Companies: 10,793     total market cap: $134.890 T
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Mechanics Bancorp
MCHB
#3820
Rank
$3.31 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$14.96
Share price
0.20%
Change (1 day)
34.29%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Mechanics Bancorp
  2. Quarterly Reports (10-Q)
  3. Submitted on 2021-11-05

Mechanics Bancorp - 10-Q quarterly report FY


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
________________________________ 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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.
(a Washington Corporation)
91-0186600
________________________________ 

601 Union Street, Suite 2000
Seattle, Washington 98101
(Address of principal executive offices)

Telephone Number - Area Code (206) 623-3050

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common StockHMSTNasdaq Global Select Market


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒   No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 


Large Accelerated Filer 
☐
Accelerated Filer 
☒

Non-accelerated Filer 
☐
Smaller Reporting Company 
☐
Emerging growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
 No ☒
The number of outstanding shares of the registrant's common stock as of November 1, 2021 was 20,450,012.



PART I – FINANCIAL INFORMATION
ITEM 1FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 2021 and December 31, 2020
3
Consolidated Income Statements for the Quarters and Nine Months Ended September 30, 2021 and 2020
4
Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2021 and 2020
5
Consolidated Statements of Shareholders’ Equity for the Quarters and Nine months Ended September 30, 2021 and 2020
6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020
7
Notes to Consolidated Financial Statements
9
ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
41
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
61
ITEM 4
CONTROLS AND PROCEDURES
64
PART II – OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
64
ITEM 1A
RISK FACTORS
65
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
66
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
67
ITEM 4
MINE SAFETY DISCLOSURES
67
ITEM 5
OTHER INFORMATION
67
ITEM 6
EXHIBITS
68
SIGNATURES
69

Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to "HomeStreet," "we," "our," "us" or the "Company" refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank ("Bank"), HomeStreet Capital Corporation ("HomeStreet Capital") and other direct and indirect subsidiaries of HomeStreet, Inc.

2

PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

September 30, 2021December 31, 2020
(in thousands, except share data)(Unaudited)
ASSETS
Cash and cash equivalents
$218,662 $58,049 
Investment securities
983,038 1,076,364 
Loans held for sale ("LHFS")
395,112 361,932 
Loans held for investment ("LHFI") (net of allowance for credit losses of $54,516 and $64,294)
5,299,741 5,179,886 
Mortgage servicing rights ("MSRs")100,831 85,740 
Premises and equipment, net58,449 65,102 
Other real estate owned ("OREO")1,484 1,375 
Goodwill and other intangible assets32,002 32,880 
Other assets283,132 375,763 
Total assets$7,372,451 $7,237,091 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits$6,359,660 $5,821,559 
Borrowings— 322,800 
Long-term debt125,979 125,838 
Accounts payable and other liabilities176,436 249,144 
Total liabilities6,662,075 6,519,341 
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 20,446,648 shares and 21,796,904 shares
256,081 278,505 
Retained earnings432,202 403,888 
Accumulated other comprehensive income22,093 35,357 
Total shareholders' equity710,376 717,750 
Total liabilities and shareholders' equity$7,372,451 $7,237,091 

See accompanying notes to consolidated financial statements
3








HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands, except share and per share data)2021202020212020
Interest income:
Loans$56,117 $57,538 $166,763 $172,275 
Investment securities5,130 5,667 16,091 16,053 
Cash, Fed Funds and other141 532 472 960 
Total interest income
61,388 63,737 183,326 189,288 
Interest expense:
Deposits2,507 5,986 8,930 28,944 
Borrowings1,397 2,067 4,423 7,730 
Total interest expense
3,904 8,053 13,353 36,674 
Net interest income
57,484 55,684 169,973 152,614 
Provision for credit losses(5,000)— (9,000)20,469 
Net interest income after provision for credit losses
62,484 55,684 178,973 132,145 
Noninterest income:
Net gain on loan origination and sale activities17,509 33,130 72,239 85,698 
Loan servicing income (loss)2,014 (1,582)4,693 6,921 
Deposit fees2,091 1,769 5,912 5,225 
Other2,684 2,838 8,511 7,543 
Total noninterest income
24,298 36,155 91,355 105,387 
Noninterest expense:
Compensation and benefits31,175 34,570 101,388 101,429 
Information services6,902 7,401 20,635 22,330 
Occupancy5,705 8,354 18,170 23,082 
General, administrative and other8,167 7,732 21,179 24,052 
Total noninterest expense
51,949 58,057 161,372 170,893 
Income before income taxes34,833 33,782 108,956 66,639 
Income tax expense7,663 7,433 22,966 14,247 
Net income $27,170 $26,349 $85,990 $52,392 
Net income per share:
Basic $1.32 $1.16 $4.08 $2.26 
Diluted
$1.31 $1.15 $4.03 $2.24 
Weighted average shares outstanding:
Basic
20,613,29022,665,06921,099,05923,226,109
Diluted
20,819,60122,877,22621,352,71523,403,729

See accompanying notes to consolidated financial statements
4








HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Net income $27,170 $26,349 $85,990 $52,392 
Other comprehensive income:
Unrealized gain (loss) on investment securities available for sale ("AFS")(7,283)5,386 (16,728)36,336 
Reclassification for net (gains) losses included in income— 15 (62)(316)
Other comprehensive income (loss) before tax(7,283)5,401 (16,790)36,020 
Income tax impact of:
Unrealized gain (loss) on investment securities AFS(1,530)1,131 (3,513)7,630 
Reclassification for net (gains) losses included in income
— 3 (13)(66)
Total
(1,530)1,134 (3,526)7,564 
Other comprehensive income (loss)(5,753)4,267 (13,264)28,456 
Total comprehensive income$21,417 $30,616 $72,726 $80,848 


See accompanying notes to consolidated financial statements
5








HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
(in thousands, except share data)Number
of shares		Common stockRetained
earnings		Accumulated
other
comprehensive
income (loss)		Total shareholders' equity
For the quarter ended September 30, 2020
Balance, June 30, 202023,007,400 $290,871 $375,268 $28,510 $694,649 
Net income— — 26,349 — 26,349 
Share-based compensation expense— 846 — — 846 
Common stock issued - Option exercise; stock grants5,576 — — — — 
Other comprehensive income — — — 4,267 4,267 
Dividends declared on common stock ($0.15 per share)
— — (3,450)— (3,450)
Common stock repurchased
(1,018,772)(11,295)(15,060)— (26,355)
Balance, September 30, 202021,994,204 $280,422 $383,107 $32,777 $696,306 
For the nine months ended September 30, 2020
Balance, December 31, 201923,890,855 $300,729 $374,673 $4,321 $679,723 
Net income— — 52,392 — 52,392 
Share-based compensation expense— 2,030 — — 2,030 
Common stock issued - Option exercise; stock grants127,273 782 — — 782 
Cumulative effect of adoption of new accounting standards
— — (3,740)— (3,740)
Other comprehensive income — — — 28,456 28,456 
Dividends declared on common stock ($0.45 per share)
(10,556)(10,556)
Common stock repurchased
(2,023,924)(23,119)(29,662)— (52,781)
Balance, September 30, 202021,994,204 $280,422 $383,107 $32,777 $696,306 
For the quarter ended September 30, 2021
Balance, June 30, 202120,791,659 $260,774 $420,111 $27,846 $708,731 
Net income— — 27,170 — 27,170 
Share-based compensation expense— 892 — — 892 
Common stock issued - Option exercise; stock grants52,265 339 — — 339 
Other comprehensive income (loss)— — — (5,753)(5,753)
Dividends declared on common stock ($0.25 per share)
— — (5,259)— (5,259)
Common stock repurchased
(397,276)(5,924)(9,820)— (15,744)
Balance, September 30, 202120,446,648 $256,081 $432,202 $22,093 $710,376 
For the nine months ended September 30, 2021
Balance, December 31, 202021,796,904 $278,505 $403,888 $35,357 $717,750 
Net income— — 85,990 — 85,990 
Share-based compensation expense
— 2,557 — — 2,557 
Common stock issued - Option exercise; stock grants245,630 2,383 — — 2,383 
Other comprehensive income (loss)— — — (13,264)(13,264)
Dividends declared on common stock ($0.75 per share)
— — (16,171)— (16,171)
Common stock repurchased
(1,595,886)(27,364)(41,505)— (68,869)
Balance, September 30, 202120,446,648 $256,081 $432,202 $22,093 $710,376 

See accompanying notes to consolidated financial statements

6








HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
Nine Months Ended September 30,
(in thousands)20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$85,990 $52,392 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses(9,000)20,469 
Depreciation and amortization, premises and equipment7,294 6,955 
Amortization of premiums and discounts: securities, deposits, debt4,788 7,228 
Operating leases: excess of payments over amortization(3,015)(2,731)
Amortization of finance leases786 1,001 
Amortization of core deposit intangibles878 1,030 
Amortization of deferred loan fees and costs(7,544)1,728 
Share-based compensation expense2,557 2,030 
Lease impairment costs248 4,623 
Deferred income tax expense (benefit)7,777 (6,998)
Origination of LHFS(1,785,393)(1,670,272)
Proceeds from sale of LHFS1,932,447 1,605,064 
Net fair value adjustment and gain on sale of LHFS(36,359)(55,443)
Origination of MSRs(27,908)(19,071)
Net gain on sale of loans originated as LHFI(4,613)(3,760)
Change in fair value of MSRs8,267 34,033 
Amortization of servicing rights5,235 4,084 
(Increase) decrease in other assets528 (24,842)
Increase (decrease) in accounts payable and other liabilities(489)2,149 
Net cash provided by (used in) operating activities182,474 (40,331)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities
(112,146)(348,384)
Proceeds from sale of investment securities28,187 58,487 
Principal payments on investment securities
159,037 152,643 
Proceeds from sale of OREO— 650 
Proceeds from sale of loans originated as LHFI251,474 349,498 
Net cash provided by disposal of discontinued operations— 2,759 
Net increase in LHFI
(492,666)(603,847)
Proceeds from sale of premises and equipment— 1,460 
Purchase of premises and equipment(852)(2,972)
Proceeds from sale of Federal Home Loan Bank stock89,882 112,808 
Purchases of Federal Home Loan Bank stock(78,286)(116,993)
Net cash provided by (used in) investing activities(155,370)(393,891)
7








Nine Months Ended September 30,
(in thousands)20212020
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net538,005 475,639 
Changes in short-term borrowings, net(322,800)43,000 
Proceeds from other long-term borrowings50,000 — 
Repayment of other long-term borrowings(50,000)— 
Repayment of finance lease principal(787)(973)
Repurchases of common stock(65,001)(51,939)
Proceeds from exercise of stock options263 237 
Dividends paid on common stock(16,171)(10,556)
Net cash provided by (used in) financing activities133,509 455,408 
Net increase in cash and cash equivalents160,613 21,186 
Cash and cash equivalents, beginning of year58,049 57,880 
Cash and cash equivalents, end of period$218,662 $79,066 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $12,371 $36,645 
Federal and state income taxes28,156 11,236 
Non-cash activities:
Increase in lease assets and lease liabilities910 — 
Decrease in lease assets and lease liabilities— 38,754 
Loans transferred from LHFI to LHFS, net390,521 412,219 
Ginnie Mae loans recognized with the right to repurchase, net— 105,727 
Ginnie Mae loans derecognized with the right to repurchase, net70,197 — 
Repurchase of common stock-award shares3,868 842 

See accompanying notes to consolidated financial statements
8








HomeStreet, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 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. 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 financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission ("2020 Annual Report on Form 10-K").

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 or other reference 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. The Company is in the process of evaluating the provisions of these ASUs, but does not expect them to have a material impact on the Company’s financial position, results of operations or financial statement disclosures.

9


NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"): 
At September 30, 2021
(in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
AFS
Mortgage backed securities ("MBS"):
Residential$33,046 $719 $(298)$33,467 
Commercial40,995 1,231 (176)42,050 
Collateralized mortgage obligations ("CMOs"):
Residential182,060 3,283 (983)184,360 
Commercial139,202 2,368 (246)141,324 
Municipal bonds513,151 22,558 (1,308)534,401 
Corporate debt securities18,990 859 — 19,849 
U.S. Treasury securities23,434 10 (52)23,392 
Total$950,878 $31,028 $(3,063)$978,843 
HTM
   Municipal bonds$4,195 $154 $— $4,349 

At December 31, 2020
(in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value
AFS
MBS:
Residential$50,001 $1,237 $(192)$51,046 
Commercial43,061 2,131 (8)45,184 
CMOs:
Residential228,685 6,319 (95)234,909 
Commercial155,645 3,719 (181)159,183 
 Municipal bonds533,719 31,321 (337)564,703 
 Corporate debt securities14,381 841 — 15,222 
Agency debentures1,846 — — 1,846 
Total$1,027,338 $45,568 $(813)$1,072,093 
HTM
   Municipal bonds
$4,271 $236 $— $4,507 

MBS and CMOs represent securities 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 September 30, 2021 and December 31, 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.

10


Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position:
At September 30, 2021
 Less than 12 months12 months or moreTotal
(in thousands)Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value
MBS:
Residential
$(70)$1,115 $(228)$1,322 $(298)$2,437 
Commercial(176)10,954 — — (176)10,954 
CMOs:
Residential(701)21,942 (282)7,159 (983)29,101 
Commercial(184)9,875 (62)1,956 (246)11,831 
Municipal bonds(1,163)49,953 (145)8,411 (1,308)58,364 
U.S. Treasury securities(52)17,873 — — (52)17,873 
Total$(2,346)$111,712 $(717)$18,848 $(3,063)$130,560 

At December 31, 2020
 Less than 12 months12 months or moreTotal
(in thousands)Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value		Gross
unrealized
losses		Fair
value
MBS:
Residential$(7)$1,196 $(185)$1,432 $(192)$2,628 
Commercial(8)925 — — (8)925 
CMOs:
Residential(95)7,391 — — (95)7,391 
Commercial(39)6,687 (142)15,358 (181)22,045 
Municipal bonds(337)10,512 — — (337)10,512 
Total$(486)$26,711 $(327)$16,790 $(813)$43,501 

There were no HTM securities in an unrealized loss position at September 30, 2021 or December 31, 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 September 30, 2021 or December 31, 2020. In addition, as of September 30, 2021 and December 31, 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.
11



The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield:
 At September 30, 2021
 Within one yearAfter one year
through five years		After five years
through ten years		After
ten years		Total
(dollars in thousands)Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield
AFS          
   Municipal bonds$3,826 3.78 %$15,685 3.33 %$65,624 3.68 %$449,266 3.23 %$534,401 3.29 %
   Corporate debt securities
— — %6,701 3.64 %13,148 5.06 %— — %19,849 4.58 %
   U.S. Treasury securities
— — %— — %23,392 1.28 %— — %23,392 1.28 %
Total$3,826 3.78 %$22,386 3.43 %$102,164 3.28 %$449,266 3.23 %$577,642 3.25 %
HTM
   Municipal bonds$1,034 2.50 %$3,315 2.40 %$— — %$— — %$4,349 2.43 %


 At December 31, 2020
 Within one yearAfter one year
through five years		After five years
through ten years		After
ten years		Total
(dollars in thousands)Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield		Fair
Value		Weighted
Average
Yield
AFS
   Municipal bonds
$4,024 3.19 %$14,978 3.82 %$59,496 3.26 %$486,205 3.29 %$564,703 3.30 %
   Corporate debt securities
183 4.27 %7,059 3.74 %7,980 4.78 %— — %15,222 4.30 %
Agency debentures— — %— — %— — %1,846 2.68 %1,846 2.68 %
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 of 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 September 30, 2021 and December 31, 2020 was 1.85% and 1.92%, respectively.

Sales of investment securities were as follows for the periods indicated:
Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Proceeds$— $2,872 $28,187 $58,487 
Gross gains— — 288 1,289 
Gross losses— (15)(226)(973)

12



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 September 30, 2021At December 31, 2020
Washington, Oregon and California State to secure public deposits$176,003 $171,471 
Other securities pledged5,608 3,391 
Total securities pledged as collateral$181,611 $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.

Tax-exempt interest income on investment securities was $2.6 million and $2.8 million for the quarters ended September 30, 2021 and 2020, respectively and $7.6 million and $7.9 million for the nine months ended September 30, 2021 and 2020, respectively.

13


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 segment and non-owner occupied commercial real estate, multifamily, construction and land development, owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment. LHFI consists of the following:
(in thousands)At September 30, 2021At December 31, 2020
Commercial real estate loans
Non-owner occupied commercial real estate$754,031 $829,538 
Multifamily2,090,156 1,428,092 
Construction/land development514,322 553,695 
Total3,358,509 2,811,325 
Commercial and industrial loans
Owner occupied commercial real estate450,350 467,256 
Commercial business435,756 645,723 
Total
886,106 1,112,979 
Consumer loans
Single family (1)
793,927 915,123 
Home equity and other315,715 404,753 
Total1,109,642 1,319,876 
                  Total LHFI5,354,257 5,244,180 
Allowance for credit losses ("ACL")(54,516)(64,294)
Total LHFI less ACL
$5,299,741 $5,179,886 

(1)    Includes $4.5 million and $7.1 million at September 30, 2021 and December 31, 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 in fair value recognized in the consolidated income statements.

Loans totaling $1.7 billion and $1.4 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $430 million and $569 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Reserve Bank.

Credit Risk Concentrations

LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At September 30, 2021 and December 31, 2020, multifamily loans in the state of California represented 29% 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. 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 the quarter ended March 31, 2020, the qualitative factors increased significantly due to the forecasted impacts of the COVID-19 pandemic. The qualitative factors have remained at a high level due to the continued uncertainty regarding the impact of the COVID-19 pandemic. Included in the qualitative factors are estimates of potential loss exposure which are based on forbearance activities relating to the COVID-19 pandemic in the Bank’s loan portfolio. Due to improvements in economic conditions, the Company recorded a $5 million and $9 million recovery of the allowance for credit losses in the third quarter of 2021 and nine months ended September 30, 2021, respectively. As of September 30, 2021, the Bank expects that over the two-year forecast period, the markets in which it operates will have a modest improvement in single family and multifamily collateral values, but deterioration in commercial real estate collateral values with negative risk factors peaking in the first year. The Bank also expects that over the two-year forecast period, the markets in which it operates will have a modest deterioration in the economic outlook, with negative risk factors peaking in the first year.

14


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 $2.5 million and $1.6 million at September 30, 2021 and December 31, 2020, respectively.
The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $18.1 million and $21.2 million at September 30, 2021 and December 31, 2020, respectively, and was reported in other assets in the consolidated balance sheets.
Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows for the periods indicated:
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Beginning balance
$59,897 $65,000 $64,294 $41,772 
Provision for credit losses(5,348)273(9,864)21,633 
Net (charge-offs) recoveries(33)(381)86 (356)
Impact of ASC 326 adoption
— —— 1,843 
Ending balance$54,516 $64,892 $54,516 $64,892 
Allowance for unfunded commitments:
Beginning balance$2,104 $2,071 $1,588 $1,065 
Provision for credit losses348 (273)864 (1,164)
Impact of ASC 326 adoption
— — — 1,897 
Ending balance$2,452 $1,798 $2,452 $1,798 
Provision for credit losses:
Allowance for credit losses - loans$(5,348)$273 $(9,864)$21,633 
Allowance for unfunded commitments348 (273)864 (1,164)
Total$(5,000)$— $(9,000)$20,469 




























15


Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows for the periods indicated:
Quarter Ended September 30, 2021
(in thousands)Beginning balanceCharge-offsRecoveriesProvision Ending balance
Commercial real estate loans
Non-owner occupied commercial real estate$9,077 $— $— $559 $9,636 
Multifamily7,245 — — (1,788)5,457 
Construction/land development
Multifamily construction500 — — 544 1,044 
Commercial real estate construction2,022 — — (1,671)351 
Single family construction5,653 — — 638 6,291 
Single family construction to permanent1,047 — — 15 1,062 
Total25,544 — — (1,703)23,841 
Commercial and industrial loans
Owner occupied commercial real estate5,518 — — (233)5,285 
Commercial business15,874 (116)24 (1,309)14,473 
     Total 21,392 (116)24 (1,542)19,758 
Consumer loans
Single family7,163 (13)33 (1,426)5,757 
Home equity and other5,798 (341)380 (677)5,160 
Total12,961 (354)413 (2,103)10,917 
Total ACL$59,897 $(470)$437 $(5,348)$54,516 

Quarter Ended September 30, 2020
(in thousands)Beginning balanceCharge-offsRecoveriesProvision
Ending balance
Commercial real estate loans
Non-owner occupied commercial real estate$7,325 $— $— $1,598 $8,923 
Multifamily5,387 — — (516)4,871 
Construction/land development
Multifamily construction3,811 — — 2,109 5,920 
Commercial real estate construction440 — — 1,269 1,709 
Single family construction5,869 — — (362)5,507 
Single family construction to permanent1,515 — — (309)1,206 
Total24,347 — — 3,789 28,136 
Commercial and industrial loans
Owner occupied commercial real estate5,641 — — 47 5,688 
Commercial business15,816 (447)24 2,951 18,344 
     Total 21,457 (447)24 2,998 24,032 
Consumer loans
Single family8,070 (3)2 (1,349)6,720 
Home equity and other11,126 (39)82 (5,165)6,004 
Total19,196 (42)84 (6,514)12,724 
Total ACL$65,000 $(489)$108 $273 $64,892 


    
16


Nine Months Ended September 30, 2021
(in thousands)Beginning balanceCharge-offsRecoveriesProvisionEnding
balance
Commercial real estate loans
Non-owner occupied commercial real estate$8,845 $— $— $791 $9,636 
Multifamily6,072 — — (615)5,457 
Construction/land development
Multifamily construction4,903 — — (3,859)1,044 
Commercial real estate construction1,670 — — (1,319)351 
Single family construction5,130 — — 1,161 6,291 
Single family construction to permanent1,315 — — (253)1,062 
Total27,935 — — (4,094)23,841 
Commercial and industrial loans
Owner occupied commercial real estate4,994 — 291 5,285 
Commercial business17,043 (116)122 (2,576)14,473 
Total22,037 (116)122 (2,285)19,758 
Consumer loans
Single family6,906 (127)155 (1,177)5,757 
Home equity and other7,416 (432)484 (2,308)5,160 
Total14,322 (559)639 (3,485)10,917 
Total ACL$64,294 $(675)$761 $(9,864)$54,516 
Nine Months Ended September 30, 2020
(in thousands)Prior to adoption of ASC 326Impact of ASC 326 adoptionCharge-offsRecoveriesProvisionEnding
balance
Commercial real estate loans
Non-owner occupied commercial real estate$7,245 $(3,392)$— $— $5,070 $8,923 
Multifamily7,015 (2,977)— — 833 4,871 
Construction/land development
Multifamily construction2,848 693 — — 2,379 5,920 
Commercial real estate construction624 (115)— — 1,200 1,709 
Single family construction3,800 4,280 — 163 (2,736)5,507 
Single family construction to permanent1,003 200 — — 3 1,206 
Total22,535 (1,311)— 163 6,749 28,136 
Commercial and industrial loans
Owner occupied commercial real estate3,639 (2,459)— — 4,508 5,688 
Commercial business2,915 510 (590)72 15,437 18,344 
Total6,554 (1,949)(590)72 19,945 24,032 
Consumer loans
Single family6,450 468 (3)56 (251)6,720 
Home equity and other6,233 4,635 (345)291 (4,810)6,004 
Total12,683 5,103 (348)347 (5,061)12,724 
Total ACL$41,772 $1,843 $(938)$582 $21,633 $64,892 

The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status.
17


At September 30, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Non-owner occupied commercial real estate
1-6 Pass
$35,832 $50,863 $172,296 $133,472 $132,238 $225,012 $1,189 $915 $751,817 
7- Special Mention
— — — — — 2,214 — — 2,214 
8 - Substandard
— — — — — — — — — 
Total35,832 50,863 172,296 133,472 132,238 227,226 1,189 915 754,031 
Multifamily
1-6 Pass
972,806 557,201 289,164 65,618 29,218 176,093 56 — 2,090,156 
7- Special Mention
— — — — — — — — — 
8 - Substandard
— — — — — — — — — 
Total972,806 557,201 289,164 65,618 29,218 176,093 56 — 2,090,156 
Multifamily construction
1-6 Pass
4,194 25,363 20,748 — — — — — 50,305 
7- Special Mention
— — — — — — — — — 
8 - Substandard
— — — — — — — — — 
Total4,194 25,363 20,748 — — — — — 50,305 
Commercial real estate construction
1-6 Pass
2,712 3,961 — 1,998 — 563 8,672 — 17,906 
7- Special Mention
— — — — — — — — — 
8 - Substandard
— — — — — — — — — 
Total2,712 3,961 — 1,998 — 563 8,672 — 17,906 
Single family construction
1-6 Pass
151,418 42,188 17,677 — — 78 91,915 — 303,276 
7- Special Mention
— — — — — — — — — 
8 - Substandard
— — — — — — — — — 
Total151,418 42,188 17,677 — — 78 91,915 — 303,276 
Single family construction to permanent
Current
62,456 55,561 21,067 3,751 — — — — 142,835 
Past due:
30-59 days
— — — — — — — — — 
60-89 days
— — — — — — — — — 
90+ days
— — — — — — — — — 
Total62,456 55,561 21,067 3,751 — — — — 142,835 
Owner occupied commercial real estate
1-6 Pass
45,688 47,907 59,378 50,584 72,188 113,575 549 2,878 392,747 
7- Special Mention
— — — 2,206 6,063 212 — 63 8,544 
8 - Substandard
— — 18,826 1,111 10,591 18,531 — — 49,059 
Total45,688 47,907 78,204 53,901 88,842 132,318 549 2,941 450,350 
Commercial business
1-6 Pass
128,807 58,648 49,889 27,876 16,780 23,331 88,636 2,341 396,308 
7- Special Mention
— — 9,145 1,518 4,503 57 5,500 142 20,865 
8 - Substandard
3,002 46 3,407 8,129 1,567 2,608 (282)106 18,583 
Total131,809 58,694 62,441 37,523 22,850 25,996 93,854 2,589 435,756 
Total commercial portfolio
$1,406,915 $841,738 $661,597 $296,263 $273,148 $562,274 $196,235 $6,445 $4,244,615 


The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
18



At September 30, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Current
$139,731 $162,824 $78,130 $83,770 $108,684 $217,957 $— $— $791,096 
Past due:
30-59 days
— — — — 212 766 — — 978 
60-89 days
— — — — 315 277 — — 592 
90+ days
— — — 858 — 403 — — 1,261 
Total (1)
139,731 162,824 78,130 84,628 109,211 219,403 — — 793,927 
Home equity and other
Current
1,184 707 496 607 537 2,930 301,977 6,373 314,811 
Past due:
30-59 days
— 2 — — — 248 183 — 433 
60-89 days
3 2 — — — 1 — — 6 
90+ days
— — — — — 64 401 — 465 
Total1,187 711 496 607 537 3,243 302,561 6,373 315,715 
Total consumer portfolio140,918 163,535 78,626 85,235 109,748 222,646 302,561 6,373 1,109,642 
Total LHFI$1,547,833 $1,005,273 $740,223 $381,498 $382,896 $784,920 $498,796 $12,818 $5,354,257 

(1)    Includes $4.5 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 in fair value recognized in the consolidated income statements.

The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class and risk rating or delinquency status:


19


At December 31, 2020
(in thousands)202020192018201720162015 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Non-owner occupied commercial real estate
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 — — 2,230 
8 - Substandard— — — — — — — — — 
Total53,782 176,556 165,268 147,719 150,221 134,165 796 1,031 829,538 
Multifamily
1-6 Pass711,009 324,246 100,572 32,693 166,937 92,255 380 — 1,428,092 
7- Special Mention— — — — — — — — — 
8 - Substandard— — — — — — — — — 
Total711,009 324,246 100,572 32,693 166,937 92,255 380 — 1,428,092 
Multifamily construction
1-6 Pass12,182 21,366 45,256 11,823 — — — — 90,627 
7- Special Mention— — — — 24,702 — — — 24,702 
8 - Substandard— — — — — — — — — 
Total12,182 21,366 45,256 11,823 24,702 — — — 115,329 
Commercial real estate construction
1-6 Pass3,963 — 2,104 14,721 — 614 5,883 — 27,285 
7- Special Mention— — — — — — — — — 
8 - Substandard— — — — — — — — — 
Total3,963 — 2,104 14,721 — 614 5,883 — 27,285 
Single family construction
1-6 Pass121,233 47,539 14,055 — — 600 75,743 — 259,170 
7- Special Mention— — — — — — — — — 
8 - Substandard— — — — — — — — — 
Total121,233 47,539 14,055 — — 600 75,743 — 259,170 
Single family construction to permanent
Current62,955 72,825 15,443 688 — — — — 151,911 
Past due:
30-59 days — — — — — — — — — 
60-89 days — — — — — — — — — 
90+ days — — — — — — — — — 
Total62,955 72,825 15,443 688 — — — — 151,911 
Owner occupied commercial real estate
1-6 Pass48,647 60,872 58,582 85,275 98,046 50,596 — 4,354 406,372 
7- Special Mention— — 5,977 3,529 — — — 69 9,575 
8 - Substandard— 19,407 1,111 10,750 17,122 2,919 — — 51,309 
Total48,647 80,279 65,670 99,554 115,168 53,515 — 4,423 467,256 
Commercial business
1-6 Pass345,540 63,020 47,710 22,556 18,411 14,972 76,218 2,577 591,004 
7- Special Mention— 10,837 2,058 6,653 — — 3,975 166 23,689 
8 - Substandard— 5,923 11,327 2,338 1,891 1,001 8,438 112 31,030 
Total345,540 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 
20




The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status:
At December 31, 2020
(in thousands)202020192018201720162015 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Current
$174,994 $111,143 $154,757 $168,412 $59,161 $242,444 $— $— $910,911 
Past due:
30-59 days
— 570 — 318 — 390 — — 1,278 
60-89 days
— — — — — — — — — 
90+ days
824 335 405 386 — 984 — — 2,934 
Total (1)
175,818 112,048 155,162 169,116 59,161 243,818 — — 915,123 
Home equity and other
Current
1,878 1,230 1,311 1,363 431 5,126 384,005 8,147 403,491 
Past due:
30-59 days
98 22 — — — 11 66 31 228 
60-89 days
— 13 — — — — 129 — 142 
90+ days
— 9 — — 275 24 584 — 892 
Total1,976 1,274 1,311 1,363 706 5,161 384,784 8,178 404,753 
Total consumer portfolio177,794 113,322 156,473 170,479 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 in fair value recognized in the consolidated income statements.





























21


Collateral Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:
At September 30, 2021
(in thousands)Land1-4 FamilyNon-residential real estateOther non-real estateTotal
Commercial and industrial loans
Owner occupied commercial real estate
$1,111 $— $2,763 $— $3,874 
Commercial business
387 — — 2,681 3,068 
   Total
1,498 — 2,763 2,681 6,942 
Consumer loans
Single family
— 2,957 — — 2,957 
Home equity loans and other
— 923 — — 923 
   Total
— 3,880 — — 3,880 
  Total collateral-dependent loans$1,498 $3,880 $2,763 $2,681 $10,822 
At December 31, 2020
(in thousands)Land1-4 FamilyNon-residential real estateOther non-real estateTotal
Commercial and industrial loans
Owner occupied commercial real estate
$1,789 $— $3,133 $— $4,922 
Commercial business
1,787 545 — 2,882 5,214 
   Total
3,576 545 3,133 2,882 10,136 
Consumer loans
Single family
— 2,457 — — 2,457 
   Total
— 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:
At September 30, 2021At December 31, 2020
(in thousands)Nonaccrual with no related ACLTotal NonaccrualNonaccrual with no related ACLTotal Nonaccrual
Commercial and industrial loans
Owner occupied commercial real estate
$3,874 $3,874 $4,922 $4,922 
        Commercial business1,360 7,249 3,100 9,183 
Total
5,234 11,123 8,022 14,105 
Consumer loans
Single family
$2,907 $4,602 $2,173 $4,883 
Home equity and other928 1,987 2 1,734 
Total3,835 6,589 2,175 6,617 
Total nonaccrual loans$9,069 $17,712 $10,197 $20,722 





22


The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:
At September 30, 2021
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more		Nonaccrual
Total past
due and nonaccrual (3)
CurrentTotal
loans
Commercial real estate loans
Non-owner occupied commercial real estate
$— $— $— $— $— $754,031 $754,031 
Multifamily— — — — — 2,090,156 2,090,156 
Construction/land development
Multifamily construction— — — — — 50,305 50,305 
Commercial real estate construction— — — — — 17,906 17,906 
Single family construction— — — — — 303,276 303,276 
Single family construction to permanent— — — — — 142,835 142,835 
Total
— — — — — 3,358,509 3,358,509 
Commercial and industrial loans
Owner occupied commercial real estate
— — — 3,874 3,874 446,476 450,350 
Commercial business— — — 7,249 7,249 428,507 435,756 
Total
— — — 11,123 11,123 874,983 886,106 
Consumer loans
Single family
1,294 1,198 8,361 (2)4,602 15,455 778,472 793,927 (1)
Home equity and other260 4 — 1,987 2,251 313,464 315,715 
Total
1,554 1,202 8,361 6,589 17,706 1,091,936 1,109,642 
Total loans$1,554 $1,202 $8,361 $17,712 $28,829 $5,325,428 $5,354,257 
%0.03 %0.02 %0.16 %0.33 %0.54 %99.46 %100.00 %

23


At December 31, 2020
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more		Nonaccrual
Total past
due and nonaccrual (3)
CurrentTotal
loans
Commercial real estate loans
Non-owner occupied commercial real estate
$— $— $— $— $— $829,538 $829,538 
Multifamily— — — — 1,428,092 1,428,092 
Construction and land development
Multifamily construction— — — — — 115,329 115,329 
Commercial real estate construction— — — — — 27,285 27,285 
Single family construction— — — — — 259,170 259,170 
Single family construction to permanent— — — — — 151,911 151,911 
Total
— — — — — 2,811,325 2,811,325 
Commercial and industrial loans
Owner occupied commercial real estate
— — 4,922 4,922 462,334 467,256 
Commercial business— — 9,183 9,183 636,540 645,723 
Total
— — — 14,105 14,105 1,098,874 1,112,979 
Consumer loans
Single family
2,161 418 11,476 (2)4,883 18,938 896,185 915,123 (1)
Home equity and other228 135 — 1,734 2,097 402,656 404,753 
Total
2,389 553 11,476 6,617 21,035 1,298,841 1,319,876 
Total loans$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 %

(1)Includes $4.5 million and $7.1 million of loans at September 30, 2021 and December 31, 2020, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value 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 $10.8 million and $14.7 million at September 30, 2021 and December 31, 2020, respectively.

24


The following tables present information about troubled debt restructuring ("TDR") activity for the periods indicated:

Quarter Ended September 30, 2021Nine Months Ended September 30, 2021
(dollars in thousands)Number of loan
modifications		Recorded
investment		Related charge-
offs		Number of loan
modifications		Recorded
investment		Related charge-
offs
Consumer loans
Single family
Interest rate reduction
10 $3,284 $— 15 $4,599 $— 
Payment restructure
4 1,005 — 6 2,145 
14 4,289 — 21 6,744 — 
Total loans
Interest rate reduction10 3,284 — 15 4,599 — 
Payment restructure4 1,005 — 6 2,145 — 
Total 14 $4,289 $— 21 $6,744 $— 


Quarter Ended September 30, 2020Nine Months Ended September 30, 2020
(dollars in thousands)Number of loan
modifications		Recorded
investment		Related charge-
offs		Number of loan
modifications		Recorded
investment		Related charge-
offs
Commercial and industrial loans
Owner occupied commercial real estate
Payment restructure—$— $— 1 $678 $— 
Commercial business
Payment restructure— — — 1 1,125 — 
Total commercial and industrial
Payment restructure— — — 2 1,803 — 
Total
— — — 2 1,803 — 
Consumer loans
Single family
Interest rate reduction8 1,642 — 23 4,878 — 
Payment restructure1 411 — 10 2,067 — 
Total
9 2,053 — 33 6,945 — 
Total loans
Interest rate reduction8 1,642 — 23 4,878 — 
Payment restructure1 411 — 12 3,870 — 
Total9 $2,053 $— 35 $8,748 $— 

25


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 for the periods indicated:
Quarter Ended September 30,
20212020
(dollars in thousands)Number of loan relationships that re-defaultedRecorded
investment		Number of loan relationships that re-defaultedRecorded
investment
Consumer loans - single family2 $422 6 $1,038 
Total
2 $422 6 $1,038 

Nine Months Ended September 30,
20212020
(dollars in thousands)Number of loan relationships that re-defaultedRecorded
investment		Number of loan relationships that re-defaultedRecorded
investment
Commercial and industrial loans
Owner occupied commercial real estate1 $678 — $— 
1 678 — — 
Consumer loans
Consumer loans - single family7 $1,764 16 $3,237 
7 1,764 16 3,237 
Total
8 $2,442 16 $3,237 

The CARES Act provides 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-19 pandemic;
•The borrower was current at the time the modification program was implemented; and
•The modification is short-term

We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible 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 September 30, 2021, excluding any SBA guaranteed loans or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of $43 million on 100 loans that were approved for and are still in forbearance under this program, including $18 million in commercial loans and $25 million in single family and consumer loans.
26



NOTE 4–DEPOSITS:

Deposit balances, including stated rates, were as follows: 
At September 30, 2021At December 31, 2020
(dollars in thousands)AmountWeighted Average RateAmountWeighted Average Rate
Noninterest-bearing demand deposits$1,706,550 — %$1,337,010 — %
Interest-bearing demand deposits 555,716 0.10 %484,265 0.10 %
Savings
305,395 0.06 %264,024 0.07 %
Money market
2,796,524 0.15 %2,596,453 0.21 %
Certificates of deposit995,475 0.50 %1,139,807 0.93 %
Total$6,359,660 0.15 %$5,821,559 0.29 %

Certificates of deposit outstanding at September 30, 2021 mature as follows: 
(in thousands)
Within one year$785,798 
One to two years182,878 
Two to three years19,005 
Three to four years4,843 
Four to five years2,951 
Thereafter— 
Total$995,475 

The aggregate amount of certificate of deposits in denominations of more than $250 thousand at September 30, 2021 and December 31, 2020 were $113 million and $130 million, respectively. There were $205 million and $210 million of brokered deposits at September 30, 2021 and December 31, 2020, respectively.

NOTE 5–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 sheet, consist of the following: 
At September 30, 2021
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$651,906 $1,419 $(1,017)
Interest rate lock commitments194,587 4,612 (3)
Interest rate swaps399,788 8,772 (10,521)
Eurodollar futures355,000 — (9)
Total derivatives before netting$1,601,281 14,803 (11,550)
Netting adjustment/Cash collateral (1)
(4,348)9,909 
Carrying value on consolidated balance sheet$10,455 $(1,641)

27


At December 31, 2020
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$977,974 $1,035 $(3,714)
Interest rate lock commitments493,873 17,395 (3)
Interest rate swaps536,969 17,459 (20,511)
Eurodollar futures314,000 — (4)
Total derivatives before netting$2,322,816 35,889 (24,232)
Netting adjustment/Cash collateral (1)
(8,250)21,447 
Carrying value on consolidated balance sheet$27,639 $(2,785)

(1)    Includes net cash collateral paid of $5.6 million and $13.2 million at September 30, 2021 and December 31, 2020, respectively.

The following tables present gross fair value and net carrying value information about derivative instruments:
(in thousands)Gross fair value
Netting adjustments/ Cash collateral (1)
Carrying value
At September 30, 2021
Derivative assets$14,803 $(4,348)$10,455 
Derivative liabilities(11,550)9,909 (1,641)
At December 31, 2020
Derivative assets$35,889 $(8,250)$27,639 
Derivative liabilities(24,232)21,447 (2,785)

(1)    Includes net cash collateral paid of $5.6 million and $13.2 million at September 30, 2021 and December 31, 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 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 September 30, 2021 and December 31, 2020, the Company had liabilities of $2.6 million and $3.3 million, respectively, in cash collateral received from counterparties and receivables of $8.2 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:
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)
$(1,165)$(3,810)$(4,574)$583 
Loan servicing income (loss) (2)
(293)(91)(7,860)22,148 
Other (3)
41 632 305 (84)
 
(1)Comprised of IRLCs and forward contracts used as an economic hedge of loans held for sale.
(2)Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as economic hedges of single family MSRs.
(3)Comprised of interest rate swaps used as economic hedges of loans held for investment.

The notional amount of open interest rate swap agreements executed with commercial banking customers at September 30, 2021 and December 31, 2020 were $275 million and $246 million, respectively. 


28


NOTE 6–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following: 
(in thousands)At September 30, 2021At December 31, 2020
Single family$135,942 $194,643 
Commercial real estate, multifamily and SBA259,170 167,289 
Total$395,112 $361,932 

Loans sold consisted of the following for the periods indicated: 
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Single family$469,090 $686,280 $1,669,412 $1,393,283 
Commercial real estate, multifamily and SBA69,810 170,980 465,948 502,059 
Total$538,900 $857,260 $2,135,360 $1,895,342 

Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following: 
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Single family$14,249 $27,632 $56,272 $73,751 
Commercial real estate, multifamily and SBA3,260 5,498 15,967 11,947 
Total$17,509 $33,130 $72,239 $85,698 

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)At September 30, 2021At December 31, 2020
Single family $5,625,386 $5,914,592 
Commercial real estate, multifamily and SBA 2,064,492 1,844,241 
Total$7,689,878 $7,758,833 

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 following is a summary of changes in the Company's liability for estimated single-family mortgage repurchase losses for the periods indicated:

 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Balance, beginning of period$1,612 $2,083 $2,122 $2,871 
Additions, net of adjustments (1)
(183)252 (229)(275)
Realized (losses) recoveries, net (2)
14 (240)(450)(501)
Balance, end of period$1,443 $2,095 $1,443 $2,095 
 
(1) Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
(2) Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related     expenses.

The Company has agreements with certain 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 $2.5 million and $3.0 million were recorded in other assets as of September 30, 2021 and December 31, 2020, respectively.
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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 September 30, 2021 and December 31, 2020, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $32 million and $102 million, respectively.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following for the periods indicated: 
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Servicing income, net:
Servicing fees and other$7,897 $7,220 $26,055 $23,073 
Amortization of single family MSRs (1)
(4,579)(4,401)(15,453)(12,246)
Amortization of multifamily and SBA MSRs(1,758)(1,350)(5,235)(4,084)
Total
1,560 1,469 5,367 6,743 
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)
747 (2,960)7,186 (21,970)
Net gain (loss) from derivative hedging (293)(91)(7,860)22,148 
Total
454 (3,051)(674)178 
               Loan servicing income (loss)$2,014 $(1,582)$4,693 $6,921 

(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily reflected by changes in mortgage interest rates.

The changes in single family MSRs measured at fair value are as follows for the periods indicated:
Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Beginning balance$59,872 $47,804 $49,966 $68,109 
Additions and amortization:
Originations
5,166 6,569 19,507 12,942 
Amortization (1)
(4,579)(4,401)(15,453)(12,246)
Net additions and amortization
587 2,168 4,054 696 
Changes in fair value assumptions (2)
747 (2,954)7,186 (21,787)
Ending balance$61,206 $47,018 $61,206 $47,018 

(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 for the periods indicated: 
Quarter Ended September 30,Nine Months Ended September 30,
(rates per annum) (1)
2021202020212020
Constant prepayment rate ("CPR") (2)
9.84 %
20.0% - 30.0%
8.75 %
17.1% - 30.0%
Discount rate 7.77 %7.71 %8.25 %7.78 %
(1) Based on a weighted average.
(2) Represents an expected lifetime average CPR used in the model.

30


For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below:
At September 30, 2021At December 31, 2020
Range of Inputs
Average (1)
Range of Inputs
Average (1)
CPRs
7.98% - 17.43%
10.74 %
8.13% - 19.70%
12.81 %
Discount Rates
6.54% - 13.78%
7.84 %
6.50% - 13.14%
8.27 %
(1) Averages of all the inputs within the range.

To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below:
(dollars in thousands)At September 30, 2021
Fair value of single family MSR$61,206 
Expected weighted-average life (in years)5.87
CPR
Impact on fair value of 25 basis points adverse change in interest rates$(3,490)
Impact on fair value of 50 basis points adverse change in interest rates$(7,016)
Discount rate
Impact on fair value of 100 basis points increase$(2,949)
Impact on fair value of 200 basis points increase$(5,675)

The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows for the periods indicated: 
Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Beginning balance$39,113 $30,583 $35,774 $29,494 
Originations2,270 2,524 9,086 6,129 
Amortization(1,758)(1,301)(5,235)(3,817)
Ending balance$39,625 $31,806 $39,625 $31,806 


NOTE 7–GUARANTEES AND MORTGAGE REPURCHASE LIABILITY:

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 September 30, 2021 and December 31, 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 $0.7 million and $2.1 million at September 30, 2021 and December 31, 2020, respectively. There were no actual losses incurred under this arrangement during the quarters and nine months ended September 30, 2021 and 2020.

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, 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, 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 $5.6 billion and $6.0 billion as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 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 on the consolidated balance sheets, of $1.4 million and $2.1 million, respectively.
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NOTE 8–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.
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Asset/Liability classValuation methodology, inputs and assumptionsClassification
Investment securities
Investment securities AFSObservable market prices of identical or similar securities are used where available.Level 2 recurring fair value measurement.
If market prices are not readily available, value is based on discounted cash flows using the following significant inputs:
 
•      Expected prepayment speeds 
•      Estimated credit losses 
•      Market liquidity adjustments
Level 3 recurring fair value measurement.
LHFS
Single family loans, excluding loans transferred from held for investment
Fair value is based on observable market data, including:
 
•       Quoted market prices, where available 
•       Dealer quotes for similar loans 
•       Forward sale commitments
Level 2 recurring fair value measurement.
When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs:
•       Benchmark yield curve  
•       Estimated discount spread to the benchmark yield curve 
•       Expected prepayment speeds
Estimated fair value classified as Level 3.
Mortgage servicing rights
Single family MSRs
For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 6, Mortgage Banking Operations.
Level 3 recurring fair value measurement.
Derivatives
Eurodollar futuresFair value is based on closing exchange prices.Level 1 recurring fair value measurement.
Interest rate swaps
Interest rate swaptions
Forward sale commitments		Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including:
 
            •       Forward interest rates 
            •       Interest rate volatilities		Level 2 recurring fair value measurement.
Interest rate lock commitments
The fair value considers several factors including:

•       Fair value of the underlying loan based on quoted prices in the secondary market, when available. 
•       Value of servicing
•       Fall-out factor
Level 3 recurring fair value measurement.

 



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The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis: 
At September 30, 2021
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Investment securities AFS
Mortgage backed securities:
Residential$33,467 $— $31,030 $2,437 
Commercial42,050 — 42,050 — 
Collateralized mortgage obligations:
Residential184,360 — 184,360 — 
Commercial141,324 — 141,324 — 
Municipal bonds534,401 — 534,401 — 
Corporate debt securities19,849 — 19,772 77 
U.S. Treasury securities23,392 — 23,392 — 
Single family LHFS135,942 — 135,942 — 
Single family LHFI4,507 — — 4,507 
Single family mortgage servicing rights 61,206 — — 61,206 
Derivatives
Forward sale commitments1,419 — 1,419 — 
Interest rate lock commitments4,612 — — 4,612 
Interest rate swaps8,772 — 8,772 — 
Total assets$1,195,301 $— $1,122,462 $72,839 
Liabilities:
Derivatives
Eurodollar futures$9 $9 $— $— 
Forward sale commitments1,017 — 1,017 — 
Interest rate lock commitments3 — — 3 
Interest rate swaps10,521 — 10,521 
Total liabilities$11,550 $9 $11,538 $3 

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At December 31, 2020
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Investment securities AFS
Mortgage backed securities:
Residential
$51,046 $— $48,417 $2,629 
Commercial
45,184 — 45,184 — 
Collateralized mortgage obligations:
Residential234,909 — 234,909 — 
Commercial159,183 — 159,183 — 
Municipal bonds564,703 — 564,703 — 
Corporate debt securities15,222 — 15,141 81 
Agency debentures1,846 — 1,846 — 
Single family LHFS 194,643 — 194,643 — 
Single family LHFI7,108 — — 7,108 
Single family mortgage servicing rights49,966 — — 49,966 
Derivatives
Forward sale commitments1,035 — 1,035 — 
Interest rate lock commitments17,395 — — 17,395 
Interest rate swaps17,459 — 17,459 — 
Total assets$1,359,699 $— $1,282,520 $77,179 
Liabilities:
Derivatives
Eurodollar futures$4 $4 $— $— 
Forward sale commitments3,714 — 3,714 — 
Interest rate lock commitments3 — — 3 
Interest rate swaps20,511 — 20,511 — 
Total liabilities$24,232 $4 $24,225 $3 

There were no transfers between levels of the fair value hierarchy during the quarters and nine months ended September 30, 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 commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and nine months ended September 30, 2021 and 2020, see Note 6, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.

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.
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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 fallout) 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 $4.5 million and $7.1 million at September 30, 2021 and December 31, 2020, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:
(dollars in thousands)Fair ValueValuation
Technique		Significant Unobservable
Input		LowHighWeighted Average
September 30, 2021
Investment securities AFS$2,514 Income approach
Implied spread to benchmark interest rate curve
2.00%2.00%2.00%
Single family LHFI4,507 Income approachImplied spread to benchmark interest rate curve3.14%8.59%4.73%
Interest rate lock commitments, net4,609 Income approachFall-out factor0.87%24.05%12.18%
Value of servicing0.39%1.52%1.19%
December 31, 2020
Investment securities AFS$2,710 Income approach
Implied spread to benchmark interest rate curve
2.00%2.00%2.00%
Single family LHFI7,108 Income approachImplied spread to benchmark interest rate curve3.96%10.64%6.23%
Interest rate lock commitments, net17,392 Income approachFall-out factor1.97%38.38%15.53%
Value of servicing0.41%1.44%0.97%


36



We had no LHFS where the fair value was not derived with significant observable inputs at September 30, 2021 and December 31, 2020.

The following table presents fair value changes and activity for certain Level 3 assets for the periods indicated:

(in thousands)Beginning balanceAdditionsTransfersPayoffs/Sales
Change in mark to market (1)
Ending balance
Quarter Ended September 30, 2021
Investment securities AFS$2,550 $— $— $(48)$12 $2,514 
Single family LHFI5,207 284 — (1,088)104 4,507 
Quarter Ended September 30, 2020
Investment securities AFS$2,861 $— $— $(48)$(16)$2,797 
Single family LHFI5,847 2,169 — (352)(26)7,638 
Nine Months Ended September 30, 2021
Investment securities AFS$2,710 $— $— $(144)$(52)$2,514 
Single family LHFI7,108 1,429 — (4,279)249 4,507 
Nine Months Ended September 30, 2020
Investment securities AFS$1,952 $985 $— $(387)$247 $2,797 
Single family LHFI3,468 5,515 — (1,135)(210)7,638 

(1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statement.

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments for the periods indicated:
Quarter Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Beginning balance, net$5,893 $17,967 $17,392 $2,223 
Total realized/unrealized gains (losses)5,299 18,285 9,112 46,313 
Settlements(6,583)(15,292)(21,895)(27,576)
Ending balance, net$4,609 $20,960 $4,609 $20,960 

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs 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.

37

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 table present assets classified as Level 3 assets that had changes in their recorded fair value for the periods indicated and what we still held at the end of the respective reporting period:

(in thousands)Fair ValueLevel 1Level 2Level 3Total Gains (Losses)
At or for the Quarter Ended September 30, 2021
      LHFI (1)
$1,121 $— $— $1,121 $(8)
At or for the Quarter Ended September 30, 2020
      LHFI (1)
$3,302 $— $— $3,302 $(2,054)
At or for the Nine Months Ended September 30, 2021
LHFI (1)
$1,121 $— $— $1,121 $(70)
At or for the Nine Months Ended September 30, 2020
LHFI (1)
$3,302 $— $— $3,302 $(2,184)

(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.

Fair Value of Financial Instruments

The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis: 
 At September 30, 2021
(in thousands)Carrying
Value		Fair
Value		Level 1Level 2Level 3
Assets:
Cash and cash equivalents$218,662 $218,662 $218,662 $— $— 
Investment securities HTM4,195 4,349 — 4,349 — 
LHFI5,295,234 5,337,837 — — 5,337,837 
LHFS – multifamily and other
259,170 267,688 — 267,688 — 
Mortgage servicing rights – multifamily
39,625 43,166 — — 43,166 
Federal Home Loan Bank stock8,723 8,723 — 8,723 — 
Other assets - GNMA EBO loans31,553 31,553 — — 31,553 
Liabilities:
Certificates of deposit$995,475 $996,743 $— $996,743 $— 
Long-term debt125,979 117,577 — 117,577 — 

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 At December 31, 2020
(in thousands)Carrying
Value		Fair
Value		Level 1Level 2Level 3
Assets:
Cash and cash equivalents $58,049 $58,049 $58,049 $— $— 
Investment securities HTM4,271 4,507 — 4,507 — 
LHFI5,172,778 5,327,711 — — 5,327,711 
LHFS – multifamily and other167,289 167,289 — 167,289 — 
Mortgage servicing rights – multifamily35,774 38,423 — — 38,423 
Federal Home Loan Bank stock20,319 20,319 — 20,319 — 
Other assets-GNMA EBO loans101,750 101,750 — — 101,750 
Liabilities:
Certificates of deposit$1,139,807 $1,143,747 $— $1,143,747 $— 
Borrowings322,800 322,876 — 322,876 — 
Long-term debt125,838 116,893 — 116,893 — 

NOTE 9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share for the periods indicated: 
 Quarter Ended September 30,Nine Months Ended September 30,
(in thousands, except share and per share data)2021202020212020
Net income$27,170 $26,349 $85,990 $52,392 
Weighted average shares:
Basic weighted-average number of common shares outstanding
20,613,290 22,665,069 21,099,059 23,226,109 
Dilutive effect of outstanding common stock equivalents 206,311 212,157 253,656 177,620 
Diluted weighted-average number of common shares outstanding20,819,601 22,877,226 21,352,715 23,403,729 
Net income per share:
Basic earnings per share$1.32 $1.16 $4.08 $2.26 
Diluted earnings per share$1.31 $1.15 $4.03 $2.24 
 

NOTE 10–RESTRUCTURING:

In 2020, we took steps to consolidate our facilities and incurred charges in connection with vacating certain office space. In addition, we incurred certain consulting fees in connection with a corporate-wide operations restructuring program which began in 2019.

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The following table summarizes the restructuring charges and the liability for restructuring costs still to be paid in the periods indicated:
(in thousands)Facility-related costsPersonnel-related costsOther costsTotal
Quarter ended September 30, 2021 activity
Costs paid or otherwise settled$(334)$(2)$— $(336)
Balance, September 30, 2021$1,963 $99 $— $2,062 
Quarter ended September 30, 2020 activity
Restructuring charges$1,736 $164 $232 $2,132 
Costs paid or otherwise settled(1,640)(150)(229)(2,019)
Balance, September 30, 2020$1,791 $185 $89 $2,065 
Nine months ended September 30, 2021 activity
Costs paid or otherwise settled$(900)$(55)$(116)$(1,071)
Balance, September 30, 2021$1,963 $99 $— $2,062 
Nine months ended September 30, 2020 activity
Restructuring charges$4,183 $299 $1,018 $5,500 
Costs paid or otherwise settled(3,627)(624)(1,088)(5,339)
Balance, September 30, 2020$1,791 $185 $89 $2,065 

NOTE 11–SUBSEQUENT EVENT:

On October 28, 2021 the Board authorized a dividend of $0.25 per share, payable on November 23, 2021 to shareholders of record on November 9, 2021. On the same day, the Board approved an expansion of the Company's share repurchase program for up to $20 million of its common stock.
40

ITEM 2     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2020 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, anticipated completion of loan forbearances with respect to customer loans, our future plans and the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020 and the risks and uncertainties discussed below and elsewhere in this Quarterly Report on Form 10-Q that could cause actual results to differ significantly from those projected. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global, national, regional and local business and economic environment as a result.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation, and expressly disclaim any such obligation to update; or clarify any of the forward-looking statements after the date of this Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes. Statements of knowledge, intention or belief reflect those characteristics of our executive management team based on current facts and circumstances.

You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith on the Securities and Exchange Commission's website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.

41

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 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 and the valuation of single family mortgage servicing rights.

These policies and estimates are described in further detail in Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies, within our 2020 Annual Report on Form 10-K.
42

Summary Financial Data

 Quarter EndedNine Months Ended September 30,
(in thousands, except per share data and FTE data)September 30, 2021June 30, 202120212020
Select Income Statement data:
Net interest income$57,484 $57,972 $169,973 $152,614 
Provision for credit losses(5,000)(4,000)(9,000)20,469 
Noninterest income24,298 28,224 91,355 105,387 
Noninterest expense51,949 52,815 161,372 170,893 
Net income:
Before income taxes
34,833 37,381 108,956 66,639 
Total
27,170 29,157 85,990 52,392 
Net income per share - diluted$1.31 $1.37 $4.03 $2.24 
Select Performance Ratios:
Return on average equity - annualized14.8 %16.3 %15.8 %10.0 %
Return on average tangible equity - annualized (1)
15.6 %17.2 %16.7 %10.6 %
Return on average assets - annualized1.48 %1.59 %1.57 %0.97 %
Efficiency ratio (1)
62.8 %62.8 %61.8 %63.4 %
Net interest margin3.42 %3.45 %3.39 %3.09 %
Other data
Full time equivalent employees983 997 983 999

(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, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.




43

 As of
(in thousands, except share and per share data)September 30, 2021December 31, 2020
Selected Balance Sheet Data
Loans held for sale$395,112 $361,932 
Loans held for investment, net5,299,741 5,179,886 
ACL54,516 64,294 
Investment securities
983,038 1,076,364 
Total assets7,372,451 7,237,091 
Deposits6,359,660 5,821,559 
Borrowings
— 322,800 
Long-term debt125,979 125,838 
Total shareholders' equity710,376 717,750 
Other data:
Book value per share
$34.74 $32.93 
Tangible book value per share (1)
$33.18 $31.42 
Total equity to total assets
9.6 %9.9 %
Tangible common equity to tangible assets (1)
9.2 %9.5 %
Shares outstanding at period end20,446,648 21,796,904 
Loans to deposit ratio
90.4 %96.3 %
Credit Quality:
ACL to total loans (2)
1.06 %1.33 %
ACL to nonaccrual loans
307.8 %310.3 %
Nonaccrual loans to total loans
0.33 %0.40 %
Nonperforming assets to total assets
0.26 %0.31 %
Nonperforming assets
$19,196 $22,097 
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio
10.17 %9.79 %
Total risk-based capital
13.71 %14.76 %
Company
Tier 1 leverage ratio
10.00 %9.65 %
Total risk-based capital
13.01 %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 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, including PPP loans.


44


Current Developments
COVID-19 Pandemic Update
We continue to monitor the spread of COVID-19 in our communities and adapt to changes in guidance from local healthcare officials. We have taken measures to mitigate opportunities for spread and to help provide a safe environment for our team members.

Our initial response included a business continuity plan with a remote working strategy, social distancing and sanitation plan. We continue to monitor this plan to adapt to recent developments. We continue to take significant measures to protect our employees, such as having most work remotely and where remote work is not viable, implementing a social distancing and sanitation plan. As a federal contractor, we believe we are subject to the Safer Federal Workforce COVID-19 Workplace Safety: Guidance for Federal Contractors and Subcontractors which will require vaccinations for most if not all of our employees beginning in December 2021. If we are not subject to the vaccine requirements for federal contractors, as a company with more than 100 employees we will be subject instead to the Department of Labor’s Occupational Safety and Health Administration ("OSHA") to Emergency Temporary Standard issued on November 4, 2021 which required that all employers with at least 100 employees ensure that their employees are fully vaccinated for COVID-19 or require employees to obtain a negative COVID-19 test at least once a week. Employers must comply with most requirements under the Emergency Temporary Standard by December 4, 2021 and with testing requirements by January 4, 2022. Any requirement to mandate COVID-19 vaccination of our workforce or require our unvaccinated employees to be tested weekly could result in employee attrition and difficulty securing future labor needs, and may have an adverse effect on our future revenues, costs, and results of operations.

At September 30, 2021, all of our retail deposit branches were open to serve our customers and communities.

We participated in the Small Business Administration’s ("SBA") Paycheck Protection Program (“PPP”), and during 2021 we funded 1,384 loans with balances of $159 million under the PPP. As of September 30, 2021, PPP outstanding loan balances were $77 million. The loans funded through the PPP program are fully guaranteed by the U.S. government. Through September 30, 2021, cumulative PPP loans forgiven totaled $368 million.

Other Items
As part of our capital management strategy, during the first nine months of 2021, we repurchased a total of 1,498,974 shares of our common stock at an average price of $43.36 per share. On October 28, 2021, the Board of Directors approved an expansion of the Company's share repurchase program for up to $20 million of its common stock.


45


Management's Overview of the Third Quarter 2021 Financial Performance

Third Quarter of 2021 Compared to the Second Quarter of 2021

General: Our net income and income before taxes were $27.2 million and $34.8 million, respectively, in the third quarter of 2021, as compared to $29.2 million and $37.4 million, respectively, in the second quarter of 2021. The $2.5 million decrease in income before taxes was due to lower net interest income and lower noninterest income, which was partially offset by a higher recovery of our allowance for credit losses and lower noninterest expenses.

Income Taxes: Our effective tax rate was 22.0% in both the second and third quarter of 2021 as compared to a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments.

46

Net Interest Income: The following tables set 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 yield on interest-earning assets:
Quarter Ended
 September 30, 2021June 30, 2021
(in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost
      
Assets:
Interest-earning assets:
Loans (1)
$5,577,149 $56,303 3.98 %$5,664,187 $57,265 4.02 %
Investment securities (1)
994,593 5,816 2.34 %1,032,995 5,677 2.20 %
FHLB Stock, Fed Funds and other147,516 141 0.38 %86,525 159 0.73 %
Total interest-earning assets
6,719,258 62,260 3.65 %6,783,707 63,101 3.70 %
Noninterest-earning assets 545,675 558,568 
Total assets
$7,264,933 $7,342,275 
Liabilities and shareholders' equity:
Deposits: (2)
Demand deposits
$529,690 $188 0.14 %$540,784 $186 0.14 %
Money market and savings
2,990,902 1,054 0.14 %2,958,761 1,058 0.14 %
Certificates of deposit
1,005,138 1,265 0.50 %1,077,959 1,529 0.57 %
Total deposits
4,525,730 2,507 0.22 %4,577,504 2,773 0.24 %
Borrowings:
Borrowings
32,167 43 0.54 %179,543 142 0.31 %
Long-term debt
125,948 1,354 4.28 %125,901 1,360 4.31 %
Total interest-bearing liabilities
4,683,845 3,904 0.33 %4,882,948 4,275 0.35 %
Noninterest-bearing liabilities
Demand deposits (2)
1,679,086 1,541,317 
Other liabilities
175,179 199,172 
Total liabilities
6,538,110 6,623,437 
Shareholders' equity726,823 718,838 
Total liabilities and shareholders' equity$7,264,933 $7,342,275 
Net interest income
$58,356 $58,826 
Net interest rate spread3.32 %3.35 %
Net interest margin3.42 %3.45 %

(1)    Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $0.9 million for both the quarters ended September 30, 2021 and June 30, 2021. The estimated federal statutory tax rate was 21% for the periods presented.
(2)    Cost of all deposits, including noninterest-bearing demand deposits was 0.16% and 0.18% for the quarter ended September 30, 2021 and June 30, 2021, respectively.

Net interest income was lower in the third quarter of 2021 as compared to the second quarter of 2021 primarily due to a $1.7 million decrease in interest income derived from Paycheck Protection Program (“PPP”) loans. This was partially offset by higher levels of non-PPP loans. Excluding the impact of PPP loans, our net interest margin in the third quarter of 2021 was consistent with our net interest margin in the second quarter of 2021.

Provision for Credit Losses: As a result of the continued 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 $5 million recovery of our allowance for credit losses in the third quarter of 2021, as compared to a $4 million recovery of our allowance for credit losses in the second quarter of 2021.

47

Noninterest Income consisted of the following for the periods indicated: 
 Quarter Ended
(in thousands)September 30, 2021June 30, 2021
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$14,249 $15,836 
Commercial real estate, multifamily and SBA3,260 5,435 
Loan servicing income2,014 1,931 
Deposit fees
2,091 1,997 
Other2,684 3,025 
Total noninterest income$24,298 $28,224 
(1) May include loans originated as held for investment.

Loan servicing income, a component of noninterest income, consisted of the following for the periods indicated:

 Quarter Ended
(in thousands)September 30, 2021June 30, 2021
Single family servicing income, net
Servicing fees and other
$3,878 $3,975 
Changes - amortization (1)
(4,579)(5,181)
Net
(701)(1,206)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
747 (5,024)
Net gain (loss) from derivatives hedging (293)5,024 
Subtotal
454 — 
Single Family servicing income (loss)(247)(1,206)
Commercial loan servicing income:
Servicing fees and other$4,019 $5,270 
Amortization of capitalized MSRs(1,758)(2,133)
Total
2,261 3,137 
Total loan servicing income $2,014 $1,931 

(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 in the third quarter of 2021 as compared to the second quarter of 2021 was due to a $3.8 million decrease in gain on loan origination and sale activities. The decrease in gain on loan origination and sale activities was primarily due to a lower volume of single family rate locks and lower levels of CRE loans sold in the third quarter of 2021 as compared to the second quarter of 2021.

Noninterest Expense consisted of the following for the periods indicated:
 Quarter Ended
(in thousands)September 30, 2021June 30, 2021
Noninterest expense
Compensation and benefits$31,175 $34,378 
Information services6,902 6,949 
Occupancy 5,705 5,973 
General, administrative and other8,167 5,515 
Total noninterest expense$51,949 $52,815 
48


The $0.9 million decrease in noninterest expense in the third quarter of 2021 as compared to the second quarter of 2021 was primarily due to lower compensation and benefits costs partially offset by higher general, administrative and other costs. The reduction in compensation and benefit costs was due to reductions in commission expense related to lower levels of loans closed for our single family mortgage operations and lower benefit costs due to third quarter seasonality. General, administrative and other costs increased due to a $1.9 million reimbursement of legal costs received from our insurance carrier in the second quarter of 2021 and higher marketing costs.


49

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

General: Our net income and income before taxes were $86.0 million and $109.0 million, respectively, in the nine months ended September 30, 2021, as compared to $52.4 million and $66.6 million, respectively, in the nine months ended September 30, 2020. The $42.3 million increase in income before taxes was due to higher net interest income, lower provision for credit losses and lower noninterest expense, partially offset by lower noninterest income.

Income Taxes: Our effective tax rate during the nine months ended September 30, 2021 was 21.1% as compared to 21.4% in the nine months ended September 30, 2020 and a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments.

Net Interest Income: The following tables set 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 yield on interest-earning assets:
Nine Months Ended September 30,
 20212020
(in thousands)Average
Balance		InterestAverage
Yield/Cost		Average
Balance		InterestAverage
Yield/Cost
      
Assets:
Interest-earning assets:
Loans (1)
$5,615,624 $167,322 3.95 %$5,490,900 $172,897 4.16 %
Investment securities (1)
1,030,726 18,084 2.34 %1,082,402 18,061 2.22 %
FHLB Stock, Fed Funds and other100,972 472 0.62 %59,901 960 2.11 %
Total interest-earning assets
6,747,322 185,878 3.65 %6,633,203 191,918 3.82 %
Noninterest-earning assets558,224 545,890 
Total assets
$7,305,546 $7,179,093 
Interest-bearing liabilities:
Deposits: (2)
Demand deposits
$521,579 $543 0.14 %$419,833 $755 0.24 %
Money market and savings
2,955,153 3,338 0.15 %2,612,536 10,593 0.54 %
Certificates of deposit
1,087,195 5,049 0.62 %1,261,376 17,770 1.88 %
Total deposits
4,563,927 8,930 0.26 %4,293,745 29,118 0.90 %
Borrowings:
Borrowings
137,754 347 0.33 %648,836 3,150 0.64 %
Long-term debt
125,902 4,076 4.31 %125,713 4,407 4.66 %
Total interest-bearing liabilities
4,827,583 13,353 0.37 %5,068,294 36,675 0.96 %
Noninterest-bearing liabilities
Demand deposits (2)
1,552,201 1,228,295 
Other liabilities
200,032 180,207 
Total liabilities
6,579,816 6,476,796 
Shareholders' equity725,730 702,297 
Total liabilities and shareholders' equity$7,305,546 $7,179,093 
Net interest income
$172,525 $155,243 
Net interest spread3.28 %2.86 %
Net interest margin3.39 %3.09 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.6 million for both the nine months ended September 30, 2021 and 2020. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 0.20% and 0.70% for the nine months ended September 30, 2021 and 2020, respectively.

Net interest income was higher in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due to a $114 million increase in interest earning assets and an increase in our net interest margin from 3.09% in the nine months ended September 30, 2020 to 3.39% in the nine months ended September 30, 2021. The increase in interest earning assets was due to an increase in total loans. The increase in our net interest margin was due to a 42 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 17 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
50

liabilities decreased from 0.96% in the nine months ended September 30, 2020 to 0.37% in the nine months ended September 30, 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 $9 million recovery of our allowance for credit losses in the nine months ended September 30, 2021. Due to adverse economic conditions related to the COVID-19 pandemic, in the nine months ended September 30, 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.

Noninterest Income consisted of the following for the periods indicated:  
 Nine Months Ended September 30,
(in thousands)20212020
Noninterest income
Gain on loan origination and sale activities (1)
Single family
$56,272 $73,751 
Commercial
15,967 11,947 
Loan servicing income4,693 6,921 
Deposit fees
5,912 5,225 
Other8,511 7,543 
Total noninterest income$91,355 $105,387 
(1) May include loans originated as held for investment.


Loan servicing income, a component of noninterest income, consisted of the following for the periods indicated:
 Nine Months Ended September 30,
(in thousands)20212020
Single family servicing income, net
Servicing fees and other
$11,788 $13,357 
Changes - amortization (1)
(15,453)(12,246)
Net
(3,665)1,111 
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)
7,186 (21,970)
Net loss from derivatives hedging (7,860)22,148 
Subtotal
(674)178 
Single Family servicing income (loss)(4,339)1,289 
Commercial loan servicing income:
Servicing fees and other14,267 9,716 
Amortization of capitalized MSRs(5,235)(4,084)
Total
9,032 5,632 
Total loan servicing income$4,693 $6,921 
(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.
51

The decrease in noninterest income for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was due to a decrease in gain on loan origination and sale activities and loan servicing income. The $13.5 million decrease in gain on loan origination and sale activities was due to a $17.5 million decrease in single family gain on loan origination and sale activities which was partially offset by a $4.0 million increase in commercial real estate (“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 22% decrease in rate locks. The increase in CRE and commercial gain on loan origination and sale activities was due to a 44% increase in the realized gain on sale which was partially offset by a 7% decrease in the volume of loans sold. The $2.2 million decrease in loan servicing income was due to a $5.6 million decrease in single family servicing income which was partially offset by a $3.4 million increase in commercial loan servicing income. The decrease in single family servicing income was due primarily to increased amortization of single family MSRs due to higher levels of prepayments and a $0.9 million decrease in risk management results. The increase in commercial loan servicing income was primarily due to higher levels of prepayment fees.

Noninterest Expense consisted of the following for the periods indicated:
 Nine Months Ended September 30,
(in thousands)20212020
Noninterest expense
Compensation and benefits$101,388 $101,429 
Information services20,635 22,330 
Occupancy 18,170 23,082 
General, administrative and other21,179 24,052 
Total noninterest expense$161,372 $170,893 

The $9.5 million decrease in noninterest expense in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was due to lower information services expense, occupancy expense and general, administrative and other expenses. The $1.7 million decrease in information services costs was primarily due to lower core processing costs related to a renegotiation of our contract. The $4.9 million decrease in occupancy expenses was primarily due to $4.4 million of impairments related to ongoing restructuring of our facilities recognized in the nine months ended September 30, 2020, with no similar charges in 2021. The $2.9 million decrease in general, administrative and other costs was due to a $1.9 million reimbursement of legal costs received from our insurance carrier in the second quarter of 2021 and $1.0 million of charges incurred in 2020 related to our efficiency improvement initiatives, which were partially offset by a $0.6 million increase in marketing costs.
52

Financial Condition

During the nine months ended September 30, 2021, total assets increased by $135 million due to a $120 million increase in loans held for investment and a $161 million increase in cash, partially offset by decreases in investments and other assets. Loans held for investment increased due to $2.5 billion of originations, which were partially offset by prepayments and scheduled payments of $2.0 billion and transfer of loans to loans held for sale of $391 million. Total liabilities increased primarily due to a $538 million increase in deposits, partially offset by a $323 million decrease in borrowings. The decrease in borrowings reflect the reduced need of wholesale funding resulting from the increase in deposits. The growth in deposits was due to new customers and increases in existing customer balances.



53

Credit Risk Management

As of September 30, 2021, our ratio of nonperforming assets to total assets remained low at 0.26% while our ratio of total loans delinquent over 30 days to total loans was 0.54%. The Company recorded a $9 million recovery of our allowance for credit losses for the nine months ended September 30, 2021.

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 September 30, 2021 is as follows:
Forbearances Approved (2)(3)
Total ExpiredOutstanding
(in thousands)Number of loansAmountNumber of loansAmountNumber of loansAmount
Loan type:
Commercial and CRE:
Commercial business
110 $59,403 110 $59,403 — $— 
CRE owner occupied27 69,302 27 69,302 — — 
CRE nonowner occupied15 75,751 13 57,843 2 17,908 
Total152 $204,456 150 $186,548 2 $17,908 
Single family and consumer (1)
Single family68 $20,880 
HELOCs and consumer30 4,016 
Total
98 $24,896 
(1) Does not include any single family loans that are guaranteed by Ginnie Mae.
(2) Does not include construction 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 make monthly payments under the existing or modified payment terms. At September 30, 2021, two of these loans with $2 million in balances were still operating under the terms of their modification.
(3) There were no forbearances initiated in the third quarter of 2021.

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, HELOCs and consumer loans were generally for a period of three to six months. As of September 30, 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 granted forbearance that were not complete as of September 30, 2021 are scheduled to be completed in the fourth quarter of 2021.


54

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:
 At September 30, 2021At December 31, 2020
(in thousands)Amount
Rate (1)
Amount
Rate (1)
Commercial real estate loans
Non-owner occupied commercial real estate$9,636 1.28 %$8,845 1.07 %
Multifamily5,457 0.26 %6,072 0.43 %
Construction/land development
Multifamily construction
1,044 2.08 %4,903 4.25 %
Commercial real estate construction
351 1.96 %1,670 6.12 %
Single family construction
6,291 2.07 %5,130 1.98 %
Single family construction to permanent
1,062 0.74 %1,315 0.87 %
Total
23,841 0.71 %27,935 0.99 %
Commercial and industrial loans
Owner occupied commercial real estate5,285 1.18 %4,994 1.08 %
Commercial business14,473 4.08 %17,043 4.72 %
Total
19,758 2.46 %22,037 2.67 %
Consumer loans
Single family5,757 0.85 %6,906 0.85 %
Home equity and other5,160 1.63 %7,416 1.83 %
Total
10,917 1.10 %14,322 1.18 %
Total ACL $54,516 1.06 %$64,294 1.33 %

(1) The reserve rate is calculated excluding balances related to loans that are insured by the FHA or guaranteed by the VA or SBA, including PPP loans.


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 five years.

At September 30, 2021 and December 31, 2020, the Bank had available borrowing capacity of $1.1 billion and $550 million, respectively, from the FHLB, and $297 million and $406 million, respectively, from the Federal Reserve Bank of San Francisco and $1.0 billion and $1.2 billion under borrowing lines established with other financial institutions.

55

Cash Flows

For the nine months ended September 30, 2021, cash and cash equivalents increased by $161 million compared to an increase of $21 million during the nine months ended September 30, 2020. 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 the nine months ended September 30, 2021, net cash of $182 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt are sufficient to fund our operating liquidity needs. For the nine months ended September 30, 2020, net cash of $40 million was used in operating activities, primarily from cash used to fund LHFS production exceeding cash proceeds from the sale of loans.

Cash flows from investing activities

The Company's investing activities primarily include AFS securities and loans originated as held for investment. For the nine months ended September 30, 2021, net cash of $155 million was used in investing activities primarily from the origination of LHFI net of principal repayments and the purchase of AFS securities, partially offset by the proceeds from the sale of loans originated as LHFI and AFS securities. For the nine months ended September 30, 2020, net cash of $394 million was used by investing activities, primarily due to the purchase of investment securities and the origination of LHFI net of principal payments, partially offset by proceeds from the sale of loans originated as LHFI and investment securities and principal payments and maturities of investment securities.

Cash flows from financing activities

The Company's financing activities are primarily related to deposits and net proceeds from borrowings. For the nine months ended September 30, 2021, net cash of $134 million was provided by financing activities, primarily due to growth in deposits, partially offset by net repayment of short-term borrowings, repurchases of and dividends paid on our common stock. For the nine months ended September 30, 2020, net cash of $455 million was provided by financing activities, primarily due to net proceeds from borrowings and increase in deposits, partially offset by common stock repurchases and dividends paid on our common stock.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments that carry off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.

These commitments include the following:
(in thousands)At September 30, 2021At December 31, 2020
Unused consumer portfolio lines$394,694 $389,122 
Commercial portfolio lines (1)
801,632 656,065 
Commitments to fund loans64,456 68,345 
Total $1,260,782 $1,113,532 

(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction
progress payments, were $564 million and $395 million at September 30, 2021 and December 31, 2020, respectively.


56

Capital Resources and Dividend Policy

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 table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them:
At September 30, 2021
ActualFor Minimum Capital
Adequacy Purposes		To Be Categorized As
"Well Capitalized" 
(in thousands)AmountRatioAmountRatioAmountRatio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)
$717,110 10.00 %$286,945 4.0 %NANA
Common equity Tier 1 capital (to risk-weighted assets)657,110 11.02 %268,398 4.5 %NANA
Tier 1 risk-based capital (to risk-weighted assets)717,110 12.02 %357,864 6.0 %NANA
Total risk-based capital (to risk-weighted assets)776,218 13.01 %477,152 8.0 %NANA
HomeStreet Bank
Tier 1 leverage capital (to average assets)
$721,955 10.17 %$283,867 4.0 %$354,834 5.0 %
Common equity Tier 1 capital (to risk-weighted assets)721,955 12.68 %256,155 4.5 %370,002 6.5 %
Tier 1 risk-based capital (to risk-weighted assets)721,955 12.68 %341,540 6.0 %455,387 8.0 %
Total risk-based capital (to risk-weighted assets)780,488 13.71 %455,387 8.0 %569,233 10.0 %
At December 31, 2020
ActualFor Minimum Capital
Adequacy Purposes		To Be Categorized As
"Well Capitalized" 
(in thousands)AmountRatioAmountRatioAmountRatio
HomeStreet, Inc.
Tier 1 leverage capital (to average assets)$709,655 9.65 %$294,211 4.0 %NANA
Common equity Tier 1 capital (to risk-weighted assets)649,655 11.67 %250,537 4.5 %NANA
Tier 1 risk-based capital (to risk-weighted assets)709,655 12.75 %334,050 6.0 %NANA
Total risk-based capital (to risk-weighted assets)779,254 14.00 %445,400 8.0 %NANA
HomeStreet Bank
Tier 1 leverage capital (to average assets)$712,533 9.79 %$291,114 4.0 %$363,893 5.0 %
Common equity Tier 1 capital (to risk-weighted assets)712,533 13.51 %237,307 4.5 %342,777 6.5 %
Tier 1 risk-based capital (to risk-weighted assets)712,533 13.51 %316,410 6.0 %421,880 8.0 %
Total risk-based capital (to risk-weighted assets)778,479 14.76 %421,880 8.0 %527,350 10.0 %

57

As of 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 HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 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 Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At September 30, 2021, capital conservation buffers for the Company and the Bank were 5.01% and 5.71%, respectively.

The Company paid a quarterly cash dividend of $0.25 per common share in each of the first, second and third quarters of 2021. It is our current intention to continue to pay quarterly dividends, and on October 28, 2021 we declared another cash dividend of $0.25 per common share payable on November 23, 2021 to shareholders of record as of the close of business on November 9, 2021. The amount and declaration of future cash dividends are subject to approval by our Board of Directors and certain regulatory restrictions.

We had no material commitments for capital expenditures as of September 30, 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.

58


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. 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 quarterly report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure.

In this quarterly report on Form 10-Q, we use (i) tangible common equity and tangible assets and ratios calculated using these measures 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.

Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures:
59

 As of or for the quarter ended As of or for the nine months ended September 30,
(in thousands)September 30, 2021June 30, 202120212020
Return on average tangible equity (annualized)
Average shareholders' equity
$726,823 $718,838 $725,730 $702,297 
Less: Average goodwill and other intangibles
(32,195)(32,487)(32,484)(33,784)
Average tangible equity
$694,628 $686,351 $693,246 $668,513 
Net income$27,170 $29,157 $85,990 $52,392 
Adjustments (tax effected)
Amortization on core deposit intangibles229 229 694 815 
Tangible income applicable to shareholders$27,399 $29,386 $86,684 $53,207 
Ratio
15.6 %17.2 %16.7 %10.6 %
Efficiency ratio
Noninterest expense
Total
$51,949 $52,815 $161,372 $170,893 
Adjustments:
Restructuring related charges— — — (5,725)
Legal fees recovery— 1,900 1,900 — 
State of Washington taxes
(578)(602)(1,759)(1,864)
Adjusted total
$51,371 $54,113 $161,513 $163,304 
Total revenues
Net interest income
$57,484 $57,972 $169,973 $152,614 
Noninterest income
24,298 28,224 $91,355 $105,387 
Adjustments
Contingent payout
— — — (566)
Adjusted total
$81,782 $86,196 $261,328 $257,435 
Ratio
62.8 %62.8 %61.8 %63.4 %
 As of
(in thousands, except share data)September 30, 2021December 31, 2020
Tangible book value per share
Shareholders' equity
$710,376 $717,750 
Less: goodwill and other intangibles
(32,002)(32,880)
Tangible shareholder's equity
$678,374 $684,870 
Common shares outstanding
20,446,648 21,796,904 
Computed amount
$33.18 $31.42 
Tangible common equity to tangible assets
Tangible shareholder's equity (per above)
$678,374 $684,870 
Tangible assets
Total assets
7,372,451 7,237,091 
Less: Goodwill and other intangibles
(32,002)(32,880)
Net
$7,340,449 $7,204,211 
Ratio
9.2 %9.5 %

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ITEM 3QUANTITATIVE 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 that we are exposed to 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, MSRs, 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, 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.


61

The following table presents sensitivity gaps for these different intervals:
 
 At September 30, 2021
(in thousands)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
Interest-earning assets:
Cash & cash equivalents$218,662 $— $— $— $— $— $— $— $218,662 
FHLB Stock95 — — — — — 8,628 — 8,723 
Investment securities (1)
120,632 21,146 36,453 118,009 120,928 416,996 148,874 — 983,038 
 LHFS395,112 — — — — — — — 395,112 
LHFI (1)
1,172,337 354,571 562,031 1,144,541 1,231,826 871,547 17,404 — 5,354,257 
Total
1,906,838 375,717 598,484 1,262,550 1,352,754 1,288,543 174,906 — 6,959,792 
Non-interest-earning assets
— — — — — — — 412,659 412,659 
Total assets$1,906,838 $375,717 $598,484 $1,262,550 $1,352,754 $1,288,543 $174,906 $412,659 $7,372,451 
Interest-bearing liabilities:
Demand deposit accounts (2)
$555,716 $— $— $— $— $— $— $— $555,716 
Savings accounts (2)
305,395 — — — — — — — 305,395 
Money market
accounts (2)
2,796,524 — — — — — — — 2,796,524 
Certificates of deposit371,789 184,080 229,929 201,883 7,794 — — — 995,475 
Long-term debt (3)
60,979 — — — 65,000 — — — 125,979 
Total
4,090,403 184,080 229,929 201,883 72,794 — — — 4,779,089 
Non-interest bearing liabilities
— — — — — — — 1,882,986 1,882,986 
Shareholders' Equity— — — — — — — 710,376 710,376 
Total liabilities and shareholders' equity$4,090,403 $184,080 $229,929 $201,883 $72,794 $— $— $2,593,362 $7,372,451 
Interest sensitivity gap$(2,183,565)$191,637 $368,555 $1,060,667 $1,279,960 $1,288,543 $174,906 
Cumulative interest sensitivity gap
Total
$(2,183,565)$(1,991,928)$(1,623,373)$(562,706)$717,254 $2,005,797 $2,180,703 
As a % of total assets
(30)%(27)%(22)%(8)%10 %27 %30 %
As a % of cumulative interest-bearing liabilities
47 %53 %64 %88 %115 %142 %146 %

(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.
(2)Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.
(3)Based on contractual maturity.

As of September 30, 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 liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest
62

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 September 30, 2021 and December 31, 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.

 At September 30, 2021At December 31, 2020
Change in Interest Rates
(basis points) (1)
Percentage Change
Net Interest Income (2)
Net Portfolio Value (3)
Net Interest Income (2)
Net Portfolio Value (3)
+2007.0 %(7.1)%3.5 %(9.3)%
+1003.0 %(4.7)%1.2 %(4.3)%
-100(4.2)%(3.7)%(3.8)%(3.7)%
-200(5.8)%(11.5)%(4.7)%(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 September 30, 2021, 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, 2020 and September 30, 2021 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 rate assumptions which 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.


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ITEM 4CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, with the participation of our management and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended September 30, 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 September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II - OTHER INFORMATION
 

ITEM 1LEGAL PROCEEDINGS

Because the nature of our business involves, among other things, the collection of numerous accounts, the validity of liens and compliance with various state and federal 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 and other consumer matters, including purported class and collective actions. 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 balance sheet, 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.



64

ITEM 1ARISK FACTORS

Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.













65

ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer
Shares repurchased, on a settlement-date basis, pursuant to the common equity repurchase program during the quarter ended September 30, 2021 were as follows:
 (in thousands, except share and per share information)
Total shares of common stock purchased
Average price paid per share of common stock Dollar value of remaining authorized repurchase
July— $— $15,000 
August372,622 40.26 — 
September— — — 
Total372,622 $— 



Sales of Unregistered Securities
There were no sales of unregistered securities during the third quarter of 2021.


66


ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5OTHER INFORMATION

Not applicable.

67

ITEM 6EXHIBITS
EXHIBIT INDEX
Exhibit
Number		Description
31.1
31.2
32 (1)
101 INSInline XBRL Instance Document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Label Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.PREInline XBRL Taxonomy Extension Definitions Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

(1)
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.

68

SIGNATURES

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 November 5, 2021.
 
HomeStreet, Inc.
By:/s/ Mark K. Mason
 Mark K. Mason
 President and Chief Executive Officer
(Principal Executive Officer)


HomeStreet, Inc.
By:/s/ John M. Michel
 John M. Michel
 Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

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