | 62,337 | $ | 407,950 | ||||||||||
| Multifamily | 7,771 | 197,069 | 2,787,835 | 2,992,675 | 137,305 | 2,847,600 | ||||||||||||||||
| Construction/land development | 332,929 | 108,393 | 31,418 | 472,740 | 98,974 | 40,836 | ||||||||||||||||
| Total | 441,163 | 429,318 | 3,165,684 | 4,036,165 | 298,616 | 3,296,386 | ||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||
| Owner occupied CRE | 16,076 | 129,278 | 216,643 | 361,997 | 110,006 | 235,915 | ||||||||||||||||
| Commercial business | 110,405 | 135,130 | 66,469 | 312,004 | 48,270 | 153,329 | ||||||||||||||||
| Total | 126,481 | 264,408 | 283,112 | 674,001 | 158,276 | 389,244 | ||||||||||||||||
| Consumer loans | ||||||||||||||||||||||
| Single family | 578 | 886 | 1,107,631 | 1,109,095 | 387,935 | 720,582 | ||||||||||||||||
| Home equity and other | 57 | 38 | 412,440 | 412,535 | 7,445 | 405,033 | ||||||||||||||||
| Total | 635 | 924 | 1,520,071 | 1,521,630 | 395,380 | 1,125,615 | ||||||||||||||||
| Total LHFI | $ | 568,279 | $ | 694,650 | $ | 4,968,867 | $ | 6,231,796 | $ | 852,272 | $ | 4,811,245 |
27
| December 31, 2023 | Loans due after one year by rate characteristic | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Within one year | After one year through five years | After five years | Total | Fixed- rate | Adjustable- rate | ||||||||||||||||
| CRE | ||||||||||||||||||||||
| Non-owner occupied CRE | $ | 29,737 | $ | 213,997 | $ | 398,151 | $ | 641,885 | $ | 101,854 | $ | 510,294 | ||||||||||
| Multifamily | 2,495 | 75,380 | 3,862,314 | 3,940,189 | 38,777 | 3,898,917 | ||||||||||||||||
| Construction/land development | 502,033 | 63,883 | — | 565,916 | 28,958 | 34,925 | ||||||||||||||||
| Total | 534,265 | 353,260 | 4,260,465 | 5,147,990 | 169,589 | 4,444,136 | ||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||
| Owner occupied CRE | 2,683 | 91,986 | 296,616 | 391,285 | 130,306 | 258,296 | ||||||||||||||||
| Commercial business | 154,785 | 118,054 | 86,210 | 359,049 | 61,173 | 143,091 | ||||||||||||||||
| Total | 157,468 | 210,040 | 382,826 | 750,334 | 191,479 | 401,387 | ||||||||||||||||
| Consumer loans | ||||||||||||||||||||||
| Single family | 590 | 1,036 | 1,138,653 | 1,140,279 | 414,957 | 724,732 | ||||||||||||||||
| Home equity and other | 1 | 95 | 384,205 | 384,301 | 7,794 | 376,506 | ||||||||||||||||
| Total | 591 | 1,131 | 1,522,858 | 1,524,580 | 422,751 | 1,101,238 | ||||||||||||||||
| Total LHFI | $ | 692,324 | $ | 564,431 | $ | 6,166,149 | $ | 7,422,904 | $ | 783,819 | $ | 5,946,761 |
Loan Roll-forward
| Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Loans - beginning balance January 1, | $ | 7,422,904 | $ | 7,426,320 | ||
| Originations and advances | 1,128,733 | 1,300,571 | ||||
| Transfers to LHFS | (1,170) | (2,507) | ||||
| Loans sold | (994,243) | — | ||||
| Payoffs, paydowns and other | (1,321,782) | (1,296,786) | ||||
| Charge-offs and transfers to OREO | (2,646) | (4,694) | ||||
| Loans - ending balance December 31, | $ | 6,231,796 | $ | 7,422,904 |
Loan Originations and Advances
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| CRE | |||||||
| Non-owner occupied CRE | $ | 2,141 | $ | 20,025 | |||
| Multifamily | 146,654 | 129,712 | |||||
| Construction/land development | 593,209 | 620,580 | |||||
| Total | 742,004 | 770,317 | |||||
| Commercial and industrial loans | |||||||
| Owner occupied CRE | 5,652 | 25,880 | |||||
| Commercial business | 142,277 | 127,790 | |||||
| Total | 147,929 | 153,670 | |||||
| Consumer loans | |||||||
| Single family | 87,125 | 232,115 | |||||
| Home equity and other | 151,675 | 144,469 | |||||
| Total | 238,800 | 376,584 | |||||
| Total | $ | 1,128,733 | $ | 1,300,571 |
28
Production Volumes for Sale to the Secondary Market
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| Loan originations | |||||||
| Single family loans | $ | 413,983 | $ | 332,811 | |||
| Commercial and industrial and CRE loans | 107,352 | 30,061 | |||||
| Loans sold | |||||||
| Single family loans | 404,952 | 335,751 | |||||
| Commercial and industrial and CRE loans (1) | 1,103,742 | 26,839 | |||||
| Net gain (loss) on loan origination and sale activities | |||||||
| Single family loans | $ | 9,573 | $ | 8,500 | |||
| Commercial and industrial and CRE loans (2) | (86,463) | 846 | |||||
| Total | $ | (76,890) | $ | 9,346 |
(1) May include loans originated as held for investment. 2024 amount includes sale of $990 million of multifamily loans in the fourth quarter.
(2) May include loans originated as held for investment. 2024 amount includes loss of $88.8 million on sale of $990 million of multifamily loans in the fourth quarter.
Capitalized Mortgage Servicing Rights ("MSRs")
| Years Ended December 31, | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | |||||
| Single Family MSRs | |||||||
| Beginning balance | $ | 74,249 | $ | 76,617 | |||
| Additions and amortization: | |||||||
| Originations | 3,409 | 3,136 | |||||
| Purchases | — | 460 | |||||
| Amortization (1) | (6,500) | (6,378) | |||||
| Net additions and amortization | (3,091) | (2,782) | |||||
| Change in fair value due to assumptions (2) | 1,743 | 414 | |||||
| Ending balance | $ | 72,901 | $ | 74,249 | |||
| Ratio to related loans serviced for others | 1.41 | % | 1.40 | % | |||
| Multifamily and SBA MSRs | |||||||
| Beginning balance | $ | 29,987 | $ | 35,256 | |||
| Originations | 2,190 | 509 | |||||
| Amortization | (5,612) | (5,778) | |||||
| Ending balance | $ | 26,565 | $ | 29,987 | |||
| Ratio to related loans serviced for others | 1.38 | % | 1.58 | % |
(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.
29
Deposits
Deposit balances and weighted average rates were as follows for the periods indicated:
| At December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | Amount | Weighted Average Rate | Amount | Weighted Average Rate | ||||||||||
| Deposits by product: | ||||||||||||||
| Noninterest-bearing demand deposits | $ | 1,195,781 | — | % | $ | 1,306,503 | — | % | ||||||
| Interest-bearing: | ||||||||||||||
| Interest-bearing demand deposits | 323,112 | 0.35 | % | 344,748 | 0.25 | % | ||||||||
| Savings | 229,659 | 0.06 | % | 261,508 | 0.06 | % | ||||||||
| Money market | 1,396,697 | 1.72 | % | 1,622,665 | 1.79 | % | ||||||||
| Certificates of deposit | ||||||||||||||
| Brokered deposits | 751,406 | 4.61 | % | 1,218,008 | 5.36 | % | ||||||||
| Other | 2,516,366 | 4.37 | % | 2,009,946 | 3.95 | % | ||||||||
| Total interest-bearing deposits | 5,217,240 | 3.31 | % | 5,456,875 | 3.19 | % | ||||||||
| Total deposits | $ | 6,413,021 | 2.65 | % | $ | 6,763,378 | 2.58 | % |
The following table presents the schedule of maturities of certificates of deposit as of December 31, 2024:
| (in thousands) | Three Months or Less | Over Three Months to Twelve Months | Over One Year through Three Years | Over Three Years | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Time deposits of $250,000 or less | $ | 1,486,016 | $ | 1,417,146 | $ | 97,155 | $ | 2,115 | $ | 3,002,432 | |||||||||
| Time deposits of $250,000 or more | 87,610 | 166,521 | 10,671 | 538 | 265,340 | ||||||||||||||
| Total | $ | 1,573,626 | $ | 1,583,667 | $ | 107,826 | $ | 2,653 | $ | 3,267,772 |
30
Credit Risk Management: Delinquent Loans, Nonperforming Assets and Provision for Credit Losses
During 2024, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans, increased, partially as a result of the sale of $990 million of multifamily loans in the fourth quarter. As of December 31, 2024, our ratio of nonperforming assets to total assets was 0.71% as compared to 0.45% at December 31, 2023, and our ratio of total loans delinquent over 30 days, including nonaccrual loans, to total loans was 1.06% as compared to 0.72% at December 31, 2023. The $16 million increase in nonaccrual loans during 2024 was primarily related to a syndicated commercial loan which we are participating.
Delinquent loans by loan type consisted of the following:
| At December 31, 2024 | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Past Due and Still Accruing | ||||||||||||||||||||||||||
| (in thousands) | 30-59 days | 60-89 days | 90 days or more | Nonaccrual | Total pastdue and nonaccrual (1) | Current | Total loans | |||||||||||||||||||
| CRE | ||||||||||||||||||||||||||
| Non- owner occupied CRE | $ | — | $ | — | $ | — | $ | 16,230 | $ | 16,230 | $ | 554,520 | $ | 570,750 | ||||||||||||
| Multifamily | — | — | — | 1,915 | 1,915 | 2,990,760 | 2,992,675 | |||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||
| Multifamily construction | — | — | — | — | — | 98,906 | 98,906 | |||||||||||||||||||
| CRE construction | — | — | — | 3,821 | 3,821 | 7,217 | 11,038 | |||||||||||||||||||
| Single family construction | — | — | — | — | — | 320,826 | 320,826 | |||||||||||||||||||
| Single family construction to permanent | — | — | — | — | — | 41,970 | 41,970 | |||||||||||||||||||
| Total | — | — | — | 21,966 | 21,966 | 4,014,199 | 4,036,165 | |||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||
| Owner occupied CRE | — | — | — | 1,161 | 1,161 | 360,836 | 361,997 | |||||||||||||||||||
| Commercial business | — | — | — | 25,740 | 25,740 | 286,264 | 312,004 | |||||||||||||||||||
| Total | — | — | — | 26,901 | 26,901 | 647,100 | 674,001 | |||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||
| Single family | 4,601 | 1,096 | 4,354 | (2) | 2,990 | 13,041 | 1,096,054 | 1,109,095 | ||||||||||||||||||
| Home equity and other | 344 | 631 | — | 3,137 | 4,112 | 408,423 | 412,535 | |||||||||||||||||||
| Total | 4,945 | 1,727 | 4,354 | 6,127 | 17,153 | 1,504,477 | 1,521,630 | (3) | ||||||||||||||||||
| Total loans | $ | 4,945 | $ | 1,727 | $ | 4,354 | $ | 54,994 | $ | 66,020 | $ | 6,165,776 | $ | 6,231,796 | ||||||||||||
| % | 0.08 | % | 0.03 | % | 0.07 | % | 0.88 | % | 1.06 | % | 98.94 | % | 100.00 | % |
(1) Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $11.3 million.
(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 $1.3 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.
31
| At December 31, 2023 | ||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Past Due and Still Accruing | ||||||||||||||||||||||||||
| (in thousands) | 30-59 days | 60-89 days | 90 days or more | Nonaccrual | Total pastdue and nonaccrual (1) | Current | Total loans | |||||||||||||||||||
| CRE | ||||||||||||||||||||||||||
| Non- owner occupied CRE | $ | — | $ | — | $ | — | $ | 16,803 | $ | 16,803 | $ | 625,082 | $ | 641,885 | ||||||||||||
| Multifamily | — | 1,915 | — | — | 1,915 | 3,938,274 | 3,940,189 | |||||||||||||||||||
| Construction and land development | ||||||||||||||||||||||||||
| Multifamily construction | — | — | — | — | — | 168,049 | 168,049 | |||||||||||||||||||
| CRE construction | — | — | — | 3,821 | 3,821 | 14,692 | 18,513 | |||||||||||||||||||
| Single family construction | — | — | — | — | — | 274,050 | 274,050 | |||||||||||||||||||
| Single family construction to permanent | — | — | — | — | — | 105,304 | 105,304 | |||||||||||||||||||
| Total | — | 1,915 | — | 20,624 | 22,539 | 5,125,451 | 5,147,990 | |||||||||||||||||||
| Commercial and industrial loans | ||||||||||||||||||||||||||
| Owner occupied CRE | — | — | — | 706 | 706 | 390,579 | 391,285 | |||||||||||||||||||
| Commercial business | — | — | — | 13,686 | 13,686 | 345,363 | 359,049 | |||||||||||||||||||
| Total | — | — | — | 14,392 | 14,392 | 735,942 | 750,334 | |||||||||||||||||||
| Consumer loans | ||||||||||||||||||||||||||
| Single family | 5,174 | 1,993 | 4,261 | (2) | 2,650 | 14,078 | 1,126,201 | 1,140,279 | ||||||||||||||||||
| Home equity and other | 974 | 225 | — | 1,310 | 2,509 | 381,792 | 384,301 | |||||||||||||||||||
| Total | 6,148 | 2,218 | 4,261 | 3,960 | 16,587 | 1,507,993 | 1,524,580 | (3) | ||||||||||||||||||
| Total loans | $ | 6,148 | $ | 4,133 | $ | 4,261 | $ | 38,976 | $ | 53,518 | $ | 7,369,386 | $ | 7,422,904 | ||||||||||||
| % | 0.08 | % | 0.05 | % | 0.06 | % | 0.53 | % | 0.72 | % | 99.28 | % | 100.00 | % |
(1)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $12.4 million.
(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 $1.3 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.
Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio. The following table presents the ACL by product type:
| December 31, 2024 | December 31, 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Balance | Rate (1) | Balance | Rate (1) | |||||||||
| CRE | |||||||||||||
| Non-owner occupied CRE | $ | 1,739 | 0.30 | % | $ | 2,610 | 0.41 | % | |||||
| Multifamily | 14,909 | 0.50 | % | 13,093 | 0.33 | % | |||||||
| Construction/land development | |||||||||||||
| Multifamily construction | 849 | 0.86 | % | 3,983 | 2.37 | % | |||||||
| CRE construction | 66 | 0.60 | % | 189 | 1.02 | % | |||||||
| Single family construction | 6,737 | 2.10 | % | 7,365 | 2.69 | % | |||||||
| Single family construction to permanent | 184 | 0.44 | % | 672 | 0.64 | % | |||||||
| Total | 24,484 | 0.61 | % | 27,912 | 0.54 | % | |||||||
| Commercial and industrial loans | |||||||||||||
| Owner occupied CRE | 576 | 0.16 | % | 899 | 0.23 | % | |||||||
| Commercial business | 6,886 | 2.23 | % | 2,950 | 0.83 | % | |||||||
| Total | 7,462 | 1.12 | % | 3,849 | 0.52 | % | |||||||
| Consumer loans | |||||||||||||
| Single family | 3,610 | 0.35 | % | 5,287 | 0.51 | % | |||||||
| Home equity and other | 3,187 | 0.77 | % | 3,452 | 0.90 | % | |||||||
| Total | 6,797 | 0.47 | % | 8,739 | 0.61 | % | |||||||
| Total ACL | $ | 38,743 | 0.63 | % | $ | 40,500 | 0.55 | % |
(1) The ACL rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA.
32
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, borrowings from the Federal Reserve, 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 three years other than $65 million in principal amount of Senior Notes maturing on June 1, 2026. The Company intends to repay the Senior Notes with dividends made to the Company from the Bank or from funds received through the issuance of new debt or sales of stock.
At December 31, 2024, the Bank had available borrowing capacity of $1.3 billion from the FHLB, $1.6 billion 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 2024 and 2023, cash and cash equivalents increased $190.9 million and $142.8 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 2024, $46 million of cash was used in operating activities primarily due to our net loss for the year, excluding the impact of the $88.8 million loss on the sale of $990 million of multifamily loans, the net proceeds of which are included in investing activities. For 2023, cash of $8 million was provided by operating activities.
Cash flows from investing activities
The Company's investing activities are primarily related to investment securities and LHFI. For 2024, cash of $1.3 billion was provided by investing activities primarily from proceeds from the sale of $990 million of multifamily loans, principal repayments on AFS investment securities, LHFI repayments in excess of originations and net FHLB stock sales. For 2023, cash of $484 million was provided by investing activities primarily from the cash acquired from an acquisition of branches and the related deposits, principal repayments on AFS investment securities and LHFI repayments in excess of originations, partially offset by the purchase of AFS investments securities and net FHLB stock purchases.
Cash flows from financing activities
The Company's financing activities are primarily related to deposits, net proceeds from borrowings and equity transactions. For 2024, cash of $1.1 billion was used in financing activities primarily due to a net decrease in long-term and short-term
33
borrowings, which was generated from the sale of $990 million of multifamily loans and decreases in deposits. For 2023, cash of $349 million was used in financing activities primarily due to decreases in deposits and dividends paid on our common stock, partially offset by a net increase in long-term and short-term borrowings.
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, 2024 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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)(1) | $ | 537,057 | 5.77 | % | $ | 372,319 | 4.0 | % | NA | NA | |||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 477,057 | 8.62 | % | 249,109 | 4.5 | % | NA | NA | |||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 537,057 | 9.70 | % | 332,145 | 6.0 | % | NA | NA | |||||||||||||
| Total risk-based capital (to risk-weighted assets) | 677,225 | 12.23 | % | 442,860 | 8.0 | % | NA | NA | |||||||||||||
| HomeStreet Bank | |||||||||||||||||||||
| Tier 1 leverage capital (to average assets)(1) | $ | 678,869 | 7.30 | % | $ | 372,132 | 4.0 | % | $ | 465,165 | 5.0 | % | |||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 678,869 | 12.27 | % | 249,000 | 4.5 | % | 359,667 | 6.5 | % | ||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 678,869 | 12.27 | % | 332,001 | 6.0 | % | 442,667 | 8.0 | % | ||||||||||||
| Total risk-based capital (to risk-weighted assets) | 720,498 | 13.02 | % | 442,667 | 8.0 | % | 553,334 | 10.0 | % |
(1)Due to the timing of our loan sale at the end of December 2024, our Tier 1 leverage regulatory capital ratios, which are based on average assets for the quarter, were temporarily suppressed. If the $990 million loan sale had occurred at the beginning of the fourth quarter, average assets for the fourth quarter for the Company and the Bank would have been approximately $8.3 billion and the Tier 1 leverage ratio for the Company and the Bank as of December 31, 2024 would have been approximately 6.45% and 8.15%, respectively.
34
| At December 31, 2023 | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 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) | $ | 675,440 | 7.04 | % | $ | 383,696 | 4.0 | % | NA | NA | |||||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 615,440 | 9.66 | % | 286,709 | 4.5 | % | NA | NA | |||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 675,440 | 10.60 | % | 382,279 | 6.0 | % | NA | NA | |||||||||||||
| Total risk-based capital (to risk-weighted assets) | 818,075 | 12.84 | % | 509,705 | 8.0 | % | NA | NA | |||||||||||||
| HomeStreet Bank | |||||||||||||||||||||
| Tier 1 leverage capital (to average assets) | $ | 814,719 | 8.50 | % | $ | 383,482 | 4.0 | % | $ | 479,352 | 5.0 | % | |||||||||
| Common equity tier 1 capital (to risk-weighted assets) | 814,719 | 12.79 | % | 286,569 | 4.5 | % | 413,933 | 6.5 | % | ||||||||||||
| Tier 1 risk-based capital (to risk-weighted assets) | 814,719 | 12.79 | % | 382,092 | 6.0 | % | 509,456 | 8.0 | % | ||||||||||||
| Total risk-based capital (to risk-weighted assets) | 858,992 | 13.49 | % | 509,456 | 8.0 | % | 636,820 | 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, 2024, capital conservation buffers for the Company and the Bank were 3.70% and 5.02%, respectively.
The Company did not pay any cash dividends in 2024 and currently does not plan to pay quarterly dividends in 2025. 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, 2024.
Accounting Developments
See Financial Statements and Supplementary Data - Note 1, Summary of Significant Accounting Policies for a discussion of accounting developments.
35
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. In this Form 10-K, we use the following non-GAAP measures: (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; (ii) core net income (loss) and effective tax rate on core net income (loss) before taxes, which excludes the loss on the sale of $990 million of multifamily loans due to the unusual nature and size of the loan sale, the deferred tax asset valuation allowance because it is a significant unusual item, goodwill impairment charges because they were an unusual nonrecurring item, loss on debt extinguishment and merger related expenses and the related tax impact as we believe this measure is a better comparison to be used for projecting future results; and (iii) 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 considered non-core 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.
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 requirements.
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 parties in the evaluation of companies in our industry. 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 reconciliations of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this Form 10-K, or a calculation of the non-GAAP financial measure.
36
Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures or the calculation of the non-GAAP financial measures
| For the Year Ended | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands, except ratio) | 2024 | 2023 | |||||
| Core net income (loss) | |||||||
| Net income (loss) | $ | (144,344) | $ | (27,508) | |||
| Adjustments (tax effected) | |||||||
| Loss on loan sale | 67,058 | — | |||||
| Merger related expenses | 2,674 | 1,170 | |||||
| Loss on debt extinguishment | 353 | — | |||||
| Goodwill impairment charge | — | 34,622 | |||||
| Deferred tax valuation allowance | 53,310 | — | |||||
| Total | $ | (20,949) | $ | 8,284 | |||
| Core net income (loss) per fully diluted share | |||||||
| Fully diluted shares | 18,857,392 | 18,783,005 | |||||
| Computed amount | $ | (1.11) | $ | 0.44 | |||
| Return on average tangible equity - Core | |||||||
| Average shareholders' equity | $ | 530,360 | $ | 552,234 | |||
| Less: Average goodwill and other intangibles | (8,476) | (25,695) | |||||
| Average tangible equity | $ | 521,884 | $ | 526,539 | |||
| Core net income | $ | (20,949) | $ | 8,284 | |||
| Adjustments (tax effected): | |||||||
| Amortization on core deposit intangibles | 1,950 | 2,302 | |||||
| Tangible income applicable to shareholders | $ | (18,999) | $ | 10,586 | |||
| Ratio | (3.6) | % | 2.0 | % | |||
| Return on average equity - Core | |||||||
| Average shareholders' equity (per above) | $ | 530,360 | $ | 552,234 | |||
| Core net income (loss) (per above) | (20,949) | 8,284 | |||||
| Ratio | (3.9) | % | 1.5 | % | |||
| Efficiency ratio | |||||||
| Noninterest expense | |||||||
| Total | $ | 196,214 | $ | 241,872 | |||
| Adjustments: | |||||||
| Merger related expenses | (3,428) | (1,500) | |||||
| Loss on debt extinguishment | (452) | — | |||||
| Goodwill Impairment charge | — | (39,857) | |||||
| State of Washington taxes | (1,510) | (994) | |||||
| Adjusted total | $ | 190,824 | $ | 199,521 | |||
| Total revenues | |||||||
| Net interest income | $ | 120,087 | $ | 166,753 | |||
| Noninterest income | (44,385) | 41,921 | |||||
| Loss on loan sale | 88,818 | — | |||||
| Total | $ | 164,520 | $ | 208,674 | |||
| Ratio | 116.0 | % | 95.6 | % | |||
| Return on Average assets - Core | |||||||
| Average Assets | $ | 9,259,233 | $ | 9,469,170 | |||
| Core net income (loss) - per above | (20,949) | 8,284 | |||||
| Ratio | (0.23) | % | 0.09 | % | |||
| Effective tax rate used in computations above (1) | 22.0 | % | 22.0 | % |
37
| As of December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands, except share data) | 2024 | 2023 | ||||
| Tangible book value per share | ||||||
| Shareholders' equity | $ | 396,997 | $ | 538,387 | ||
| Less: other intangibles | (7,141) | (9,641) | ||||
| Tangible shareholder's equity | $ | 389,856 | $ | 528,746 | ||
| Common shares outstanding | 18,857,565 | 18,810,055 | ||||
| Computed amount | $ | 20.67 | $ | 28.11 | ||
| Tangible common equity to tangible assets | ||||||
| Tangible shareholder's equity (per above) | $ | 389,856 | $ | 528,746 | ||
| Tangible assets | ||||||
| Total assets | $ | 8,123,698 | $ | 9,392,450 | ||
| Less: Other intangibles | (7,141) | (9,641) | ||||
| Net | $ | 8,116,557 | $ | 9,382,809 | ||
| Ratio | 4.8 | % | 5.6 | % |
(1) Effective tax rate indicated is used for all adjustments except the loss on loan sale and the goodwill impairment charge. A computed effective rate of 13.1% was used for the goodwill impairment charge as a portion of this charge was not deductible for tax purposes. The gross effective tax rate of 24.5% was used for the loss on loan sale due to the large size of the loss in relation to permanent differences that could impact our gross effective rate.
38