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HMST HomeStreet

Filed: 6 Nov 19, 3:05pm
0001518715 srt:MinimumMember us-gaap:FairValueInputsLevel3Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:MeasurementInputPriceVolatilityMember 2019-09-30
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, 2019
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 4, 2019 was 24,410,586.6.
 





PART I – FINANCIAL INFORMATION 
  
ITEM 1FINANCIAL STATEMENTS 
  
 
ITEM 2 

2





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.


3


PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(in thousands, except share data) September 30,
2019
 December 31,
2018
     
ASSETS    
Cash and cash equivalents (includes interest-earning instruments of $48,559 and $28,534) $74,788
 $57,982
Investment securities (includes $862,339 and $851,968 carried at fair value) 866,736
 923,253
Loans held for sale (includes $87,717 and $52,186 carried at fair value) 172,958
 77,324
Loans held for investment (net of allowance for loan losses of $43,437 and $41,470; includes $5,295 and $4,057 carried at fair value) 5,139,108
 5,075,371
Mortgage servicing rights (includes $61,823 and $75,047 carried at fair value) 90,624
 103,374
Other real estate owned 1,753
 455
Federal Home Loan Bank stock, at cost 8,764
 45,497
Premises and equipment, net 78,925
 88,112
Lease right-of-use assets 101,843
 
Goodwill 30,170
 22,564
Other assets 187,298
 171,255
Assets of discontinued operations 82,911
 477,034
Total assets $6,835,878
 $7,042,221
LIABILITIES AND SHAREHOLDERS' EQUITY    
Liabilities:    
Deposits $5,804,307
 $4,888,558
Federal Home Loan Bank advances 5,590
 932,590
Accounts payable and other liabilities 84,095
 169,970
Federal funds purchased and securities sold under agreements to repurchase 
 19,000
Long-term debt 125,603
 125,462
Lease liabilities 120,072
 
Liabilities of discontinued operations 5,075
 167,121
Total liabilities 6,144,742
 6,302,701
Commitments and contingencies (Note 8) 

 

Shareholders' equity:    
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares 
 
Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 24,408,513 shares and 26,995,348 shares 511
 511
Additional paid-in capital 309,649
 342,439
Retained earnings 372,981
 412,009
Accumulated other comprehensive income (loss) 7,995
 (15,439)
Total shareholders' equity 691,136
 739,520
Total liabilities and shareholders' equity $6,835,878
 $7,042,221

See accompanying notes to interim consolidated financial statements (unaudited).

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except share data)2019 2018 2019 2018
Interest income:       
Loans$64,803
 $58,624
 $194,749
 $166,280
Investment securities4,879
 5,580
 15,327
 16,666
Other395
 76
 763
 263
 70,077
 64,280
 210,839
 183,209
Interest expense:       
Deposits20,502
 11,286
 51,754
 28,636
Federal Home Loan Bank advances501
 3,277
 8,778
 8,286
Federal funds purchased and securities sold under agreements to repurchase39
 83
 806
 139
Long-term debt1,698
 1,695
 5,167
 4,941
Other203
 79
 456
 154
 22,943
 16,420
 66,961
 42,156
Net interest income47,134
 47,860
 143,878
 141,053
Provision for credit losses
 750
 1,500
 2,500
Net interest income after provision for credit losses47,134
 47,110
 142,378
 138,553
Noninterest income:       
Net gain on loan origination and sale activities15,951
 4,193
 30,736
 8,350
Loan servicing income2,687
 954
 5,906
 2,799
Depositor and other retail banking fees2,079
 2,031
 5,848
 5,915
Insurance agency commissions603
 588
 1,801
 1,658
(Loss) gain on sale of investment securities available for sale, net(18) (4) (128) 234
Other3,278
 2,888
 8,338
 7,195
 24,580
 10,650
 52,501
 26,151
Noninterest expense:       
Salaries and related costs32,793
 25,183
 92,311
 79,393
General and administrative9,539
 8,591
 25,565
 25,658
Amortization of core deposit intangibles429
 406
 1,223
 1,219
Legal594
 873
 2,214
 2,393
Consulting866
 426
 3,161
 1,723
Federal Deposit Insurance Corporation (recoveries) assessments(694) 880
 960
 2,739
Occupancy4,856
 4,548
 15,650
 13,531
Information services7,325
 7,005
 21,361
 20,782
Net benefit (cost) from operation and sale of other real estate owned13
 2
 (46) (89)
 55,721
 47,914
 162,399
 147,349
Income from continuing operations before income taxes15,993
 9,846
 32,480
 17,355
Income tax expense from continuing operations2,328
 1,757
 4,865
 3,341
Income from continuing operations13,665
 8,089
 27,615
 14,014
Income (loss) from discontinued operations before income taxes (includes net gain on disposal of $1,260 and net loss on disposal of $21,760 for the three and nine months ended September 30, 2019)190
 4,561
 (24,928) 13,651
Income tax expense (benefit) from discontinued operations28
 815
 (3,837) 2,865
Income (loss) from discontinued operations162
 3,746
 (21,091) 10,786
NET INCOME$13,827
 $11,835
 $6,524
 $24,800
Basic earnings per common share:       
Income from continuing operations$0.55
 $0.30
 $1.04
 $0.52
Income (loss) from discontinued operations0.01
 0.14
 (0.81) 0.40
Basic earnings per share$0.55
 $0.44
 $0.23
 $0.92
        
Diluted earnings per common share       
  Income from continuing operations$0.54
 $0.30
 $1.03
 $0.52
Income (loss) from discontinued operations0.01
 0.14
 (0.80) 0.40
Diluted earnings per share$0.55
 $0.44
 $0.22
 $0.91
Basic weighted average number of shares outstanding24,419,793
 26,985,425
 26,020,172
 26,963,260
Diluted weighted average number of shares outstanding24,625,938
 27,181,688
 26,204,414
 27,165,672

See accompanying notes to interim consolidated financial statements (unaudited).

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Net income$13,827
 $11,835
 $6,524
 $24,800
Other comprehensive income (loss), net of tax:       
Unrealized gain (loss) on investment securities available for sale:       
Unrealized holding gain (loss) arising during the period, net of tax expense (benefit) of $1,402 and $(1,169) for the three months ended September 30, 2019 and 2018, and $6,607 and $(4,469) for the nine months ended September 30, 2019 and 2018, respectively5,273
 (4,399) 25,412
 (16,811)
Reclassification adjustment for net losses (gains) included in net income, net of tax expense (benefit) of $(4) and zero for the three months ended September 30, 2019 and 2018, and $(27) and $49 for the nine months ended September 30, 2019 and 2018, respectively15
 4
 102
 (184)
Other comprehensive income (loss)5,288
 (4,395) 25,514
 (16,995)
Comprehensive income$19,115
 $7,440
 $32,038
 $7,805

See accompanying notes to interim consolidated financial statements (unaudited).

6


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
(in thousands, except share data)
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 Total temporary equity Total permanent equity
              
For the three months ended September 30, 2019             
Balance, July 1, 201926,085,164
 $511
 $308,705
 $359,252
 $2,707
 $52,735
 $671,175
Net income
 
 
 13,827
 
 
 13,827
Common stock issued15,750
 
 95
 
 
 
 95
Share-based compensation expense
 
 849
 (98) 
 
 751
Other comprehensive income
 
 
 
 5,288
 
 5,288
Common stock repurchased and retired(1,692,401) 
 
 
 
 (52,735) 
Reclassification from temporary equity
 
 
 
 
 
 
Balance, September 30, 201924,408,513
 $511
 $309,649
 $372,981
 $7,995
 $
 $691,136
             

For the nine months ended September 30, 2019             
Balance, January 1, 201926,995,348
 $511
 $342,439
 $412,009
 $(15,439) $
 $739,520
Net income
 
 
 6,524
 
 

 6,524
Common stock issued69,166
 
 176
 
 
 

 176
Share-based compensation expense
 
 1,109
 (98) 
 

 1,011
Cumulative effect of adoption of new accounting standards
 
 
 1,532
 (2,080) 

 (548)
Other comprehensive income
 
 
 
 25,514
 

 25,514
Common stock repurchased and retired(2,656,001) 
 (12,199) (16,127) 
 (52,735) (28,326)
Reclassification to temporary equity
 
 (21,876) (30,859) 
 52,735
 (52,735)
Balance, September 30, 201924,408,513
 $511
 $309,649
 $372,981
 $7,995
 $
 $691,136
           

 

For the three months ended September 30, 2018             
Balance at July 1, 201826,978,229
 $511
 $340,723
 $384,947
 $(19,722)   $706,459
Net income
 
 
 11,835
 
 
 11,835
Common stock issued11,513
 
 107
 
 
 
 107
Share-based compensation expense
 
 776
 
 
 
 776
Other comprehensive loss
 
 
 
 (4,395) 
 (4,395)
Balance, September 30, 201826,989,742
 $511
 $341,606
 $396,782
 $(24,117) $
 $714,782
              
For the nine months ended September 30, 2018             
January 1, 201826,888,288
 $511
 $339,009
 $371,982
 $(7,122) $
 $704,380
Net income
 
 
 24,800
 
 
 24,800
Common stock issued101,454
 
 361
 
 
 
 361
Share-based compensation expense
 
 2,236
 
 
 
 2,236
Other comprehensive loss
 
 
 
 (16,995) 
 (16,995)
Balance, September 30, 201826,989,742
 $511
 $341,606
 $396,782
 $(24,117) $
 $714,782

See accompanying notes to interim consolidated financial statements (unaudited).

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 Nine Months Ended September 30,
(in thousands)2019 2018
    
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income$6,524
 $24,800
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation, amortization and accretion29,834
 18,671
Provision for credit losses1,500
 2,500
Net fair value adjustment and gain on sale of loans held for sale(72,287) (71,098)
Gain on sale of mortgage servicing rights, gross(6,206) 
Loss on sale of HLC mortgage origination assets, net573
 
Fair value adjustment of loans held for investment(193) 35
Origination of mortgage servicing rights(27,823) (50,551)
Change in fair value of mortgage servicing rights37,293
 (28,243)
Net loss (gain) on sale of investment securities128
 (234)
Net gain on sale of loans originated as held for investment(6,405) (169)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned(110) (92)
Loss on disposal of fixed assets128
 303
Loss on lease abandonment and exit costs15,816
 6,073
Change in deferred income taxes(40,409) 4,372
Share-based compensation expense1,187
 2,528
Origination of loans held for sale(3,232,664) (4,850,098)
Proceeds from sale of loans originated as held for sale3,496,809
 5,175,266
Changes in operating assets and liabilities:   
Decrease in accounts receivable and other assets3,797
 4,986
Decrease in accounts payable and other liabilities(25,217) (10,250)
Net cash provided by operating activities182,275
 228,799
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchase of investment securities(146,780) (147,134)
Proceeds from sale of investment securities144,602
 38,465
Principal repayments and maturities of investment securities84,890
 82,432
Proceeds from sale of other real estate owned744
 460
Proceeds from sale of loans originated as held for investment528,745
 319,004
Proceeds from sale of mortgage servicing rights2,958
 65,318
Net cash provided by disposal of discontinued operations174,333
 
Origination of loans held for investment and principal repayments, net(593,292) (887,449)
Proceeds from sale of property and equipment
 467
Purchase of property and equipment(1,196) (7,056)
Net cash used for acquisitions(47,390) 
Net cash provided by (used in) investing activities147,614
 (535,493)

8


 Nine Months Ended September 30,
(in thousands)2019 2018
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
Increase in deposits, net678,016
 393,916
Proceeds from Federal Home Loan Bank advances5,798,300
 9,077,500
Repayment of Federal Home Loan Bank advances(6,725,300) (9,240,000)
Proceeds from federal funds purchased and securities sold under agreements to repurchase7,750,703
 1,733,700
Repayment of federal funds purchased and securities sold under agreements to repurchase(7,769,703) (1,678,700)
Proceeds from line of credit draws20,000
 30,000
Repayment of line of credit draws(20,000) (30,000)
Repayment of lease principal(1,375) 
Proceeds from Federal Home Loan Bank stock repurchase138,099
 151,771
Purchase of Federal Home Loan Bank stock(101,366) (145,864)
Stock repurchased(81,061) 
Proceeds from stock issuance, net
 69
Net cash (used in) provided by financing activities(313,687) 292,392
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH16,202
 (14,302)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:   
Cash, cash equivalents and restricted cash, beginning of year58,586
 73,909
Cash, cash equivalents and restricted cash, end of period74,788
 59,607
Less: restricted cash included in other assets
 (601)
CASH AND CASH EQUIVALENTS AT END OF PERIOD$74,788

$59,006
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Cash paid during the period for:   
Interest paid$70,738
 $47,007
Federal and state income taxes paid, net17,600
 193
Non-cash activities:   
Loans held for investment foreclosed and transferred to other real estate owned915
 455
Loans transferred from held for investment to held for sale617,778
 423,504
Loans transferred from held for sale to held for investment6,488
 57,061
Ginnie Mae loans (derecognized) recognized with the right to repurchase, net(26,418) 415
Receivable from sale of mortgage servicing rights6,945
 3,414
Acquisition:   
Assets acquired114,725
 
Liabilities assumed74,941
 
Goodwill7,606
 

See accompanying notes to interim consolidated financial statements (unaudited).

9


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

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the "Company") is a diversified financial services company serving customers primarily on the West Coast of the United States, including Hawaii. The Company is principally engaged in commercial banking, mortgage banking, and consumer/retail banking activities. The Company's consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, Union Street Holdings LLC, HS Cascadia Holdings LLC and YNB Real Estate LLC. HomeStreet Bank was formed in 1986 and is a state-chartered commercial bank.

The Company's accounting and financial reporting policies conform with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Inter-company balances 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 as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. Some of these estimates require application of management's most difficult, subjective or complex judgments and result in amounts that are inherently uncertain and may change in future periods. Management has made significant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business combinations (Note 12, Business Combinations), allowance for credit losses (Note 4, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 7, Mortgage Banking Operations), valuation of investment securities (Note 3, Investment Securities), and valuation of derivatives (Note 6, Derivatives and Hedging Activities). We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income, cash flows, total assets or total shareholders' equity as previously reported.

During the three months ended March 31, 2019, the Company's Board of Directors (the "Board") adopted a Resolution of Exit or Disposal of Home Loan Center ("HLC") Based Mortgage Banking Operations to sell or abandon the assets and transfer or terminate the personnel associated with the Company's high-volume home loan center-based mortgage origination business. The Company also successfully closed and settled two separate sales of the rights to service $14.26 billion in total unpaid principal balance of single family mortgage loans serviced for others, representing in the aggregate 71% of HomeStreet's total single family mortgage loans serviced for others portfolio at December 31, 2018. These two actions largely represent the Company's former Mortgage Banking segment. In accordance with Accounting Standards Codification (ASC) 205-20, the Company determined that the Board's decision to sell or abandon the assets and personnel associated with the Company's HLC-based mortgage business and the related mortgage servicing rights ("MSR") sales met the criteria to be classified as discontinued operations and its operating results and financial condition are presented as discontinued operations in the consolidated financial statements for the current and all comparative periods which have been recast to conform to the new presentation (see Note 2, Discontinued Operations for additional information). Unless otherwise indicated, information included in these notes to the consolidated financial statements (unaudited) are presented on a consolidated operations basis, which includes results from both continuing and discontinued operations, for all periods presented.

In connection with the mortgage servicing rights ("MSR") sales and Board resolution regarding the former Mortgage Banking segment, the Company reassessed its reportable operating segments given these changes and associated changes made to its Chief Operating Decision Maker (CODM) package as of March 31, 2019. The Company concluded that as of March 31, 2019 the CODM evaluates the Company’s performance on a consolidated, entity-wide basis and accordingly has resulted in the elimination of segment reporting. The Company will no longer disclose operating results below the consolidated entity level which is now the reportable segment.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of 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, 2018, filed with the Securities and Exchange Commission ("2018 Annual Report on Form 10-K").


10


Share Repurchase Program

On March 28, 2019, the Board authorized a share repurchase program pursuant to which the Company could purchase up to $75 million of its issued and outstanding common stock, no par value, at prevailing market rates at the time of such purchase.

On June 20, 2019, the Company agreed to repurchase approximately 1.7 million shares from Blue Lion Capital and affiliates at a share price of $31.16, which represented the five-day volume weighted average price prior to the date of the 2019 annual meeting on June 20, 2019. This agreement required the Federal Reserve Bank of San Francisco to review and provide its non-objection prior to consummation. On July 11, 2019, we received the non-objection to the purchase agreement from the Federal Reserve and executed this share repurchase. We subsequently terminated the March 28, 2019 share repurchase program on
July 25, 2019.

There were repurchases of 2,656,001 shares of our common stock in the nine months ended September 30, 2019.

On September 26, 2019, the Board authorized a new share repurchase program pursuant to which the Company could purchase up to $25.0 million of its issued and outstanding common stock, 0 par value, at prevailing market rates at the time of such purchase.


Recent Accounting Developments

In May 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-05, Financial Instruments - Credit Losses (Topic 326) Targeted Transition Relief, or ASU 2019-05. This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the same effective date as ASU 2016-13 therefore, it will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The Company does not expect to elect the fair value option under this guidance, and therefore, ASU 2019-05 is not expected to impact the Company’s Consolidated Financial Statements.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 – Financial Instruments. The new ASU provides narrow-scope amendments to help apply these recent standards. The transition requirements and effective date of this ASU for HomeStreet is January 1, 2020 with early adoption permitted for certain amendments. The Company is currently assessing this standard’s impact on our consolidated results of operations and financial condition.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds, eliminates, and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the added disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not impact the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current U.S. GAAP requires an "incurred loss" methodology for recognizing credit losses that delay recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the

11


expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that has the contractual right to receive cash. The amendments in this ASU replace the incurred loss impairment model in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Our allowance for credit losses includes both the allowance for loan losses and a separate allowance for losses related to unfunded loan commitments. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision relevant to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company plans to adopt this ASU on January 1, 2020.

The Company has substantially completed the development of the credit loss models for all loan portfolios and is in the process of testing these models and validating data inputs, while continuing to develop the policies, systems and controls that will be required to implement CECL. Based on forecasted economic conditions and portfolio composition at September 30, 2019, the adoption of the CECL standard is estimated to result in an overall allowance for credit losses increase of 0% to 10%, as compared to our current aggregate reserve levels. The estimated increase is driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios and will also consider forecasts of expected future economic conditions. The extent of the impact of the adoption of CECL on the Company’s consolidated financial statements may vary and will depend on, completion of the Company’s models, policies and management judgment's, and the composition of the loan portfolios on the date of adoption. At adoption, we will have a cumulative-effect adjustment to retained earnings for our change in the allowance for credit losses.
In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities classified as available for sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address the provisions of this ASU. Based on the credit quality of our existing debt securities portfolio, the Company does not expect the allowance for credit losses for HTM and AFS debt securities to be material.


NOTE 2–DISCONTINUED OPERATIONS:

On March 29, 2019, the Company successfully closed and settled 2 sales of the rights to service $14.26 billion in total unpaid principal balance of single family mortgage loans serviced for Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ('Freddie Mac") and Government National Mortgage Association ("Ginnie Mae"), representing 71% of HomeStreet's total single family mortgage loans serviced for others portfolio as of December 31, 2018. The sale resulted in a $941 thousand pre-tax loss from discontinued operations during the nine months ended September 30, 2019. The Company transferred the servicing for some of these loans in the second quarter of 2019 and transferred the remainder in the third quarter of 2019 and subserviced these loans through the transfer dates.

On March 31, 2019, based on mortgage market conditions and the operating environment, the Board adopted a Resolution of Exit or Disposal of HLC Based Mortgage Banking Operations to sell or abandon the assets and related personnel associated with those operations. The assets that were sold or abandoned largely represented the Company's former Mortgage Banking segment, the activities of which related to originating, servicing, underwriting, funding and selling single family residential mortgage loans.

The Company determined that the above actions constituted commitment to a plan of exit or disposal of certain long-lived assets (through sale or abandonment) and termination of employees. Further, the Company determined that the shift from a large-scale HLC based originator and servicer to a branch-focused product offering represented a strategic shift. As a result, the HLC-related mortgage banking operations are reported separately from the continuing operations as discontinued operations. In addition, the former Mortgage Banking operating segment and reporting unit were eliminated. This has resulted in a recast of the financial statements in the current and all comparative periods as detailed below.


12


On April 4, 2019 the Company entered into a definitive agreement related to the sale of the HLC based mortgage origination business assets and transfer of personnel to Homebridge Financial Services, Inc. ("Homebridge").

On June 24, 2019 the Company completed the sale with Homebridge. This sale included 47 stand-alone HLCs and the transfer of certain related mortgage personnel. These HLCs, along with certain other mortgage banking related assets and liabilities that were to be sold or abandoned within one year, are classified as discontinued operations in the accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Operations. HLCs that were not sold were closed during the second quarter of 2019 and none remain as of September 30, 2019. Certain components of the Company's former Mortgage Banking segment, including MSRs on certain mortgage loans that were not part of the sales and right-of-use assets and lease liabilities where we did not obtain full landlord release have been classified as continuing operations based on the Company's intent.

The following table summarizes the calculation of the net gain (loss) on disposal of discontinued operations.
(in thousands)Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Proceeds from asset sales$
 $186,612
Book value of asset sales(4) 180,978
Gain on assets sold4
 5,634
Transaction cost (recovery) expenses(386) 8,791
Compensation expense related to the transactions596
 4,388
Facility and IT related cost (recovery) expenses(1,466) 14,215
Total cost (recovery) expenses(1,256) 27,394
Net gain (loss) on disposal$1,260
 $(21,760)
    


The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the following.
(in thousands)September 30, 2019 December 31, 2018
ASSETS   
Loans held for sale, at fair value$71,213
 $269,683
Mortgage serving rights
 177,121
Premises and equipment, net
 6,689
Other assets (1)
11,698
 23,541
Assets of discontinued operations$82,911
 $477,034
LIABILITIES   
Deposits$
 $162,850
Accrued expenses and other liabilities5,075
 4,271
Liabilities of discontinued operations$5,075
 $167,121
(1) Includes $1.2 million and $15.5 million of derivative balances at September 30, 2019 and December 31, 2018, respectively.

Statements of Operations of Discontinued Operations
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
Net interest income$842
 $3,784
 $5,604
 $10,054
Noninterest income1,604
 47,458
 64,332
 162,177
Noninterest expense2,256
 46,681
 94,864
 158,580
Income (loss) before income taxes190
 4,561
 (24,928) 13,651
Income tax expense (benefit)28
 815
 (3,837) 2,865
Income (loss) from discontinued operations$162
 $3,746
 $(21,091) $10,786


13


Cash Flows for Discontinued Operations
 Nine Months Ended September 30,
(in thousands)2019 2018
Net cash provided by operating activities$196,712
 $179,273
Net cash provided by investing activities177,291
 214,488



NOTE 3–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities available for sale and held to maturity.
 
 At September 30, 2019
(in thousands)Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
        
AVAILABLE FOR SALE       
Mortgage-backed securities:       
Residential$111,221
 $149
 $(1,789) $109,581
Commercial29,219
 624
 (7) 29,836
Collateralized mortgage obligations:       
Residential187,651
 1,269
 (931) 187,989
Commercial109,116
 1,072
 (645) 109,543
Municipal bonds369,988
 11,078
 (972) 380,094
Corporate debt securities18,507
 311
 (50) 18,768
U.S. Treasury securities1,296
 12
 
 1,308
Agency debentures25,221
 
 (1) 25,220
 $852,219
 $14,515
 $(4,395) $862,339
        
HELD TO MATURITY (1)
       
Municipal bonds$4,397
 $116
 $
 $4,513
 $4,397
 $116
 $
 $4,513

(1) In conjunction with adopting ASU 2017-12, in the first quarter of 2019, we transferred $66.2 million in HTM securities to AFS.

14


 At December 31, 2018
(in thousands)Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
        
AVAILABLE FOR SALE       
Mortgage-backed securities:       
Residential$112,852
 $19
 $(4,910) $107,961
Commercial34,892
 109
 (487) 34,514
Collateralized mortgage obligations:       
Residential171,412
 221
 (4,889) 166,744
Commercial118,555
 140
 (2,021) 116,674
Municipal bonds393,463
 1,526
 (9,334) 385,655
Corporate debt securities21,177
 1
 (1,183) 19,995
U.S. Treasury securities11,211
 6
 (317) 10,900
Agency debentures9,876
 
 (351) 9,525
 $873,438
 $2,022
 $(23,492) $851,968
        
HELD TO MATURITY       
Mortgage-backed securities:       
Residential$11,071
 $
 $(274) $10,797
Commercial17,307
 30
 (311) 17,026
Collateralized mortgage obligations15,624
 10
 (65) 15,569
Municipal bonds27,191
 190
 (319) 27,062
Corporate debt securities92
 
 
 92
 $71,285
 $230
 $(969) $70,546


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("GSEs"). Each 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, 2019 and December 31, 2018, 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 ("S&P") or Moody's Investors Services ("Moody's"). As of September 30, 2019 and December 31, 2018, substantially all securities held had ratings available by external ratings agencies.


15


Investment securities available for sale and held to maturity 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, 2019
 Less than 12 months 12 months or more Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
            
AVAILABLE FOR SALE           
Mortgage-backed securities:           
Residential$(338) $18,888
 $(1,451) $80,120
 $(1,789) $99,008
Commercial(2) 2,929
 (5) 2,509
 (7) 5,438
Collateralized mortgage obligations:           
Residential(277) 44,854
 (654) 31,432
 (931) 76,286
Commercial(195) 22,845
 (450) 42,873
 (645) 65,718
Municipal bonds(192) 26,805
 (780) 54,189
 (972) 80,994
Corporate debt securities
 
 (50) 1,744
 (50) 1,744
U.S. Treasury securities
 
 
 
 
 
Agency debentures(1) 25,221
 
 
 (1) 25,221
 $(1,005) $141,542
 $(3,390) $212,867
 $(4,395) $354,409

There were 0 held to maturity securities in an unrealized loss position at September 30, 2019.

 At December 31, 2018
 Less than 12 months 12 months or more Total
(in thousands)Gross
unrealized
losses
 Fair
value
 Gross
unrealized
losses
 Fair
value
 Gross
unrealized
losses
 Fair
value
            
AVAILABLE FOR SALE           
Mortgage-backed securities:           
Residential$(34) $1,269
 $(4,876) $104,822
 $(4,910) $106,091
Commercial
 
 (487) 18,938
 (487) 18,938
Collateralized mortgage obligations:           
Residential(131) 24,085
 (4,758) 128,899
 (4,889) 152,984
Commercial(350) 22,051
 (1,671) 73,429
 (2,021) 95,480
Municipal bonds(1,283) 85,057
 (8,051) 201,189
 (9,334) 286,246
Corporate debt securities(104) 5,557
 (1,079) 14,213
 (1,183) 19,770
U.S. Treasury securities
 
 (317) 9,598
 (317) 9,598
Agency debentures
 
 (351) 9,525
 (351) 9,525
 $(1,902) $138,019
 $(21,590) $560,613
 $(23,492) $698,632
            
HELD TO MATURITY           
Mortgage-backed securities:           
Residential$(31) $2,314
 $(243) $6,197
 $(274) $8,511
Commercial(24) 2,800
 (287) 11,256
 (311) 14,056
Collateralized mortgage obligations(65) 10,597
 
 
 (65) 10,597
Municipal bonds(102) 7,210
 (217) 11,273
 (319) 18,483
 $(222) $22,921
 $(747) $28,726
 $(969) $51,647


The Company has evaluated securities available for sale 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

16


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, 2019 and December 31, 2018. In addition, as of September 30, 2019 and December 31, 2018, 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.

The following tables present the fair value of investment securities available for sale and held to maturity by contractual maturity along with the associated contractual yield for the periods indicated below. Contractual maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the effect of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature. 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.

 At September 30, 2019
 Within one year 
After 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
                    
AVAILABLE FOR SALE                   
Mortgage-backed securities:                   
Residential$
 % $4
 1.33% $5,654
 1.67% $103,923
 2.13% $109,581
 2.11%
Commercial
 
 7,603
 2.74
 12,125
 2.76
 10,108
 2.42
 29,836
 2.64
Collateralized mortgage obligations:                   
Residential
 
 
 
 
 
 187,989
 2.45
 187,989
 2.45
Commercial
 
 7,607
 2.34
 28,058
 2.79
 73,878
 2.47
 109,543
 2.54
Municipal bonds
 
 
 
 14,081
 3.01
 366,013
 3.69
 380,094
 3.67
Corporate debt securities1,016
 3.41
 7,584
 3.63
 10,078
 3.70
 90
 6.13
 18,768
 3.67
U.S. Treasury securities1,308
 2.83
 
 
 
 
 
 
 1,308
 2.83
Agency debentures
 
 25,220
 1.90
 
 
 
 
 25,220
 1.90
Total available for sale$2,324
 3.08% $48,018
 2.37% $69,996
 2.87% $742,001
 3.01% $862,339
 2.96%
                    
HELD TO MATURITY                   
Mortgage-backed securities:                   
Municipal bonds$
 % $1,794
 2.90% $2,719
 2.08% $
 % $4,513
 2.40%
Total held to maturity$
 % $1,794
 2.90% $2,719
 2.08% $
 % $4,513
 2.40%
 


17


 At December 31, 2018
 Within one year 
After 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
                    
AVAILABLE FOR SALE                   
Mortgage-backed securities:                   
Residential$
 % $
 % $7,094
 1.62% $100,867
 2.05% $107,961
 2.03%
Commercial
 
 14,175
 2.20
 16,737
 2.99
 3,602
 2.90
 34,514
 2.66
Collateralized mortgage obligations:                   
Residential
 
 
 
 
 
 166,744
 2.43
 166,744
 2.43
Commercial
 
 9,008
 2.42
 29,292
 2.88
 78,374
 2.42
 116,674
 2.53
Municipal bonds5,670
 2.12
 16,276
 2.24
 30,659
 2.89
 333,050
 3.51
 385,655
 3.39
Corporate debt securities
 
 3,949
 2.96
 13,608
 3.31
 2,438
 3.65
 19,995
 3.29
U.S. Treasury securities
 
 10,900
 1.87
 
 
 
 
 10,900
 1.87
Agency debentures
 
 
 
 9,525
 2.23
 
 
 9,525
 2.23
Total available for sale$5,670
 2.12% $54,308
 2.24% $106,915
 2.81% $685,075
 2.90% $851,968
 2.84%
                    
HELD TO MATURITY                   
Mortgage-backed securities:                   
Residential$
 % $
 % $
 % $10,797
 2.82% $10,797
 2.82%
Commercial
 
 12,147
 2.51
 4,879
 2.64
 
 
 17,026
 2.55
Collateralized mortgage obligations
 
 7,205
 3.59
 
 
 8,364
 2.94
 15,569
 3.24
Municipal bonds
 
 1,790
 2.85
 5,651
 2.29
 19,621
 3.24
 27,062
 3.01
Corporate debt securities
 
 
 
 
 
 92
 6.00
 92
 6.00
Total held to maturity$
 % $21,142
 2.91% $10,530
 2.45% $38,874
 3.07% $70,546
 2.93%


Sales of investment securities available for sale were as follows.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Proceeds$25,190
 $16,233
 $144,602
 $38,465
Gross gains58
 39
 589
 300
Gross losses(76) (43) (717) (66)



18


The following table summarizes the carrying value of securities pledged as collateral to secure borrowings, public deposits and other purposes as permitted or required by law:

(in thousands)At September 30,
2019
 At December 31,
2018
    
Federal Home Loan Bank to secure borrowings$
 $63,179
Washington and California State to secure public deposits150,828
 126,565
Securities pledged to secure derivatives in a liability position
 5,077
Other securities pledged4,516
 5,147
Total securities pledged as collateral$155,344
 $199,968



The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little risk. There were 0 securities pledged under repurchase agreements at September 30, 2019 and December 31, 2018.

Tax-exempt interest income on securities totaling $2.5 million and $2.0 million for the three months ended September 30, 2019 and 2018, respectively, and $7.8 million and $6.2 million for the nine months ended September 30, 2019 and 2018, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies, and Note 5, Loans and Credit Quality, within our 2018 Annual Report on Form 10-K.

The Company's portfolio of loans held for investment is divided into 2 portfolio segments, consumer loans and commercial loans, which are the same segments used to determine the allowance for loan losses. 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/land development, owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment.


19


Loans held for investment consist of the following. 
(in thousands)At September 30,
2019
 At December 31,
2018
    
Consumer loans   
Single family (1)
$1,188,159
 $1,358,175
Home equity and other567,791
 570,923
Total consumer loans1,755,950
 1,929,098
Commercial real estate loans  
Non-owner occupied commercial real estate794,863
 701,928
Multifamily920,279
 908,015
Construction/land development762,332
 794,544
Total commercial real estate loans2,477,474
 2,404,487
Commercial and industrial loans   
Owner occupied commercial real estate476,650
 429,158
Commercial business446,739
 331,004
             Total commercial and industrial loans923,389
 760,162
                  Loans held for investment before deferred fees, costs and allowance5,156,813
 5,093,747
Net deferred loan fees and costs25,732
 23,094
 5,182,545
 5,116,841
Allowance for loan losses(43,437) (41,470)
                      Total loans held for investment$5,139,108
 $5,075,371

(1)Includes $5.3 million and $4.1 million at September 30, 2019 and December 31, 2018, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

Loans in the amount of $2.12 billion and $2.16 billion at September 30, 2019 and December 31, 2018, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") as part of our liquidity management strategy. Additionally, loans totaling $505.0 million and $502.7 million at September 30, 2019 and December 31, 2018, respectively, were pledged to secure borrowings from the Federal Reserve Bank. The FHLB and Federal Reserve Bank do not have the right to sell or re-pledge these loans.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

Loans held for investment are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At September 30, 2019, we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and multifamily within the states of Washington and California, which represented 11.5% and 10.6% of the total portfolio, respectively. At December 31, 2018, we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and multifamily within the states of Washington and California, which represented 13.1% and 10.2% of the total portfolio, respectively.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of September 30, 2019. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on our consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses. The allowance for unfunded commitments was $1.2 million at September 30, 2019, compared to $1.4 million at September 30, 2018.


20


For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 1, Summary of Significant Accounting Policies, and Note 5, Loans and Credit Quality, within our 2018 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Allowance for credit losses (roll-forward):       
Beginning balance$44,628
 $40,982
 $42,913
 $39,116
Provision for credit losses
 750
 1,500
 2,500
Recoveries, net of (charge-offs)6
 122
 221
 238
Ending balance$44,634
 $41,854
 $44,634
 $41,854



21


Activity in the allowance for credit losses by loan portfolio and loan class was as follows.

 Three Months Ended September 30, 2019
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
          
Consumer loans         
Single family$7,540
 $
 $1
 $(321) $7,220
Home equity and other7,563
 (68) 59
 (69) 7,485
            Total consumer loans15,103
 (68) 60
 (390) 14,705
Commercial real estate loans         
Non-owner occupied commercial real estate6,151
 
 
 330
 6,481
Multifamily7,047
 
 
 (357) 6,690
Construction/land development9,707
 
 1
 99
 9,807
     Total commercial real estate loans22,905
 
 1
 72
 22,978
Commercial and industrial loans         
Owner occupied commercial real estate3,462
 
 
 139
 3,601
Commercial business3,158
 
 13
 179
 3,350
     Total commercial and industrial loans6,620
 
 13
 318
 6,951
Total allowance for credit losses$44,628
 $(68) $74
 $
 $44,634
          

 Three Months Ended September 30, 2018
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
          
Consumer loans         
Single family$8,594
 $(43) $2
 $(46) $8,507
Home equity and other7,346
 (107) 102
 205
 7,546
            Total consumer loans15,940
 (150) 104
 159
 16,053
Commercial real estate loans         
Non-owner occupied commercial real estate4,764
 
 
 249
 5,013
Multifamily5,017
 
 
 608
 5,625
Construction/land development9,205
 
 170
 (94) 9,281
     Total commercial real estate loans18,986
 
 170
 763
 19,919
Commercial and industrial loans         
Owner occupied commercial real estate3,032
 
 
 111
 3,143
Commercial business3,024
 (10) 8
 (283) 2,739
     Total commercial and industrial loans6,056
 (10) 8
 (172) 5,882
Total allowance for credit losses$40,982
 $(160) $282
 $750
 $41,854



22


    
 Nine Months Ended September 30, 2019
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
          
Consumer loans         
Single family$8,217
 $
 $143
 $(1,140) $7,220
Home equity and other7,712
 (209) 212
 (230) 7,485
 15,929
 (209) 355
 (1,370) 14,705
Commercial real estate loans         
Non-owner occupied commercial real estate5,496
 
 
 985
 6,481
Multifamily5,754
 
 
 936
 6,690
Construction/land development9,539
 
 48
 220
 9,807
     Total commercial real estate loans20,789



48

2,141
 22,978
Commercial and industrial loans        

Owner occupied commercial real estate3,282
 
 
 319
 3,601
Commercial business2,913
 
 27
 410
 3,350
     Total commercial and industrial loans6,195
 
 27
 729
 6,951
Total allowance for credit losses$42,913
 $(209) $430
 $1,500
 $44,634
 Nine Months Ended September 30, 2018
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
Consumer loans         
Single family$9,412
 $(43) $284
 $(1,146) $8,507
Home equity and other7,081
 (349) 325
 489
 7,546
 16,493
 (392) 609
 (657) 16,053
Commercial real estate loans         
Non-owner occupied commercial real estate4,755
 
 
 258
 5,013
Multifamily3,895
 
 
 1,730
 5,625
Construction/land development8,677
 
 513
 91
 9,281
     Total commercial real estate loans17,327



513

2,079

19,919
Commercial and industrial loans         
Owner occupied commercial real estate2,960
 
 
 183
 3,143
Commercial business2,336
 (663) 171
 895
 2,739
 5,296
 (663) 171
 1,078
 5,882
Total allowance for credit losses$39,116
 $(1,055) $1,293
 $2,500
 $41,854














23


The following tables disaggregate our allowance for credit losses and recorded investment in loans by impairment methodology. 
 At September 30, 2019 
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 Total 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 Total 
             
Consumer loans            
Single family$7,136
 $84
 $7,220
 $1,117,056
 $65,821
 $1,182,877
 
Home equity and other7,448
 37
 7,485
 566,739
 1,039
 567,778
 
             Total consumer loans14,584
 121
 14,705
 1,683,795
 66,860
 1,750,655
 
Commercial real estate loans            
Non-owner occupied commercial real estate6,481
 
 6,481
 794,863
 
 794,863
 
Multifamily6,690
 
 6,690
 920,279
 
 920,279
 
Construction/land development9,807
 
 9,807
 760,977
 1,355
 762,332
 
     Total commercial real estate loans22,978
 
 22,978
 2,476,119
 1,355
 2,477,474
 
Commercial and industrial loans            
Owner occupied commercial real estate3,601
 
 3,601
 474,349
 2,301
 476,650
 
Commercial business3,342
 8
 3,350
 444,374
 2,365
 446,739
 
     Total commercial and industrial loans6,943

8

6,951

918,723

4,666

923,389
 
Total loans evaluated for impairment44,505
 129
 44,634
 5,078,637
 72,881
 5,151,518
 
Loans held for investment carried at fair value
 
 
 
 
 5,295
(1) 
Total loans held for investment$44,505
 $129
 $44,634
 $5,078,637
 $72,881
 $5,156,813
 

 At December 31, 2018 
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 Total 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 Total 
             
Consumer loans            
Single family$8,151
 $66
 $8,217
 $1,286,556
 $67,575
 $1,354,131
 
Home equity and other7,671
 41
 7,712
 569,673
 1,237
 570,910
 
            Total consumer loans15,822
 107
 15,929
 1,856,229
 68,812
 1,925,041
 
Commercial real estate loans            
Non-owner occupied commercial real estate5,496
 
 5,496
 701,928
 
 701,928
 
Multifamily5,754
 
 5,754
 907,523
 492
 908,015
 
Construction/land development9,539
 
 9,539
 793,818
 726
 794,544
 
     Total commercial real estate loans20,789
 
 20,789
 2,403,269
 1,218
 2,404,487
 
Commercial and industrial loans            
Owner occupied commercial real estate3,282
 
 3,282
 427,938
 1,220
 429,158
 
Commercial business2,787
 126
 2,913
 329,170
 1,834
 331,004
 
     Total commercial and industrial loans6,069
 126
 6,195
 757,108
 3,054
 760,162
 
Total loans evaluated for impairment42,680
 233
 42,913
 5,016,606
 73,084
 5,089,690
 
Loans held for investment carried at fair value
 
 
 
 
 4,057
(1) 
Total loans held for investment$42,680
 $233
 $42,913
 $5,016,606
 $73,084
 $5,093,747
 

(1)Comprised of single family loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.


24


Impaired Loans
Loans are classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This includes all loans classified as nonaccrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification.

The following tables present impaired loans by loan portfolio segment and loan class.
 At September 30, 2019
(in thousands)
Recorded
investment  (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
      
With no related allowance recorded:     
Consumer loans     
Single family(3)
$64,316
 $64,754
 $
Home equity and other559
 585
 
                     Total consumer loans64,875
 65,339
 
Commercial real estate loans     
Construction/land development1,355
 1,355
 
     Total commercial real estate loans1,355
 1,355
 
Commercial and industrial loans     
Owner occupied commercial real estate2,301
 2,369
 
Commercial business1,848
 2,500
 
     Total commercial and industrial loans4,149
 4,869
 
 $70,379
 $71,563
 $
With an allowance recorded:     
Consumer loans     
Single family$1,505
 $1,505
 $84
Home equity and other480
 480
 37
                     Total consumer loans1,985
 1,985
 121
Commercial and industrial loans     
Commercial business517
 548
 8
     Total commercial and industrial loans517
 548
 8
 $2,502
 $2,533
 $129
Total:     
Consumer loans     
Single family (3)
$65,821
 $66,259
 $84
Home equity and other1,039
 1,065
 37
                     Total consumer loans66,860
 67,324
 121
Commercial real estate loans     
Construction/land development1,355
 1,355
 
     Total commercial real estate loans1,355
 1,355
 
Commercial and industrial loans     
Owner occupied commercial real estate2,301
 2,369
 
Commercial business2,365
 3,048
 8
     Total commercial and industrial loans4,666
 5,417
 8
Total impaired loans$72,881
 $74,096
 $129

(1)
Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.
(2)
Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $63.8 million in single family performing trouble debt restructurings ("TDRs").


25


 At December 31, 2018
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
      
With no related allowance recorded:     
Consumer loans     
Single family(3)
$66,725
 $67,496
 $
Home equity and other743
 769
 
                     Total consumer loans67,468
 68,265
 
Commercial real estate loans     
Multifamily492
 492
 
Construction/land development726
 726
 
             Total commercial real estate loans1,218

1,218


Commercial and industrial loans     
Owner occupied commercial real estate1,220
 1,543
 
Commercial business1,331
 2,087
 
             Total commercial and industrial loans2,551
 3,630
 
 $71,237
 $73,113
 $
With an allowance recorded:     
Consumer loans     
Single family$850
 $850
 $66
Home equity and other494
 494
 41
                     Total consumer loans1,344
 1,344
 107
Commercial and industrial loans     
Commercial business503
 503
 126
Total commercial and industrial loans503
 503
 126
 $1,847
 $1,847
 $233
Total:     
Consumer loans     
Single family (3)
$67,575
 $68,346
 $66
Home equity and other1,237
 1,263
 41
   Total consumer loans68,812
 69,609
 107
Commercial real estate loans     
Multifamily492
 492
 
Construction/land development726
 726
 
             Total commercial real estate loans1,218
 1,218
 
Commercial and industrial loans     
Owner occupied commercial real estate1,220
 1,543
 
Commercial business1,834
 2,590
 126
Total commercial and industrial loans3,054
 4,133
 126
Total impaired loans$73,084
 $74,960
 $233
 
(1)Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.
(2)Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $65.8 million in single family performing TDRs.


26



The following tables provide the average recorded investment and interest income recognized on impaired loans by portfolio segment and class.

 Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
        
(in thousands)
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Consumer loans       
Single family$67,814
 $662
 $66,754
 $653
Home equity and other1,044
 14
 1,256
 20
Total consumer loans68,858
 676
 68,010
 673
Commercial real estate loans       
Multifamily242
 
 640
 6
Construction/land development677
 
 677
 6
             Total commercial real estate loans919
 
 1,317
 12
Commercial and industrial loans       
Owner occupied commercial real estate1,744
 
 1,250
 19
Commercial business1,842
 9
 1,895
 28
Total commercial and industrial loans3,586
 9
 3,145
 47
 $73,363
 $685
 $72,472
 $732

    
 Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
        
(in thousands)
Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Consumer loans       
Single family$68,181
 $2,088
 $69,384
 $1,963
Home equity and other1,112
 46
 1,267
 58
Total consumer loans69,293
 2,134
 70,651
 2,021
Commercial real estate loans       
Non-owner occupied commercial real estate3
 
 
 
Multifamily366
 14
 722
 18
Construction/land development1,689
 
 600
 17
             Total commercial real estate loans2,058

14

1,322

35
Commercial and industrial loans       
Owner occupied commercial real estate2,936
 112
 2,085
 74
Commercial business1,889
 29
 2,420
 94
Total commercial and industrial loans4,825
 141
 4,505
 168
 $76,176
 $2,289
 $76,478
 $2,224


Credit Quality Indicators

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Company differentiates its lending portfolios into homogeneous loans and non-homogeneous loans.


27


The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:

Pass. We have five pass risk ratings which represent a level of credit quality that ranges from no well-defined deficiency or weakness to some noted weakness. However, the risk of default on any loan classified as pass is expected to be remote. The five pass risk ratings are described below:

Minimal Risk. A minimal risk loan, risk rated 1-Exceptional, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty.

Low Risk. A low risk loan, risk rated 2-Superior, is similar in characteristics to a minimal risk loan. Balance sheet and operations are slightly more prone to fluctuations within the business cycle; however, debt capacity and debt service coverage remains strong. The borrower will have a strong demonstrated ability to produce profits and absorb market disturbances.

Modest Risk. A modest risk loan, risk rated 3-Excellent, is a desirable loan with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the loan in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have cash reserves to weather these cycles.

Average Risk. An average risk loan, risk rated 4-Good, is an attractive loan with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.

Acceptable Risk. An acceptable risk loan, risk rated 5-Acceptable, is a loan with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.

Watch. A watch loan, risk rated 6-Watch, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time. Borrowers rated watch are characterized by elements of uncertainty, such as:
The borrower may be experiencing declining operating trends, strained cash flows or less-than anticipated financial performance. Cash flow should still be adequate to cover debt service, and the negative trends should be identified as being of a short-term or temporary nature.
The borrower may have experienced a minor, unexpected covenant violation.
The borrower may be experiencing tight working capital or have a cash cushion deficiency.
A loan may also be a watch if financial information is late, there is a documentation deficiency, the borrower has experienced unexpected management turnover, or if it faces industry issues that, when combined with performance factors create uncertainty in its future ability to perform.
Delinquent payments, increasing and material overdraft activity, request for bulge and/or out-of-formula advances may be an indicator of inadequate working capital and may suggest a lower rating.
Failure of the intended repayment source to materialize as expected, or renewal of a loan (other than cash/marketable security secured or lines of credit) without reduction are possible indicators of a watch or worse risk rating.

Special Mention. A special mention loan, risk rated 7-Special Mention, has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or the institution's credit position at some future date. Loans in this category contain unfavorable characteristics and are generally undesirable. They are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan has potential weaknesses, which if not checked or corrected, weaken the loan or inadequately protect the Company's position at some future date. Such weaknesses include:

28


Performance is poor or significantly less than expected. There may be a temporary debt-servicing deficiency or inadequate working capital as evidenced by a cash cushion deficiency, but not to the extent that repayment is compromised. Material violation of financial covenants is common.
Loans with unresolved material issues that significantly cloud the debt service outlook, even though a debt servicing deficiency does not currently exist.
Modest underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt as structured. Depth of support for interest carry provided by owner/guarantors may mitigate and provide for improved rating.
This rating may be assigned when a loan officer is unable to supervise the credit properly, or when there is an inadequate loan agreement, an inability to control collateral, failure to obtain proper documentation, or any other deviation from prudent lending practices.
Unlike a substandard credit, there should be a reasonable expectation that these temporary issues will be corrected within the normal course of business, rather than through liquidation of assets, and in a reasonable period of time.

Substandard. A substandard loan, risk rated 8-Substandard, is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Loans are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan normally has one or more well-defined weaknesses that could jeopardize repayment of the loan. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations, is the key distinction between special mention and substandard. The following are examples of well-defined weaknesses:
Cash flow deficiencies or trends are of a magnitude to jeopardize current and future payments with no immediate relief. A loss is not presently expected; however, the outlook is sufficiently uncertain to preclude ruling out the possibility.
The borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.
Material underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt and risk is not mitigated by willingness and capacity of owner/guarantor to support interest payments.
Management character or honesty has become suspect. This includes instances where the borrower has become uncooperative.
Due to unprofitable or unsuccessful business operations, some form of restructuring of the business, including liquidation of assets, has become the primary source of loan repayment. Cash flow has deteriorated, or been diverted, to the point that sale of collateral is now the Company's primary source of repayment (unless this was the original source of repayment). If the collateral is under the Company's control and is cash or other liquid, highly marketable securities and properly margined, then a more appropriate rating might be special mention or watch.
The borrower is involved in bankruptcy proceedings where collateral liquidation values are expected to fully protect the Company against loss.
There is material, uncorrectable faulty documentation or materially suspect financial information.

Doubtful. Loans classified as doubtful, risk rated 9-Doubtful, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening the loan, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Company is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining uncollateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard; however, must remain on non-accrual.


29


Loss. Loans classified as loss, risk rated 10-Loss, are considered uncollectible and of such little value that the continuance as an active Company asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged-off now, even though partial or full recovery may be possible in the future.

Homogeneous loans maintain their original risk rating until they are greater than 30 days past due, and risk rating reclassification is based primarily on the past due status of the loan. The risk rating categories can be generally described by the following groupings for commercial and commercial real estate homogeneous loans:

Watch. A homogeneous watch loan, risk rated 6, is 60-89 days past due from the required payment date at month-end.

Special Mention. A homogeneous special mention loan, risk rated 7, is less than 90 days past due from the required payment date at month-end.

Substandard. A homogeneous substandard loan, risk rated 8, is more than 90 days or more past due from the required payment date at month-end.

Loss. A homogeneous loss loan, risk rated 10, is 120 days or more past due from the required payment date for non-real estate secured closed-end loans or 180 days or more past due from the required payment date for open-end loans and all loans secured by real estate. These loans are generally charged off in the month in which the applicable time period elapses.

The risk rating categories can be generally described by the following groupings for residential and home equity and other homogeneous loans:

Watch. A homogeneous retail watch loan, risk rated 6, is 60-89 days past due from the required payment date at month-end.

Substandard. A homogeneous retail substandard loan, risk rated 8, is 90-180 days past due from the required payment date at month-end.

Loss. A homogeneous retail loss loan, risk rated 10, is past due 180 cumulative days or more from the contractual due date. These loans are generally charged-off in the month in which the 180 day period elapses.

Residential and home equity loans modified in a troubled debt restructure are not considered homogeneous. The risk rating classification for such loans are based on the non-homogeneous definitions noted above.


30


The following tables summarize designated loan grades by loan portfolio segment and loan class.
 
 At September 30, 2019
(in thousands)Pass Watch Special mention Substandard Total
          
Consumer loans         
Single family$1,172,275
(1) 
$2,417
 $7,992
 $5,475
 $1,188,159
Home equity and other565,632
 360
 812
 987
 567,791
Total consumer loans1,737,907
 2,777
 8,804
 6,462
 1,755,950
Commercial real estate loans         
Non-owner occupied commercial real estate791,964
 2,899
 
 
 794,863
Multifamily915,452
 4,827
 
 
 920,279
Construction/land development727,673
 14,208
 19,096
 1,355
 762,332
Total commercial real estate loans2,435,089
 21,934
 19,096
 1,355
 2,477,474
Commercial and industrial loans         
Owner occupied commercial real estate435,811
 22,647
 12,685
 5,507
 476,650
Commercial business390,367
 33,178
 19,601
 3,593
 446,739
Total commercial and industrial loans826,178
 55,825
 32,286
 9,100
 923,389
 $4,999,174
 $80,536
 $60,186
 $16,917
 $5,156,813
(1)Includes $5.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

 At December 31, 2018
(in thousands)Pass Watch Special mention Substandard Total
          
Consumer loans         
Single family$1,338,025
(1) 
$2,882
 $8,775
 $8,493
 $1,358,175
Home equity and other569,370
 95
 510
 948
 570,923
Total consumer loans1,907,395
 2,977
 9,285
 9,441
 1,929,098
Commercial real estate loans         
Non-owner occupied commercial real estate695,077
 1,426
 5,425
 
 701,928
Multifamily903,897
 3,626
 492
 
 908,015
Construction/land development767,113
 21,531
 1,084
 4,816
 794,544
Total commercial real estate loans2,366,087
 26,583
 7,001
 4,816
 2,404,487
Commercial and industrial loans         
Owner occupied commercial real estate392,273
 22,928
 11,087
 2,870
 429,158
Commercial business299,225
 14,331
 15,427
 2,021
 331,004
Total commercial and industrial loans691,498
 37,259
 26,514
 4,891
 760,162
 $4,964,980
 $66,819
 $42,800
 $19,148
 $5,093,747
(1)Includes $4.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

As of September 30, 2019 and December 31, 2018, NaN of the Company's loans were rated Doubtful or Loss. For a detailed discussion on credit quality, see Note 5, Loans and Credit Quality, within our 2018 Annual Report on Form 10-K.


31


Nonaccrual and Past Due Loans
Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. Loans whose repayments are insured by the Federal Housing Administration ("FHA") or guaranteed by the Veterans Administration ("VA") are generally maintained on accrual status even if 90 days or more past due.
The following tables present an aging analysis of past due loans by loan portfolio segment and loan class.
 At September 30, 2019 
(in thousands)
30-59 days
past due
 
60-89 days
past due
 
90 days or
more
past due
 
Total past
due
 Current 
Total
loans
 
90 days or
more past
due and
accruing
 
               
Consumer loans              
Single family$6,447
 $2,972
 $27,065
 $36,484
 $1,151,675
(1) 
$1,188,159
 $21,590
(2) 
Home equity and other147
 360
 987
 1,494
 566,297
 567,791
 
 
Total consumer loans6,594
 3,332
 28,052
 37,978
 1,717,972
 1,755,950
 21,590
 
Commercial real estate loans              
Non-owner occupied commercial real estate
 
 
 
 794,863
 794,863
 
 
Multifamily
 
 
 
 920,279
 920,279
 
 
Construction/land development
 
 1,355
 1,355
 760,977
 762,332
 
 
Total commercial real estate loans
 
 1,355
 1,355
 2,476,119
 2,477,474
 
 
Commercial and industrial loans              
Owner occupied commercial real estate1,110
 
 2,301
 3,411
 473,239
 476,650
 
 
Commercial business45
 
 2,315
 2,360
 444,379
 446,739
 
 
Total commercial and industrial loans1,155
 
 4,616
 5,771
 917,618
 923,389
 
 
 $7,749
 $3,332
 $34,023
 $45,104
 $5,111,709
 $5,156,813
 $21,590
 


 At December 31, 2018 
(in thousands)30-59 days
past due
 60-89 days
past due
 90 days or
more
past due
 Total past
due
 Current Total
loans
 90 days or
more past
due and
accruing
 
               
Consumer loans              
Single family$9,725
 $3,653
 $47,609
 $60,987
 $1,297,188
(1) 
$1,358,175
 $39,116
(2) 
Home equity and other145
 100
 948
 1,193
 569,730
 570,923
 
 
Total consumer loans9,870
 3,753
 48,557
 62,180
 1,866,918
 1,929,098
 39,116
 
Commercial real estate loans              
Non-owner occupied commercial real estate
 
 
 
 701,928
 701,928
 
 
Multifamily
 
 
 
 908,015
 908,015
 
 
Construction/land development
 
 72
 72
 794,472
 794,544
 
 
Total commercial real estate loans
 
 72
 72
 2,404,415
 2,404,487
 
 
Commercial and industrial loans              
Owner occupied commercial real estate
 
 374
 374
 428,784
 429,158
 
 
Commercial business
 
 1,732
 1,732
 329,272
 331,004
 
 
Total commercial and industrial loans
 
 2,106
 2,106
 758,056
 760,162
 
 
 $9,870
 $3,753
 $50,735
 $64,358
 $5,029,389
 $5,093,747
 $39,116
 


32


(1)Includes $5.3 million and $4.1 million of loans at September 30, 2019 and December 31, 2018, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in our consolidated statements of operations.
(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.


The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.
 
 At September 30, 2019
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family (1)
$1,182,684
 $5,475
 $1,188,159
Home equity and other566,804
 987
 567,791
Total consumer loans1,749,488
 6,462
 1,755,950
Commercial real estate loans     
Non-owner occupied commercial real estate794,863
 
 794,863
Multifamily920,279
 
 920,279
Construction/land development760,977
 1,355
 762,332
Total commercial real estate loans2,476,119
 1,355
 2,477,474
Commercial and industrial loans     
Owner occupied commercial real estate474,349
 2,301
 476,650
Commercial business444,424
 2,315
 446,739
Total commercial and industrial loans918,773
 4,616
 923,389
 $5,144,380
 $12,433
 $5,156,813


 At December 31, 2018
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family (1)
$1,349,682
 $8,493
 $1,358,175
Home equity and other569,975
 948
 570,923
Total consumer loans1,919,657
 9,441
 1,929,098
Commercial real estate loans     
Non-owner occupied commercial real estate701,928
 
 701,928
Multifamily908,015
 
 908,015
Construction/land development794,472
 72
 794,544
Total commercial real estate loans2,404,415

72

2,404,487
Commercial and industrial loans     
Owner occupied commercial real estate428,784
 374
 429,158
Commercial business329,272
 1,732
 331,004
Total commercial and industrial loans758,056
 2,106
 760,162
 $5,082,128
 $11,619
 $5,093,747


(1)Includes $5.3 million and $4.1 million of loans at September 30, 2019 and December 31, 2018, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.


33


The following tables present information about TDR activity during the periods presented.

 Three Months Ended September 30, 2019
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 6
 $1,112
 $
 Payment restructure 21
 5,420
 
Total consumer       
 Interest rate reduction 6
 1,112
 
 Payment restructure 21
 5,420
 
   27
 6,532
 
Total loans       
 Interest rate reduction 6
 1,112
 
 Payment restructure 21
 5,420
 
   27
 $6,532
 $

 Three Months Ended September 30, 2018
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 2
 $374
 $
 Payment restructure 42
 8,854
 
Total consumer       
 Interest rate reduction 2
 374
 
 Payment restructure 42
 8,854
 
   44
 9,228
 
Total loans       
 Interest rate reduction 2
 374
 
 Payment restructure 42
 8,854
 
   44
 $9,228
 $


34


 Nine Months Ended September 30, 2019
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 13
 $2,386
 $
 Payment restructure 111
 23,904
 
Home equity and other       
 Payment restructure 1
 116
 
Total consumer       
 Interest rate reduction 13
 2,386
 
 Payment restructure 112
 24,020
 
   125
 26,406
 
Commercial real estate loans       
Construction/land development       
 Payment restructure 1
 4,675
 
Total commercial real estate       
 Payment restructure 1
 4,675
 
   1
 4,675
 
Commercial and industrial loans       
Owner occupied commercial real estate       
 Payment restructure 1
 5,840
 
Commercial business       
 Payment restructure 1
 259
 
Total commercial and industrial       
 Payment restructure 2
 6,099
 
   2
 6,099
 
Total loans       
 Interest rate reduction 13
 2,386


 Payment restructure 115
 34,794


   128
 $37,180
 $


35


 Nine Months Ended September 30, 2018
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 15
 $2,836
 $
 Payment restructure 106
 22,784
 
Total consumer       
 Interest rate reduction 15
 2,836
 
 Payment restructure 106
 22,784
 
   121
 25,620
 
Commercial and industrial loans       
Commercial business       
 Payment restructure 2
 267
 
Total commercial and industrial       
 Payment restructure 2
 267
 
   2
 267
 
Total loans       
 Interest rate reduction 15
 2,836
 
 Payment restructure 108

23,051
 
   123
 $25,887
 $


The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three and nine months ended September 30, 2019 and 2018, respectively. 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.

 Three Months Ended September 30,
 2019 2018
(dollars in thousands)Number of loan relationships that re-defaulted Recorded
investment
 Number of loan relationships that re-defaulted Recorded
investment
        
Consumer loans       
Single family3
 $643
 6
 $988
 3

$643

6
 $988


 Nine Months Ended September 30,
 2019 2018
(dollars in thousands)Number of loan relationships that re-defaulted Recorded
investment
 Number of loan relationships that re-defaulted Recorded
investment
        
Consumer loans       
Single family9
 $1,873
 18
 $3,267
 9
 $1,873
 18
 $3,267





36


NOTE 5–DEPOSITS:

Deposit balances, including stated rates, were as follows.
 
(in thousands)At September 30,
2019
 At December 31,
2018
    
Noninterest-bearing accounts (1)
$952,380
 $914,154
NOW accounts, 0.00% to 1.44% at September 30, 2019 and December 31, 2018421,750
 376,137
Statement savings accounts, due on demand, 0.05% to 1.13% at September 30, 2019 and December 31, 2018220,401
 245,795
Money market accounts, due on demand, 0.00% to 3.43% at September 30, 2019 and 0.00% to 2.40% at December 31, 20182,073,907
 1,935,516
Certificates of deposit, 0.10% to 3.06% at September 30, 2019 and 0.10% to 3.80% at December 31, 20182,135,869
 1,579,806
 $5,804,307
 $5,051,408

(1) Includes 0 and $162.8 million in servicing deposits related to discontinued operations at September 30, 2019 and December 31, 2018, respectively. These deposits were transferred to the MSR buyers concurrent with the transfer of the loan servicing.

Interest expense on deposits was as follows.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
NOW accounts$371
 $416
 $1,140
 $1,286
Statement savings accounts121
 197
 407
 643
Money market accounts7,129
 4,481
 19,822
 12,003
Certificates of deposit12,972
 6,192
 30,476
 14,704
 $20,593
 $11,286
 $51,845
 $28,636


(1) Includes $91 thousand in interest expense on deposits related to discontinued operations for the three and nine months ended September 30, 2019.

The weighted-average interest rates on certificates of deposit were 2.27% and 1.87% at September 30, 2019 and December 31, 2018, respectively.

Certificates of deposit outstanding mature as follows.
 
(in thousands)At September 30,
2019
  
Within one year$1,737,262
One to two years309,166
Two to three years57,857
Three to four years16,065
Four to five years15,485
Thereafter34
 $2,135,869


The aggregate amount of time deposits in denominations of more than $250 thousand at September 30, 2019 and December 31, 2018 were $231.2 million and $85.3 million, respectively. There were $739.0 million and $786.1 million of brokered deposits at September 30, 2019 and December 31, 2018, respectively.


NOTE 6–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as certain mortgage loans held for sale or MSRs, the Company utilizes derivatives, such as forward sale commitments, futures, option contracts, interest rate swaps and interest rate swaptions as risk management instruments in its hedging strategy. Derivative transactions

37


are measured in terms of notional amount, which is not recorded in the consolidated statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments.

We held 0 derivatives designated as a fair value, cash flow or foreign currency hedge instrument at September 30, 2019 or December 31, 2018. Derivatives are reported at their respective fair values in the other assets or accounts payable and other liabilities line items on the consolidated statements of financial condition, with changes in fair value reflected in current period earnings.

As permitted under U.S. GAAP, the Company nets derivative assets and liabilities when a legally enforceable master netting agreement exists between the Company and the derivative counterparty, which are documented under industry standard master agreements and credit support annexes. The Company's master netting agreements provide that following an uncured payment default or other event of default, the non-defaulting party may promptly terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting party. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery (which remains uncured following applicable notice and grace periods). The Company's right of offset requires that master netting agreements are legally enforceable and that the exercise of rights by the non-defaulting party under these agreements will not be stayed or avoided under applicable law upon an event of default, including bankruptcy, insolvency or similar proceeding.

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 on the Company's consolidated statements of financial condition. Any securities pledged to counterparties as collateral remain on the consolidated statements of financial condition. Refer to Note 3, Investment Securities, for further information on securities collateral pledged. At September 30, 2019 and December 31, 2018, the Company did not hold any collateral received from counterparties under derivative transactions.

In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on the variable and fixed components of the customer loan agreement. As the interest rate swap agreements with the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the FASB ASC, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at September 30, 2019 and December 31, 2018 were $77.8 million and $2.6 million, respectively. During the three and nine months ended September 30, 2019, there were $115 thousand and $149 thousand, respectively, mark-to-market loss recorded to “Other” noninterest income in our consolidated statements of operations. The Company had 0 similar activity in the three and nine months ended September 30, 2018.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of Significant Accounting Policies, and Note 11, Derivatives and Hedging Activities, within our 2018 Annual Report on Form 10-K.


38


The notional amounts and fair values for derivatives consist of the following.
 
 At September 30, 2019
 Notional amount Fair value derivatives
(in thousands)  Asset Liability
      
Forward sale commitments$1,509,784
 $3,026
 $(2,180)
Interest rate lock and purchase loan commitments287,806
 4,239
 (203)
Interest rate swaps633,387
 36,563
 (14,568)
Eurodollar futures1,661,000
 24
 
Total derivatives before netting$4,091,977
 43,852
 (16,951)
Netting adjustment/Cash collateral (1)
  (14,981) 16,532
Carrying value on consolidated statements of financial condition (2)
  $28,871
 $(419)


 At December 31, 2018
 Notional amount Fair value derivatives
(in thousands)  Asset Liability
      
Forward sale commitments$1,334,947
 $3,025
 $(5,340)
Interest rate swaptions34,000
 203
 
Interest rate lock and purchase loan commitments390,558
 10,289
 (5)
Interest rate swaps803,652
 14,566
 (11,549)
Eurodollar futures3,135,000
 
 (110)
Total derivatives before netting$5,698,157
 28,083
 (17,004)
Netting adjustment/Cash collateral (1)
  (8,329) 12,517
Carrying value on consolidated statements of financial condition(2)
  $19,754
 $(4,487)

(1)
Includes cash collateral of $1.6 million and $4.2 million at September 30, 2019 and December 31, 2018, as part of netting adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security.
(2)Includes both continuing and discontinued operations.


39


The following tables present gross and net information about derivative instruments.
 At September 30, 2019
(in thousands)Gross fair value 
Netting adjustments/ Cash collateral (1)
 Carrying value Securities not offset in consolidated balance sheet (disclosure-only netting) Net amount
          
Derivative assets$43,852
 $(14,981) $28,871
 $
 $28,871
Derivative liabilities(16,951) 16,532
 (419) 
 (419)

 At December 31, 2018
(in thousands)Gross fair value 
Netting adjustments/ Cash collateral (1)
 Carrying value Securities not offset in consolidated balance sheet (disclosure-only netting) Net amount
          
Derivative assets$28,083
 $(8,329) $19,754
 $
 $19,754
Derivative liabilities(17,004) 12,517
 (4,487) 3,223
 (1,264)


(1)
Includes cash collateral of $1.6 million and $4.2 million at September 30, 2019 and December 31, 2018, respectively, as part of the netting adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security.
The following table presents the net gain (loss) recognized on derivatives, including economic hedge derivatives, within the respective line items in the statement of operations for the periods indicated.

 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Recognized in noninterest income:(1)
       
Net (loss) gain on loan origination and sale activities (2)
$(6,884) $(4,760) $(17,983) $12,322
Loan servicing income (loss) (3)
9,040
 (9,446) 19,917
 (52,611)
Other (4)
115
 
 149
 
 $2,271
 $(14,206) $2,083
 $(40,289)
 

(1)Includes both continuing and discontinued operations.
(2)Comprised of interest rate lock commitments ("IRLCs") and forward contracts used as an economic hedge of IRLCs and single family mortgage loans held for sale.
(3)Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as an economic hedge of single family MSRs.
(4)Comprised of interest rate swaps used as an economic hedge of loans held for investment.


40


NOTE 7–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
(in thousands)At September 30,
2019
 At December 31,
2018
    
Commercial$85,240
 $25,139
Single family (1)
158,931
 321,868
Total loans held for sale$244,171
 $347,007


(1)Includes loans from discontinued operations of $71.2 million and $269.7 million at September 30, 2019 and December 31, 2018, respectively.

Loans sold proceeds consisted of the following.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Commercial$270,484
 $157,868
 $586,217
 $367,429
Single family (1)
893,959
 1,724,697
 3,352,872
 5,043,769
Total loans sold (2)
$1,164,443
 $1,882,565
 $3,939,089
 $5,411,198



(1)    Includes both continuing and discontinued operations.
(2) Includes loans originated as held for investment.



41


Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Commercial$6,693
 $4,236
 $12,179
 $8,481
Single family (1)
9,628
 40,335
 78,612
 141,458
Gain on loan origination and sale activities (2)
$16,321
 $44,571
 $90,791
 $149,939


(1) Includes $370 thousand and $40.4 million from discontinued operations for three months ended September 30, 2019 and 2018, respectively, and $60.1 million and $142.0 million for the nine months ended September 30, 2019 and 2018, respectively.
(2) Includes loans originated as held for investment.

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. Loans serviced for others are not included in the consolidated statements of financial condition as they are not assets of the Company.

The composition of loans serviced for others that contribute to loan servicing income is presented below at the unpaid principal balance.
(in thousands)At September 30,
2019
 At December 31,
2018
    
Commercial$1,576,714
 $1,542,477
Single family (1)
7,014,265
 20,151,735
Total loans serviced for others$8,590,979
 $21,694,212


(1)Includes both continuing and discontinued operations at December 31, 2018.

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. For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies, of this Quarterly Report on Form 10-Q.


42


The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.

 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Balance, beginning of period$3,237
 $2,504
 $3,120
 $3,015
Additions, net of adjustments (1)
(22) 643
 482
 1,248
Realized losses (2)
(28) (273) (415) (1,389)
Balance, end of period$3,187
 $2,874
 $3,187
 $2,874
 
(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 expense.

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 $3.0 million and $2.5 million were recorded in other assets as of September 30, 2019 and December 31, 2018, respectively.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the loan on its consolidated statement of financial condition. At September 30, 2019 and December 31, 2018, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $11.2 million and $37.7 million, respectively, with a corresponding offsetting amount recorded within accounts payable and other liabilities on the consolidated statements of financial condition. The recognition of previously sold loans does not impact the accounting for the previously recognized MSRs.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Servicing income, net:       
Servicing fees and other$7,454
 $15,046
 $30,877
 $51,882
Changes in fair value of single family MSRs due to modeled amortization (1)
(4,489) (8,300) (16,894) (26,570)
Amortization of multifamily and SBA MSRs(1,315) (1,034) (3,793) (3,147)
 1,650
 5,712
 10,190
 22,165
Risk management, single family MSRs:       
Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)(3)
(7,501) 11,562
 (22,193) 52,880
Net gain (loss) from derivatives economically hedging MSR9,040
 (9,446) 19,917
 (52,611)
 1,539
 2,116
 (2,276) 269
Loan servicing income (4)
$3,189
 $7,828
 $7,914
 $22,434
 
(1)Represents changes due to collection/realization of expected cash flows and curtailments.
(2)Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speed and cash flow projections.
(3)Includes pre-tax income of $333 thousand and pre-tax loss of $941 thousand, net of transaction costs, brokerage fees and prepayment reserves, resulting from the sales of single family MSRs during the three and nine months ended September 30, 2019, respectively, and pre-tax income of $573 thousand for the nine months ended September 30, 2018.
(4)
Includes $502 thousand and $6.9 million from discontinued operations for three months ended September 30, 2019 and 2018 and $2.0 million and $19.6 million for the nine months ended 2019 and 2018, respectively.



43


All MSRs are initially measured and recorded at fair value at the time loans are sold. Single family MSRs are subsequently carried at fair value with changes in fair value reflected in earnings in the periods in which the changes occur, while multifamily and SBA MSRs are subsequently carried at the lower of amortized cost or fair value.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. The Company determines fair value using a valuation model that calculates the net present value of estimated future cash flows. Estimates of future cash flows include contractual servicing fees, ancillary income and costs of servicing, the timing of which are impacted by assumptions, primarily expected prepayment speeds and discount rates, which relate to the underlying performance of the loans.

The initial fair value measurement of MSRs is adjusted up or down depending on whether the underlying loan pool interest rate is at a premium, discount or par. Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(rates per annum) (1)
2019 2018 2019 2018
        
Constant prepayment rate ("CPR") (2)
18.86% 17.19% 18.82% 15.54%
Discount rate (3)
8.96% 10.29% 9.39% 10.27%

(1)Weighted average rates for sales during the period for sales of loans with similar characteristics.
(2)Represents the expected lifetime average.
(3)Discount rate is a rate based on market observations.

Key economic assumptions and the sensitivity of the current fair value for single family MSRs to immediate adverse changes in those assumptions were as follows.
(dollars in thousands)At September 30, 2019
  
Fair value of single family MSR$61,823
Expected weighted-average life (in years)4.05
Constant prepayment rate (1)
20.50%
Impact on fair value of 25 basis points adverse change in interest rates$(4,234)
Impact on fair value of 50 basis points adverse change in interest rates$(7,956)
Discount rate9.00%
Impact on fair value of 100 basis points increase$(1,718)
Impact on fair value of 200 basis points increase$(3,331)
 
(1)Represents the expected lifetime average.

These sensitivities are hypothetical and subject to key assumptions of the underlying valuation model. As the table above demonstrates, the Company's methodology for estimating the fair value of MSRs is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

In March 2019, the Company successfully closed and settled two sales of the rights to service an aggregate of $14.26 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie Mae and Freddie Mac representing 71% of HomeStreet's total single family mortgage loans serviced for others portfolio as of December 31, 2018. These sales resulted in a $941 thousand pre-tax loss from discontinued operations for the nine months ended September 30,

44


2019. The Company completed the servicing transfer for a portion of these loans in the second quarter and then finalized the transfer of the remainder in the third quarter of 2019.

The changes in single family MSRs measured at fair value are as follows.
 
 Three Months Ended September 30, Nine Months Ended September 30, 
(in thousands)2019 2018 2019 2018 
         
Beginning balance$67,723
 $245,744
 $252,168
 $258,560
 
Additions and amortization:        
Originations6,422
 14,525
 23,893
 45,551
 
Sale of single family MSRs
 (12) (176,944) (66,902) 
Changes due to modeled amortization (1)
(4,489) (8,300) (16,894) (26,570) 
Net additions and amortization1,933
 6,213
 (169,945) (47,921) 
Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)
(7,833) 11,665
 (20,400) 52,983
 
Ending balance$61,823
 $263,622
 $61,823
 $263,622
 
 
(1)Represents changes due to collection/realization of expected cash flows and curtailments.
(2)Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speed and cash flow projections.

MSRs resulting from the sale of multifamily loans are recorded at fair value and subsequently carried at the lower of amortized cost or fair value. Multifamily MSRs are amortized in proportion to, and over, the estimated period the net servicing income will be collected.

The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Beginning balance$27,227
 $26,460
 $28,326
 $26,093
Origination2,770
 2,657
 3,931
 5,000
Amortization(1,196) (981) (3,456) (2,957)
Ending balance$28,801
 $28,136
 $28,801
 $28,136


At September 30, 2019, the expected weighted-average remaining life of the Company's multifamily MSRs was 10.59 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)At September 30, 2019
  
Remainder of 2019$1,028
20204,068
20213,953
20223,734
20233,516
20243,241
2025 and thereafter9,261
Carrying value of multifamily MSR$28,801




45


NOTE 8–COMMITMENTS, GUARANTEES AND CONTINGENCIES:

Commitments

Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual provisions. These commitments may be for specific periods or contain termination clauses and may require the payment of a fee by the borrower. The total amount of unused commitments does not necessarily represent future credit exposure or cash requirements in that commitments may expire without being drawn upon.

The Company makes certain unfunded loan commitments as part of its lending activities that have not been recognized in the Company's financial statements. These include commitments to extend credit made as part of the Company's lending activities on loans the Company intends to hold in its held for investment portfolio. The aggregate amount of these unrecognized unfunded loan commitments existing at September 30, 2019 and December 31, 2018 was $36.7 million and $33.8 million, respectively.

In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $400.7 million and $607.2 million at September 30, 2019 and December 31, 2018, respectively. Unused home equity and commercial banking funding lines totaled $750.4 million and $662.1 million at September 30, 2019 and December 31, 2018, respectively. The Company has recorded an allowance for credit losses on loan commitments, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $1.2 million and $1.4 million at September 30, 2019 and December 31, 2018, respectively.

Guarantees

In the ordinary course of business, the Company sells and services loans through the Fannie Mae Multifamily DUS® program and shares in the risk of loss with Fannie Mae under the terms of the DUS® contracts (pari passu loss sharing agreement). Under such agreements, 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 and 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, 2019 and December 31, 2018, the total unpaid principal balance of loans sold under this program was $1.50 billion and $1.46 billion, respectively. The Company's reserve liability related to this arrangement totaled $2.6 million and $2.5 million at September 30, 2019 and December 31, 2018, respectively. There were 0 actual losses incurred under this arrangement during the three and nine months ended September 30, 2019 and 2018.

Mortgage Repurchase Liability

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. In addition, the Company pools FHA-insured and VA-guaranteed mortgage loans into Ginnie Mae Securities guaranteed mortgage-backed securities. 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.

These obligations expose the Company to mark-to-market and credit losses on the repurchased mortgage loans after accounting for any mortgage insurance that we may receive. Generally, the maximum amount of future payments the Company would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain circumstances, accrued and unpaid interest on such loans and certain expenses.

The Company does not typically receive repurchase requests from the FHA or VA. As an originator of FHA-insured or VA-guaranteed loans, the Company is responsible for obtaining the insurance with FHA or the guarantee with the VA. If loans are later found not to meet the requirements of FHA or VA, through required internal quality control reviews or through agency audits, the Company may be required to indemnify FHA or VA against losses. The loans remain in Ginnie Mae pools unless and until they are repurchased by the Company. In general, once an FHA or VA loan becomes 90 days past due, the Company repurchases the FHA or VA residential mortgage loan to minimize the cost of interest advances on the loan. If the loan is cured through borrower efforts or through loss mitigation activities, the loan may be resold into another Ginnie Mae pool. The Company's liability for mortgage loan repurchase losses incorporates probable losses associated with such indemnification.


46


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 $7.09 billion and $20.24 billion as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, 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 statements of financial condition, of $3.2 million and $3.1 million, respectively.

Contingencies

In the normal course of business, the Company may have various legal claims and other similar contingent matters outstanding for which a loss may be realized. For these claims, the Company establishes a liability for contingent losses when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. For claims determined to be reasonably possible but not probable of resulting in a loss, there may be a range of possible losses in excess of the established liability. At September 30, 2019, we reviewed our legal claims and determined that there were 0 material claims that were considered to be probable or reasonably possible of resulting in a material loss. As a result, the Company did not have any material amounts reserved for legal claims as of September 30, 2019.


NOTE 9–FAIR VALUE MEASUREMENT:

For a further discussion of fair value measurements, including information regarding the Company's valuation methodologies and the fair value hierarchy, see Note 18, Fair Value Measurement within our 2018 Annual Report on Form 10-K.

Valuation Processes
The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. The Finance Committee of the Board provides oversight and approves the Company's Asset/Liability Management Policy ("ALMP"). The Company's ALMP governs, among other things, the application and control of the valuation models used to measure fair value. On a quarterly basis, the Company's Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Board review significant modeling variables used to measure the fair value of the Company's financial instruments, including the significant inputs used in the valuation of single family MSRs. Additionally, ALCO periodically obtains an independent review of the MSR valuation process and procedures, including a review of the model architecture and the valuation assumptions. The Company obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value estimate and the reasonableness of the assumptions used in measuring fair value.

The Company's real estate valuations are overseen by the Company's appraisal department, which is independent of the Company's lending and credit administration functions. The appraisal department maintains the Company's appraisal policy and recommends changes to the policy subject to approval by the Company's Loan Committee and the Credit Committee of the Board. The Company's appraisals are prepared by independent third-party appraisers and the Company's internal appraisers. Single family appraisals are generally reviewed by the Company's single family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as commercial real estate appraisals, are reviewed by the Company's appraisal department.

We obtain pricing from third party service providers for determining the fair value of a substantial portion of our investment securities available for sale. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques used are appropriate. For fair value measurements obtained from third party services, we monitor and review the results to ensure the values are reasonable and in line with market experience for similar classes of securities. While the inputs used by the pricing vendor in determining fair value are not provided, and therefore unavailable for our review, we do perform certain procedures to validate the values received, including comparisons to other sources of valuation (if available), comparisons to other independent market data and a variance analysis of prices by Company personnel that are not responsible for the performance of the investment securities.

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.

47



The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and classification of the Company's assets and liabilities.
Asset/Liability class  Valuation methodology, inputs and assumptions  Classification
Investment securities    
Investment securities available for sale  
Observable 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.
Loans held for sale      
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 7, Mortgage Banking Operations.
  Level 3 recurring fair value measurement.
Derivatives      
Eurodollar futures Fair 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 and purchase loan 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.

 




48


The following table presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis.
 
(in thousands)Fair Value at September 30, 2019 Level 1 Level 2 Level 3
        
Assets:       
Investment securities available for sale       
Mortgage backed securities:       
Residential$109,581
 $
 $107,647
 $1,934
Commercial29,836
 
 29,836
 
Collateralized mortgage obligations:       
Residential187,989
 
 187,989
 
Commercial109,543
 
 109,543
 
Municipal bonds380,094
 
 380,094
 
Corporate debt securities18,768
 
 18,678
 90
U.S. Treasury securities1,308
 
 1,308
 
Agency debentures25,220
 
 25,220
 
Single family loans held for sale (1)
158,931
 
 152,854
 6,077
Single family loans held for investment5,295
 
 
 5,295
Single family mortgage servicing rights61,823
 
 
 61,823
Derivatives (1)
       
Eurodollar futures24
 24
 
 
Forward sale commitments3,026
 
 3,026
 
Interest rate lock and purchase loan commitments4,239
 
 
 4,239
Interest rate swaps36,563
 
 36,563
 
Total assets$1,132,240
 $24
 $1,052,758
 $79,458
Liabilities:       
Derivatives       
Forward sale commitments$2,180
 $
 2,180
 $
Interest rate lock and purchase loan commitments203
 
 
 203
Interest rate swaps14,568
 
 14,568
 
Total liabilities$16,951
 $
 $16,748
 $203

(1) Includes both continuing and discontinued operations.

49


(in thousands)Fair Value at December 31, 2018 Level 1 Level 2 Level 3
        
Assets:       
Investment securities available for sale       
Mortgage backed securities:       
Residential$107,961
 $
 $107,961
 $
Commercial34,514
 
 34,514
 
Collateralized mortgage obligations:       
Residential166,744
 
 166,744
 
Commercial116,674
 
 116,674
 
Municipal bonds385,655
 
 385,655
 
Corporate debt securities19,995
 
 19,995
 
U.S. Treasury securities10,900
 
 10,900
 
Agency debentures9,525
 
 9,525
 
Single family loans held for sale (1)
321,868
 
 319,177
 2,691
Single family loans held for investment4,057
 
 
 4,057
Single family mortgage servicing rights252,168
 
 
 252,168
Derivatives       
Forward sale commitments3,025
 
 3,025
 
Interest rate swaptions203
 
 203
 
Interest rate lock and purchase loan commitments10,289
 
 
 10,289
Interest rate swaps14,566
 
 14,566
 
Total assets$1,458,144
 $
 $1,188,939
 $269,205
Liabilities:       
Derivatives       
Eurodollar futures$110
 $110
 $
 $
Forward sale commitments5,340
 
 5,340
 
Interest rate lock and purchase loan commitments5
 
 
 5
Interest rate swaps11,550
 
 11,550
 
Total liabilities$17,005
 $110
 $16,890
 $5


(1) Includes both continuing and discontinued operations.

There were 0 transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2019 and 2018.

Level 3 Recurring Fair Value Measurements

The Company's Level 3 recurring fair value measurements consist of investment securities available for sale, single family MSRs, single family loans held for investment where fair value option was elected, certain single family loans held for sale, and interest rate lock and purchase loan commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three and nine months ended September 30, 2019 and 2018, see Note 7, Mortgage Banking Operations of this Form 10-Q.

The fair value of interest rate lock commitments ("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 loans held for sale, 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

50


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.

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 loans held for sale 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 these certain single family loans that have been transferred from held for sale to held for investment and these certain single family loans held for sale is 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 $5.3 million and $4.1 million at September 30, 2019 and December 31, 2018, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain investment securities available for sale.

(dollars in thousands)At September 30, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Investment securities available for sale (1)
$2,024
 Income approach Implied spread to benchmark interest rate curve 2.00% 2.00% 2.00%
(1)In conjunction with adopting ASU 2017-12 in the first quarter of 2019, we transferred $66.2 million HTM securities to AFS, therefore we did not have a similar balance at December 31, 2018.

The following information presents significant Level 3 unobservable inputs used to measure fair value of single family loans held for investment where fair value option was elected.

(dollars in thousands)At September 30, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for investment, fair value option$5,295
 Income approach Implied spread to benchmark interest rate curve 4.34% 7.01% 5.30%

(dollars in thousands)At December 31, 2018
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for investment, fair value option$4,057
 Income approach Implied spread to benchmark interest rate curve 3.34% 5.15% 4.20%



51


The following information presents significant Level 3 unobservable inputs used to measure fair value of certain single family loans held for sale where fair value option was elected.

(dollars in thousands)At September 30, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for sale, fair value option$6,077
 Income approach Implied spread to benchmark interest rate curve 5.71% 6.71% 6.07%
     Market price movement from comparable bond (0.10)% (0.08)% (0.09)%


(dollars in thousands)At December 31, 2018
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for sale, fair value option$2,691
 Income approach Implied spread to benchmark interest rate curve 4.26% 4.96% 4.40%
     Market price movement from comparable bond 0.71% 1.09% 0.90%



The following information presents significant Level 3 unobservable inputs used to measure fair value of interest rate lock and purchase loan commitments.

(dollars in thousands)At September 30, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock and purchase loan commitments, net$4,036
 Income approach Fall-out factor —% 63.68% 12.62%
     Value of servicing 0.51% 1.62% 1.12%

(dollars in thousands)At December 31, 2018
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock and purchase loan commitments, net$10,284
 Income approach Fall-out factor —% 67.92% 19.84%
     Value of servicing 0.54% 1.64% 0.93%



The following table present fair value changes and activity for Level 3 investment securities available for sale.

  Three Months Ended September 30, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Investment securities available for sale $1,981
 $
 $
 $(40) $83
 $2,024




52



  Nine Months Ended September 30, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Investment securities available for sale $
 $
 $2,379
 $(120) $(235) $2,024


The following tables present fair value changes and activity for Level 3 loans held for sale and loans held for investment.
  Three Months Ended September 30, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Loans held for sale $4,427
 $2,393
 $
 $(686) $(57) $6,077
Loans held for investment 4,475
 789
 
 
 31
 5,295

  Three Months Ended September 30, 2018
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)            
             
Loans held for sale $1,823
 $
 $
 $
 $(30) $1,793
Loans held for investment 4,178
 
 
 (2) (86) 4,090

  Nine Months Ended September 30, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)            
             
Loans held for sale $2,691
 $5,060
 $
 $(1,595) $(79) $6,077
Loans held for investment 4,057
 1,788
 
 (606) 56
 5,295

  Nine Months Ended September 30, 2018
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)            
             
Loans held for sale $1,336
 $2,601
 $
 $(1,998) $(146) $1,793
Loans held for investment 5,477
 
 
 (1,116) (271) 4,090



53


The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments.
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Beginning balance, net$8,624
 $16,866
 $10,284
 $12,925
Total realized/unrealized gains1,243
 26,527
 34,655
 77,607
Settlements(5,831) (32,996) (40,903) (80,135)
Ending balance, net$4,036
 $10,397
 $4,036
 $10,397


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 nonrecurring basis. These assets include certain loans held for investment and other real estate owned that are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. All impaired loans are subject to an internal evaluation completed quarterly by management as part of the allowance process.

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 loans held for investment 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 loans held for investment that are not collateralized by real estate. During the three and nine months ended September 30, 2019 and 2018, the Company did not apply any adjustment to the appraisal value of OREO.

Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period.

The following tables present assets that had changes in their recorded fair value during the three and nine months ended September 30, 2019 and 2018 and assets held at the end of the respective reporting period.

 At or for the Three Months Ended September 30, 2019
(in thousands)Fair Value of Assets Held at September 30, 2019 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$266
 $
 $
 $266
 $(2)
Total$266
 $
 $
 $266
 $(2)

 At or for the Three Months Ended September 30, 2018
(in thousands)Fair Value of Assets Held at September 30, 2018 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$1,213
 $
 $
 1,213
 $(68)
Total$1,213
 $
 $
 $1,213
 $(68)


54


 At or for the Nine Months Ended September 30, 2019
(in thousands)Fair Value of Assets Held at September 30, 2019 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$266
 $
 $
 $266
 $(2)
Total$266
 $
 $
 $266
 $(2)

 At or for the Nine Months Ended September 30, 2018
(in thousands)Fair Value of Assets Held at September 30, 2018 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$1,213
 $
 $
 $1,213
 $(212)
Total$1,213
 $
 $
 $1,213
 $(212)


(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, 2019
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
          
Assets:         
Cash and cash equivalents$74,788
 $74,788
 $74,788
 $
 $
Investment securities held to maturity4,397
 4,513
 
 4,513
 
Loans held for investment5,133,813
 5,285,639
 
 
 5,285,639
Loans held for sale – multifamily and other85,240
 85,240
 
 85,240
 
Mortgage servicing rights – multifamily28,801
 31,903
 
 
 31,903
Federal Home Loan Bank stock8,764
 8,764
 
 8,764
 
Liabilities:       �� 
Time deposits$2,135,869
 $2,146,696
 $
 $2,146,696
 $
Federal Home Loan Bank advances5,590
 7,013
 
 7,013
 
Long-term debt125,603
 115,447
 
 115,447
 




55


 At December 31, 2018
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
          
Assets:         
Cash and cash equivalents$57,982
 $57,982
 $57,982
 $
 $
Investment securities held to maturity71,285
 70,546
 
 70,546
 
Loans held for investment5,071,314
 5,099,960
 
 
 5,099,960
Loans held for sale – multifamily and other25,139
 25,139
 
 25,139
 
Mortgage servicing rights – multifamily28,326
 31,168
 
 
 31,168
Federal Home Loan Bank stock45,497
 45,497
 
 45,497
 
Liabilities:         
Time deposits$1,579,806
 $1,575,139
 $
 $1,575,139
 $
Federal Home Loan Bank advances932,590
 935,021
 
 935,021
 
Federal funds purchased and securities sold under agreements to repurchase19,000
 19,021
 19,021
 
 
Long-term debt125,462
 112,475
 
 112,475
 


NOTE 10–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.
 
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except share and per share data)2019 2018 2019 2018
        
EPS numerator:       
Income from continuing operations$13,665
 $8,089
 $27,615
 $14,014
Undistributed stock dividends share repurchase(223) 
 (505) 
Allocated undistributed earnings in share repurchase(101) 
 (128) 
Income from continuing operations available to common shareholders13,341
 8,089
 26,982
 14,014
Income (loss) from discontinued operations162
 3,746
 (21,091) 10,786
Net income available to common shareholders$13,503
 $11,835
 $5,891
 $24,800
EPS denominator:       
Weighted average shares:       
Basic weighted-average number of common shares outstanding24,419,793
 26,985,425
 26,020,172
 26,963,260
Dilutive effect of outstanding common stock equivalents (1)
206,145
 196,263
 184,242
 202,412
Diluted weighted-average number of common stock outstanding24,625,938
 27,181,688
 26,204,414
 27,165,672
Basic earnings per share:       
Income from continuing operations$0.55
 $0.30
 $1.04
 $0.52
Income (loss) from discontinued operations0.01
 0.14
 (0.81) 0.40
Basic earnings per share$0.55
 $0.44
 $0.23
 $0.92
Diluted earnings per share:       
Income from continuing operations$0.54
 $0.30
 $1.03
 $0.52
Income (loss) from discontinued operations0.01
 0.14
 (0.80) 0.40
Diluted earnings per share$0.55
 $0.44
 $0.22
 $0.91
 
(1)
Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three and nine months ended September 30, 2019 and 2018 were certain stock options and unvested restricted stock issued to key senior management personnel and directors of the Company. The aggregate number of common stock equivalents related to such options and unvested restricted shares, which could potentially be dilutive in future periods, was 690 at September 30, 2019 and 0 at September 30, 2018.



56


NOTE 11–LEASES:

We have operating and finance leases for corporate offices, commercial lending centers, retail deposit branches and certain equipment. Our leases have remaining lease terms of up to 20 years, some of which include options which are reasonably certain to be extended. Leases with an initial term of less than a year are not included in the Statement of Financial Condition.

The Company, as sublessor, subleases certain office and retail space in which the terms of the subleases end by September 2024. Under all of our executed sublease arrangements, the sublessees are obligated to pay the Company sublease payments of $1.7 million during the remainder of 2019, $6.3 million in 2020, $5.3 million in 2021, $4.1 million in 2022, $2.5 million in 2023 and $1.9 million thereafter.
In the three and nine months ended September 30, 2019, we incurred $38 thousand and $3.9 million in impairment charges related to the closure of certain offices.

The components of lease expense were as follows.
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2019
    
Operating lease cost$3,464
 $11,180
Finance lease cost:   
Amortization of right-of-use assets442
 1,601
Interest on lease liabilities81
 262
Short-term lease10
 16
Variable lease cost1,132
 4,934
Sublease income(1,686) (2,515)
Total lease cost$3,443
 $15,478

Supplemental cash flow information related to leases was as follows.
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2019
    
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases$4,184
 $12,916
Operating cash flows from finance leases81
 262
Financing cash flows from finance leases322
 1,375
Right-of-use assets obtained in exchange for lease obligations:   
Operating leases$2,059
 $(5,306)
Finance leases446
 (570)



57


Supplemental balance sheet information related to leases was as follows.
(in thousands, except lease term and discount rate)September 30, 2019
  
Operating lease right-of-use assets$92,840
Operating lease liabilities110,727
  
Finance lease right-of-use assets$9,003
Finance lease liabilities9,345
  
Weighted Average Remaining lease term in years 
Operating leases11.89
Finance leases14.63
Weighted Average Discount Rate 
Operating leases3.48%
Finance leases3.56%


Maturities of lease liabilities were as follows.
  Operating Leases Finance Leases
Year ended December 31,    
2019 (excluding the nine months ended September 30, 2019) $4,363
 $497
2020 16,496
 1,767
2021 15,346
 1,465
2022 13,331
 590
2023 10,994
 474
2024 9,451
 400
Thereafter 69,653
 7,238
Total lease payments 139,634
 12,431
Less imputed interest 28,907
 3,086
Total $110,727
 $9,345


Future minimum rental payments, prior to the adoption of the new lease guidance, for all non-cancelable leases were as follows at December 31, 2018.
 
(in thousands)At December 31, 2018
  
2019$22,770
202020,671
202118,825
202216,418
202313,274
2024 and thereafter40,717
Total minimum payments$132,675




58


NOTE 12–BUSINESS COMBINATIONS:
Recent Acquisition Activity
On March 25, 2019, the Company completed its acquisition of a branch and its related deposits and loans in San Diego County, from Silvergate Bank along with its business lending team. The purchase accounting remains provisional for the valuation of the acquired loans and will be finalized later this year. The application of the acquisition method of accounting resulted in goodwill of $7.6 million.

NOTE 13–ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

The following table shows changes in accumulated other comprehensive income (loss) from unrealized gain (loss) on available-for-sale securities, net of tax.

 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2019 2018 2019 2018
        
Beginning balance$2,707
 $(19,722) $(15,439) $(7,122)
Cumulative effect of adoption of new accounting standards (1)

 
 (2,080) 
Other comprehensive income (loss) before reclassifications5,273
 (4,399) 25,412
 (16,811)
Amounts reclassified from accumulated other comprehensive income (loss)15
 4
 102
 (184)
Net current-period other comprehensive income (loss)5,288
 (4,395) 25,514
 (16,995)
Ending balance$7,995
 $(24,117) $7,995
 $(24,117)


(1)
Reflects the January 1, 2019 adoption of ASU 2018-02 and ASU 2017-12. For additional information see Note 1, Summary of Significant Accounting Policies.


The following table shows the impacted line items in the consolidated statements of operations from reclassifications of unrealized gain (loss) on available-for-sale securities from accumulated other comprehensive income (loss).

Affected Line Item in the Consolidated Statements of Operations 
Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)
  Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
         
(Loss) Gain on sale of investment securities available for sale $(19) $(4) $(129) $234
Income tax (benefit) expense (4) 
 (27) 50
Total, net of tax $(15)
$(4) $(102) $184



NOTE 14–REVENUE:

On January 1, 2018, the Company adopted ASU No. 2014-09 Revenue from Contracts with Customers ("Topic 606"). We elected to implement Topic 606 using the modified retrospective application, with the cumulative effect recorded as an adjustment to retained earnings at January 1, 2018. Due to immateriality, we had no cumulative effect to record. Since net interest income on financial assets and liabilities is excluded from this guidance, a significant majority of our revenues are not subject to the new guidance.

Our revenue streams that fall within the scope of Topic 606 are presented within noninterest income and are, in general, recognized as revenue as we satisfy our obligation to the customer. Most of the Company's contracts that fall within the scope of this guidance are contracts with customers that are cancelable by either party without penalty and are short-term in nature. These revenues include depositor and other retail and business banking fees, commission income, credit card fees and sales of other real estate owned. For the nine months ended September 30, 2019 and 2018, in scope revenue streams were approximately 2.3% and 2.3% of our total revenues, respectively. As this standard is immaterial to our consolidated financial

59


statements, the Company has omitted certain disclosures in ASU 2014-09, including the disaggregation of revenue table. In-scope noninterest revenue streams are discussed below.

Depositor and other retail and business banking fees
Depositor and other retail banking fees consist of monthly service fees, check orders, and other deposit account related fees. The Company's performance obligation for these fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.
Commission Income
Commission income primarily consists of revenue received on insurance policies and monthly investment management fees earned where the Company has acted as an intermediary between customers and the insurance carriers or investment advisers.
Under Topic 606, the commissions received at the inception of the policy should be deferred and recognized over the course of the policy. The Company's performance obligation for commissions is generally satisfied, and the related revenue generally recognized, over the course of the policy or over the period in which the services are provided, typically monthly.
Credit Card Fees
The Company offers credit cards to its customers through a third party and earns a fee on each transaction and a fee for each new account activation on a net basis. Revenue is recognized on a one-month lag when cash is received for these fees which does not vary materially from recognizing revenue over the period the services are performed.
Sale of Other Real Estate Owned
A gain or loss, the difference between the cost basis of the property and its sale price, on other real estate owned is recognized when the performance obligation is met, which is at the time the property title is transferred to the buyer.



60


NOTE 15–RESTRUCTURING:

In the first quarter of 2019, in connection with the Board of Directors approved plan of exit or disposal of our stand-alone home loan-center based mortgage origination business and related mortgage servicing, the Company restructured certain aspects of its infrastructure and back office operations, which has resulted in certain indirect severance and other employee related costs and impairment charges related to certain facilities and information systems. Cost directly related to the plan of exit or disposal are not included in restructuring, but rather are characterized as gain or loss on disposal, for further information, see Note 2. Discontinued Operations.

In 2017, in response to changing market conditions and forecasts, we implemented restructuring plans in the Company's former Mortgage Banking segment to reduce operating costs and improve efficiency. In June 2018, the Company implemented further restructuring in the legacy Mortgage Banking segment to further reduce operating costs and improve profitability.

Restructuring charges primarily consist of facility-related costs and severance costs and are included in the occupancy and the salaries and related costs line items on our consolidated statement of operations in the applicable periods for continuing operations and in the income (loss) from discontinued operations for the applicable periods for discontinued operations.

The following tables summarize the restructuring charges recognized during the three and nine months ended September 30, 2019 and 2018 and the Company's net remaining liability balance at September 30, 2019 and 2018 for both continuing and discontinued operations.
  2019 2018
At and for the three months ended September 30 Facility-related costs Personnel-related costs Other costs Total Facility-related costs Personnel- related costs Other costs Total
(in thousands)                
Beginning balance $1,423
 $562
 $22
 $2,007
 $4,209
 $439
 $
 $4,648
Restructuring charges 6
 168
 
 174
 456
 15
 
 471
Costs paid or otherwise settled (173) (480) 
 (653) (1,409) (400) 
 (1,809)
Ending balance $1,256
 $250
 $22
 $1,528
 $3,256
 $54
 $
 $3,310

  2019 2018
At and for the nine months ended September 30 Facility-related costs Personnel-related costs Other costs Total Facility-related costs Personnel- related costs Other costs Total
(in thousands)                
Beginning balance $1,604
 $
 $
 $1,604
 $1,386
 $
 $
 $1,386
Restructuring charges 200
 1,168
 147
 1,515
 6,619
 454
 
 7,073
Costs paid or otherwise settled (548) (918) (125) (1,591) (4,749) (400) 
 (5,149)
Ending balance $1,256
 $250
 $22
 $1,528
 $3,256
 $54
 $
 $3,310




NOTE 16–SUBSEQUENT EVENT:

The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q and has concluded that there are no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements.


61


ITEM 2MANAGEMENT'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 2018 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

The following discussion contains certain forward-looking statements, which are statements of expectations and not statements of historical fact. 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 below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Item 1A of Part II, "Risk Factors," that could cause actual results to differ significantly from those projected. 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 to, 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 of 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.




62


Summary Financial Data
 At or for the Three Months Ended At or for the Nine Months Ended
(dollars in thousands, except share data)Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
 Dec. 31,
2018
 Sept. 30,
2018
 Sept. 30, 2019 Sept. 30,
2018
              
Income statement data (for the period ended):             
Net interest income$47,134
 $49,187
 $47,557
 $48,910
 $47,860
 $143,878
 $141,053
Provision for credit losses
 
 1,500
 500
 750
 1,500
 2,500
Noninterest income24,580
 19,829
 8,092
 10,382
 10,650
 52,501
 26,151
Noninterest expense55,721
 58,832
 47,846
 47,892
 47,914
 162,399
 147,349
Income from continuing operations before income taxes15,993
 10,184
 6,303
 10,900
 9,846
 32,480
 17,355
Income tax expense (benefit) from continuing operations2,328
 1,292
 1,245
 (1,575) 1,757
 4,865
 3,341
Income from continuing operations13,665
 8,892
 5,058
 12,475
 8,089
 27,615
 14,014
Income (loss) from discontinued operations before income taxes190
 (16,678) (8,440) 3,959
 4,561
 (24,928) 13,651
Income tax expense (benefit) from discontinued operations28
 (2,198) (1,667) 1,207
 815
 (3,837) 2,865
Income (loss) from discontinued operations162
 (14,480) (6,773) 2,752
 3,746
 (21,091) 10,786
Net income (loss)$13,827
 $(5,588) $(1,715) $15,227
 $11,835
 $6,524
 $24,800
Basic income (loss) per common share:             
Income from continuing operations$0.55
 $0.32
 $0.19
 $0.46
 $0.30
 $1.04
 $0.52
Income (loss) from discontinued operations0.01
 (0.54) (0.25) 0.10
 0.14
 (0.81) 0.40
Basic income (loss) per common share$0.55
 $(0.22) $(0.06) $0.56
 $0.44
 $0.23
 $0.92
Diluted income (loss) per common share:             
Income from continuing operations$0.54
 $0.32
 $0.19
 $0.46
 $0.30
 $1.03
 $0.52
Income (loss) from discontinued operations0.01
 (0.54) (0.25) 0.10
 0.14
 (0.80) 0.40
Diluted income (loss) per common share$0.55
 $(0.22) $(0.06) $0.56
 $0.44
 $0.22
 $0.91
Common shares outstanding24,408,513
 26,085,164
 27,038,257
 26,995,348
 26,989,742
 24,408,513
 26,989,742
Weighted average number of shares outstanding:             
Basic24,419,793
 26,619,216
 27,021,507
 26,993,885
 26,985,425
 26,020,172
 26,963,260
Diluted24,625,938
 26,802,130
 27,185,175
 27,175,522
 27,181,688
 26,204,414
 27,165,672
Shareholders' equity per share$28.32
 $27.75
 $27.63
 $27.39
 $26.48
 $28.32
 $26.48
Financial position (at period end):             
Cash and cash equivalents$74,788
 $99,602
 $67,690
 $57,982
 $59,006
 $74,788
 $59,006
Investment securities866,736
 803,819
 816,878
 923,253
 903,685
 866,736
 903,685
Loans held for sale172,958
 145,252
 56,928
 77,324
 103,763
 172,958
 103,763
Loans held for investment, net5,139,108
 5,287,859
 5,345,969
 5,075,371
 5,026,301
 5,139,108
 5,026,301
Loan servicing rights90,624
 94,950
 95,942
 103,374
 106,592
 90,624
 106,592
Other real estate owned1,753
 1,753
 838
 455
 751
 1,753
 751
Total assets6,835,878
 7,200,790
 7,171,405
 7,042,221
 7,029,082
 6,835,878
 7,029,082
Deposits5,804,307
 5,590,893
 5,178,334
 4,888,558
 4,943,545
 5,804,307
 4,943,545
Federal Home Loan Bank advances5,590
 387,590
 599,590
 932,590
 816,591
 5,590
 816,591
Federal funds purchased and securities sold under agreements to repurchase
 
 27,000
 19,000
 55,000
 
 55,000
Shareholders' equity$691,136
 $723,910
 $747,031
 $739,520
 $714,782
 $691,136
 $714,782
Financial position (averages):             
Investment securities$803,355
 $815,287
 $891,813
 $917,300
 $915,439
 $836,494
 $916,685
Loans held for investment5,277,586
 5,435,474
 5,236,387
 5,035,953
 4,945,065
 5,316,633
 4,809,007
Total interest-earning assets6,437,903
 6,699,821
 6,471,930
 6,460,666
 6,457,129
 6,536,426
 6,310,127
Total interest-bearing deposits4,846,585
 4,361,850
 4,145,778
 4,212,150
 4,110,179
 4,453,971
 3,997,900
Federal Home Loan Bank advances85,894
 594,810
 833,478
 828,648
 838,569
 501,989
 880,114
Federal funds purchased and securities sold under agreements to repurchase6,930
 73,189
 47,778
 26,421
 15,192
 42,483
 9,288
Total interest-bearing liabilities5,074,429
 5,165,939
 5,159,853
 5,192,654
 5,094,216
 5,133,093
 5,014,507
Shareholders' equity$693,475
 $741,330
 $750,466
 $733,969
 $760,446
 $728,215
 $743,417


63


Summary Financial Data (continued)

 At or for the Three Months Ended At or for the Nine Months Ended
(dollars in thousands, except share data)Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
 Dec. 31,
2018
 Sept. 30,
2018
 Sept. 30, 2019 Sept. 30,
2018
              
Financial performance, consolidated (1):
             
Return on average shareholders' equity (2)
7.98% (3.02)% (0.91)% 8.30% 6.23% 1.19% 4.45%
Return on average assets0.79% (0.31)% (0.10)% 0.86% 0.66% 0.12% 0.47%
Net interest margin (3)
2.96% 3.11 % 3.11 % 3.19% 3.20% 3.06% 3.22%
Efficiency ratio (4)
78.08% 106.83 % 100.66 % 84.64% 86.19% 96.60% 90.13%
Asset quality:             
Allowance for credit losses$44,634

$44,628

$44,536
 $42,913
 $41,854
 $44,634
 $41,854
Allowance for loan losses/total loans (5)
0.84%
0.81 %
0.80 % 0.81% 0.80% 0.84% 0.80%
Allowance for loan losses/nonaccrual loans349.37% 435.59 % 271.99 % 356.92% 419.57% 349.37% 419.57%
Total nonaccrual loans (6)(7)
$12,433
 $9,930
 $15,874
 $11,619
 $9,638
 $12,433
 $9,638
Nonaccrual loans/total loans0.24%
0.19 %
0.29 %
0.23% 0.19% 0.24% 0.19%
Other real estate owned$1,753

$1,753

$838

$455
 $751
 $1,753
 $751
Total nonperforming assets (7)
$14,186

$11,683

$16,712

$12,074
 $10,389
 $14,186
 $10,389
Nonperforming assets/total assets0.21% 0.16 % 0.23 % 0.17% 0.15% 0.21% 0.15%
Net (recoveries) charge-offs$(6) $(92) $(123) $(559) $(122) $(221) $(238)
Regulatory capital ratios for the Bank:             
Tier 1 leverage capital (to average assets)10.17% 9.86 % 11.17 % 10.15% 9.70% 10.17% 9.70%
Common equity tier 1 risk-based capital (to risk-weighted assets)13.45% 13.26 % 14.88 % 13.82% 13.26% 13.45% 13.26%
Tier 1 risk-based capital (to risk-weighted assets)13.45% 13.26 % 14.88 % 13.82% 13.26% 13.45% 13.26%
Total risk-based capital (to risk-weighted assets)14.37% 14.15 % 15.77 % 14.72% 14.15% 14.37% 14.15%
Regulatory capital ratios for the Company:          

 

Tier 1 leverage capital (to average assets)10.04% 10.12 % 10.73 % 9.51% 9.17% 10.04% 9.17%
Tier 1 common equity risk-based capital (to risk-weighted assets)11.67% 11.99 % 12.62 % 11.26% 10.84% 11.67% 10.84%
Tier 1 risk-based capital (to risk-weighted assets)12.77% 13.06 % 13.68 % 12.37% 11.94% 12.77% 11.94%
Total risk-based capital (to risk-weighted assets)13.69% 13.95 % 14.58 % 13.27% 12.82% 13.69% 12.82%

(1)Consolidated operations include both continuing and discontinued operations.
(2)Net earnings available to common shareholders divided by average shareholders' equity.
(3)Net interest income divided by total average interest-earning assets on a tax equivalent basis.
(4)Noninterest expense divided by total revenue (net interest income and noninterest income).
(5)Includes loans acquired with bank acquisitions. Excluding acquired loans, allowance for loan losses /total loans was 0.89%, 0.86%, 0.86%, 0.85% and 0.84% at September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.
(6)Generally, loans are placed on nonaccrual status when they are 90 or more days past due, unless payment is insured by the FHA or guaranteed by the VA.
(7)Includes $1.3 million, $1.4 million, $1.7 million, $1.9 million and $1.4 million of nonperforming loans guaranteed by the SBA at September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.


64


 At or for the Three Months Ended 
(in thousands)Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
 Dec. 31,
2018
 Sept. 30,
2018
 
           
SUPPLEMENTAL DATA:          
Loans serviced for others:          
Commercial$1,576,714
 $1,535,522
 $1,521,597
 $1,542,477
 $1,526,035
 
Single family7,014,265
 6,790,955
 6,052,394
 20,151,735
 19,804,263
 
Total loans serviced for others$8,590,979
 $8,326,477
 $7,573,991
 $21,694,212
 $21,330,298
 


65


About Us

HomeStreet, Inc. and its primary subsidiaries, HomeStreet Bank (the “Bank”) and HomeStreet Capital Corporation ("HSC") together are a diversified financial services company serving customers primarily on the West Coast of the United States, including Hawaii. HomeStreet, Inc., founded in 1921, is a bank holding company that has elected to be treated as a financial holding company. In addition to the banking and lending operations of our wholly owned subsidiaries, HomeStreet also sells insurance products and services for consumer clients under the name HomeStreet Insurance.

HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans, mortgage loans, deposit products, non-deposit investment products, private banking and cash management services and other banking services. Our loan products include commercial business and agriculture loans, consumer loans, single family residential mortgages, loans secured by commercial real estate and construction loans for residential and commercial real estate projects. Our branch network is primarily located in large metropolitan markets of the Western United States which promotes convenience for our customers, and together with the growth of commercial and consumer account deposits at our existing branches, helps build our market share.

HSC, a Washington corporation, sells and services multifamily mortgage loans originated by HomeStreet Bank under the Fannie Mae Delegated Underwriting and Servicing Program ("DUS®")1.

HomeStreet Bank also has partial ownership in WMS Series LLC ("WMS"), an affiliated business arrangement with various owners of Windermere Real Estate Company franchises that operates a single family mortgage origination business from select Windermere Real Estate Offices and is known as Penrith Home Loans. As we announced in July 2019, we are in the process of selling our interest in WMS Series LLC and expect to complete that transaction during the fourth quarter. Assuming the successful completion of this transaction, our single family mortgage banking volume will again decline and after a post-sale transition period all correspondent origination volume we currently purchase from WMS will be eliminated.

We generate revenue by earning net interest income and noninterest income. Net interest income is primarily the interest income we earn on loans and investment securities, less the interest we pay on deposits and other borrowings. We also earn noninterest income from the origination, sale and servicing of loans and from fees earned on deposit products and investment and insurance sales.

In the last few years, we have been strategically focused on becoming a leading West Coast regional commercial bank, growing commercial banking to diversify our earnings and actively reducing our exposure to the single family lending mortgage business and its more cyclical and volatile earnings results. This includes the sale of our stand-alone home loan centers ("HLC") and related mortgage servicing rights in the first half of 2019 to focus more on commercial lending, commercial and consumer banking and single family mortgage lending through our retail branch, online and affinity networks.

In connection with these changes, we eliminated segment reporting in the first quarter of 2019 and have classified all remaining activity for these HLCs, along with certain other mortgage banking related assets and liabilities that are expected to be sold or abandoned within approximately one year, as discontinued operations in the accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Operations. Certain components of the Company's former Mortgage Banking segment, including MSRs on certain mortgage loans that were not sold as part of this restructuring, along with our remaining single family mortgage origination and servicing business, have been classified in continuing operations beginning on April 1, 2019 based on the Company's intent.

We continue to take steps to improve productivity and reduce total corporate expenses in light of the recent substantial reduction in the size and complexity of our operations and a lower growth plan going forward. Since the second quarter of 2019, we have been working with an outside consulting firm that specializes in bank efficiency on an enterprise-wide profitability improvement project intended to analyze and improve all of our corporate expenses and business line processes, including contracts terms, costs related to occupancy and technology, organization and staffing improvements, and other cost savings and efficiency proposals. The project efficiency plan includes:

Simplifying the organizational structure by reducing management levels and management redundancy
Consolidating similar functions currently residing in multiple organizations
Renegotiating, where possible, our contracts
Identifying and eliminating redundant or unnecessary systems and services
Rationalizing staffing appropriate to recognize the significant changes in work volumes and company direction


1 DUS® is a registered trademark of Fannie Mae
66 



We began executing on this plan in the third quarter and expect these reductions and enhancements will continue through 2020 and beyond.

In addition to proactively reducing our exposure to single family mortgage lending by exiting the HLC-based mortgage banking business, in the third quarter of 2019 we also continued to grow our commercial and consumer banking business. Our retail branch network continued to perform well, with total deposits from continuing operations increasing 18.7% over December 31, 2018.

As of September 30, 2019, following the consolidation of our Lake Oswego, OR retail branch into our Lake Grove, OR retail branch, we had 36 retail branches in Washington, 19 retail branches in California, four retail branches in Hawaii and three branches in Oregon. We also had four primary stand-alone commercial lending centers and one stand-alone insurance office. While we continue to focus on the growth and strength of our commercial and consumer banking business, we have temporarily suspended future de novo deposit branch openings as we focus on our strategy of improving efficiency and overall profitability.


Management's Overview of the Three and Nine Months Ended September 30, 2019 Financial Performance

Results for the three and nine months ended September 30, 2019 and 2018 reflect the impact of the adoption of a plan of exit or disposal, announced in the first quarter of 2019, with respect to the stand-alone home loan center-based mortgage origination and related servicing businesses as discontinued operations. Discontinued operations reported in the first quarter of 2019 included our entire mortgage banking business as did all prior periods presented. Effective April 1, 2019, the newly organized bank location-based mortgage banking business commenced operations and the associated direct revenues and direct expenses are reported as part of the Company's continuing operations beginning in the second quarter of 2019 ("Retained MB Business").
 At or for the Three Months Ended September 30, Percent Change At or for the Nine Months Ended September 30, Percent Change
 (in thousands, except per share data and ratios)2019 2018  2019 2018 
            
Selected statement of operations data           
Total net revenue (1)
$71,714
 $58,510
 23 % $196,379
 $167,204
 17 %
Total noninterest expense55,721
 47,914
 16
 162,399
 147,349
 10
Provision for credit losses
 750
 (100) 1,500
 2,500
 (40)
Income from continuing operations before income taxes15,993
 9,846
 62
 32,480
 17,355
 87
Income tax expense for continuing operations2,328
 1,757
 32
 4,865
 3,341
 46
Income from continuing operations13,665
 8,089
 69
 27,615
 14,014
 97
Income (loss) from discontinued operations before income taxes190
 4,561
 (96) (24,928) 13,651
 (283)
Income tax expense (benefit) for discontinued operations28
 815
 (97) (3,837) 2,865
 (234)
Income (loss) for discontinued operations162
 3,746
 (96) (21,091) 10,786
 (296)
Net income$13,827
 $11,835
 17 % $6,524
 $24,800
 (74)%
            
Financial performance           
Diluted income per share for continuing operations$0.54
 $0.30
   $1.03
 $0.52
  
Diluted income (loss) per share for discontinued operations0.01
 0.14
   (0.80) 0.40
  
Diluted income per share$0.55
 $0.44
   $0.22
 $0.91
  
Return on average common shareholders' equity7.98% 6.23%   1.19% 4.45%  
Return on average assets0.79% 0.66%   0.12% 0.47%  
Net interest margin2.96% 3.20%   3.06% 3.22%  
(1)Total net revenue is net interest income and noninterest income.


67


For the three and nine months ended September 30, 2019, the Company had net income of $13.8 million and $6.5 million, respectively, which included both continuing and discontinued operations, compared to net income of $11.8 million and $24.8 million for the three and nine months ended September 30, 2018, respectively. The increase in net income from the three months ended September 30, 2018 primarily related to a reduction in noninterest expense from reduced salaries and commissions on lower closed loan volume, lower headcount, reductions in non-personnel costs from cost savings initiatives and the exit of our stand-alone HLC-based mortgage business ("HLC Business Sale"), and $2.3 million of recoveries on restructuring costs and compensation related costs, net of tax. The increase is partially offset by a decline in mortgage servicing income related to the first quarter 2019 sales of single family mortgage servicing rights, a decline in single family net gain on mortgage loan sale and origination activities primarily from the HLC Business Sale and a reduction in net interest income.

The decrease in net income from the nine months ended September 30, 2018 was primarily due to the $18.3 million loss on disposal and restructuring-related expenses, net of tax, taken in the nine months ended September 30, 2019 compared to the $5.6 million in restructuring related expenses, net of tax taken in the nine months ended September 30, 2018, a decline in single-family mortgage servicing income related to the first quarter 2019 sales of single family mortgage servicing rights and a decline in single family net gain on mortgage loan sale and origination activities primarily from the HLC Business Sale. This decrease is partially offset by a reduction in noninterest expense from reduced salaries and commissions on lower closed loan volume, lower headcount, reductions in non-personnel costs from cost savings initiatives and the HLC Business Sale and $2.3 million of recoveries on restructuring costs and compensation related costs, net of tax.

Net income from continuing operations in the three and nine months ended September 30, 2019 increased compared to the three and nine months ended September 30, 2018 primarily due to $2.7 million and $5.9 million in after-tax net income, respectively, from the Retained MB Business. Excluding this impact, the improvement relates to an increase in gain on loan origination and sale activities related to higher commercial loan sales volume and improved margin on commercial loans and an increase in servicing income.


Regulatory Matters

Under the Basel III standards, the Company and Bank's Tier 1 leverage, common equity risk-based capital, Tier 1 risk-based capital and total risk-based capital ratios are as follows.
  At September 30, 2019
  HomeStreet, Inc. HomeStreet Bank
  Ratio Ratio
     
     
Tier 1 leverage capital (to average assets) 10.04% 10.17%
Common equity Tier 1 risk-based capital (to risk-weighted assets) 11.67
 13.45
Tier 1 risk-based capital (to risk-weighted assets) 12.77
 13.45
Total risk-based capital (to risk-weighted assets) 13.69
 14.37


  At December 31, 2018
  HomeStreet, Inc. HomeStreet Bank
  Ratio Ratio
     
     
Tier 1 leverage capital (to average assets) 9.51% 10.15%
Common equity Tier 1 risk-based capital (to risk-weighted assets) 11.26
 13.82
Tier 1 risk-based capital (to risk-weighted assets) 12.37
 13.82
Total risk-based capital (to risk-weighted assets) 13.27
 14.72

As part of our ongoing balance sheet and capital management, in the first quarter of 2019, HomeStreet Bank executed definitive agreements with two different buyers to sell a significant portion of its single family MSRs. The series of transactions provided for the sale of the rights to service an aggregate of approximately $14.26 billion in total unpaid principal balance of single

68


family mortgage loans serviced for Fannie Mae, Freddie Mac and Ginnie Mae, which represented approximately 71% of HomeStreet’s total single family mortgage loans serviced for others as of December 31, 2018. In addition to increasing certain regulatory capital ratios, this action provided additional regulatory capital to support the continued growth of our commercial and consumer banking business, accelerate the diversification of the Company's earnings and fund the Company's prior stock repurchase program, which was executed in the second and third quarters.

The Company and the Bank remain above current "well-capitalized" regulatory minimums.


Critical Accounting Policies and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Certain of these policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
Allowance for Credit Losses
Fair Value of Financial Instruments and Single Family Mortgage Servicing Rights ("MSRs")

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 2018 Annual Report on Form 10-K.


69


Results of Operations
 
Average Balances and Rates

Average balances, together with the total dollar amounts of interest income and expense, on a tax equivalent basis related to such balances and the weighted average rates, were as follows.

 Three Months Ended September 30,
 2019 2018
(in thousands)
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
            
Assets:           
Interest-earning assets: (1)
           
Cash and cash equivalents$91,381
 $342
 1.48% $66,127
 $188
 1.13%
Investment securities803,355
 5,291
 2.63
 915,439
 6,072
 2.65
Loans held for sale (4)
265,581
 2,704
 4.07
 530,498
 6,267
 4.73
Loans held for investment5,277,586
 63,226
 4.72
 4,945,065
 57,859
 4.61
Total interest-earning assets6,437,903
 71,563
 4.38
 6,457,129
 70,386
 4.31
Noninterest-earning assets (2)(4)
566,305
     662,784
    
Total assets$7,004,208
     $7,119,913
    
Liabilities and shareholders' equity:           
Deposits: (4)
           
Interest-bearing demand accounts$384,937
 $371
 0.38% $427,777
 $416
 0.39%
Savings accounts221,446
 122
 0.22
 279,325
 198
 0.28
Money market accounts2,016,600
 7,129
 1.40
 1,919,412
 4,481
 0.92
Certificate accounts2,223,602
 13,093
 2.34
 1,483,665
 6,382
 1.71
Total interest-bearing deposits4,846,585
 20,715
 1.69
 4,110,179
 11,477
 1.11
Federal Home Loan Bank advances85,894
 593
 2.71
 838,569
 4,719
 2.20
Federal funds purchased and securities sold under agreements to repurchase6,930
 39
 2.22
 15,192
 83
 2.13
Other borrowings9,446
 83
 3.52
 4,892
 54
 4.34
Long-term debt125,574
 1,698
 5.37
 125,384
 1,695
 5.37
Total interest-bearing liabilities5,074,429
 23,128
 1.81
 5,094,216
 18,028
 1.40
Noninterest-bearing liabilities (4)
1,236,304
     1,265,251
    
Total liabilities6,310,733
     6,359,467
    
Temporary shareholders' equity2,378
     
    
Permanent shareholders' equity691,097
     760,446
    
Total liabilities and shareholders' equity$7,004,208
     $7,119,913
    
Net interest income (3)
  $48,435
     $52,358
  
Net interest spread    2.57%     2.91%
Impact of noninterest-bearing sources    0.39%     0.29%
Net interest margin    2.96%     3.20%
(1)The average balances of nonaccrual assets and related income, if any, are included in their respective categories.
(2)Includes loan balances that have been foreclosed and are now recorded in other real estate owned
(3)Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $458 thousand and $714 thousand for the three months ended September 30, 2019 and 2018, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(4)Includes average balances related to discontinued operations, which were impractical to remove for the periods presented. The net interest margin related to discontinued operations is immaterial.

70


 
 Nine Months Ended September 30,
 2019 2018
(in thousands)
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
            
Assets:           
Interest-earning assets: (1)
           
Cash and cash equivalents$68,554
 $667
 1.30% $77,228
 $620
 1.07%
Investment securities836,494
 16,691
 2.66
 916,685
 18,187
 2.65
Loans held for sale (4)
314,745
 10,283
 4.36
 507,207
 17,000
 4.47
Loans held for investment5,316,633
 192,307
 4.79
 4,809,007
 164,855
 4.54
Total interest-earning assets6,536,426
 219,948
 4.46
 6,310,127
 200,662
 4.22
Noninterest-earning assets (2) (4)
629,428
     674,909
    
Total assets$7,165,854
     $6,985,036
    
Liabilities and shareholders' equity:           
Deposits: (4)
           
Interest-bearing demand accounts$385,113
 $1,139
 0.40% $438,039
 $1,286
 0.39%
Savings accounts231,840
 410
 0.24
 288,146
 645
 0.30
Money market accounts1,990,481
 19,822
 1.33
 1,902,466
 11,992
 0.84
Certificate accounts1,846,537
 30,908
 2.24
 1,369,249
 15,225
 1.49
Total interest-bearing deposits4,453,971
 52,279
 1.57
 3,997,900
 29,148
 0.97
Federal Home Loan Bank advances501,989
 10,179
 2.67
 880,114
 13,138
 1.97
Federal funds purchased and securities sold under agreements to repurchase42,483
 805
 2.50
 9,288
 139
 1.97
Other borrowings9,123
 264
 3.86
 1,868
 62
 4.34
Long-term debt125,527
 5,167
 5.47
 125,337
 4,941
 5.24
Total interest-bearing liabilities5,133,093
 68,694
 1.78
 5,014,507
 47,428
 1.26
Noninterest-bearing liabilities (4)
1,304,546
     1,227,112
    
Total liabilities6,437,639
     6,241,619
    
Temporary shareholders' equity1,932
          
Permanent shareholders' equity726,283
     743,417
    
Total liabilities and shareholders' equity$7,165,854
     $6,985,036
    
Net interest income (3)
  $151,254
     $153,234
  
Net interest spread    2.68%     2.97%
Impact of noninterest-bearing sources    0.38
     0.25
Net interest margin    3.06%     3.22%

(1)The average balances of nonaccrual assets and related income, if any, are included in their respective categories.
(2)Includes loan balances that have been foreclosed and are now recorded in other real estate owned.
(3)Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.8 million and $2.1 million for the nine months ended September 30, 2019 and 2018, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(4)Includes average balances related to discontinued operations, which were impractical to remove for the periods presented. The net interest margin related to discontinued operations is immaterial.

Interest on Nonaccrual Loans

We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual status, we reverse the accrued but unpaid interest, which reduces interest income for the period in which the reversal occurs and we stop amortizing any net deferred fees (which are normally amortized over the life of the loan). Additionally, if interest is received on nonaccrual loans, the interest collected on the loan is recognized as an adjustment to the cost basis of the loan. The net decrease to interest income due to adjustments made for nonaccrual loans, including the effect of additional interest income that would have been recorded during the periods if the loans had been accruing, were $510 thousand and $1.7 million for the three and nine months ended September 30, 2019, respectively, and $319 thousand and $1.0 million for the three and nine months ended September 30, 2018, respectively.

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Net Income

Net income, which included both continuing and discontinued operations, increased in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily related to a reduction in noninterest expense from reduced salaries and commissions on lower closed loan volume, lower headcount, reductions in non-personnel costs from cost savings initiatives and the exit of our stand-alone home loan center-based mortgage business and $2.3 million of recoveries on restructuring costs and compensation related costs, net of tax. The increase is partially offset by a decline in mortgage servicing income related to the first quarter 2019 sales of single family mortgage servicing rights, a decline in single family net gain on mortgage loan sale and origination activities primarily from our HLC Business Sale and a reduction in net interest income.

Net income decreased in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to $18.3 million of loss on disposal and restructuring-related expenses, net of tax, taken in the nine months ended September 30, 2019 compared to $5.6 million in restructuring charges, net of tax, taken in the nine months ended September 30, 2018, a decline in mortgage servicing income related to the first quarter 2019 sales of single family mortgage servicing rights and a decline in single family net gain on mortgage loan sale and origination activities primarily from our HLC Business Sale. This decrease is partially offset by a reduction in noninterest expense from reduced salaries and commissions on lower closed loan volume, lower headcount, reductions in non-personnel costs from cost savings initiatives and our HLC Business Sale and $2.3 million of recoveries on restructuring costs and compensation related costs, net of tax.

Net Income from Continuing Operations

Net income from continuing operations increased in the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 primarily due to $2.7 million and $5.9 million after-tax, respectively, that was contributed by the Retained MB Business. Excluding this impact, the improvement relates to an increase in gain on loan origination and sale activities related to higher commercial loan sales volume and improved margin on commercial loans and an increase in servicing income.

Net Income from Discontinued Operations

Net income from discontinued operations was $162 thousand and a net loss of $21.1 million for the three and nine months ended September 30, 2019, respectively, compared to net income of $3.7 million and $10.8 million, respectively, for the three and nine months ended September 30, 2018.

The decrease in net income from discontinued operations in the three months ended September 30, 2019 was primarily due to the impact of the Retained MB Business, a reduction in single family mortgage loan origination and sale activities and related noninterest expense as we wind down the operations of our stand-alone home loan center-based mortgage business and lower servicing income due to the first quarter sales of mortgage servicing rights. Included in noninterest expense was $2.3 million of recoveries on prior period restructuring costs and compensation related cost, net of tax.

The decrease in net income from discontinued operations in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily due to an increase in restructuring and loss on disposal charges, the impact of the Retained MB Business, a reduction in single family mortgage net gain on loan origination and sale activities and related noninterest expense as we wind down the operations of our stand-alone home loan center-based mortgage business, and lower servicing income due to the first quarter sales of mortgage servicing rights This decrease was partially offset by reduced commissions on lower closed loan volume, savings associated with lower headcount and other savings related to our prior cost reduction initiatives.

Net Interest Income

Our profitability depends significantly on net interest income, which is the difference between income earned on our interest-earning assets, primarily loans and investment securities, and interest paid on interest-bearing liabilities. Our interest-bearing liabilities consist primarily of deposits and borrowed funds, including our outstanding trust preferred securities, senior unsecured notes and advances from the Federal Home Loan Bank ("FHLB").

Net interest income on a tax equivalent basis for the third quarter of 2019 was $48.4 million, a decrease of $3.9 million, or 7.5%, from the third quarter of 2018. Net interest income on a tax equivalent basis for the nine months ended September 30, 2019 was $151.3 million, a decrease of $2.0 million, or 1.3%, from the nine months ended September 30, 2018. The decreases from 2018 were primarily due to an increase in higher rate certificate of deposit balances and a decrease in interest income from lower loans held for sale as we closed out the pipeline of loans associated with our HLC Business Sale. This decrease was partially offset by a

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decrease in interest expense on FHLB advances due to a reduction in these advances and an increase in loans held for investment primarily due to organic growth.

The net interest margin on a tax equivalent basis for the third quarter of 2019 decreased to 2.96% from 3.20% for the same period in 2018. For the nine months ended September 30, 2019 net interest margin decreased to 3.06% from 3.22% for the same period in 2018. The decreases from 2018 were primarily due to a higher balance of high cost certificate of deposit accounts, partially offset by higher balances and yields on loans held for investment and a decrease in volume of FHLB advances.

For the three and nine months ended September 30, 2019, total average interest-earning assets decreased $19.2 million, or 0.3% from the three months ended September 30, 2018, and increased $226.3 million or 3.6% from the nine months ended September 30, 2018. The decrease for the three months is due to lower mortgage volume. The increase for the nine months ended September 30, 2018 is primarily the result of organic loan growth.

Total interest income of $71.6 million on a tax equivalent basis in the third quarter of 2019 increased $1.2 million, or 1.7%, from $70.4 million in the third quarter of 2018. For the nine months ended September 30, 2019 total interest income on a tax equivalent basis was $219.9 million, an increase of $19.3 million, or 9.6% from the same period in 2018. The increase was primarily the result of higher average balances of loans held for investment, which increased $332.5 million, or 6.7% and $507.6 million or 10.6% from the three and nine months ended September 30, 2018.

Total interest expense in the third quarter of 2019 increased $5.1 million, or 28.3% from $18.0 million in the third quarter of 2018. For the nine months ended September 30, 2019 total interest expense increased $21.3 million, or 44.8% from $47.4 million in the same period in 2018. The increases resulted from higher rates on interest-bearing deposits, FHLB advances and wholesale deposits including brokered CDs as market interest rates rise.


Provision for Credit Losses

Our provision for credit losses was zero and $1.5 million in the three and nine months ended September 30, 2019, respectively, compared to a provision for credit losses of $750 thousand and $2.5 million in the three and nine months ended September 30, 2018, respectively. The decrease in the provision for credit losses from the third quarter of 2018 was primarily due to a reduction in loan balances and net recoveries, and the decrease in provision from the nine months ended September 30, 2018 was primarily due to lower portfolio loan growth and continued net recoveries.

Net recoveries were $6 thousand in the third quarter of 2019 compared to net recoveries of $122 thousand in the same period in 2018. Net recoveries were $221 thousand in the first nine months of 2019 compared to net recoveries of $238 thousand in the first nine months of 2018. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 0.84% and 0.80% of loans held for investment at September 30, 2019 and September 30, 2018, respectively. Excluding loans acquired through business combinations, the allowance for loan losses was 0.89% of loans held for investment at September 30, 2019 compared to 0.84% at September 30, 2018.

For a more detailed discussion on our allowance for loan losses and related provision for loan losses, see Credit Risk Management within Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.


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Noninterest Income

Noninterest income from continuing operations consisted of the following.
 
 Three Months Ended September 30, Dollar
Change
 
Percent
Change
 Nine Months Ended September 30, Dollar
Change
 Percent
Change
(in thousands)2019 2018   2019 2018  
                
Noninterest income               
Gain on loan origination and sale activities$15,951
 $4,193
 $11,758
 280% $30,736
 $8,350
 $22,386
 268 %
Loan servicing income2,687
 954
 1,733
 182
 5,906
 2,799
 3,107
 111
Depositor and other retail banking fees2,079
 2,031
 48
 2
 5,848
 5,915
 (67) (1)
Insurance agency commissions603
 588
 15
 3
 1,801
 1,658
 143
 9
Gain (loss) on sale of investment securities available for sale(18) (4) (14) 350
 (128) 234
 (362) (155)
Other3,278
 2,888
 390
 14
 8,338
 7,195
 1,143
 16
Total noninterest income$24,580
 $10,650
 $13,930
 131% $52,501
 $26,151
 $26,350
 101 %


The increases in noninterest income in the three and nine months ended September 30, 2019 compared to the same periods in 2018 were primarily due to $11.3 million and $21.7 million, respectively, of noninterest income contributed by the Retained MB Business. Excluding this impact, noninterest income increased primarily due to an increase in net gain on loan origination and sale activities related to an increase in commercial loan sales volume and profit margin on those commercial loan sales.

The significant components of our noninterest income are described in greater detail as follows.


Gain on loan origination and sale activities consisted of the following.
 Three Months Ended September 30, Dollar
Change
 Percent
Change
 Nine Months Ended September 30, Dollar
Change
 Percent
Change
(in thousands)2019 2018   2019 2018  
                
Commercial$6,693
 $4,236
 $2,457
 58 % $12,179
 $8,481
 $3,698
 44 %
Single family (1)
9,628
 40,335
 (30,707) (76)% 78,612
 141,458
 (62,846) (44)%
Gain on loan origination and sale activities (2)
$16,321
 $44,571
 $(28,250) (63)% $90,791
 $149,939
 $(59,148) (39)%
 


(1) Includes $370 thousand and $40.4 million from discontinued operations for the three months ended September 30, 2019 and 2018, respectively, and $60.1 million and $142.0 million for the nine months ended 2019 and 2018, respectively.
(2) Includes loans originated as held for investment.

Loans Serviced for Others

(in thousands) Sept. 30, 2019 Dec. 31,
2018
     
Commercial $1,576,714
 $1,542,477
Single family (1)
 7,014,265
 20,151,735
Total loans serviced for others $8,590,979
 $21,694,212

(1)Includes both continuing and discontinued operations at December 31, 2018.


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Loan servicing income consisted of the following.
  Three Months Ended September 30,     Nine Months Ended September 30,    
(in thousands) 2019 2018 Dollar Change Percent
Change
 2019 2018 Dollar Change Percent
Change
                 
Commercial loan servicing income, net:                
Servicing fees and other $2,202
 $1,988
 $214
 11 % $6,804
 $5,946
 $858
 14 %
Amortization of capitalized MSRs (1,315) (1,034) (281) 27
 (3,793) (3,147) (646) 21
Commercial loan servicing income 887
 954
 (67) (7) 3,011
 2,799
 212
 8
                 
Single family servicing income, net:(4)
 

 

 
 

 

      
Servicing fees and other 5,252
 13,058
 (7,806) (60) 24,073
 45,936
 (21,863) (48)
Changes in fair value of single family MSRs due to amortization (1)
 (4,489) (8,300) 3,811
 (46) (16,894) (26,570) 9,676
 (36)
  763
 4,758
 (3,995) (84) 7,179
 19,366
 (12,187) (63)
Risk management, single family MSRs:(4)
                
Changes in fair value of MSR due to changes in model inputs and/or assumptions (2)(3)
 (7,501) 11,562
 (19,063) (165) (22,193) 52,880
 (75,073) (142)
Net gain (loss) from derivatives economically hedging MSR 9,040
 (9,446) 18,486
 (196) 19,917
 (52,611) 72,528
 (138)
  1,539
 2,116
 (577) (27) (2,276) 269
 (2,545) (946)
Single Family servicing income 2,302
 6,874
 (4,572) (67) 4,903
 19,635
 (14,732) (75)
Total loan servicing income $3,189
 $7,828
 $(4,639) (59)% $7,914
 $22,434
 $(14,520) (65)%
                 
  
(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.
(3)Includes pre-tax income of $333 thousand and pre-tax loss of $941 thousand, net of transaction costs, brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during the three and nine months ended September 30, 2019, respectively, and pre-tax income of $573 thousand for the nine months ended September 30, 2018.
(4)Includes both continuing and discontinued operations.

The decrease in loans serviced for others was primarily due to the sale of single family mortgages serviced for others with aggregate unpaid principal balance ("UPB") of $14.26 billion on March 29, 2019. Mortgage servicing fees collected in the three and nine months ended September 30, 2019 decreased compared to the same periods in 2018 primarily due to the sales of mortgage servicing rights. Our loans serviced for others portfolio was $8.59 billion at September 30, 2019 compared to $21.69 billion at December 31, 2018 and $21.33 billion at September 30, 2018.

The decreases in loan servicing income for the three and nine months ended September 30, 2019 compared to the same periods in 2018 were primarily due to a lower average UPB of loans serviced for others due to our sales of single family mortgage servicing rights and lower risk management fees.

MSR risk management results represent changes in the fair value of single family MSRs due to changes in model inputs and assumptions net of the gain/(loss) from derivatives economically hedging MSRs. The fair value of MSRs is sensitive to changes in interest rates, primarily due to the effect on prepayment speeds. MSRs typically increase in value when interest rates rise because rising interest rates tend to decrease mortgage prepayment speeds, and therefore increase the expected life of the net servicing cash flows of the MSR asset. Certain other changes in MSR fair value relate to factors other than interest rate changes and are generally not within the scope of the Company's MSR economic hedging strategy. These factors may include but are not limited to the impact of changes to the housing price index, prepayment model assumptions, the level of home sales activity, changes to mortgage spreads, valuation discount rates, costs to service and policy changes by U.S. government agencies.

Depositor and other retail banking fees for the three months ended September 30, 2019 increased compared to the three months ended September 30, 2018 primarily due to an increase in the number of transaction accounts from which we generate fee

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income. Depositor and other retail banking fees decreased for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to refunding the overpayment of certain consumer overdraft fees.

The following table presents the composition of depositor and other retail banking fees for the periods indicated.
 
 Three Months Ended September 30, Dollar
Change
 Percent
Change
 Nine Months Ended September 30, Dollar
Change
 Percent
Change
(in thousands)2019 2018   2019 2018  
                
Fees:               
Monthly maintenance and deposit-related fees$881
 $873
 $8
 1 % $2,405
 $2,471
 $(66) (3)%
Debit Card/ATM fees1,129
 1,094
 35
 3
 3,256
 3,260
 (4) 
Other fees69
 71
 (2) (3) 195
 205
 (10) (5)
Total depositor and other retail banking fees$2,079
 $2,038
 $41
 2 % $5,856
 $5,936
 $(80) (1)%

Noninterest Expense

Noninterest expense from continuing operations consisted of the following.
 Three Months Ended September 30, 
Dollar 
Change
 
Percent
Change
 Nine Months Ended September 30, 
Dollar 
Change
 
Percent
Change
(in thousands)2019 2018   2019 2018  
                
Noninterest expense               
Salaries and related costs$32,793
 $25,183
 $7,610
 30 % $92,311
 $79,393
 $12,918
 16 %
General and administrative9,539
 8,591
 948
 11
 25,565
 25,658
 (93) 
Amortization of core deposit intangibles429
 406
 23
 6
 1,223
 1,219
 4
 
Legal594
 873
 (279) (32) 2,214
 2,393
 (179) (7)
Consulting866
 426
 440
 103
 3,161
 1,723
 1,438
 83
Federal Deposit Insurance Corporation assessments(694) 880
 (1,574) (179) 960
 2,739
 (1,779) (65)
Occupancy4,856
 4,548
 308
 7
 15,650
 13,531
 2,119
 16
Information services7,325
 7,005
 320
 5
 21,361
 20,782
 579
 3
Net cost (benefit) of operation and sale of other real estate owned13
 2
 11
 550
 (46) (89) 43
 (48)
Total noninterest expense$55,721
 $47,914
 $7,807
 16 % $162,399
 $147,349
 $15,050
 10 %

The increase in noninterest expense in the three and nine months ended September 30, 2019 compared to the same periods in 2018 was primarily due to $9.3 million and $16.9 million, respectively, of expenses contributed by the Retained MB Business. Excluding this contribution, noninterest expense decreased in both periods primarily due to a $1.7 million FDIC assessment credit recognized in the third quarter of 2019.

Income Tax Expense

Our effective income tax rate of 14.6% and 13.6% in the three and nine months ended September 30, 2019, respectively, differed from the Federal blended state statutory tax rate of 23.6% primarily due to the benefit we received from tax-exempt interest income and its proportion to total net income.

Review of Financial Condition - Comparison of September 30, 2019 to December 31, 2018

Total assets were $6.84 billion at September 30, 2019 compared to $7.04 billion at December 31, 2018, an increase of $206.3 million, or 2.9%.


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Cash and cash equivalents were $74.8 million at September 30, 2019 compared to $58.0 million at December 31, 2018, an increase of $16.8 million, or 29.0%.

Investment securities were $866.7 million at September 30, 2019 compared to $923.3 million at December 31, 2018, a decrease of $56.5 million, or 6.1%.

We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of interest income. We designated the majority of these securities as available for sale. We designated securities having a carrying value of $4.4 million at September 30, 2019 as held to maturity.

The following table details the composition of our investment securities available for sale by dollar amount and as a percentage of the total available for sale securities portfolio.
 
 At September 30, 2019 At December 31, 2018
(in thousands)Fair Value Percent Fair Value Percent
        
Investment securities available for sale:       
Mortgage-backed securities:       
Residential$109,581
 13% $107,961
 13%
Commercial29,836
 3
 34,514
 4
Collateralized mortgage obligations:       
Residential187,989
 22
 166,744
 20
Commercial109,543
 13
 116,674
 14
Municipal bonds380,093
 44
 385,655
 45
Corporate debt securities18,767
 2
 19,995
 2
U.S. Treasury securities1,309
 
 10,900
 1
Agency debentures25,221
 3
 9,525
 1
Total investment securities available for sale$862,339
 100% $851,968
 100%
 
Loans held for sale were $173.0 million at September 30, 2019 compared to $77.3 million at December 31, 2018, an increase of $95.6 million, or 123.7%. Loans held for sale primarily include single family residential loans, typically sold within 30 days of closing the loan, and multi-family loans. The increase in the loans held for sale balance was primarily due to an increase in commercial loans.


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The following table details the composition of our loans held for investment, net portfolio by dollar amount and as a percentage of our total loan portfolio. 
 At September 30, 2019 At December 31, 2018
(in thousands)Amount Percent Amount Percent
        
Consumer loans:       
Single family (1)
$1,188,159
 23% $1,358,175
 27%
Home equity and other567,791
 11
 570,923
 11
 1,755,950
 34
 1,929,098
 38
Commercial real estate loans:       
Non-owner occupied commercial real estate794,863
 15
 701,928
 14
Multifamily920,279
 18
 908,015
 18
Construction/land development762,332
 15
 794,544
 16
 2,477,474
 48
 2,404,487
 48
Commercial and industrial loans:       
Owner occupied commercial real estate476,650
 9
 429,158
 8
Commercial business446,739
 9
 331,004
 6
 923,389
 18
 760,162
 14
Total loans before allowance, net deferred loan fees and costs5,156,813
 100% 5,093,747
 100%
Net deferred loan fees and costs25,732
   23,094
  
 5,182,545
   5,116,841
  
Allowance for loan losses(43,437)   (41,470)  
 $5,139,108
   $5,075,371
  
 
(1)Includes $5.3 million and $4.1 million at September 30, 2019 and December 31, 2018, 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 value recognized in the consolidated statements of operations.

Loans held for investment, net increased $63.7 million, or 1.3%, from December 31, 2018. Included in the increase were $86.4 million of acquired commercial and industrial loans and $23.5 million of acquired non-owner occupied commercial real estate loans. During the quarter, new commitments totaled $495.4 million and included $64.9 million of consumer loans, $35.7 million of non-owner occupied commercial real estate loans, $162.0 million of multifamily permanent loans, $61.9 million of commercial and industrial loans and $170.9 million of construction loans. New commitments for construction loans included $113.2 million in residential construction and $57.7 million in single family custom home construction.

Mortgage servicing rights from continuing operations were $90.6 million at September 30, 2019 compared to $103.4 million at December 31, 2018, a decrease of $12.8 million, or 12.3%. The decrease primarily relates to a decline in single family fair value related to a decline in interest rates.

Federal Home Loan Bank stock was $8.8 million at September 30, 2019 compared to $45.5 million at December 31, 2018, a decrease of $36.7 million, or 80.7% due to lower outstanding advances. FHLB stock is carried at par value and can only be purchased or redeemed at par value in transactions between the FHLB and its member institutions. Cash dividends received on FHLB stock are reported in other income.

Other assets were $187.3 million at September 30, 2019, compared to $171.3 million at December 31, 2018, an increase of $16.0 million, or 9.4%.


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Deposit balances were as follows for the periods indicated:

(in thousands) At September 30, 2019 At December 31, 2018
  Amount Percent Amount Percent
         
Noninterest-bearing accounts - checking and savings $698,714
 12% $612,540
 12%
Interest-bearing transaction and savings deposits:        
NOW accounts 421,750
 7
 376,137
 8
Statement savings accounts due on demand 220,401
 4
 245,795
 5
Money market accounts due on demand 2,073,907
 36
 1,935,516
 38
Total interest-bearing transaction and savings deposits 2,716,058
 47
 2,557,448
 51
Total transaction and savings deposits 3,414,772
 59
 3,169,988
 63
Certificates of deposit 2,135,869
 37
 1,579,806
 31
Noninterest-bearing accounts - other(1)
 253,666
 4
 301,614
 6
Total deposits $5,804,307
 100% $5,051,408
 100%

(1)Includes zero and $162.8 million in servicing deposits related to discontinued operations for the periods ended September 30, 2019 and December 31, 2018, respectively.

 
Deposits at September 30, 2019 increased $752.9 million, or 14.9%, from December 31, 2018. The increase in deposits from December 31, 2018 was a result of competitive rates offered on consumer time deposits, with an increase of $550.5 million, and money markets, with an increase of $132.1 million. The increase also included $74.5 million in deposits related to the acquisition of a retail deposit branch in San Marcos, San Diego County, California from Silvergate Bank, which was completed in the first quarter of 2019, including $42.7 million of noninterest-bearing accounts and $31.8 million of money market and savings accounts. In addition, the increase also included approximately $42 million in institutional CDs generated during the second quarter of 2019. Consumer deposit growth can be sensitive to changes in interest rates, therefore, the Company continues to actively monitor the adequacy of its offered deposit rates.

The aggregate amount of time deposits in denominations of more than $250 thousand at September 30, 2019 and December 31, 2018 was $231.2 million and $85.3 million, respectively. There were $739.0 million and $786.1 million of brokered deposits at September 30, 2019 and December 31, 2018, respectively.

Federal Home Loan Bank advances were $5.6 million at September 30, 2019 compared to $932.6 million at December 31, 2018. We use these borrowings primarily to fund single family loans held for sale and secondarily to fund our investment securities activities. The reduction in advances was largely due to an increase in brokered deposits as well as other deposits and the contraction of the balance sheet, which reduced our reliance on wholesale borrowings.


Shareholders' Equity

Shareholders' equity was $691.1 million at September 30, 2019 compared to $739.5 million at December 31, 2018. This decrease was primarily related to share repurchases of $81.1 million during the nine months ended September 30, 2019, partially offset by other comprehensive income of $25.5 million and net income of $6.5 million. Other comprehensive income (loss) represents unrealized gains and losses, net of tax in the valuation of our available for sale investment securities portfolio at September 30, 2019.

Shareholders' equity, on a per share basis, was $28.32 per share at September 30, 2019, compared to $27.39 per share at December 31, 2018.


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Return on Equity and Assets

The following table presents certain information regarding our returns on average equity and average total assets.
 
 At or For the Three Months Ended September 30, At or For the Nine Months Ended September 30,
 2019 2018 2019 2018
        
Return on assets (1)(4)
0.79% 0.66% 0.12% 0.47%
Return on equity (2)(4)
7.98% 6.23
 1.19% 4.45
Equity to assets ratio (3)
9.90% 10.68
 10.16% 10.64
(1)Net income divided by average total assets.
(2)Net income divided by average common shareholders' equity.
(3)Average equity divided by average total assets.
(4)Net income includes both continuing and discontinued operations.

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.

For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the Off-Balance Sheet Arrangements and Commitments, Guarantees and Contingencies discussions within Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K, as well as Note 13, Commitments, Guarantees and Contingencies in our 2018 Annual Report on Form 10-K and Note 8, Commitments, Guarantees and Contingencies in this Quarterly Report on Form 10-Q.

Enterprise Risk Management

Like many financial institutions, we manage and control a variety of business and financial risks that can significantly affect our financial performance. Among these risks are credit risk; market risk, which includes interest rate risk and price risk; liquidity risk; and operational risk. We are also subject to risks associated with compliance/legal, strategic and reputational matters.
For more information on how we manage these business, financial and other risks, see the discussion in "Enterprise Risk Management" within Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.
Credit Risk Management

The following discussion highlights developments since December 31, 2018 and should be read in conjunction with the "Credit Risk Management" within Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.

Asset Quality and Nonperforming Assets

Credit quality remained strong with nonperforming assets remaining low at $14.2 million, or 0.21% of total assets, at September 30, 2019, compared to $12.1 million, or 0.17% of total assets, at December 31, 2018. The deterioration from December 31, 2018 was primarily due to an increase in commercial nonperforming loans.

Nonaccrual loans were $12.4 million, or 0.24% of total loans, at September 30, 2019, an increase of $814 thousand, or 7.0%, from $11.6 million, or 0.23% of total loans, at December 31, 2018. Delinquency rates (excluding FHA/VA insured and guaranteed portion of SBA loans) were 0.28% at September 30, 2019 compared to 0.26% at December 31, 2018; the increase was primarily related to increased commercial loan delinquencies.  

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Net recoveries for the three months ended September 30, 2019 were $6 thousand and net recoveries for the nine months ended September 30, 2019 were $221 thousand compared to net recoveries of $122 thousand and $238 thousand for the three and nine months ended September 30, 2018.

At September 30, 2019, our loans held for investment portfolio, net of the allowance for loan losses, was $5.14 billion, an increase of $63.7 million from December 31, 2018. The allowance for loan losses was $43.4 million, or 0.84% of loans held for investment, compared to $41.5 million, or 0.81% of loans held for investment, at December 31, 2018.

We recorded a provision for credit losses of zero and $1.5 million for the three and nine months ended September 30, 2019, respectively, compared to a provision for credit losses of $750 thousand and $2.5 million for the three and nine months ended September 30, 2018, respectively. Management considers the current level of the allowance for loan losses to be appropriate to cover estimated losses inherent within our loans held for investment portfolio.

For information regarding the activity on our allowance for credit losses, which includes the reserves for unfunded commitments, and the amounts that were collectively and individually evaluated for impairment, see Part I, Item 1 Notes to Interim Consolidated Financial Statements—Note 4, Loans and Credit Quality, of this Quarterly Report on Form 10-Q.

The following tables present the recorded investment, unpaid principal balance and related allowance for impaired loans, broken down by those with and those without a specific reserve.
 At September 30, 2019
(in thousands)
Recorded
Investment
 
Unpaid Principal
Balance (2)
 
Related
Allowance
      
Impaired loans:     
Loans with no related allowance recorded$70,379
(1) 
$71,563
 $
Loans with an allowance recorded2,502
 2,533
 129
Total$72,881
(1) 
$74,096
 $129
 
 At December 31, 2018
(in thousands)
Recorded
Investment
 
Unpaid Principal
Balance (2)
 
Related
Allowance
      
Impaired loans:     
Loans with no related allowance recorded$71,237
(1) 
$73,113
 $
Loans with an allowance recorded1,847
 1,847
 233
Total$73,084
(1) 
$74,960
 $233

(1)Includes $63.8 million and $65.8 million in single family performing troubled debt restructurings ("TDRs") at September 30, 2019 and December 31, 2018, respectively.
(2)Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.

The Company had 330 impaired loan relationships totaling $72.9 million at September 30, 2019 and 349 impaired loan relationships totaling $73.1 million at December 31, 2018. Included in the total impaired loan amounts were 307 single family TDR loan relationships totaling $65.8 million at September 30, 2019 and 320 single family TDR loan relationships totaling $67.6 million at December 31, 2018. At September 30, 2019, there were 300 single family impaired loan relationships totaling $63.8 million that were performing per their current contractual terms. Additionally, the impaired loan balance, at September 30, 2019, included $52.7 million of loans insured by the FHA or guaranteed by the VA. The average recorded investment in these loans for the three and nine months ended September 30, 2019 was $73.4 million and $76.2 million compared to $72.5 million and $76.5 million for the three and nine months ended September 30, 2018. Impaired loans of $2.5 million and $1.8 million had a valuation allowance of $129 thousand and $233 thousand at September 30, 2019 and December 31, 2018, respectively.

The allowance for credit losses represents management's estimate of the incurred credit losses inherent within our loan
portfolio. For further discussion related to credit policies and estimates see "Critical Accounting Policies and Estimates —

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Allowance for Loan Losses" within Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2018 Annual Report on Form 10-K.

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The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.

 At September 30, 2019 At December 31, 2018
(in thousands)Amount 
Percent of
Allowance
to Total
Allowance
 
Loan
Category
as a % of
Total Loans (1)
 Amount 
Percent of
Allowance
to Total
Allowance
 
Loan
Category
as a % of
Total Loans
(1)
            
Consumer loans           
Single family$7,220
 16% 23% $8,217
 19% 27%
Home equity and other7,485
 17
 11
 7,712
 18
 11
 14,705
 33
 34
 15,929
 37
 38
Commercial real estate loans           
Non-owner occupied commercial real estate6,481
 14
 15
 5,496
 13
 14
Multifamily6,690
 15
 18
 5,754
 13
 18
Construction/land development9,807
 22
 15
 9,539
 22
 16
 22,978
 51
 48
 20,789
 48
 48
Commercial and industrial loans           
Owner occupied commercial real estate3,601
 8
 9
 3,282
 8
 8
Commercial business3,350
 8
 9
 2,913
 7
 6
 6,951
 16
 18
 6,195
 15
 14
Total allowance for credit losses$44,634
 100% 100% $42,913
 100% 100%
(1)Excludes loans held for investment balances that are carried at fair value.


The following tables present the composition of TDRs by accrual and nonaccrual status.
 
 At September 30, 2019
(in thousands)Accrual Nonaccrual Total
      
Consumer     
Single family (1)
$63,802
 $2,019
 $65,821
Home equity and other925
 114
 1,039
 64,727
 2,133
 66,860
Commercial and industrial loans     
Commercial business50
 222
 272
 50
 222
 272
 $64,777
 $2,355
 $67,132
(1)Includes loan balances insured by the FHA or guaranteed by the VA of $52.7 million at September 30, 2019.


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 At December 31, 2018
(in thousands)Accrual Nonaccrual Total
      
Consumer     
Single family (1)
$65,835
 $1,740
 $67,575
Home equity and other1,237
 
 1,237
 67,072
 1,740
 68,812
Commercial real estate loans     
Multifamily492
 
 492
Construction/land development726
 
 726
 1,218
 
 1,218
Commercial and industrial loans     
Owner occupied commercial real estate846
 
 846
Commercial business103
 164
 267
 949
 164
 1,113
 $69,239
 $1,904
 $71,143
(1)Includes loan balances insured by the FHA or guaranteed by the VA of $52.4 million at December 31, 2018.

The Company had 324 loan relationships classified as TDRs totaling $67.1 million at September 30, 2019 with no related unfunded commitments. The Company had 343 loan relationships classified as TDRs totaling $71.1 million at December 31, 2018 with $15 thousand in related unfunded commitments. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above.

Delinquent loans and other real estate owned by loan type consisted of the following.
 
 At September 30, 2019
(in thousands)
30-59 Days
Past Due
 
60-89 Days
Past Due
 Nonaccrual 
90 Days or 
More Past Due and Accruing
 
Total
Past Due
Loans
 
Other
Real Estate
Owned