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HMST HomeStreet

Filed: 8 May 20, 2:38pm
0001518715 us-gaap:FairValueInputsLevel1Member us-gaap:FairValueMeasurementsRecurringMember us-gaap:CorporateDebtSecuritiesMember 2019-12-31
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: March 31, 2020
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 May 5, 2020 was 23,395,938.6.
 





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) March 31,
2020
 December 31,
2019
     
ASSETS    
Cash and cash equivalents (includes interest-earning instruments of $40,041 and $28,489) $72,441
 $57,880
Investment securities (includes $1,054,145 and $938,778 carried at fair value) 1,058,492
 943,150
Loans held for sale (includes $138,095 and $79,335 carried at fair value) 140,527
 208,177
Loans held for investment (net of allowance for credit losses of $58,299 and $41,772; includes $4,926 and $3,468 carried at fair value) 5,034,930
 5,072,784
Mortgage servicing rights (includes $49,933 and $68,109 carried at fair value) 80,053
 97,603
Other real estate owned 1,343
 1,393
Federal Home Loan Bank stock, at cost 26,795
 22,399
Premises and equipment, net 74,698
 76,973
Lease right-of-use assets 91,375
 94,873
Goodwill 28,492
 28,492
Other assets 197,572
 180,083
Assets of discontinued operations 
 28,628
Total assets $6,806,718
 $6,812,435
LIABILITIES AND SHAREHOLDERS' EQUITY    
Liabilities:    
Deposits $5,257,057
 $5,339,959
Federal Home Loan Bank advances 463,590
 346,590
Accounts payable and other liabilities 78,959
 79,818
Federal funds purchased and securities sold under agreements to repurchase 
 125,000
Other borrowings 95,000
 
Long-term debt 125,697
 125,650
Lease liabilities 109,101
 113,092
Liabilities of discontinued operations 
 2,603
Total liabilities 6,129,404
 6,132,712
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, 23,376,793 shares and 23,890,855 shares 511
 511
Additional paid-in capital 293,791
 300,218
Retained earnings 365,283
 374,673
Accumulated other comprehensive income 17,729
 4,321
Total shareholders' equity 677,314
 679,723
Total liabilities and shareholders' equity $6,806,718
 $6,812,435

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

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended March 31, 
(in thousands, except share data)2020 2019 
Interest income:    
Loans$59,114
 $62,931
 
Investment securities4,387
 5,564
 
Other248
 188
 
 63,749
 68,683
 
Interest expense:    
Deposits14,783
 14,312
 
Federal Home Loan Bank advances1,310
 4,642
 
Federal funds purchased and securities sold under agreements to repurchase458
 304
 
Long-term debt1,590
 1,744
 
Other174
 124
 
 18,315
 21,126
 
Net interest income45,434
 47,557
 
Provision for credit losses14,000
 1,500
 
Net interest income after provision for credit losses31,434
 46,057
 
Noninterest income:    
Net gain on loan origination and sale activities22,541
 2,607
 
Loan servicing income5,607
 1,043
 
Depositor and other retail banking fees1,890
 1,745
 
Insurance agency commissions406
 625
 
Gain (loss) on sale of investment securities available for sale, net112
 (247) 
Other2,074
 2,319
 
 32,630
 8,092
 
Noninterest expense:    
Salaries and related costs32,043
 25,279
 
General and administrative7,966
 8,182
 
Amortization of core deposit intangibles345
 333
 
Legal610
 (204) 
Consulting934
 1,408
 
Federal Deposit Insurance Corporation assessments771
 821
 
Occupancy5,521
 4,968
 
Information services6,942
 7,088
 
Net cost (benefit) from operation and sale of other real estate owned52
 (29) 
 55,184
 47,846
 
Income from continuing operations before income taxes8,880
 6,303
 
Income tax expense from continuing operations1,741
 1,245
 
Income from continuing operations7,139
 5,058
 
Loss from discontinued operations before income taxes (includes net loss on disposal of $12,224 for the three months ended March 31, 2019)
 (8,440) 
Income tax benefit from discontinued operations
 (1,667) 
Income (loss) from discontinued operations
 (6,773) 
NET INCOME (LOSS)$7,139
 $(1,715) 
Basic earnings per common share:    
Income from continuing operations$0.30
 $0.19
 
Income (loss) from discontinued operations
 (0.25) 
Basic earnings per share$0.30
 $(0.06) 
     
Diluted earnings per common share    
  Income from continuing operations$0.30
 $0.19
 
Income (loss) from discontinued operations
 (0.25) 
Diluted earnings per share$0.30
 $(0.06) 
Basic weighted average number of shares outstanding23,688,930
 27,021,507
 
Diluted weighted average number of shares outstanding23,860,280
 27,185,175
 

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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Net income (loss)$7,139
 $(1,715) 
Other comprehensive income (loss), net of tax:    
Unrealized gain (loss) on investment securities available for sale:    
Unrealized holding gain arising during the year, net of tax expense of $3,587 and $2,50213,496
 9,969
 
Reclassification adjustment for net (gains) losses included in net income, net of tax expense (benefit) of $24 and $(52)(88) 195
 
Other comprehensive income13,408
 10,164
 
Comprehensive income$20,547
 $8,449
 

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
            
For the three months ended March 31, 2019           
Balance, December 31, 201826,995,348
 $511
 $342,439
 $412,009
 $(15,439) $739,520
Cumulative effect of adoption of new accounting standards
 
 
 1,532
 (2,080) (548)
Net loss
 
 
 (1,715) 
 (1,715)
Common stock issued42,909
 
 62
 
 
 62
Share-based compensation recovery
 
 (452) 
 
 (452)
Other comprehensive income
 
 
 
 10,164
 10,164
Balance, March 31, 201927,038,257
 $511
 $342,049
 $411,826
 $(7,355) $747,031
           

For the three months ended March 31, 2020           
Balance, December 31, 201923,890,855
 $511
 $300,218
 $374,673
 $4,321
 $679,723
Cumulative effect of adoption of ASC 326
 
 
 (3,740) 
 (3,740)
Net income
 
 
 7,139
 
 7,139
Dividends declared on common stock ($0.15 per share)
 
 
 (3,574) 
 (3,574)
Common stock issued89,507
 
 664
 
 
 664
Share-based compensation expense
 
 426
 
 
 426
Other comprehensive income
 
 
 
 13,408
 13,408
Common stock repurchased and retired(603,569) 
 (7,517) (9,215) 
 (16,732)
Balance, March 31, 202023,376,793
 $511
 $293,791
 $365,283
 $17,729
 $677,314
            

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

7


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

 
 Three Months Ended March 31,
(in thousands)2020 2019
    
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income (loss)$7,139
 $(1,715)
Adjustments to reconcile net income to net cash used in operating activities:   
Depreciation, amortization and accretion10,343
 9,883
Provision for credit losses14,000
 1,500
Net fair value adjustment and gain on sale of loans held for sale(10,430) (25,560)
Gain on sale of mortgage servicing rights, gross
 (6,206)
Loss on sale of HLC mortgage origination assets, net144
 
Fair value adjustment of loans held for investment(55) (85)
Origination of mortgage servicing rights(4,119) (7,916)
Change in fair value of mortgage servicing rights20,338
 14,260
Net (gain) loss on sale of investment securities(112) 247
Net gain on sale of loans originated as held for investment(1,864) (1,613)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned51
 (64)
Loss on disposal of fixed assets1
 
Loss on lease abandonment and exit costs627
 11,425
Change in deferred income taxes(7,031) (40,515)
Share-based compensation expense477
 (390)
Origination of loans held for sale(378,996) (1,036,635)
Proceeds from sale of loans originated as held for sale358,839
 1,047,718
Changes in operating assets and liabilities:   
(Increase) decrease in accounts receivable and other assets(17,074) 3,077
(Decrease) increase in accounts payable and other liabilities(2,920) 20,372
Decrease in lease liability(3,396) 
Net cash used in operating activities(14,038) (12,217)
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchase of investment securities(166,533) (6,683)
Proceeds from sale of investment securities33,792
 94,998
Principal repayments and maturities of investment securities34,605
 28,022
Proceeds from sale of other real estate owned
 518
Proceeds from sale of loans originated as held for investment244,725
 148,585
Proceeds from sale of mortgage servicing rights66
 1,052
Net cash provided by disposal of discontinued operations1,398
 166,250
Origination of loans held for investment and principal repayments, net(98,023) (337,197)
Purchase of property and equipment(1,002) (638)
Net cash used for acquisitions
 (32,554)
Net cash provided by investing activities49,028
 62,353

8


 Three Months Ended March 31,
(in thousands)2020 2019
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
(Decrease) increase in deposits, net(82,936) 271,459
Proceeds from Federal Home Loan Bank advances3,943,000
 2,224,300
Repayment of Federal Home Loan Bank advances(3,826,000) (2,557,300)
Proceeds from federal funds purchased and securities sold under agreements to repurchase8,173,000
 2,967,000
Repayment of federal funds purchased and securities sold under agreements to repurchase(8,298,000) (2,959,000)
Proceeds from other borrowings255,000
 
Repayment of other borrowings(160,000) 
Repayment of lease principal(285) (455)
Proceeds from Federal Home Loan Bank stock repurchase57,877
 48,632
Purchase of Federal Home Loan Bank stock(62,273) (35,668)
Repurchase of common stock(16,476) 
Proceeds from stock issuance, net238
 
Dividends paid on common stock(3,574) 
Net cash used in financing activities(20,429) (41,032)
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH14,561
 9,104
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:   
Cash, cash equivalents and restricted cash, beginning of year57,880
 58,586
Cash, cash equivalents and restricted cash, end of period72,441
 67,690
Less: restricted cash included in other assets
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$72,441

$67,690
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:   
Cash paid during the period for:   
Interest paid$17,876
 $22,563
Federal and state income taxes paid, net
 (7,387)
Non-cash activities:   
Loans held for investment foreclosed and transferred to other real estate owned
 180
Loans transferred from held for investment to held for sale120,530
 153,794
Loans transferred from held for sale to held for investment2,087
 3,867
Ginnie Mae loans (derecognized) recognized with the right to repurchase, net(298) (27,278)
Receivable from sale of mortgage servicing rights
 18,315
Acquisition:   
Assets acquired
 115,038
Liabilities assumed
 74,942
Goodwill
 7,293

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 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 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.

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, 2019, filed with the Securities and Exchange Commission ("2019 Annual Report on Form 10-K").

Risks and Uncertainties

The worldwide spread of coronavirus (“COVID-19”) has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

Share Repurchase Program

In the first quarter of 2020, the Board authorized 2 share repurchase programs pursuant to which the Company could purchase up to $35 million of its issued and outstanding common stock, no par value, at prevailing market rates at the time of such purchase. In March 2020, due to the COVID-19 pandemic, the Company suspended or withdrew these share repurchase programs.

Prior to the suspension of these programs, there were repurchases of 580,278 shares of our common stock at an average price of $27.57 per share in the three months ended March 31, 2020.


10


Recent Accounting Developments

In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU No 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

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. The Company adopted ASU No. 2018-13 on January 1, 2020 and it did 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. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 on January 1, 2020 and it did not impact our consolidated financial statements.

On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology ("ALLL") with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. The measurement of the expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities ("AFS") by adjusting the factors in evaluating whether an AFS investment in a debt security is impaired and to accelerate the timing of when impairment losses would be recorded.
The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet ("OBS") credit exposure. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP, ASC 450-20. The Company recorded a decrease of $3.7 million to the beginning balance of retained earnings on January 1, 2020 for the cumulative effect of adopting this guidance.
The Company adopted ASU 2016-13 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2020. As a result, the amortized cost basis remains the same before and after the effective date of this guidance. The effective interest rate on the debt securities was not changed.
The following table illustrates the impact of the adoption of CECL on January 1, 2020.

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(in thousands) As reported under ASC 450-20 Impact of ASC 326 adoption As reported under ASC 326
Assets (1)
      
Loans held for investment      
Consumer loans      
Single family $6,450
 $468
 $6,918
Home equity and other 6,233
 4,635
 10,868
Total consumer loans 12,683
 5,103
 17,786
Commercial real estate loans      
Non-owner occupied commercial real estate 7,245
 (3,392) 3,853
Multifamily 7,015
 (2,977) 4,038
Construction/land development      
Multifamily construction 2,848
 693
 3,541
Commercial real estate construction 624
 (115) 509
Single family construction 3,800
 4,280
 8,080
Single family construction to permanent 1,003
 200
 1,203
Total commercial real estate loans 22,535
 (1,311) 21,224
Commercial and industrial loans      
Owner occupied commercial real estate 3,639
 (2,459) 1,180
Commercial business 2,915
 510
 3,425
Total commercial and industrial loans 6,554
 (1,949) 4,605
Total allowance for credit losses on loans held for investment 41,772
 1,843
 43,615
       
Liabilities      
Allowance for credit losses on unfunded loan commitments 1,065
 1,897
 2,962
Total allowance for credit losses including unfunded commitments $42,837
 $3,740
 $46,577
       
(1) There was no impact from the adoption of this standard for either held to maturity ("HTM") securities or AFS investments as the adoption of this standard did not have a material impact on the measurement of credit losses for these assets.

The following accounting policies have been updated to reflect the adoption of CECL.

Loans Held for Investment
Loans held for investment are loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, net of the allowance for credit losses.
Amortized cost is the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Accrued interest receivable was reported in Other Assets in Consolidated Statements of Financial Condition, and the Bank has elected to exclude evaluation of accrued interest receivable from the allowance for credit losses.
Deferred fees and costs and premiums and discounts are amortized into interest income over the contractual terms of the underlying loans using the constant effective yield (the interest method) or straight-line method.
A determination is made as of the loan commitment date as to whether a loan will be held for sale or held for investment. This determination is based primarily on the type of loan or loan program and its related profitability characteristics. When a loan is designated as held for investment, the intent is to hold these loans for the foreseeable future or until maturity or pay-off. If subsequent changes occur, the Company may change its intent to hold these loans. Once a determination has been made to sell

12


such loans, they are immediately transferred to loans held for sale. Only HFI loans are subject to the allowance for credit losses. HFS loans that are not fair value option are carried at the lower of cost or market value.
Past Due Loans
Management reports loans as past due when the payment is 30 days or more past due from the required payment date at month-end.

Nonaccrual Loans
Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off.
All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost recovery method, all cash collected is applied to first reduce the principal balance. A loan may be returned to accrual status if all delinquent principal and interest payments are brought current and the collectability of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans that are well-secured and in the process of collection are maintained on accrual status, even if they are 90 days or more past due. Loans whose repayments are insured by the Federal Housing Administration ("FHA") or guaranteed by the Department of Veterans' Affairs ("VA") are maintained on accrual status even if 90 days or more past due.
Troubled Debt Restructurings
A loan is accounted for and reported as a troubled debt restructuring ("TDR") when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not otherwise consider. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt's original contractual maturity or original expected duration.
TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR irrespective of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan will not be designated as a TDR.
Allowance for Credit Losses for Loans Held for Investment
The allowance for credit losses ("ACL") for loans held for investment is a valuation account that is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the non-collectability of a loan balance is confirmed. Expected recoveries may not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance for credit losses for loans held for investment, as reported in our consolidated statements of financial condition, is adjusted by a provision for credit losses, which is reported in earnings, and reduced by the charge-offs of loan amounts, net of recoveries.
Management estimates the ACL balance using relevant available information, from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix or delinquency levels or other relevant factors, see Loans that Share Similar Risk Characteristics with Other Loans for more detail.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of its two loan portfolio segments, the consumer loan portfolio segment and the commercial loan portfolio segment. These two segments are further disaggregated into loan pools, the level at which credit risk is monitored. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance for credit losses is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, based on the factors

13


and forecasts then prevailing, may result in material changes in the allowance for credit losses and provision for credit losses in those future periods.
Credit Loss Measurement
The allowance level is influenced by current conditions related to loan volumes, loan asset quality ratings ("AQR") migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses has two basic components: first, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics and second an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans.
Loans that Share Similar Risk Characteristics with Other Loans
In estimating the component of the ACL, for loans that share similar risk characteristics with other loans, such loans are segregated into loan pools. Loans are designated into loan pools based on similar risk characteristics, like product types or areas of risk concentration.
The Company's ACL model methodology is to build a reserve rate using historical life of loan default rates combined with assessments of current loan portfolio information and forecasted economic environment and business cycle information. The model uses statistical analysis to determine the life of loan default rates for the quantitative component and analyzes qualitative factors (Q-Factors) that assess the current loan portfolio conditions and forecasted economic environment. Below is the general overview our new ACL model.
Historical Loss Rate
The Company chose to analyze loan data from a full economic cycle, to the extent that data was available, to calculate life of loan loss rates. Based on the current economic environment and available loan level data, it was determined the Loss Horizon Period (LHP) should begin prior to the last economic recession. The Company plans to monitor and review the LHP on an annual basis to determine appropriate time frames to be included based on economic indicators.
The Company has largely maintained existing ALLL pools under CECL to represent pools of loans grouped by similar risk characteristics. Using these pools, sub-pools are established at a more granular level incorporating delinquency status and original FICO or original LTV (for consumer loans) and risk ratings (for commercial loans). Using the pool and sub-pool structure, cohorts are established historically on a quarterly basis containing the population in these sets as of that point in time. After the establishment of these cohorts, the loans within the cohorts are then tracked from that point forward to establish long-term Probability of Default ("PD") for the sub-pool. Loss Given Default ("LGD") is calculated for the pool. These historical cohorts and their PD/LGD outcomes are then averaged together to establish expected PDs and LGDs for each sub-pool.

Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events. The Company has defined default events as the first dollar of loss. If a loan in the cohort has experienced a default event over the “default horizon” then the balance of the loan at the time of cohort establishment becomes part of the numerator of the PD calculation. The Loss Given Probability of Default ("LGPD") or Expected Loss ("EL") is the weighted average PD for each sub-pool cohort times the average LGD for each pool. The output from the model then is a series of EL rates for each loan sub-pool, which are applied to the related outstanding balances for each loan sub-pool to determine the ACL reserve based on historical loss rates.
Q-Factors
The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. The Company has established a methodology for adjusting historical expected loss rates based on these more recent or forecasted changes. The Q-Factor methodology is based on a blend of quantitative analysis and management judgment and reviewed on a quarterly basis.
Each of the thirteen factors in the FASB standard were analyzed for common risk characteristics and grouped into seven consolidated Q-Factors as listed below.

14


Qualitative FactorFinancial Instruments - Credit Losses
Portfolio Credit QualityThe borrower's financial condition, credit rating, credit score, asset quality, or business prospects
The borrower's ability to make scheduled interest or principal payments
The volume and severity of past due financial assets and the volume and severity of adversely classified or rated financial assets
Remaining PaymentsThe remaining payment terms of the financial assets
The remaining time to maturity and the timing and extent of prepayments on the financial assets
Volume & NatureThe nature and volume of the entity's financial assets
Collateral ValuesThe value of underlying collateral on financial assets in which the collateral-dependent practical expedient has not been utilized
EconomicThe environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: Changes and expected changes in national, regional, and local economic and business conditions and developments in which the entity operates, including the condition and expected condition of various market segments
Credit CultureThe entity's lending policies and procedures, including changes in lending strategies, underwriting standards, collection, write-off, and recovery practices, as well as knowledge of the borrower's operations or the borrower's standing in the community
The quality of the entity's credit review system
The experience, ability, and depth of the entity's management, lending staff, and other relevant staff
Business EnvironmentThe environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: Regulatory, legal, or technological environment to which the entity has exposure
The environmental factors of a borrower and the areas in which the entity's credit is concentrated, such as: Changes and expected changes in the general market condition of either the geographical area or the industry to which the entity has exposure

An eighth Q-Factor, Management Overlay, has been created to allow the Bank to adjust specific pools when conditions exist that were not contemplated in the model design that warrant an adjustment.
The Company has chosen two years as the forecast period based on management judgment and has determined that reasonable and supportable forecasts should be made for two of the Q-Factors: Economic and Collateral values.
Management has assigned weightings for each qualitative factor as well as individual metrics within each qualitative factor as to the relative importance of that factor or metric specific to each portfolio type. The Q-Factors above are evaluated using a seven-point scale ranging from significant improvement to significant deterioration.
The CECL Q-Factor methodology bounds the Q-Factor adjustments by a minimum and maximum range, based on the Bank’s own historical expected loss rates for each respective pool. The rating of the Q-Factor on the seven-point scale, along with the allocated weight, determines the final expected loss adjustment. The model is constructed so that the total of the Q-Factor adjustments plus the current expected loss rate cannot exceed the maximum or minimum two-year loss rate for that pool, which is aligned with the Bank's chosen forecast period. Loss rates beyond two years are not adjusted in the Q-Factor process and the model reverts to the historical mean loss rates.
Review and Model Maintenance
Quarterly, loan data is gathered to update the portfolio metrics analyzed in the Q-Factor model. The model is updated with current data and applicable forecasts, then the results are reviewed by management. After consensus is reached on all Q-Factor ratings, the results are input into the Q-Factor model and applied to the pooled loans which are reviewed to determine the adequacy of the reserve. Annually, the CECL model will be validated through an independent review. The review will cover data inputs, model assumptions, methodology and logic used in the estimation process as well as operational reviews, back testing, model control environment, output and reports.

15


Additional details describing the model by portfolio segment are below:
Consumer Loan Portfolio
The consumer loan portfolio segment is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower's capacity, credit, and collateral. Capacity refers to a borrower's ability to make payments on the loan. Several factors are considered when assessing a borrower's capacity, including the borrower's employment, income, current debt, assets, and level of equity in the property. Credit refers to how well a borrower manages current and prior debts as documented by a credit report that provides credit scores and current and past information about the borrower's credit history. Collateral refers to the type and use of property, occupancy, and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.
Consumer Loan Portfolio Segment Estimated Loss Rate Model
With some modifications under CECL, the Bank has largely maintained existing ALLL pools established under ASC 450-20. These pools of loans are groups with similar risk characteristics: Single Family and Home Equity Loans which includes Consumer loans. Sub-Pools are established at a more granular level for the calculation of PDs, incorporating delinquency status, original FICO, and original LTV.
Consumer portfolio cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events as noted in the Historical Loss Rate section above.

The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. For Single Family loans all Q-Factors noted above are evaluated. For the Home Equity and Consumer loans, collateral values are not evaluated as the Bank has determined the FICO score trends are a more relevant predictor of default than current collateral value for those types of loans. Factors above are evaluated based on current conditions and forecasts (as applicable), using a seven-point scale ranging from significant improvement to significant deterioration.
Commercial Loan Portfolio
The commercial loan portfolio segment is comprised of the non-owner occupied commercial real estate, multifamily, construction/land development, owner occupied commercial real estate and commercial business loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower's and associated guarantors or other related party’s financial position. These other factors include assessing liquidity, net worth, leverage, other outstanding indebtedness of the borrower, the quality and reliability of cash expected to flow through the borrower (including the outflow to other lenders) and prior known experiences with the borrower.
This information is used to assess financial capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing.
Commercial Loan Portfolio Segment Loss Rate Model
The Bank maintained loan classes above but has subdivided the construction / land development into the following ACL reporting pools to more accurately group risk characteristics: Multifamily construction, Commercial Real Estate construction, Single Family construction to permanent and Single Family construction which also includes lot, land, and acquisition and development loans. ACL sub-pools are established at a more granular level for the calculation of PDs, utilizing risk rating.
As outlined in the Bank’s policies, commercial loans pools are non-homogenous and are regularly assessed for credit quality. The Company’s risk rating methodology assigns risk ratings from 1 to 10. For purposes of CECL, loans are sub-pooled according to the following AQR Ratings:
AQR 1-4: These loans range from minimal to average risk characteristics and are pooled together. They exhibit sound sources of repayment and evidence no material collection or repayment weakness.
AQR 5: These loans have acceptable risk. While lower than average risk, weaknesses can be adequately mitigated by structure, collateral, or credit enhancement.
AQR 6: These loans meet the regulatory definition of “Watch”. They are considered satisfactory but have less than acceptable risk due to emerging risk elements or declining performance. Loans in this category are generally characterized by elements of uncertainty and require close management attention.

16


AQR 7: These loans meet the regulatory definition of “Special Mention.” They contain unfavorable characteristics and are generally undesirable. Loans in this category are currently protected but are potentially weak and constitute an undue or unwarranted credit risk.
AQR 8: These loans meet the regulatory definition of “Substandard”. They are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. They have well-defined weaknesses and have unsatisfactory characteristics causing unacceptable levels of risk.
    
There are two risk class ratings that are excluded from pooling: AQR 9 defined as “Doubtful” and AQR 10 defined as “Loss”. The Bank has not had any AQR 9 loans to date, and any loans rated AQR 10 have been charged off in their entirety.
Commercial segment cohorts are established by grouping each ACL sub-pool at a point in time. Once historical cohorts are established, the loans in the cohort are tracked moving forward for default events as noted in the Historical Loss Rate section above. The Q-Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. All the Q-Factors noted above are evaluated for Commercial portfolio loans except for Commercial Business and Owner Occupied Commercial Real Estate ("CRE") loans which exclude the collateral values Q-Factor. The Company has determined that these loans are primarily underwritten by evaluating the cash flow of the business and not the underlying collateral. Factors above are evaluated based on current conditions and forecasts (as applicable), using a seven-point scale ranging from significant improvement to significant deterioration.
Loans That Do Not Share Risk Characteristics with Other Loans
For a loan that does not share risk characteristics with other loans, expected credit loss is measured on net realizable value, that is the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the amortized cost basis of the loan. For these loans, we recognize expected credit loss equal to the amount by which the net realizable value of the loan is less than the amortized cost basis of the loan (which is net of previous charge-offs and deferred loan fees and costs), except when the loan is collateral dependent, which is when the borrower is experiencing financial difficulty, and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated costs to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, collateral values for collateral dependent loans are updated every twelve months, either from external third parties or in-house certified appraisers. A third-party appraisal is required at least annually for substandard loans and other real estate owned ("OREO"). Third party appraisals are obtained from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. Generally, appraisals are internally reviewed by the appraisal services group to ensure the quality of the appraisal and the expertise and independence of the appraiser. For performing consumer segment loans secured by real estate that are classified as collateral dependent, the Bank determines the fair value estimates quarterly using automated valuation services. Once the expected loss amount is determined, an allowance is recorded equal to the calculated expected credit loss and included in the allowance for credit losses. If the calculated expected loss is determined to be permanent or not recoverable, the expected credit loss will be charged off. Factors considered by management in determining if the expected credit loss is permanent or not recoverable include whether management judges the loan to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames, or the loss becomes evident owing to the borrower's lack of assets or, for single family loans, the loan is 180 days or more past due unless both well-secured and in the process of collection.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. Reserves are required for off-balance-sheet credit exposures that are not unconditionally cancellable. The allowance for credit losses on unfunded loans commitments is based on an estimate of unfunded commitment utilization over the life of the loan, applying the EL to the estimated utilization balance as of the reporting period. As these estimated credit loss calculations are similar to the funded loans held for investment they share similar risks plus the additional risk from estimating commitment utilization.

17


Allowance for Other Financial Instruments
The Company evaluates available-for-sale securities in an unrealized loss position, using a qualitative approach, at the end of each quarter to determine whether the decline in value is from a credit loss or other factors. An unrealized loss exists when the fair value of an individual lot is less than its amortized cost basis. When qualitative factors indicate that a credit loss may exist, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. The Company recognizes an allowance for credit losses measured as the difference between the present value of expected cash flows and the amortized cost basis of the security, limited by the amount that the security’s fair value is less than its amortized cost basis. The Company does not believe any of these securities that were in an unrealized loss position at March 31, 2020 represent a credit loss impairment.

The Company carries a limited amount of held to maturity ("HTM") debt securities. Utilizing the CECL approach, the Company determined that the expected credit loss on this portfolio was immaterial, and therefore, an allowance for credit losses was not recorded as of March 31, 2020.


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 $774 thousand pre-tax gain from discontinued operations during the three months ended March 31, 2019. The Company finalized the servicing transfer for these loans in 2019 and subserviced these loans through the transfer dates. These loans are excluded from the Company's MSR portfolio at March 31, 2019.
On March 31, 2019, based on mortgage market conditions and the operating environment, 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 related personnel associated with those operations. The assets that were sold or abandoned largely represented the Company's former Mortgage Banking segment, the activities of which related to originating, servicing, underwriting, funding and selling single family residential mortgage loans.

The Company determined that the above actions constituted commitment to a plan of exit or disposal of certain long-lived assets (through sale or abandonment) and termination of employees. Further, the Company determined that the shift from a large-scale HLC based originator and servicer to a branch-focused product offering represented a strategic shift. As a result, the HLC-related mortgage banking operations are reported separately from the continuing operations as discontinued operations. In addition, the former Mortgage Banking operating segment and reporting unit were eliminated. This has resulted in a recast of the financial statements in 2019 and all comparative periods as detailed below.

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 2019 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. 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 were classified as continuing operations based on the Company's intent.

At the end of the second quarter 2019, the Company also entered into a non-binding letter of interest to sell its ownership interest in WMS LLC at which time related operations also met the criteria to be classified as discontinued operations for periods presented. The sales transaction was closed in November 2019, resulting in an immaterial loss on disposal.

These discontinued operations activities, including the exit or disposal of the former mortgage banking segment, were concluded by December 31, 2019. Consequently, we ceased discontinued operations accounting effective January 1, 2020.


18


The following table summarizes the calculation of the net loss on disposal of discontinued operations.
(in thousands)Three Months Ended March 31, 
  2019 
Proceeds from asset sales $183,151
 
Book value of asset sales 176,944
 
Gain on assets sold 6,207
 
Transaction costs 6,418
 
Compensation expense related to the transactions 1,117
 
Facility and IT related costs 10,896
 
Total costs 18,431
 
Net loss on disposal $(12,224) 

(1) Discontinued operations accounting was concluded effective January 1, 2020, therefore there is 0 comparable balance for the three months ended March 31, 2020.

The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the following.
(in thousands)December 31, 2019
ASSETS 
Loans held for sale, at fair value$26,123
Other assets (1)
2,505
Assets of discontinued operations$28,628
LIABILITIES 
Accrued expenses and other liabilities$2,603
Liabilities of discontinued operations$2,603

(1)Includes $227 thousand of derivative balance at December 31, 2019.
(2)Discontinued operations accounting was concluded effective January 1, 2020, therefore there is 0 comparable balance for the three months ended March 31, 2020.

Statement of Operations of Discontinued Operations
 Three Months Ended March 31, 
(in thousands)2019 
Net interest income$2,145
 
Noninterest income39,269
 
Noninterest expense49,854
 
Loss before income taxes(8,440) 
Income tax benefit(1,667) 
Loss from discontinued operations$(6,773) 

(1)Discontinued operations accounting was concluded effective January 1, 2020, therefore there is 0 comparable balance for the three months ended March 31, 2020.


19


Cash Flows for Discontinued Operations
 Three Months Ended March 31,
(in thousands)2019
Net cash used in operating activities$(31,117)
Net cash provided by investing activities178,096


(1) Discontinued operations accounting was concluded effective January 1, 2020, therefore there is 0 comparable balance for the three months ended March 31, 2020.


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 March 31, 2020
(in thousands)Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
        
AVAILABLE FOR SALE       
Mortgage-backed securities:       
Residential$84,150
 $1,155
 $(559) $84,746
Commercial41,940
 1,978
 
 43,918
Collateralized mortgage obligations:       
Residential285,188
 9,321
 (356) 294,153
Commercial159,803
 2,569
 (1,602) 160,770
Municipal bonds442,224
 12,979
 (2,570) 452,633
Corporate debt securities17,103
 66
 (558) 16,611
U.S. Treasury securities1,297
 17
 
 1,314
 $1,031,705
 $28,085
 $(5,645) $1,054,145
        
HELD TO MATURITY       
Municipal bonds4,347
 115
 
 4,462
 $4,347
 $115
 $
 $4,462



20


 At December 31, 2019
(in thousands)Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
        
AVAILABLE FOR SALE       
Mortgage-backed securities:       
Residential$93,283
 $120
 $(1,708) $91,695
Commercial37,972
 411
 (358) 38,025
Collateralized mortgage obligations:       
Residential292,370
 935
 (1,687) 291,618
Commercial156,693
 684
 (1,223) 156,154
Municipal bonds333,303
 8,997
 (982) 341,318
Corporate debt securities18,391
 313
 (43) 18,661
U.S. Treasury securities1,296
 11
 
 1,307
 $933,308
 $11,471
 $(6,001) $938,778
        
HELD TO MATURITY 
       
Municipal bonds4,372
 129
 
 4,501
 $4,372
 $129
 $
 $4,501



Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, substantially all securities held had ratings available by external ratings agencies.

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 March 31, 2020
 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$
 $811
 $(559) $18,799
 $(559) $19,610
Collateralized mortgage obligations:           
Residential(356) 36,486
 
 
 (356) 36,486
Commercial(797) 58,541
 (805) 24,746
 (1,602) 83,287
Municipal bonds(2,147) 76,591
 (423) 28,341
 (2,570) 104,932
Corporate debt securities(558) 12,629
 
 
 (558) 12,629
 $(3,858) $185,058
 $(1,787) $71,886
 $(5,645) $256,944

There were 0 held to maturity securities in an unrealized loss position at March 31, 2020.


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 At December 31, 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$(409) $18,440
 $(1,299) $68,362
 $(1,708) $86,802
Commercial(352) 21,494
 (6) 2,483
 (358) 23,977
Collateralized mortgage obligations:           
Residential(965) 171,708
 (722) 29,264
 (1,687) 200,972
Commercial(680) 67,160
 (543) 41,605
 (1,223) 108,765
Municipal bonds(334) 39,127
 (648) 45,869
 (982) 84,996
Corporate debt securities(5) 3,689
 (38) 1,743
 (43) 5,432
 $(2,745) $321,618
 $(3,256) $189,326
 $(6,001) $510,944



There were 0 held to maturity securities in an unrealized loss position at December 31, 2019

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 related to the occurrence of any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of March 31, 2020 and December 31, 2019. In addition, as of March 31, 2020 and December 31, 2019, 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.


22


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 March 31, 2020
 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$
 % $3
 1.26% $
 % $84,743
 2.02% $84,746
 2.02%
Commercial
 
 7,567
 2.83
 21,795
 2.65
 14,556
 2.36
 43,918
 2.58
Collateralized mortgage obligations:                   
Residential
 
 
 
 7,036
 2.89
 287,117
 2.27
 294,153
 2.29
Commercial
 
 9,578
 2.16
 71,944
 2.40
 79,248
 2.27
 160,770
 2.28
Municipal bonds5,276
 3.40
 9,606
 3.65
 30,450
 3.33
 407,301
 3.43
 452,633
 3.42
Corporate debt securities374
 4.29
 6,855
 3.55
 9,295
 3.44
 87
 6.09
 16,611
 3.52
U.S. Treasury securities1,314
 2.84
 
 
 
 
 
 
 1,314
 2.84
Total available for sale$6,964
 3.34% $33,609
 3.01% $140,520
 2.73% $873,052
 2.79% $1,054,145
 2.79%
                    
HELD TO MATURITY                   
Mortgage-backed securities:                   
Municipal bonds$
 
 $1,771
 2.89
 $2,691
 2.08
 $
 
 $4,462
 2.40
Total held to maturity$
 % $1,771
 2.89% $2,691
 2.08% $
 % $4,462
 2.40%
 


23


 At December 31, 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$
 % $3
 1.30% $5,428
 1.67% $86,264
 2.10% $91,695
 2.08%
Commercial
 
 7,514
 2.73
 20,631
 2.50
 9,880
 2.32
 38,025
 2.49
Collateralized mortgage obligations:                   
Residential
 
 
 
 
 
 291,618
 2.39
 291,618
 2.39
Commercial
 
 7,563
 2.20
 68,470
 2.41
 80,121
 2.31
 156,154
 2.35
Municipal bonds5,337
 3.41
 555
 3.90
 13,000
 3.01
 322,426
 3.61
 341,318
 3.59
Corporate debt securities1,007
 3.40
 7,544
 3.64
 10,022
 3.70
 88
 6.10
 18,661
 3.67
U.S. Treasury securities1,307
 2.82
 
 
 
 
 
 
 1,307
 2.82
Total available for sale$7,651
 3.31% $23,179
 2.87% $117,551
 2.57% $790,397
 2.84% $938,778
 2.81%
                    
HELD TO MATURITY                   
Municipal bonds
 
 1,787
 2.90
 2,714
 2.09
 
 
 4,501
 2.41
Total held to maturity$
 % $1,787
 2.90% $2,714
 2.09% $
 % $4,501
 2.41%


Sales of investment securities available for sale were as follows.
 
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Proceeds$33,792
 $94,998
 
Gross gains745
 372
 
Gross losses(633) (619) 


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 March 31,
2020
 At December 31,
2019
    
Washington and California State to secure public deposits$176,545
 $200,571
Other securities pledged2,098
 4,332
Total securities pledged as collateral$178,643
 $204,903



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 March 31, 2020 and December 31, 2019.

Tax-exempt interest income on securities totaling $2.3 million and $2.8 million for the three months ended March 31, 2020 and 2019, respectively, was recorded in the Company's consolidated statements of operations.


24


NOTE 4-LOANS AND CREDIT QUALITY:
For a detailed discussion of loans and credit quality, including accounting policies and the new required methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies.
As a result of the adoption of CECL on January 1, 2020, there is a lack of comparability in both the reserves and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative period information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.

The Company's loans held for investment is divided into 2 portfolio segments, consumer loans and commercial loans, which are the same segments used to estimate expected credit losses reported in the allowance for credit 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.
Loans held for investment consist of the following.
(in thousands)At March 31,
2020
 At December 31,
2019
 
     
Consumer loans    
Single family (1)
$988,967
 $1,072,706
 
Home equity and other525,544
 553,376
 
Total consumer loans1,514,511
 1,626,082
 
Commercial real estate loans  
 
Non-owner occupied commercial real estate872,173
 895,546
 
Multifamily1,167,242
 999,140
 
Construction/land development626,969
 701,762
 
Total commercial real estate loans2,666,384
 2,596,448
 
Commercial and industrial loans    
Owner occupied commercial real estate473,338
 477,316
 
Commercial business438,996
 414,710
 
Total commercial and industrial loans912,334
 892,026
 
                  Total loans before allowance, net deferred loan fees and costs5,093,229
 5,114,556
(2 
) 
Allowance for credit losses (3)
(58,299) (41,772) 
                      Total loans held for investment$5,034,930
 $5,072,784
 

(1)Includes $4.9 million and $3.5 million at March 31, 2020 and December 31, 2019, 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.
(2)Net deferred loans fees and costs of $24.5 million are now included within the carrying amounts of the loan balances as of December 31, 2019, in order to conform to the current period presentation.
(3)Accrued interest receivable on loans held for investment totaled $18.7 million at March 31, 2020 and is excluded from the calculations of estimated credit losses.

Loans in the amount of $1.88 billion and $2.01 billion at March 31, 2020 and December 31, 2019, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") as part of our liquidity management strategy. Additionally, loans totaling $430.0 million and $490.7 million at March 31, 2020 and December 31, 2019, 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.


25


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 March 31, 2020, the Company had one concentration representing 10% or more of the total portfolio by state and property type for the loan class of multifamily within the state of California, which represented 14.9% of the total portfolio. At December 31, 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 10.7% and 12.2% of the total portfolio, respectively.

Credit Quality
Management considers the level of allowance of credit losses to be appropriate to cover credit losses expected over the life of the loans within the loans held for investment portfolio as of March 31, 2020. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.
Management applied an overlay to reallocate the results of the qualitative factors to consider the levels of commercial COVID-19 related forbearance requests in the final determination for the ACL pool reserves. No other changes have been made to the allowance for credit loss model methodology for the three months ending March 31, 2020.

During the quarter ended March 31, 2020 the historical expected loss rates decreased from January 1, 2020 implementation due to minimal losses and our stable portfolio credit composition. During the quarter ended March 31, 2020, the Qualitative Factors increased significantly due to the forecasted impacts of the COVID-19 pandemic. As of March 31, 2020, the Bank expects that the markets in which it operates will have deterioration in collateral values and economic outlook over the two-year forecast period, with negative risk factors peaking in the first year and modestly improving in the second year.
In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses on 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 including unfunded commitments. The allowance for credit losses on unfunded commitments was $2.3 million at March 31, 2020 compared to $1.4 million at March 31, 2019.
The Bank has elected to exclude accrued interest receivable from the allowance for credit losses. Accrued interest on loans held for investment was $18.7 million at March 31, 2020 and was reported in Other Assets in the Consolidated Statements of Financial condition.
For further information on the policies that govern the determination of the allowance for credit losses levels, see Note 1, Summary of Significant Accounting Policies above.
Activity in the allowance for credit losses including unfunded commitments was as follows.
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Allowance for credit losses including unfunded commitments (roll-forward):    
Beginning balance$42,837
 $42,913
 
Impact of ASC 326 adoption (1)
3,740
 
 
Provision for credit losses14,000
 1,500
 
Recoveries, net of (charge-offs)29
 123
 
Ending balance$60,606
 $44,536
 

(1)In conjunction with adopting ASU 2016-13 on January 1, 2020 we recorded a decrease of $3.7 million to retained earnings on January 1, 2020 for the cumulative effect of adopting this guidance.


26


Activity in the allowance for credit losses including unfunded commitments by loan portfolio and loan sub-class was as follows.

 Three Months Ended March 31, 2020
(in thousands)Prior to adoption of ASC 326 Impact of ASC 326 adoption Charge-offs Recoveries Provision (Reversal) Ending
balance
            
Consumer loans           
Single family$6,450
 $468
 $
 $53
 $1,616
 $8,587
Home equity and other6,843
 4,555
 (217) 149
 1,561
 12,891
            Total consumer loans13,293
 5,023
 (217) 202
 3,177
 21,478
Commercial real estate loans           
Non-owner occupied commercial real estate7,249
 (3,386) 
 
 5,164
 9,027
Multifamily7,015
 (2,963) 
 
 223
 4,275
Construction/land development

 

       

Multifamily construction2,996
 1,077
 
 
 (415) 3,658
Commercial real estate construction627
 (103) 
 
 (128) 396
Single family construction3,940
 5,356
 
 163
 (2,107) 7,352
Single family construction to permanent1,116
 622
 
 
 247
 1,985
     Total commercial real estate loans22,943
 603
 
 163
 2,984
 26,693
Commercial and industrial loans           
Owner occupied commercial real estate3,640
 (2,458) 
 
 2,984
 4,166
Commercial business2,961
 572
 (143) 24
 4,855
 8,269
     Total commercial and industrial loans6,601
 (1,886) (143) 24
 7,839
 12,435
Total allowance for credit losses including unfunded commitments$42,837
 $3,740
 $(360) $389
 $14,000
 $60,606
            

 Three Months Ended March 31, 2019
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
          
Consumer loans         
Single family$8,217
 $
 $85
 $(112) $8,190
Home equity and other7,712
 (46) 73
 52
 7,791
            Total consumer loans15,929
 (46) 158
 (60) 15,981
Commercial real estate loans         
Non-owner occupied commercial real estate5,496
 
 
 680
 6,176
Multifamily5,754
 
 
 606
 6,360
Construction/land development9,539
 
 4
 108
 9,651
     Total commercial real estate loans20,789
 
 4
 1,394
 22,187
Commercial and industrial loans         
Owner occupied commercial real estate3,282
 
 
 22
 3,304
Commercial business2,913
 
 7
 144
 3,064
     Total commercial and industrial loans6,195
 
 7
 166
 6,368
Total allowance for credit losses including unfunded commitments$42,913
 $(46) $169
 $1,500
 $44,536

    
 
 
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

27


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.
The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:
Per the Company's policies, most commercial loans pools are non-homogenous and are regularly assessed for credit quality. The Company’s risk rating methodology assigns risk ratings from 1 to 10. For purposes of CECL, loans are sub-pooled according to the following AQR Ratings:
AQR 1-4: These loans range from minimal to average risk characteristics and are pooled together. They exhibit sound sources of repayment and evidence no material collection or repayment weakness.
AQR 5: These loans have acceptable risk. While lower than average risk, weaknesses can be adequately mitigated by structure, collateral, or credit enhancement.
AQR 6: These loans meet the regulatory definition of “Watch”. They are considered satisfactory but have less than acceptable risk due to emerging risk elements or declining performance. Loans in this category are generally characterized by elements of uncertainty and require close management attention.
AQR 7: These loans meet the regulatory definition of “Special Mention.” They contain unfavorable characteristics and are generally undesirable. Loans in this category are currently protected but are potentially weak and constitute an undue or unwarranted credit risk.
AQR 8: These loans meet the regulatory definition of “Substandard”. They are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. They have well-defined weaknesses and have unsatisfactory characteristics causing unacceptable levels of risk.
    
There are two risk class ratings that are excluded from pooling: AQR 9 defined as “Doubtful” and AQR 10 defined as “Loss”. The Bank has not had any AQR 9 loans to date and any loans rated AQR 10 have been charged-off in their entirety.
The risk rating categories can be generally described by the following groupings for commercial and commercial real estate homogeneous loans:
AQR 6: These loans meet the regulatory definition of “Watch”. A homogeneous watch loan, risk rated 6, is 60-89 days past due from the required payment date at month-end.
AQR 7: These loans meet the regulatory definition of “Special Mention.” A homogeneous special mention loan, risk rated 7, is less than 90 days past due from the required payment date at month-end.
AQR 8: These loans meet the regulatory definition of “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.
AQR 10: These loans meet the regulatory definition of “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:
AQR 6: These loans meet the regulatory definition of “Watch”. A homogeneous watch loan, risk rated 6, is 60-89 days past due from the required payment date at month-end.
AQR 8: These loans meet the regulatory definition of “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.
AQR 10: These loans meet the regulatory definition of “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 restructuring are considered homogeneous unless the modification was an interest rate concession or payment modification with a significant balloon and the concession modification period has not been completed. The risk rating classification for such loans are based on the non-homogeneous definitions noted above.


28


The following table presents a vintage analysis of the consumer portfolio segment by loan sub-class and delinquency status.
  As of March 31, 2020
(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving Revolving-term Total
CONSUMER PORTFOLIO                  
Single family                 
Current $14,076
 $86,322
 $226,526
 $247,856
 $84,453
 $323,377
 $
 $
 $982,610
30-59 days past due 
 
 
 
 
 680
 
 
 680
60-89 days past due 
 
 
 
 
 399
 
 
 399
90+ days past due 
 534
 155
 962
 594
 3,033
 
 
 5,278
Total single family (1)
 14,076
 86,856
 226,681
 248,818
 85,047
 327,489
 
 
 988,967
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 53
 
 
 53
Single family net recoveries 
 
 
 
 
 53
 
 
 53
Home equity and other                  
Current 921
 3,651
 2,341
 2,533
 1,298
 8,654
 493,200
 10,209
 522,807
30-59 days past due 2
 50
 8
 
 
 61
 1,058
 31
 1,210
60-89 days past due 
 43
 3
 4
 
 7
 217
 
 274
90+ days past due 
 12
 8
 
 
 55
 1,112
 66
 1,253
Total home equity and other 923
 3,756
 2,360
 2,537
 1,298
 8,777
 495,587
 10,306
 525,544
Year to date charge-offs 
 (23) (15) 
 
 
 (179) 
 (217)
Year to date recoveries 
 
 1
 1
 1
 35
 111
 
 149
Home equity and other net (charge- offs) recoveries 
 (23) (14) 1
 1
 35
 (68) 
 (68)
Total consumer portfolio $14,999
 $90,612
 $229,041
 $251,355
 $86,345
 $336,266
 $495,587
 $10,306
 $1,514,511
Year to date charge-offs 
 (23) (15) 
 
 
 (179) 
 (217)
Year to date recoveries 
 
 1
 1
 1
 88
 111
 
 202
Total consumer portfolio net (charge-offs) recoveries $
 $(23) $(14) $1
 $1
 $88
 $(68) $
 $(15)

(1)Includes $4.9 million at March 31, 2020 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.


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

29


  As of March 31, 2020
(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving Revolving-term Total
COMMERCIAL PORTFOLIO                  
Non-owner occupied commercial real estate                  
1-4 Good $4,094
 $115,378
 $119,289
 $85,310
 $105,922
 $106,101
 $(2) $
 $536,092
5 - Acceptable 32,606
 76,697
 49,136
 62,867
 50,674
 51,220
 10,197
 226
 333,623
6 - Watch 
 
 310
 
 
 1,193
 
 955
 2,458
7- Special Mention 
 
 
 
 
 
 
 
 
8 - Substandard 
 
 
 
 
 
 
 
 
Total non-owner occupied commercial real estate 36,700
 192,075
 168,735
 148,177
 156,596
 158,514
 10,195
 1,181
 872,173
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Non-owner occupied commercial real estate net (charge-offs) recoveries 
 
 
 
 
 
 
 
 
Multifamily                  
1-4 Good 147,564
 245,999
 29,936
 38,382
 111,467
 22,864
 13,951
 
 610,163
5 - Acceptable 128,750
 162,736
 58,748
 35,120
 85,035
 83,491
 1,491
 
 555,371
6 - Watch 
 
 
 1,248
 460
 
 
 
 1,708
7- Special Mention 
 
 
 
 
 
 
 
 
8 - Substandard 
 
 
 
 
 
 
 
 
Total multifamily 276,314
 408,735
 88,684
 74,750
 196,962
 106,355
 15,442
 
 1,167,242
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Multifamily net (charge- offs) recoveries 
 
 
 
 
 
 
 
 
Multifamily construction                  
1-4 Good (155) 8,074
 58,378
 
 
 
 
 
 66,297
5 - Acceptable 
 
 54,727
 11,920
 
 
 
 
 66,647
6 - Watch 
 
 
 
 
 
 
 
 
7- Special Mention 
 
 
 
 21,988
 
 
 
 21,988
8 - Substandard 
 
 
 
 
 
 
 
 
Total multifamily construction (155) 8,074
 113,105
 11,920
 21,988
 
 
 
 154,932
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Multifamily construction net (charge-offs) recoveries 
 
 
 
 
 
 
 
 
Commercial real estate construction                  
1-4 Good 
 
 5,343
 25,263
 
 
 
 
 30,606
5 - Acceptable 
 
 2,205
 21,827
 
 654
 
 
 24,686
6 - Watch 
 
 
 
 
 
 
 
 
7- Special Mention 
 
 
 
 
 
 
 
 


30


  As of March 31, 2020
(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving Revolving-term Total
8 - Substandard 
 
 
 
 
 
 
 
 
Total commercial real estate construction loans 
 
 7,548
 47,090
 
 654
 
 
 55,292
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Commercial real estate construction net (charge-offs) recoveries 
 
 
 
 
 
 
 
 
Single family construction                  
1-4 Good 1,468
 2,950
 1,136
 354
 
 148
 10,489
 
 16,545
5 - Acceptable 31,029
 95,185
 47,871
 492
 468
 
 66,871
 
 241,916
6 - Watch 
 
 
 
 
 
 1,799
 
 1,799
7- Special Mention 
 
 
 
 
 
 
 
 
8 - Substandard 
 
 
 
 
 
 
 
 
Total single family construction 32,497
 98,135
 49,007
 846
 468
 148
 79,159
 
 260,260
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 163
 
 
 163
Single family construction net recoveries 
 
 
 
 
 163
 
 
 163
Single family construction to permanent                  
Current 6,024
 105,414
 40,898
 4,667
 1,698
 
 
 
 158,701
30-59 days past due 
 
 
 
 
 
 
 
 
60-89 days past due 
 
 
 
 
 
 
 
 
90+ days past due 
 
 
 
 
 
 
 
 
Total single family construction to permanent 6,024
 105,414
 40,898
 4,667
 1,698
 
 
 
 158,701
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Single family construction to permanent net (charge- offs) recoveries 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate                  
1-4 Good 1,255
 1,756
 2,405
 10,895
 41,238
 11,003
 
 
 68,552
5 - Acceptable 11,268
 50,221
 48,172
 85,666
 64,967
 44,636
 
 6,361
 311,291
6 - Watch 
 28,499
 2,185
 3,491
 24,482
 8,872
 600
 1,838
 69,967
7- Special Mention 
 
 12,468
 6,378
 
 1,149
 
 231
 20,226
8 - Substandard 
 253
 1,111
 833
 678
 98
 
 329
 3,302
Total owner occupied commercial real estate 12,523
 80,729
 66,341
 107,263
 131,365
 65,758
 600
 8,759
 473,338


31


  As of March 31, 2020
(in thousands) 2020 2019 2018 2017 2016 2015 and prior Revolving Revolving-term Total
Year to date charge-offs 
 
 
 
 
 
 
 
 
Year to date recoveries 
 
 
 
 
 
 
 
 
Owner occupied commercial real estate net (charge-offs) recoveries 
 
 
 
 
 
 
 
 
Commercial business                  
1-4 Good 10,107
 15,333
 5,533
 262
 50
 782
 52,538
 
 84,605
5 - Acceptable 16,511
 61,192
 37,408
 38,253
 23,631
 20,729
 72,657
 3,709
 274,090
6 - Watch 1,392
 14,133
 23,503
 7,715
 67
 421
 12,202
 1,520
 60,953
7- Special Mention 
 643
 4,054
 68
 1,262
 1,033
 2,385
 190
 9,635
8 - Substandard 
 110
 3,833
 455
 552
 436
 2,016
 95
 7,497
Total commercial business 28,010
 91,411
 74,331
 46,753
 25,562
 23,401
 141,798
 5,514
 436,780
Year to date charge-offs 
 
 
 (41) (102) 
 
 
 (143)
Year to date recoveries 
 
 
 
 
 24
 
 
 24
Commercial business net (charge-offs) recoveries 
 
 
 (41) (102) 24
 
 
 (119)
Total commercial portfolio $391,913
 $984,573
 $608,649
 $441,466
 $534,639
 $354,830
 $247,194
 $15,454
 $3,578,718
Year to date charge-offs 
 
 
 (41) (102) 
 
 
 (143)
Year to date Recoveries 
 
 
 
 
 187
 
 
 187
Total commercial portfolio (charge-offs) recoveries $
 $
 $
 $(41) $(102) $187
 $
 $
 $44
Total loans held for investment $406,912
 $1,075,185
 $837,690
 $692,821
 $620,984
 $691,096
 $742,781
 $25,760
 $5,093,229
Year to date charge-offs 
 (23) (15) (41) (102) 
 (179) 
 (360)
Year to date recoveries 
 
 1
 1
 1
 275
 111
 
 389
Year to date net (charge-offs) recoveries $
 $(23) $(14) $(40) $(101) $275
 $(68) $
 $29


Collateral Dependent Loans
A loan is collateral dependent when the borrower is experiencing financial difficulty, and repayment is expected to be provided substantially through the operation or sale of the collateral. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated costs to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type. All collateral dependent loans are reviewed quarterly and loan amounts are charged down to fair value of the collateral, less costs to sell if the loss is confirmed and the expected repayment is from the sale of the collateral. If the expected repayment of the loan is from the operation of the collateral, then the cost of sale is not deducted from the fair value of the collateral.

32


  At March 31, 2020
(in thousands) Land 1-4 Family Multifamily Non-residential real estate Other non-real estate Total
Consumer loans            
Single family 
 $
 $1,251
 $
 $
 $
 $1,251
Home equity loans and other 
 19
 
 
 
 19
   Total consumer loans 
 1,270
 
 
 
 1,270
Commercial and industrial loans            
Owner occupied commercial real estate 1,789
 
 
 1,261
 
 3,050
Commercial business 
 
 
 
 3,183
 3,183
   Total commercial and industrial loans 1,789
 
 
 1,261
 3,183
 6,233
  Total collateral-dependent loans $1,789
 $1,270
 $
 $1,261
 $3,183
 $7,503


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.

33


The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.
 
 At March 31, 2020
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family (1)
$983,478
 $5,489
 $988,967
Home equity and other524,291
 1,253
 525,544
Total consumer loans1,507,769
 6,742
 1,514,511
Commercial real estate loans     
Non-owner occupied commercial real estate872,173
 
 872,173
Multifamily1,167,242
 
 1,167,242
Construction/land development

    
Multifamily construction154,932
 
 154,932
Commercial real estate construction55,292
 
 55,292
Single family construction260,260
 
 260,260
Single family construction to permanent156,485
 
 156,485
Total commercial real estate loans2,666,384
 
 2,666,384
Commercial and industrial loans     
Owner occupied commercial real estate470,288
 3,050
 473,338
Commercial business435,813
 3,183
 438,996
Total commercial and industrial loans906,101
 6,233
 912,334
 $5,080,254
 $12,975
 $5,093,229


 
At December 31, 2019 (2)
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family (1)
$1,067,342
 $5,364
 $1,072,706
Home equity and other552,216
 1,160
 553,376
Total consumer loans1,619,558
 6,524
 1,626,082
Commercial real estate loans     
Non-owner occupied commercial real estate895,546
 
 895,546
Multifamily999,140
 
 999,140
Construction/land development701,762
 
 701,762
Total commercial real estate loans2,596,448
 
 2,596,448
Commercial and industrial loans     
Owner occupied commercial real estate474,425
 2,891
 477,316
Commercial business411,264
 3,446
 414,710
Total commercial and industrial loans885,689
 6,337
 892,026
 $5,101,695
 $12,861
 $5,114,556

(1)Includes $4.9 million and $3.5 million of loans at March 31, 2020 and December 31, 2019, 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.
(2)Net deferred loans fees and costs of $24.5 million were included within the carrying amounts of the loan balances as of December 31, 2019, in order to conform to the current period presentation.


34


The following table presents nonaccrual status for loans in compliance with ASC 326-20-50-16.
 At March 31, 2020 At December 31, 2019
(in thousands)Nonaccrual Nonaccrual with no related ACL 
90 days or
more past
due and
accruing
 Nonaccrual Nonaccrual with no related ACL 
90 days or
more past
due and
accruing
            
Consumer loans           
Single family$5,489
 $1,461
 $20,845
 $5,364
 $1,652
 $19,702
Home equity and other1,253
 20
 
 1,160
 9
 
Total consumer loans6,742
 1,481
 20,845
 6,524
 1,661
 19,702
Commercial and industrial loans           
Owner occupied commercial real estate3,050
 3,049
 
 2,891
 2,892
 
        Commercial business3,183
 2,716
 
 3,446
 2,954
 
Total commercial and industrial loans6,233
 5,765
 
 6,337
 5,846
 
 $12,975
 $7,246
 $20,845
 $12,861
 $7,507
 $19,702




35


The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class.
 At March 31, 2020 
(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$5,872
 $2,501
 $26,334
 $34,707
 $954,260
(1) 
$988,967
 $20,845
(2) 
Home equity and other1,210
 274
 1,253
 2,737
 522,807
 525,544
 
 
Total consumer loans7,082
 2,775
 27,587
 37,444
 1,477,067
 1,514,511
 20,845
 
Commercial real estate loans              
Non-owner occupied commercial real estate
 
 
 
 872,173
 872,173
 
 
Multifamily
 
 
 
 1,167,242
 1,167,242
 
 
Construction/land development      

   
   
Multifamily construction
 
 
 
 154,932
 154,932
 
 
Commercial real estate construction
 
 
 
 55,292
 55,292
 
 
Single family construction
 
 
 
 260,260
 260,260
 
 
Single family construction to permanent
 
 
 
 156,485
 156,485
 
 
Total commercial real estate loans
 
 
 
 2,666,384
 2,666,384
 
 
Commercial and industrial loans              
Owner occupied commercial real estate
 
 3,050
 3,050
 470,288
 473,338
 
 
Commercial business
 
 3,183
 3,183
 435,813
 438,996
 
 
Total commercial and industrial loans
 
 6,233
 6,233
 906,101
 912,334
 
 
 $7,082
 $2,775
 $33,820
 $43,677
 $5,049,552
 $5,093,229
 $20,845
 

 
At December 31, 2019(3)
 
(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$5,694
 $4,261
 $25,066
 $35,021
 $1,037,685
(1) 
$1,072,706
 $19,702
(2) 
Home equity and other837
 372
 1,160
 2,369
 551,007
 553,376
 
 
Total consumer loans6,531
 4,633
 26,226
 37,390
 1,588,692
 1,626,082
 19,702
 
Commercial real estate loans              
Non-owner occupied commercial real estate
 
 
 
 895,546
 895,546
 
 
Multifamily
 
 
 
 999,140
 999,140
 
 
Construction/land development
 
 
 
 701,762
 701,762
 
 
Total commercial real estate loans
 
 
 
 2,596,448
 2,596,448
 
 
Commercial and industrial loans              
Owner occupied commercial real estate
 
 2,891
 2,891
 474,425
 477,316
 
 
Commercial business44
 
 3,446
 3,490
 411,220
 414,710
 
 
Total commercial and industrial loans44
 
 6,337
 6,381
 885,645
 892,026
 
 
 $6,575
 $4,633
 $32,563
 $43,771
 $5,070,785
 $5,114,556
 $19,702
 


36


(1)Includes $4.9 million and $3.5 million of loans at March 31, 2020 and December 31, 2019, 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.
(3)Net deferred loans fees and costs of $24.5 million were included within the carrying amounts of the loan balances as of December 31, 2019, in order to conform to the current period presentation.


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

 Three Months Ended March 31, 2020
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 11
 $2,213
 $
 Payment restructure 3
 454
 
Total consumer       
 Interest rate reduction 11
 2,213
 
 Payment restructure 3
 454
 
   14
 2,667
 
Commercial and industrial loans       
Owner occupied commercial real estate       
 Payment restructure 1
 678
 
Commercial business       
 Payment restructure 1
 1,125
 
Total commercial and industrial       
 Payment restructure 2
 1,803
 
   2
 1,803
 
Total loans       
 Interest rate reduction 11
 2,213
 
 Payment restructure 5
 2,257
 
   16
 $4,470
 $


37


 Three Months Ended March 31, 2019
(dollars in thousands)Concession type Number of loan
modifications
 Recorded
investment
 Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 5
 $1,192
 $
 Payment restructure 48
 9,761
 
Total consumer       
 Interest rate reduction 5
 1,192
 
 Payment restructure 48
 9,761
 
   53
 10,953
 
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
 
Total commercial and industrial       
 Payment restructure 1
 5,840
 
   1
 5,840
 
Total loans       
 Interest rate reduction 5
 1,192
 
 Payment restructure 50
 20,276
 
   55
 $21,468
 $



The CARES Act provides temporary relief from the accounting and disclosure requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. In addition, interagency guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that borrowers who receive relief are not experiencing financial difficulty if they meet the following qualifying criteria:

The modification is in response to the National Emergency;
The borrower was current at the time the modification program was implemented; and
The modification is short-term

We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible short-term modifications and therefore will not treat qualifying loan modifications as TDRs for accounting or disclosure purposes. Additionally, eligible short-term loan modifications subject to the practical expedient in the interagency guidance will also not be treated as TDRs for accounting or disclosure purposes if they qualify. 

As of May 5, 2020, the Company had granted a forbearance on 393 loans with an outstanding balance of $223.0 million. The Company had 173 additional forbearance requests representing $204.0 million in outstanding balances that were in process.

In addition, the regulatory agencies have also provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status.  

The Bank will exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by COVID-19. The Bank also will not designate loans with deferrals granted due to COVID-19 as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs we are offering as a result of the COVID-19 pandemic, we expect that borrowers granted relief under these programs will generally not be

38


reported as nonaccrual. However, we are currently evaluating our policy for interest income recognition for loans that receive forbearance or deferral as a result of a hardship related to COVID-19.
 
 

The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three months ended March 31, 2020 and 2019, 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 March 31,
 2020 2019
(dollars in thousands)Number of loan relationships that re-defaulted Recorded
investment
 Number of loan relationships that re-defaulted Recorded
investment
        
Consumer loans       
Single family6
 $1,281
 5
 $1,059
 6
 $1,281
 5
 $1,059


This section reports results prior to the January 1, 2020 adoption of ASC 326 and is presented in accordance with previously applicable GAAP.
The following table summarizes designated loan grades by loan portfolio segment and loan class.
 At December 31, 2019
(in thousands)Pass Watch Special mention Substandard Total
          
Consumer loans         
Single family$1,053,648
(1) 
$2,518
 $8,802
 $5,364
 $1,070,332
Home equity and other530,784
 318
 664
 1,160
 532,926
Total consumer loans1,584,432
 2,836
 9,466
 6,524
 1,603,258
Commercial real estate loans         
Non-owner occupied commercial real estate892,890
 2,006
 
 
 894,896
Multifamily991,696
 4,802
 
 
 996,498
Construction/land development669,751
 11,694
 20,954
 
 702,399
Total commercial real estate loans2,554,337
 18,502
 20,954
 
 2,593,793
Commercial and industrial loans         
Owner occupied commercial real estate422,434
 37,885
 12,709
 5,144
 478,172
Commercial business351,911
 50,149
 9,405
 3,415
 414,880
Total commercial and industrial loans774,345
 88,034
 22,114
 8,559
 893,052
 $4,913,114
 $109,372
 $52,534
 $15,083
 $5,090,103
(1)Includes $3.5 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

As of March 31, 2020 and December 31, 2019, NaN of the Company's loans were rated Doubtful or Loss. For a detailed discussion on credit quality, see Note 6, Loans and Credit Quality, within our 2019 Annual Report on Form 10-K.


39


The following tables disaggregate our allowance for credit losses and recorded investment in loans by impairment methodology.
 At December 31, 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$6,333
 $117
 $6,450
 $1,005,386
 $61,503
 $1,066,889
 
Home equity and other6,815
 28
 6,843
 532,038
 863
 532,901
 
            Total consumer loans13,148
 145
 13,293
 1,537,424
 62,366
 1,599,790
 
Commercial real estate loans            
Non-owner occupied commercial real estate7,249
 
 7,249
 894,896
 
 894,896
 
Multifamily7,015
 
 7,015
 996,498
 
 996,498
 
Construction/land development8,679
 
 8,679
 702,399
 
 702,399
 
     Total commercial real estate loans22,943
 
 22,943
 2,593,793
 
 2,593,793
 
Commercial and industrial loans            
Owner occupied commercial real estate3,640
 
 3,640
 475,281
 2,891
 478,172
 
Commercial business2,953
 8
 2,961
 411,386
 3,494
 414,880
 
     Total commercial and industrial loans6,593
 8
 6,601
 886,667
 6,385
 893,052
 
Total loans evaluated for impairment42,684
 153
 42,837
 5,017,884
 68,751
 5,086,635
 
Loans held for investment carried at fair value
 
 
 
 
 3,468
(1) 
Total loans held for investment$42,684
 $153
 $42,837
 $5,017,884
 $68,751
 $5,090,103
 
(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.



40


The following tables present impaired loans by loan portfolio segment and loan class.
 At December 31, 2019
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
      
With no related allowance recorded:     
Consumer loans     
Single family(3)
$60,009
 $60,448
 $
Home equity and other472
 472
 
                     Total consumer loans60,481
 60,920
 
Commercial and industrial loans     
Owner occupied commercial real estate2,891
 3,013
 
Commercial business2,954
 3,267
 
             Total commercial and industrial loans5,845
 6,280
 
 $66,326
 $67,200
 $
With an allowance recorded:     
Consumer loans     
Single family$1,494
 $1,494
 $117
Home equity and other391
 391
 28
                     Total consumer loans1,885
 1,885
 145
Commercial and industrial loans     
Commercial business540
 919
 8
Total commercial and industrial loans540
 919
 8
 $2,425
 $2,804
 $153
Total:     
Consumer loans     
Single family (3)
$61,503
 $61,942
 $117
Home equity and other863
 863
 28
   Total consumer loans62,366
 62,805
 145
Commercial and industrial loans     
Owner occupied commercial real estate2,891
 3,013
 
Commercial business3,494
 4,186
 8
Total commercial and industrial loans6,385
 7,199
 8
Total impaired loans$68,751
 $70,004
 $153
 
(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 $59.8 million in single family performing TDRs.


41


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

  Three Months Ended March 31, 2019
     
(in thousands)
 Average Recorded Investment Interest Income Recognized
Consumer loans    
Single family $68,548
 $706
Home equity and other 1,180
 18
Total consumer loans 69,728
 724
Commercial real estate loans    
Non-owner occupied commercial real estate 6
 
Multifamily 490
 7
Construction/land development 2,701
 
             Total commercial real estate loans 3,197
 7
Commercial and industrial loans    
Owner occupied commercial real estate 4,128
 93
Commercial business 1,937
 11
Total commercial and industrial loans 6,065
 104
  $78,990
 $835

    
 
























42


NOTE 5–DEPOSITS:

Deposit balances, including stated rates, were as follows.
 
(in thousands)At March 31,
2020
 At December 31,
2019
    
Noninterest-bearing accounts$1,016,264
 $907,918
NOW accounts, 0.00% to 0.70% at March 31, 2020 and 0.00% to 1.19% at December 31, 2019420,606
 373,832
Statement savings accounts, due on demand, 0.05% to 1.13% at March 31, 2020 and December 31, 2019222,821
 219,182
Money market accounts, due on demand, 0.00% to 2.18% at March 31, 2020 and 0.00% to 2.42% at December 31, 20192,299,442
 2,224,494
Certificates of deposit, 0.10% to 3.06% at March 31, 2020 and December 31, 20191,297,924
 1,614,533
 $5,257,057
 $5,339,959


Interest expense on deposits was as follows.
 
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
NOW accounts$341
 $375
 
Statement savings accounts96
 149
 
Money market accounts6,306
 5,803
 
Certificates of deposit8,040
 7,985
 
 $14,783
 $14,312
 



The weighted-average interest rates on certificates of deposit were 1.91% and 2.24% at March 31, 2020 and December 31, 2019, respectively.

Certificates of deposit outstanding mature as follows.
 
(in thousands)At March 31,
2020
  
Within one year$1,040,961
One to two years175,905
Two to three years56,234
Three to four years11,334
Four to five years13,457
Thereafter33
 $1,297,924


The aggregate amount of time deposits in denominations of more than $250 thousand at March 31, 2020 and December 31, 2019 were $157.9 million and $222.9 million, respectively. There were $196.4 million and $266.5 million of brokered deposits at March 31, 2020 and December 31, 2019, 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 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.

43



The Company held 0 derivatives designated as a fair value, cash flow or foreign currency hedge instrument at March 31, 2020 or December 31, 2019. 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. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn money on cash paid to counterparties. 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 March 31, 2020 the Company had liabilities of $16.7 million in cash collateral received from counterparties and receivables of $17.7 million in cash collateral paid to counterparties. At December 31, 2019 the cash collateral received from counterparties was $15.2 million with $2.9 million paid to 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 815, the instruments are marked to market in earnings. The notional amount of open interest rate swap agreements at March 31, 2020 and December 31, 2019 were $193.3 million and $144.1 million, respectively. During the three months ended March 31, 2020 and 2019, there were $494 thousand and $10 thousand mark-to-market losses recorded to “Other” noninterest income in our consolidated statements of operations.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of Significant Accounting Policies, and Note 12, Derivatives and Hedging Activities, within our 2019 Annual Report on Form 10-K.


44


The notional amounts and fair values for derivatives consist of the following.
 
 At March 31, 2020
 Notional amount Fair value derivatives
(in thousands)  Asset Liability
      
Forward sale commitments$2,208,952
 $16,269
 $(19,614)
Interest rate lock and purchase loan commitments439,186
 13,565
 (63)
Interest rate swaps568,635
 45,076
 (27,850)
Eurodollar futures1,012,000
 
 (41)
Total derivatives before netting$4,228,773
 74,910
 (47,568)
Netting adjustment/Cash collateral (1)
  (41,435) 42,458
Carrying value on consolidated statements of financial condition  $33,475
 $(5,110)


 At December 31, 2019
 Notional amount Fair value derivatives
(in thousands)  Asset Liability
      
Forward sale commitments$651,838
 $830
 $(492)
Interest rate lock and purchase loan commitments124,379
 2,281
 (58)
Interest rate swaps688,516
 27,097
 (10,889)
Eurodollar futures2,232,000
 3
 
Total derivatives before netting$3,696,733
 30,211
 (11,439)
Netting adjustment/Cash collateral (1)
  (21,414) 9,101
Carrying value on consolidated statements of financial condition(2)
  $8,797
 $(2,338)

(1)Includes net cash collateral paid of $1.0 million and net cash collateral received of $12.3 million at March 31, 2020 and December 31, 2019, 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.

The following tables present gross and net information about derivative instruments.
 At March 31, 2020
(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$74,910
 $(41,435) $33,475
 $
 $33,475
Derivative liabilities(47,568) 42,458
 (5,110) 
 (5,110)

 At December 31, 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$30,211
 $(21,414) $8,797
 $
 $8,797
Derivative liabilities(11,439) 9,101
 (2,338) 
 (2,338)


(1)Includes net cash collateral paid of $1.0 million and net cash collateral received of $12.3 million at March 31, 2020 and December 31, 2019, 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.

45


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 March 31, 
(in thousands)2020 2019 
     
Recognized in noninterest income:    
Net gain on loan origination and sale activities (1)
$5,140
 $146
 
Loan servicing income (2)
19,921
 3,683
 
Other (3)
(494) 9
 
 $24,567
 $3,838
(4 
) 
 

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

NOTE 7–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
(in thousands)At March 31,
2020
 At December 31,
2019
    
Commercial$2,432
 $128,841
Single family (1)
138,095
 105,458
Total loans held for sale$140,527
 $234,299


(1)Includes loans from discontinued operations of $26.1 million at December 31, 2019 with 0 similar balance at March 31, 2020.

Loans sold proceeds consisted of the following.
 
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Commercial$282,457
 $164,071
 
Single family309,853
 1,004,849
(1 
) 
Total loans sold (2)
$592,310
 $1,168,920
 


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


46


Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.
 
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Commercial$4,710
 $2,660
 
Single family (1)
17,831
 35,435
 
Gain on loan origination and sale activities (2)
$22,541
 $38,095
 


(1) Includes 0 and $35.5 million from discontinued operations for three months ended March 31, 2020 and 2019, 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 March 31,
2020
 At December 31,
2019
    
Commercial$1,661,038
 $1,618,876
Single family6,772,912
 7,023,441
Total loans serviced for others$8,433,950
 $8,642,317



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.


47


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

 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Balance, beginning of period$2,871
 $3,120
 
Additions, net of adjustments (1)
(316) 253
 
Realized losses (2)
(73) (117) 
Balance, end of period$2,482
 $3,256
 
 
(1)Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
(2)Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses.

The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $3.9 million and $2.5 million were recorded in other assets as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $9.1 million and $9.4 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 March 31, 
(in thousands)2020 2019 
     
Servicing income, net:    
Servicing fees and other$7,535
 $16,577
(5 
) 
Changes in fair value of single family MSRs due to modeled amortization (1)
(3,494) (8,983) 
Amortization of multifamily and SBA MSRs(1,511) (1,376) 
 2,530
 6,218
 
Risk management, single family MSRs:    
Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)(3)
(16,844) (4,498)
(5 
) 
Net gain from derivatives economically hedging MSR19,921
 3,683
 
 3,077
 (815) 
Loan servicing income (4)
$5,607
 $5,403
 
 
(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 $774 thousand, net of transaction costs, brokerage fees and prepayment reserves, resulting from the sales of single family MSRs during the three months ended March 31, 2019.
(4)Includes $3.6 million from discontinued operations for the three months ended March 31, 2019.
(5)The Company has corrected an error of $780 thousand for the three months ended March 31, 2019 due to incorrect presentation of pre-tax net income from the sale of single family MSRs within servicing fees and other instead of within changes in fair value of MSRs due to changes in market inputs and/or model updates of $17.4 million and $(5.3) million, respectively, to amounts as corrected of $16.6 million and $(4.5) million. 




48


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 March 31, 
(rates per annum) (1)
2020 2019 
     
Constant prepayment rate ("CPR") (2)
15.61% 19.84% 
Discount rate (3)
7.83% 9.73% 

(1)Weighted average rates during the period for sales of loans with similar characteristics.
(2)Represents the expected lifetime average.
(3)Discount rate is 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 March 31, 2020
  
Fair value of single family MSR$49,933
Expected weighted-average life (in years)3.52
Constant prepayment rate (1)
18.01%
Impact on fair value of 25 basis points adverse change in interest rates$(3,751)
Impact on fair value of 50 basis points adverse change in interest rates$(6,853)
Discount rate7.41%
Impact on fair value of 100 basis points increase$(1,474)
Impact on fair value of 200 basis points increase$(2,867)
 
(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 2 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 $774 thousand pre-tax gain from discontinued operations for the three months ended March 31, 2019. For more information, see Note 2, Discontinued Operations on this Quarterly Report on Form 10-Q.

49



The changes in single family MSRs measured at fair value are as follows.
 
 Three Months Ended March 31,  
(in thousands)2020 2019  
      
Beginning balance$68,109
 $252,168
  
Additions and amortization:     
Originations2,162
 7,287
  
Sale of single family MSRs
 (176,944)  
Changes due to amortization (1)
(3,494) (8,983)  
Net additions and amortization(1,332) (178,640)  
Changes in fair value of MSRs due to changes in market inputs and/or model updates (2)
(16,844) (5,278)  
Ending balance$49,933
 $68,250
  
 
(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 March 31, 
(in thousands)2020 2019 
     
Beginning balance$29,494
 $28,328
 
Origination1,957
 630
 
Amortization(1,331) (1,266) 
Ending balance$30,120
 $27,692
 


At March 31, 2020, the expected weighted-average remaining life of the Company's multifamily MSRs was 7.16 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)At March 31, 2020
  
Remainder of 2020$3,248
20214,229
20224,011
20233,798
20243,542
20253,206
2026 and thereafter8,086
Carrying value of multifamily MSR$30,120




50


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 March 31, 2020 and December 31, 2019 was $12.1 million and $52.8 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. These commitments include unused consumer portfolio lines of $467.2 million and $485.1 million as of March 31, 2020 and December 31, 2019, respectively, and commercial portfolio lines $672.2 million and $722.2 million at March 31, 2020 and December 31, 2019, respectively. Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments, were $420.0 million and $435.2 million at March 31, 2020 and December 31, 2019, 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 $2.3 million and $1.1 million at March 31, 2020 and December 31, 2019, respectively.

The Company is in certain agreements to invest in qualifying small businesses and small enterprises, as well as low income housing tax credit partnerships and a tax-exempt bond partnership that have not been recognized in the Company's financial statements. At March 31, 2020 and December 31, 2019, we had $26.4 million and $23.5 million, respectively, of future commitments to invest in these enterprises.

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 March 31, 2020 and December 31, 2019, the total unpaid principal balance of loans sold under this program was $1.59 billion and $1.55 billion, respectively. The Company's reserve liability related to this arrangement totaled $2.9 million and $2.8 million at March 31, 2020 and December 31, 2019, respectively. There were 0 actual losses incurred under this arrangement during the three months ended March 31, 2020 and 2019.

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

51


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 mortgage repurchase liability incorporates probable losses associated with such indemnification.

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 $6.84 billion and $7.10 billion as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020 and December 31, 2019, 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 $2.5 million and $2.9 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 March 31, 2020, 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 March 31, 2020.


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 19, Fair Value Measurement within our 2019 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.


52


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.

53


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.

 




54


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 March 31, 2020 Level 1 Level 2 Level 3
        
Assets:       
Investment securities available for sale       
Mortgage backed securities:       
Residential$84,746
 $
 $81,948
 $2,798
Commercial43,918
 
 43,918
 
Collateralized mortgage obligations:       
Residential294,153
 
 294,153
 
Commercial160,770
 
 160,770
 
Municipal bonds452,633
 
 452,633
 
Corporate debt securities16,611
 
 16,524
 87
U.S. Treasury securities1,314
 
 1,314
 
Single family loans held for sale138,095
 
 138,095
 
Single family loans held for investment4,926
 
 
 4,926
Single family mortgage servicing rights49,933
 
 
 49,933
Derivatives       
Forward sale commitments16,269
 
 16,269
 
Interest rate lock and purchase loan commitments13,565
 
 
 13,565
Interest rate swaps45,076
 
 45,076
 
Total assets$1,322,009
 $
 $1,250,700
 $71,309
Liabilities:       
Derivatives       
Eurodollar futures$41
 $41
 $
 $
Forward sale commitments19,614
 
 19,614
 
Interest rate lock and purchase loan commitments63
 
 
 63
Interest rate swaps27,850
 
 27,850
 
Total liabilities$47,568
 $41
 $47,464
 $63



55


(in thousands)Fair Value at December 31, 2019 Level 1 Level 2 Level 3
        
Assets:       
Investment securities available for sale       
Mortgage backed securities:       
Residential$91,695
 $
 $89,831
 $1,864
Commercial38,025
 
 38,025
 
Collateralized mortgage obligations:       
Residential291,618
 
 291,618
 
Commercial156,154
 
 156,154
 
Municipal bonds341,318
 
 341,318
 
Corporate debt securities18,661
 
 18,573
 88
U.S. Treasury securities1,307
 
 1,307
 
Single family loans held for sale (1)
105,458
 
 105,458
 
Single family loans held for investment3,468
 
 
 3,468
Single family mortgage servicing rights68,109
 
 
 68,109
Derivatives       
Eurodollar futures3
 3
 
 
Forward sale commitments830
 
 830
 
Interest rate lock and purchase loan commitments2,281
 
 
 2,281
Interest rate swaps27,097
 
 27,097
 
Total assets$1,146,024
 $3
 $1,070,211
 $75,810
Liabilities:       
Derivatives       
Forward sale commitments$492
 $
 $492
 $
Interest rate lock and purchase loan commitments58
 
 
 58
Interest rate swaps10,889
 
 10,889
 
Total liabilities$11,439
 $
 $11,381
 $58


(1) Includes both continuing and discontinued operations.

There were 0 transfers between levels of the fair value hierarchy during the three months ended March 31, 2020 and 2019.

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 months ended March 31, 2020 and 2019, see Note 7, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.

The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on 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 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.


56


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 are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement.

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $4.9 million and $3.5 million at March 31, 2020 and December 31, 2019, 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 March 31, 2020
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Investment securities available for sale$2,885
 Income approach Implied spread to benchmark interest rate curve 2.00% 2.00% 2.00%


(dollars in thousands)At December 31, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Investment securities available for sale$1,952
 Income approach Implied spread to benchmark interest rate curve 2.00% 2.00% 2.00%


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 March 31, 2020
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for investment, fair value option$4,926
 Income approach Implied spread to benchmark interest rate curve 5.75% 8.23% 6.37%

(dollars in thousands)At December 31, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Loans held for investment, fair value option$3,468
 Income approach Implied spread to benchmark interest rate curve 4.56% 6.87% 5.63%


57



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. We had no loans held for sale with fair value option that were subject to Level 3 fair value due to a significant unobservable input at March 31, 2020 and December 31, 2019.
 
           


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 March 31, 2020
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock and purchase loan commitments, net$13,502
 Income approach Fall-out factor 0.71% 34.34% 16.89%
     Value of servicing 0.37% 1.36% 1.05%

(dollars in thousands)At December 31, 2019
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock and purchase loan commitments, net$2,223
 Income approach Fall-out factor —% 59.69% 12.20%
     Value of servicing 0.55% 1.77% 1.14%



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

  Three Months Ended March 31, 2020
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Investment securities available for sale $1,952
 $985
 $
 $(291) $239
 $2,885




58



  Three Months Ended March 31, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Investment securities available for sale $
 $
 $2,379
 $(40) $(402) $1,937


The following tables present fair value changes and activity for Level 3 loans held for sale and loans held for investment. We had no loans held for sale with fair value option that were subject to Level 3 fair value due to a significant unobservable input
at March 31, 2020 and December 31, 2019.
  Three Months Ended March 31, 2020
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)  
             
Loans held for investment $3,468
 $1,679
 $
 $(247) $26
 $4,926

  Three Months Ended March 31, 2019
  Beginning balance Additions Transfers Payoffs/Sales Change in mark to market Ending balance
(in thousands)            
             
Loans held for sale $2,691
 $1,886
 $
 $
 $(52) $4,525
Loans held for investment 4,057
 725
 
 (3) 51
 4,830
  
 
The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments.
 Three Months Ended March 31, 
(in thousands)2020 2019 
     
Beginning balance, net$2,223
 $10,284
 
Total realized/unrealized gains15,762
 19,665
 
Settlements(4,483) (15,893) 
Ending balance, net$13,502
 $14,056
 


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 quarterly 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.

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.


59


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 months ended March 31, 2020 and 2019, the Company did not apply any adjustments 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 commercial and residential appraisal 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 months ended March 31, 2020 and 2019 and assets held at the end of the respective reporting period.

 At or for the Three Months Ended March 31, 2020
(in thousands)Fair Value of Assets Held at March 31, 2020 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$890
 $
 $
 $890
 $113

 At or for the Three Months Ended March 31, 2019
(in thousands)Fair Value of Assets Held at March 31, 2019 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment (1)
$270
 $
 $
 $270
 $(4)

(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 March 31, 2020
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
          
Assets:         
Cash and cash equivalents$72,441
 $72,441
 $72,441
 $
 $
Investment securities held to maturity4,347
 4,462
 
 4,462
 
Loans held for investment5,030,004
 5,164,795
 
 
 5,164,795
Loans held for sale – multifamily and other2,432
 2,432
 
 2,432
 
Mortgage servicing rights – multifamily30,120
 33,483
 
 
 33,483
Federal Home Loan Bank stock26,795
 26,795
 
 26,795
 
Liabilities:         
Time deposits$1,297,924
 $1,312,470
 $
 $1,312,470
 $
Federal Home Loan Bank advances463,590
 465,297
 
 465,297
 
Other borrowings95,000
 94,998
 
 94,998
 
Long-term debt125,697
 117,694
 
 117,694
 




60


 At December 31, 2019
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
          
Assets:         
Cash and cash equivalents$57,880
 $57,880
 $57,880
 $
 $
Investment securities held to maturity4,372
 4,501
 
 4,501
 
Loans held for investment5,069,316
 5,139,078
 
 
 5,139,078
Loans held for sale – multifamily and other128,841
 130,720
 
 130,720
 
Mortgage servicing rights – multifamily29,494
 32,738
 
 
 32,738
Federal Home Loan Bank stock22,399
 22,399
 
 22,399
 
Liabilities:         
Time deposits$1,614,533
 $1,622,879
 $
 $1,622,879
 $
Federal Home Loan Bank advances346,590
 347,949
 
 347,949
 
Federal funds purchased and securities sold under agreements to repurchase125,000
 125,101
 125,101
 
 
Long-term debt125,650
 115,011
 
 115,011
 


NOTE 10–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.
 
 Three Months Ended March 31, 
(in thousands, except share and per share data)2020 2019 
     
EPS numerator:    
Income from continuing operations$7,139
 $5,058
 
Income (loss) from discontinued operations
 (6,773) 
Net income available to common shareholders$7,139
 $(1,715) 
EPS denominator:    
Weighted average shares:    
Basic weighted-average number of common shares outstanding23,688,930
 27,021,507
 
Dilutive effect of outstanding common stock equivalents (1)
171,350
 163,668
 
Diluted weighted-average number of common stock outstanding23,860,280
 27,185,175
 
Basic earnings per share:    
Income from continuing operations$0.30
 $0.19
 
Income (loss) from discontinued operations
 (0.25) 
Basic earnings per share$0.30
 $(0.06) 
Diluted earnings per share:    
Income from continuing operations$0.30
 $0.19
 
Income (loss) from discontinued operations
 (0.25) 
Diluted earnings per share$0.30
 $(0.06) 
 
(1)Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three months ended March 31, 2020 and 2019 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 1,067 at March 31, 2020 and 0 at March 31, 2019.


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.

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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 $4.9 million during the remainder of 2020, $5.4 million in 2021, $4.4 million in 2022, $2.6 million in 2023, $870 thousand in 2024 and $989 thousand thereafter.
We incurred $357 thousand and $2.5 million in impairment charges related to the closure of certain offices for the three months ended March 31, 2020 and 2019, respectively.

The components of lease expense were as follows.
 Three Months Ended March 31,
(in thousands)2020 2019
    
Operating lease cost$3,215
 $3,951
Finance lease cost:   
Amortization of right-of-use assets374
 616
Interest on lease liabilities74
 94
Short-term lease
 4
Variable lease cost1,355
 1,768
Sublease income(2,049) (339)
Total lease cost$2,969
 $6,094


Supplemental cash flow information related to leases was as follows.
 Three Months Ended March 31,
(in thousands)2020 2019
    
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases$4,269
 $4,431
Operating cash flows from finance leases74
 94
Financing cash flows from finance leases285
 455
Right-of-use assets obtained in exchange for lease obligations:   
Operating leases$324
 $4,836
Finance leases28
 176



62


Supplemental balance sheet information related to leases was as follows.
(in thousands, except lease term and discount rate)March 31, 2020 December 31, 2019
    
Operating lease right-of-use assets$83,666
 $86,789
Operating lease liabilities100,850
 104,579
    
Finance lease right-of-use assets$7,709
 $8,084
Finance lease liabilities8,251
 8,513
    
Weighted Average Remaining lease term in years   
Operating leases11.84
 11.87
Finance leases15.66
 15.46
Weighted Average Discount Rate   
Operating leases3.49% 3.48%
Finance leases3.64
 2.63

Maturities of lease liabilities were as follows.
  Operating Leases Finance Leases
Year ended December 31,    
2020 (excluding the three months ended March 31, 2020) $11,021
 $1,184
2021 13,626
 1,294
2022 12,175
 590
2023 10,637
 475
2024 10,205
 400
2025 9,012
 420
2026 and thereafter 56,604
 6,818
Total lease payments 123,280
 11,181
Less imputed interest 22,430
 2,930
Total $100,850
 $8,251




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 application of the acquisition method of accounting resulted in goodwill of $5.9 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 March 31, 
(in thousands)2020 2019 
     
Beginning balance$4,321
 $(15,439) 
Cumulative effect of adoption of new accounting standards 

 (2,080)
(1 
) 
Other comprehensive income before reclassifications13,496
 9,969
 
Amounts reclassified from accumulated other comprehensive (loss) income(88) 195
 
Net current-period other comprehensive income13,408
 10,164
 
Ending balance$17,729
 $(7,355) 


(1) Reflects the January 1, 2019 adoption of ASU 2018-02 and ASU 2017-12.

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 March 31, 
(in thousands) 2020 2019 
      
Gain (loss) on sale of investment securities available for sale $112
 $(247) 
Income tax expense (benefit) 24
 (52) 
Total, net of tax $88

$(195) 



NOTE 14–REVENUE:

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 three months ended March 31, 2020 and 2019, in scope revenue streams were approximately 2.4% and 2.0% of our total revenues, respectively. As this standard is immaterial to our consolidated financial 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.

63


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.



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NOTE 15–RESTRUCTURING:

In 2019, we took steps to restructure our corporate operations in order to improve productivity and reduce total corporate expenses in light of a substantial reduction in the size and complexity of our Company and a lower growth plan going forward. Throughout 2019, we began executing this restructuring plan which included:

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

The costs incurred include severance, retention, facility related charges and consulting fees. These restructuring activities and related costs will continue through 2020.

Also in 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 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 charges, but rather are characterized as gain/loss on disposal of discontinued operations; for further information, see Note 2, Discontinued Operations.

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 months ended March 31, 2020 and 2019 and the Company's net remaining liability balance at March 31, 2020 for both continuing and discontinued operations.
  2020 2019
At and for the three months ended March 31 Facility-related costs Personnel-related costs Other costs Total Facility-related costs Personnel- related costs Other costs Total
(in thousands)                
Beginning balance $1,235
 $510
 $159
 $1,904
 $1,604
 $
 $
 $1,604
Transfers-In 497
 707
 
 1,204
 
 
 
 
Restructuring charges 580
 147
 488
 1,215
 (96) 
 128
 32
Costs paid or otherwise settled (1,072) (1,072) (522) (2,666) (101) 
 
 (101)
Ending balance $1,240
 $292
 $125
 $1,657
 $1,407
 $
 $128
 $1,535



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.


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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 2019 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business or in the markets in which we operate, and our future plans, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute forward-looking statements.
Many forward-looking statements can be identified as using words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2019 and the risks and uncertainties 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. In addition, many of the risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result.

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation 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 or otherwise, except as required by law. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.

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

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




66


Summary Financial Data
 At or for the Three Months Ended
(dollars in thousands, except share data)Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
          
Income statement data (for the period ended):         
Net interest income$45,434
 $45,512
 $47,134
 $49,187
 $47,557
Provision (reversal) for credit losses14,000
 (2,000) 
 
 1,500
Noninterest income32,630
 21,931
 24,580
 19,829
 8,092
Noninterest expense55,184
 53,215
 55,721
 58,832
 47,846
Income from continuing operations before income taxes8,880
 16,228
 15,993
 10,184
 6,303
Income tax expense (benefit) from continuing operations1,741
 3,123
 2,328
 1,292
 1,245
Income from continuing operations7,139
 13,105
 13,665
 8,892
 5,058
(Loss) income from discontinued operations before income taxes
 (3,357) 190
 (16,678) (8,440)
Income tax (benefit) expense from discontinued operations
 (1,240) 28
 (2,198) (1,667)
(Loss) income from discontinued operations (1)

 (2,117) 162
 (14,480) (6,773)
Net income (loss)$7,139
 $10,988
 $13,827
 $(5,588) $(1,715)
Basic income (loss) per common share:         
Income from continuing operations$0.30
 $0.54
 $0.55
 $0.32
 $0.19
(Loss) income from discontinued operations
 (0.09) 0.01
 (0.54) (0.25)
Basic income (loss) per common share$0.30
 $0.45
 $0.55
 $(0.22) $(0.06)
Diluted income (loss) per common share:         
Income from continuing operations$0.30
 $0.54
 $0.54
 $0.32
 $0.19
(Loss) income from discontinued operations
 (0.09) 0.01
 (0.54) (0.25)
Diluted income (loss) per common share$0.30
 $0.45
 $0.55
 $(0.22) $(0.06)
          
Common shares outstanding23,376,793
 23,890,855
 24,408,513
 26,085,164
 27,038,257
Weighted average number of shares outstanding:         
Basic23,688,930
 24,233,434
 24,419,793
 26,619,216
 27,021,507
Diluted23,860,280
 24,469,891
 24,625,938
 26,802,130
 27,185,175
Shareholders' equity per share$28.97
 $28.45
 $28.32
 $27.75
 $27.63
Financial position (at period end):         
Cash and cash equivalents$72,441
 $57,880
 $74,788
 $99,602
 $67,690
Investment securities1,058,492
 943,150
 866,736
 803,819
 816,878
Loans held for sale140,527
 208,177
 172,958
 145,252
 56,928
Loans held for investment, net5,034,930
 5,072,784
 5,139,108
 5,287,859
 5,345,969
Loan servicing rights80,053
 97,603
 90,624
 94,950
 95,942
Other real estate owned1,343
 1,393
 1,753
 1,753
 838
Total assets6,806,718
 6,812,435
 6,835,878
 7,200,790
 7,171,405
Deposits5,257,057
 5,339,959
 5,804,307
 5,590,893
 5,178,334
Federal Home Loan Bank advances463,590
 346,590
 5,590
 387,590
 599,590
Federal funds purchased and securities sold under agreements to repurchase
 125,000
 
 
 27,000
Other borrowings95,000
 
 
 
 
Shareholders' equity677,314
 679,723
 691,136
 723,910
 747,031
Financial position (averages):         
Investment securities$993,158
 $892,833
 $803,355
 $815,287
 $891,813
Loans held for investment5,080,928
 5,184,089
 5,277,586
 5,435,474
 5,236,387
Total interest-earning assets6,253,147
 6,328,179
 6,437,903
 6,699,821
 6,471,930
Total interest-bearing deposits4,333,756
 4,674,797
 4,846,585
 4,361,850
 4,145,778
Federal Home Loan Bank advances333,821
 125,414
 85,894
 594,810
 833,478
Federal funds purchased and securities sold under agreements to repurchase134,539
 53,163
 6,930
 73,189
 47,778
Total interest-bearing liabilities4,943,155
 4,988,112
 5,074,429
 5,165,939
 5,159,853
Shareholders' equity691,292
 701,018
 693,475
 741,330
 750,466


67


Summary Financial Data (continued)

 At or for the Three Months Ended
(dollars in thousands, except share data)Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
          
Financial performance, consolidated 
         
Return on average shareholders' equity (2)
4.13% 6.27% 7.98% (3.02)% (0.91)%
Return on average assets0.42
 0.64
 0.79
 (0.31) (0.10)
Net interest margin (3)
2.93
 2.87
 2.96
 3.11
 3.11
Efficiency ratio (4)
70.69
 83.87
 78.08
 106.83
 100.66
Asset quality:         
Allowance for credit losses including unfunded commitments$60,606

$42,837

$44,634
 $44,628
 $44,536
Allowance for credit losses/total loans (8)
1.14%
0.82%
0.84% 0.81 % 0.80 %
Allowance for credit losses/nonaccrual loans (9)
449.32% 324.80% 349.37% 435.59 % 271.99 %
Total nonaccrual loans (5)(6)
$12,975
 $12,861
 $12,433
 $9,930
 $15,874
Nonaccrual loans/total loans0.25%
0.25%
0.24%
0.19 % 0.29 %
Other real estate owned$1,343

$1,393

$1,753

$1,753
 $838
Total nonperforming assets$14,318

$14,254

$14,186

$11,683
 $16,712
Nonperforming assets/total assets0.21% 0.21% 0.21% 0.16 % 0.23 %
Net (recoveries) charge-offs$(29) $(203) $(6) $(92) $(123)
Regulatory capital ratios for the Bank:         
Tier 1 leverage capital (to average assets)10.06% 10.56% 10.17% 9.86 % 11.17 %
Common equity tier 1 risk-based capital (to risk-weighted assets)12.75
 13.50
 13.45
 13.26
 14.88
Tier 1 risk-based capital (to risk-weighted assets)12.75
 13.50
 13.45
 13.26
 14.88
Total risk-based capital (to risk-weighted assets)13.95
 14.37
 14.37
 14.15
 15.77
Regulatory capital ratios for the Company:         
Tier 1 leverage capital (to average assets)10.15% 10.16% 10.04% 10.12 % 10.73 %
Tier 1 common equity risk-based capital (to risk-weighted assets)11.24
 11.43
 11.67
 11.99
 12.62
Tier 1 risk-based capital (to risk-weighted assets)12.32
 12.52
 12.77
 13.06
 13.68
Total risk-based capital (to risk-weighted assets)13.50
 13.40
 13.69
 13.95
 14.58
 At or for the Three Months Ended
(in thousands)Mar. 31, 2020 Dec. 31, 2019 Sept. 30, 2019 June 30, 2019 Mar. 31,
2019
          
SUPPLEMENTAL DATA:         
Loans serviced for others:         
Commercial$1,661,038
 $1,618,876
 $1,576,714
 $1,535,522
 $1,521,597
Single family (7)
6,772,912
 7,023,441
 7,014,265
 6,790,955
 6,052,394
Total loans serviced for others$8,433,950
 $8,642,317
 $8,590,979
 $8,326,477
 $7,573,991

(1)Discontinued operations accounting was terminated effective January 1, 2020, as it was no longer material to our consolidated 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 (pre-provision net interest income and noninterest income).
(5)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.
(6)Includes $1.4 million, $1.3 million, $1.3 million, $1.4 million and $1.7 million of nonperforming loans guaranteed by the SBA at March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, respectively.
(7)Excludes interim loan servicing from first quarter 2019 sale of single family mortgage servicing rights.
(8)Prior to January 1, 2020 and the adoption of ASU 2016-13, this calculation represented the Allowance for Loan Losses/Total Loans.

68


(9)Prior to January 1, 2020 and the adoption of ASU 2016-13, this calculation represented the Allowance for Loan Losses/Non-Accrual Loans.




69


About Us

HomeStreet is a diversified financial services company founded in 1921, headquartered in Seattle, Washington, serving customers primarily on the West Coast of the United States, including Hawaii. We are principally engaged in commercial banking, consumer banking, and real estate lending, including commercial real estate and single family mortgage banking operations.

HomeStreet, Inc. is a bank holding company that has elected to be treated as a financial holding company. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. We also sell 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, private banking and cash management services and other banking services. Our loan products include commercial business loans 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.

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

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.

Current Developments
The outbreak of COVID-19 has adversely impacted a broad range of industries across the region where the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization has declared COVID-19 to be a global pandemic and as a result almost all public commerce and related business activities has been and continue to be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted business and other financial activity in the areas in which the Company operates. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While there has been no material impact to the Company’s employees to date, COVID-19 could potentially create widespread business continuity issues for the Company in the future.
Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package, which was further expanded in April 2020 by $484 billion. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and health care providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations, as discussed below.
While it is not possible to know the full extent of the impacts of COVID-19 on the Company’s operations, including any additional mitigation measures that may be imposed to curtail its spread, the Company is disclosing potentially material items of which it is aware.
Financial position and results of operations
The Company’s net interest income could be reduced due to COVID-19. In keeping with guidance from regulators, the Company is actively working with COVID-19 affected borrowers to defer their payments. While loans should continue to accrue interest during the initial deferral period, should the economic downturn persist causing the borrowers’ financial situation to deteriorate we would potentially need to reverse interest income and could sustain credit losses on these loans. In such a scenario, interest income and provision for credit losses in future periods could be negatively impacted.  At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

1 DUS® is a registered trademark of Fannie Mae
70 



Credit
The Company is working with customers directly affected by COVID-19. The Company is prepared to offer short-term assistance in accordance with banking regulatory guidelines. As a result of the current economic environment caused by the COVID-19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their financial situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for credit losses and record additional provision for credit losses. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 pandemic are prolonged.

Goodwill Impairment Analysis

We evaluated goodwill for impairment at March 31, 2020 and based on our impairment assessment determined our goodwill assets were not impaired. COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform another goodwill impairment test and result in an impairment charge being recorded to earnings for that period.
Processes, controls and business continuity plan
The Company has implemented a business continuity plan that includes a remote working strategy and a social distancing and sanitation plan. The Company does not anticipate incurring material additional costs related to its continued deployment of the business continuity plan.  No material operational failures or internal control challenges have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraints through the implementation of its business continuity plans, but staffing remains a risk if key employees or a large number of employees were to become ill and unable to work. The Company has taken significant measures to protect its employees, such as having most work remotely from home under stay at home orders and where remote work is not viable, implemented a social distancing and sanitation plan. At May 6, 2020, all of our retail deposit branches were open and operating under the guidelines issued by Federal, state, and regional health departments
Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company has executed multiple assistance programs including a loan forbearance program for its lending customers that are adversely affected by the COVID-19 pandemic.  As of May 5, 2020, the Company had granted a forbearance on 393 qualifying loans with an outstanding balance of $223.0 million. The Company had 173 additional forbearance requests representing $204.0 million in outstanding balances that were in the review process. In accordance with the CARES Act and interagency guidance issued in March 2020, loans granted forbearance due to COVID-19 are not currently considered troubled debt restructurings under US GAAP.
With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company assisted its customers with applications for resources through the program. As of May 5, 2020, the Treasury Department advised that that all funds available under this program had been allocated. PPP loans have a two-year term and earn interest at 1%. Additionally, the Company will earn fees paid by the SBA based upon the sliding fee scale established for the PPP program. The Company believes that a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of May 5, 2020, the Company has closed or approved with the SBA, 1,479 PPP loans representing $304.7 million in funding. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government.

As part of our capital management strategy, in 2020, we repurchased a total of 580,278 shares of our common stock at an average price of $27.57 per share. However, on March 20, 2020, due to the COVID-19 pandemic we suspended our share repurchase program to preserve our capital.
The extent to which the COVID-19 pandemic affects the Company’s future financial results and operations will depend on future developments which are uncertain and unpredictable, including new information which continues to emerge concerning the expected duration and broad impacts of the pandemic both social and economic, and current or future domestic and international actions in response to the pandemic and its effects. In addition, due to these uncertainties, we do not know if dividends will be declared in future periods.


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Management's Overview of the First Quarter of 2020 Financial Performance

Results for the first quarter of 2019 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") and thereafter. Discontinued operations accounting was concluded as of January 1, 2020.
 At or for the Three Months Ended March 31, Percent Change
 (in thousands, except per share data and ratios)2020 2019 
      
Selected statement of operations data     
Total net revenue (1)
$78,064
 $55,649
 40 %
Total noninterest expense55,184
 47,846
 15
Provision for credit losses14,000
 1,500
 833
Income from continuing operations before income taxes8,880
 6,303
 41
Income tax expense for continuing operations1,741
 1,245
 40
Income from continuing operations7,139
 5,058
 41
Loss from discontinued operations before income taxes
 (8,440) (100)
Income tax benefit from discontinued operations
 (1,667) (100)
Loss from discontinued operations
 (6,773) (100)
Net income (loss)$7,139
 $(1,715) (516)%
      
Financial performance     
Diluted income per share for continuing operations$0.30
 $0.19
  
Diluted income (loss) per share for discontinued operations
 (0.25)  
Diluted income (loss) per share$0.30
 $(0.06)  
Return on average common shareholders' equity4.13% (0.91)%  
Return on average assets0.42% (0.10)%  
Net interest margin2.93% 3.11 %  
(1)Total net revenue is net interest income and noninterest income.

For the three months ended March 31, 2020 and 2019, the Company had net income of $7.1 million and a net loss of $1.7 million, respectively, which included both continuing and discontinued operations. The increase in net income from the three months ended March 31, 2019 primarily related to the $9.6 million, net of tax, loss on exit or disposal and restructuring charges taken in the first quarter of 2019 and an increase in gain on loan origination and sale activities related to higher commercial loan sales volume and improved margin on commercial loans. The increase is partially offset by the $14.0 million provision for credit losses.

Net income from continuing operations in the three months ended March 31, 2020 increased compared to the three months ended March 31, 2019 primarily due to $11.3 million, after-tax, that was contributed by the Retained MB Business. In the comparative period, income and expense associated with the legacy MB Business was in discontinued operations. Excluding this impact, the improvement primarily 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. The increase is partially offset by the $14.0 million provision for credit losses.



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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 March 31, 2020
  HomeStreet, Inc. HomeStreet Bank
  Ratio Ratio
     
     
Tier 1 leverage capital (to average assets) 10.15% 10.06%
Common equity Tier 1 capital (to risk-weighted assets) 11.24
 12.75
Tier 1 risk-based capital (to risk-weighted assets) 12.32
 12.75
Total risk-based capital (to risk-weighted assets) 13.50
 13.95

  At December 31, 2019
  HomeStreet, Inc. HomeStreet Bank
  Ratio Ratio
     
     
Tier 1 leverage capital (to average assets) 10.16% 10.56%
Common equity Tier 1 capital (to risk-weighted assets) 11.43
 13.50
Tier 1 risk-based capital (to risk-weighted assets) 12.52
 13.50
Total risk-based capital (to risk-weighted assets) 13.40
 14.37

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 for Loans Held for Investment
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 2019 Annual Report on Form 10-K and Note 1, Summary of Significant Accounting Policies within this Form 10-Q.

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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 March 31,
 2020 2019
(in thousands)
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
            
Assets:           
Interest-earning assets: (1)
           
Cash and cash equivalents$41,652
 $5
 0.05% $58,650
 $184
 1.27%
Investment securities993,158
 5,317
 2.14
 891,813
 6,048
 2.71
Loans held for sale (4)
137,409
 1,367
 3.98
 285,080
 3,344
 4.69
Loans held for investment5,080,928
 57,878
 4.52
 5,236,387
 63,034
 4.82
Total interest-earning assets6,253,147
 64,567
 4.10
 6,471,930
 72,610
 4.50
Noninterest-earning assets (2)(4)
572,846
     721,795
    
Total assets$6,825,993
     $7,193,725
    
Liabilities and shareholders' equity:           
Deposits: (4)
           
Interest-bearing demand accounts$369,439
 $341
 0.37% $375,530
 $375
 0.41%
Savings accounts220,150
 98
 0.18
 240,900
 150
 0.25
Money market accounts2,261,776
 6,306
 1.12
 1,932,317
 5,803
 1.21
Certificate accounts1,482,391
 8,134
 2.21
 1,597,031
 8,153
 2.07
Total interest-bearing deposits (5)
4,333,756
 14,879
 1.38
 4,145,778
 14,481
 1.41
Federal Home Loan Bank advances333,821
 1,310
 1.55
 833,478
 5,614
 2.69
Federal funds purchased and securities sold under agreements to repurchase134,539
 458
 1.35
 47,778
 304
 2.54
Other borrowings15,373
 78
 2.03
 7,339
 94
 5.15
Long-term debt125,666
 1,590
 5.04
 125,480
 1,744
 5.56
Total interest-bearing liabilities4,943,155
 18,315
 1.48
 5,159,853
 22,237
 1.74
Noninterest-bearing liabilities (4) (5)
1,191,546
     1,283,406
    
Total liabilities6,134,701
     6,443,259
    
Shareholders' equity691,292
     750,466
    
Total liabilities and shareholders' equity$6,825,993
     $7,193,725
    
Net interest income (3)
  $46,252
     $50,373
  
Net interest spread    2.62%     2.76%
Impact of noninterest-bearing sources    0.31
     0.35
Net interest margin    2.93%     3.11%
(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 $818 thousand and $670 thousand for the three months ended March 31, 2020 and 2019, 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.
(5)Cost of deposits was 1.14% in both the three months ended March 31, 2020 and 2019.



74


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 $457 thousand and $525 thousand for the three months ended March 31, 2020 and 2019, respectively.

Net Income

Net income, which included both continuing and discontinued operations, increased in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in net income from the three months ended March 31, 2019 primarily related to the $9.6 million, net of tax, in loss on exit or disposal and restructuring charges taken in the first quarter of 2019 and an increase in gain on loan origination and sale activities related to higher commercial loan sales volume and improved margin on commercial loans. The increase is partially offset by the $14.0 million provision for credit losses.

Net Income from Continuing Operations

Net income from continuing operations increased in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to $11.3 million after-tax, that was contributed by the Retained MB Business. In the comparative period, income and expense associated with the legacy MB Business was in discontinued operations. Excluding this impact, the improvement primarily 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. The increase is partially offset by the $14.0 million provision for credit losses.

Net Income from Discontinued Operations

We had no income from discontinued operations for the three months ended March 31, 2020 compared to a net loss of $6.8 million for the three months ended March 31, 2019 due to the conclusion of discontinued operations activity and the impact from revenues and expenses associated with the Retained MB Business, which were reflected in continuing operations beginning April 1, 2019.

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 first quarter of 2020 was $46.3 million, a decrease of $4.1 million, or 8.2%, from the first quarter of 2019. The decrease from 2019 was primarily due to lower balances and yields on loans held for investment and loans held for sale due to lower loan origination volume resulting from the HLC business sale and higher amount of prepayments due to the reduction in market interest rates. This decrease was partially offset by a decrease in interest expense on FHLB advances due to both a reduction in these advances and a decline in rates paid on the advances.

The net interest margin on a tax equivalent basis for the first quarter of 2020 decreased to 2.93% from 3.11% for the same period in 2019. The decrease from 2019 was primarily due to the cost of funds not falling at the same rate as the yields on interest-earning assets with the substantial decline in market interest rates. The cost of interest-bearing deposits only declined 0.03% from last year primarily due to higher-rate time deposit accounts that were originated in the second and third quarters of 2019 and did not mature until the end of the first quarter of 2020 and the beginning of the second quarter of 2020. Additionally, the yield on investment securities declined 0.57% due primarily to the retrospective level yield amortization method that accelerated premium amortization on certain mortgage backed securities and collateralized mortgage obligations that resulted from the decline in market interest rates. Also, our yield on cash and cash equivalents was adversely impacted by the cash collateral that we held from our derivative counterparties as we paid interest on this cash collateral that reduced the yield on cash and cash equivalents during the quarter.


75


For the three months ended March 31, 2020, total average interest-earning assets decreased $218.8 million, or 3.4% from the three months ended March 31, 2019. The decrease for the three months ended March 31, 2019 is primarily due to lower loan origination volume resulting from the home loan center ("HLC') business sale and higher level of prepayments due to the reduction in market interest rates.

Total interest income of $64.6 million on a tax equivalent basis in the first quarter of 2020 decreased $8.0 million, or 11.1%, from $72.6 million in the first quarter of 2019. The decrease was primarily the result of lower average balances and yields of loans held for investment, which decreased $155.5 million, or 3.0% and from the three months ended March 31, 2019, respectively.

Total interest expense in the first quarter of 2020 decreased $3.9 million, or 17.6% from $22.2 million in the first quarter of 2019. The decrease resulted from lower FHLB advances average balances and rates.

Provision for Credit Losses

As a result of the adoption of CECL on January 1, 2020, there is a lack of comparability in the both the reserves and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.

Our provision for credit losses was $14.0 million and $1.5 million in the three months ended March 31, 2020 and 2019, respectively. The $14.0 million provision for credit losses in the first quarter of 2020 was exclusively due to the forecasted impacts of the COVID-19 pandemic on our loan portfolio. As of March 31, 2020, we expect that the markets in which we operate will have some deterioration in both collateral values and the economic outlook over the two-year forecast period, with negative risk factors peaking in the first year and modestly improving in the second year.

The allowance for credit losses for loans held for investment are collectively evaluated considering eight qualitative factors (Q-Factors) for each loan pool, including changes in collateral values and economic conditions. The Q-Factors adjust the expected historical loss rates for current and forecasted conditions that are not incorporated into the historical loss information.

Management uses relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts.

In the first quarter 2020, the economic Q-Factor forecast was based on inputs from Moody’s economic scenarios released on March 27, 2020, which include COVID-19 pandemic effects. Final forecast inputs were based on Moody’s Baseline scenario. These results were compared to and consistent with results derived using forecast inputs from Moody’s Moderate Recession scenario.

Collateral Q-Factor forecast inputs were based on a combination of commercial real estate (“CRE”) forecasts provided by REIS, the Bank’s data provider for CRE market information, released on February 3, 2020 and residential real estate forecasts from Moody’s released on March 27, 2020. To determine final forecast inputs for commercial real estate collateral values, REIS’ baseline scenario was compared to two alternate COVID-19 pandemic scenarios. To determine final forecast inputs for residential real estate collateral values, Moody's baseline scenario was compared to an alternate moderate recession scenario. Final forecast inputs were based on Moody’s Baseline scenario, CRE were based on REIS' most severe pandemic scenario, and final forecast inputs for residential real estate.

Net recoveries were $29 thousand in the first quarter of 2020 compared to net recoveries of $123 thousand in the same period in 2019. Overall, the allowance for credit losses (which excludes the allowance for credit losses on unfunded commitments) was 1.14% and 0.80% of loans held for investment at March 31, 2020 and March 31, 2019, respectively.

Although our credit quality remains strong, it is still too early to determine the full impacts of the COVID-19 pandemic and additional provisions to the ACL may be necessary in future periods. For a more detailed discussion on our allowance for credit losses and related provision for credit 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 March 31, Dollar
Change
 
Percent
Change
(in thousands)2020 2019  
        
Noninterest income       
Gain on loan origination and sale activities$22,541
 $2,607
 $19,934
 765 %
Loan servicing income5,607
 1,043
 4,564
 438
Depositor and other retail banking fees1,890
 1,745
 145
 8
Insurance agency commissions406
 625
 (219) (35)
Gain (loss) on sale of investment securities available for sale112
 (247) 359
 (145)
Other2,074
 2,319
 (245) (11)
Total noninterest income$32,630
 $8,092
 $24,538
 303 %

The increases in noninterest income in the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to $22.4 million of noninterest income contributed by the Retained MB Business. In the comparative period, noninterest income associated with the legacy MB Business was in discontinued operations. Excluding this impact, noninterest income increased largely 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 March 31, Dollar
Change
 Percent
Change
(in thousands)2020 2019  
        
Commercial$4,710
 $2,660
 $2,050
 77 %
Single family (1)
17,831
 35,435
 (17,604) (50)
Gain on loan origination and sale activities (2)
$22,541
 $38,095
 $(15,554) (41)%
 

(1) Includes $35.5 million from discontinued operations for the three months ended March 31, 2019. There are no similar balances in the three months ended March 31, 2020 as we concluded our discontinued operations activity.
(2) Includes loans originated as held for investment.

Loans Serviced for Others

(in thousands) At March 31,
2020
 At December 31,
2019
     
Commercial $1,661,038
 $1,618,876
Single family 6,772,912
 7,023,441
Total loans serviced for others $8,433,950
 $8,642,317



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Loan servicing income consisted of the following.

  Three Months Ended March 31,    
(in thousands) 2020 2019 Dollar Change Percent
Change
         
Commercial loan servicing income, net:        
Servicing fees and other $2,556
 $2,419
 $137
 6 %
Amortization of capitalized MSRs (1,511) (1,376) (135) 10
Commercial loan servicing income 1,045
 1,043
 2
 
         
Single family servicing income, net 

 

 
 

Servicing fees and other 4,979
 14,158
(4) 
(9,179) (65)
Changes in fair value of single family MSRs due to amortization (1)
 (3,494) (8,983) 5,489
 (61)
  1,485
 5,175
 (3,690) (71)
Risk management, single family MSRs:        
Changes in fair value of MSR due to changes in model inputs and/or assumptions (2)
 (16,844) (4,498)
(3) (4) 
(12,346) 274
Net gain (loss) from derivatives economically hedging MSR 19,921
 3,683
 16,238
 441
  3,077
 (815) 3,892
 (478)
Single Family servicing income 4,562
 4,360
 202
 5
Total loan servicing income $5,607
 $5,403
(5) 
$204
 4 %
         

(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 $774 thousand, net of transaction costs, brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during the three months ended March 31, 2019.
(4)Reclassified $780 thousand between these line items as compared to prior year disclosures.
(5)Includes both continuing and discontinued operations.

The decrease in loans serviced for others was primarily due to loan payoffs. Mortgage servicing fees collected in the three months ended March 31, 2020 decreased compared to the same period in 2019 was primarily due to the sales of mortgage servicing rights in March 2019. Our loans serviced for others portfolio was $8.43 billion at March 31, 2020 compared to $8.64 billion at December 31, 2019 and $7.57 billion at March 31, 2019.

The increase in loan servicing income for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to positive single family MSR risk management results. Participants in the primary mortgage market, HomeStreet included, have responded to both capacity constraints created by the large volume surge and market uncertainty by substantially increasing gain on sale margins through price increases. This shift in mortgage industry pricing resulted in primary mortgage rates not declining to the same extent as secondary mortgage rates during the quarter, driving the positive variance between the change in fair value of our MSRs and its related hedges. The increase in loan servicing income, was partially offset by a decrease in single family servicing income primarily due to the sale of single family mortgages serviced for others with aggregate unpaid principal balance ("UPB") of $14.26 billion in late March 2019.

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 March 31, 2020 increased compared to the three months ended March 31, 2019 primarily due to an increase in the collection of fees.


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The following table presents the composition of depositor and other retail banking fees for the periods indicated.
 
 Three Months Ended March 31, Dollar
Change
 Percent
Change
(in thousands)2020 2019  
        
Fees:       
Monthly maintenance and deposit-related fees$842
 $689
 $153
 22 %
Debit Card/ATM fees987
 997
 (10) (1)
Other fees61
 64
 (3) (5)
Total depositor and other retail banking fees$1,890
 $1,750
 $140
 8 %

Noninterest Expense

Noninterest expense from continuing operations consisted of the following.
 Three Months Ended March 31, 
Dollar 
Change
 
Percent
Change
(in thousands)2020 2019  
        
Noninterest expense       
Salaries and related costs$32,043
 $25,279
 $6,764
 27 %
General and administrative7,966
 8,182
 (216) (3)
Amortization of core deposit intangibles345
 333
 12
 4
Legal610
 (204) 814
 (399)
Consulting934
 1,408
 (474) (34)
Federal Deposit Insurance Corporation assessments771
 821
 (50) (6)
Occupancy5,521
 4,968
 553
 11
Information services6,942
 7,088
 (146) (2)
Net cost (benefit) of operation and sale of other real estate owned52
 (29) 81
 (279)
Total noninterest expense$55,184
 $47,846
 $7,338
 15 %
        

The increase in noninterest expense in the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to $9.4 million of expenses contributed by the Retained MB Business. In the comparative period, noninterest expense associated with the legacy MB Business was in discontinued operations. Excluding this contribution, noninterest expense decreased primarily due to savings related to reduced headcount and our cost saving initiatives.

Income Tax Expense

Our effective income tax rate of 19.6% for the first quarter of 2020, differed from the Federal blended state statutory tax rate of 23.7% primarily due to the benefit we received from tax-exempt interest income, excess tax benefit from share-based compensation, and bank-owned life insurance (“BOLI”).

Review of Financial Condition - Comparison of March 31, 2020 to December 31, 2019

Total assets were $6.81 billion at March 31, 2020 compared to $6.81 billion at December 31, 2019, a decrease of $5.7 million, or 0.1%.

Cash and cash equivalents were $72.4 million at March 31, 2020 compared to $57.9 million at December 31, 2019, an increase of $14.6 million, or 25.2%.

Investment securities were $1.06 billion at March 31, 2020 compared to $943.2 million at December 31, 2019, an increase of $115.3 million, or 12.2%.


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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 $4.3 million at March 31, 2020 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 March 31, 2020 At December 31, 2019
(in thousands)Fair Value Percent Fair Value Percent
        
Investment securities available for sale:       
Mortgage-backed securities:       
Residential$84,746
 8% $91,695
 10%
Commercial43,918
 4
 38,025
 4
Collateralized mortgage obligations:       
Residential294,153
 28
 291,618
 31
Commercial160,770
 15
 156,154
 17
Municipal bonds452,633
 43
 341,318
 36
Corporate debt securities16,611
 2
 18,661
 2
U.S. Treasury securities1,314
 
 1,307
 
Total investment securities available for sale$1,054,145
 100% $938,778
 100%

 
Loans held for sale were $140.5 million at March 31, 2020 compared to $208.2 million at December 31, 2019, a decrease of $67.7 million, or 32.5%. Loans held for sale include single family residential and multifamily loans, typically sold within 30 days of origination or transfer to held for sale. The decrease in the loans held for sale balance was primarily due to a reduction of CRE loans in the pipeline compared to the prior period.

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 March 31, 2020 
December 31, 2019 (2)
(in thousands)Amount Percent Amount Percent
        
Consumer loans:       
Single family (1)
$988,967
 20% $1,072,706
 21%
Home equity and other525,544
 10
 553,376
 10
Total consumer loans1,514,511
 30
 1,626,082
 31
Commercial real estate loans:       
Non-owner occupied commercial real estate872,173
 17
 895,546
 18
Multifamily1,167,242
 23
 999,140
 20
Construction/land development626,969
 12
 701,762
 14
Total commercial real estate loans2,666,384
 52
 2,596,448
 52
Commercial and industrial loans:       
Owner occupied commercial real estate473,338
 9
 477,316
 9
Commercial business438,996
 9
 414,710
 8
Total commercial and industrial loans912,334
 18
 892,026
 17
Loans held for investment5,093,229
 100% 5,114,556
 100%
Allowance for credit losses(58,299)   (41,772)  
Total loans held for investment$5,034,930
   $5,072,784
  
 

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(1)Includes $4.9 million and $3.5 million at March 31, 2020 and December 31, 2019, 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.
(2)Net deferred loans fees and costs of $24.5 million are now included within the carrying amounts of the loan balances as of December 31, 2019, in order to conform to the current period presentation.

Loans held for investment, net decreased $37.9 million, or 0.7%, from December 31, 2019. During the quarter, new commitments totaled $594.4 million and included $39.4 million of consumer loans, $36.6 million of non-owner occupied commercial real estate loans, $274.2 million of multifamily permanent loans, $58.3 million of commercial and industrial loans and $185.9 million of construction loans. New commitments for construction loans included $116.5 million in residential construction and $41.9 million in single family custom home construction.

Mortgage servicing rights were $80.1 million at March 31, 2020 compared to $97.6 million at December 31, 2019, a decrease of $17.6 million, or 18.0%. The decrease primarily relates to a decline in the fair value of single family MSRs related to a decline in interest rates.

Federal Home Loan Bank stock was $26.8 million at March 31, 2020 compared to $22.4 million at December 31, 2019, an increase of $4.4 million, or 19.6% due to higher 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 when declared.

Other assets were $197.6 million at March 31, 2020, compared to $180.1 million at December 31, 2019, an increase of $17.5 million, or 9.7%.

Deposit balances were as follows for the periods indicated:

(in thousands) At March 31, 2020 At December 31, 2019
  Amount Percent Amount Percent
         
Noninterest-bearing accounts - checking and savings $768,776
 15% $704,743
 13%
Interest-bearing transaction and savings deposits:        
NOW accounts 420,606
 8
 373,832
 7
Statement savings accounts due on demand 222,821
 4
 219,182
 4
Money market accounts due on demand 2,299,442
 44
 2,224,494
 42
Total interest-bearing transaction and savings deposits 2,942,869
 56
 2,817,508
 53
Total transaction and savings deposits 3,711,645
 71
 3,522,251
 66
Certificates of deposit 1,297,924
 24
 1,614,533
 30
Noninterest-bearing accounts - other 247,488
 5
 203,175
 4
Total deposits $5,257,057
 100% $5,339,959
 100%

 
Deposits at March 31, 2020 decreased $82.9 million, or 1.6%, from December 31, 2019. The decrease in deposits from December 31, 2019 was primarily driven by a decrease in the amount of certain high-rate brokered deposits and the maturity of promotional certificate of deposits that we previously issued to fund the transfer of servicing related deposits in 2019. The decrease was offset by increases of $72.6 million, or 4.5%, and $117.5 million, or 6.1%, of business and consumer core deposits - checking, savings and money market deposits, respectively. 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 March 31, 2020 and December 31, 2019 was $157.9 million and $222.9 million, respectively. There were $196.4 million and $266.5 million of brokered deposits at March 31, 2020 and December 31, 2019, respectively.

Federal Home Loan Bank advances, one of our core borrowing sources, were $463.6 million at March 31, 2020 compared to $346.6 million at December 31, 2019. The increase in advances was largely due to a decrease in brokered deposits as well as other deposits and reduction in federal funds purchased.



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Shareholders' Equity

Shareholders' equity was $677.3 million at March 31, 2020 compared to $679.7 million at December 31, 2019. This decrease was primarily related to share repurchases of $16.7 million, adoption of CECL of $3.7 million, dividends declared and paid of $3.6 million during the three months ended March 31, 2020, partially offset by other comprehensive income of $13.4 million and net income of $7.1 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 March 31, 2020.

Shareholders' equity, on a per share basis, was $28.97 per share at March 31, 2020, compared to $28.45 per share at December 31, 2019.

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 March 31,
 2020 2019
    
Return on assets (1)(4)
0.42% (0.10)%
Return on equity (2)(4)
4.13
 (0.91)
Equity to assets ratio (3)
10.13
 10.43

(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 for the three months ended March 31, 2019.

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 2019 Annual Report on Form 10-K, as well as Note 14, Commitments, Guarantees and Contingencies in our 2019 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.
In March 2020 as the COVID 19 pandemic challenges began to unfold in earnest, management updated its enterprise wide risk assessment and risk monitoring reporting to overlay identified COVID-19 specific risks and mitigations to inform the Board and other constituents.  The Board and its various committees, specifically the Executive Committee, the Enterprise Risk Management Committee and the Credit Committee, are actively engaged in oversight of the heightened risks stemming from the pandemic, the mitigations put in place by management and to keep apprised of the status through regularly scheduled meetings and special meetings.  The management-level Executive Committee initiated daily meetings in March to be briefed by the Crisis Management Team, to discuss risks on a real time basis and to oversee the rollout and implementation of federal programs such as the CARES Act and regulatory guidance related to the COVID-19 pandemic.  These daily meetings will

82




continue until no longer deemed necessary.  Management level reporting is continuing to evolve and is being kept current on a daily, weekly and monthly basis.

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 2019 Annual Report on Form 10-K.

Credit Risk Management

The following discussion highlights developments since December 31, 2019 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 2019 Annual Report on Form 10-K.

Asset Quality and Nonperforming Assets

Credit quality remained strong with nonperforming assets remaining low at $14.3 million, or 0.21% of total assets, at March 31, 2020, compared to $14.3 million, or 0.21% of total assets, at December 31, 2019.

Nonaccrual loans were $13.0 million, or 0.25% of total loans, at March 31, 2020, an increase of $114 thousand, or 0.9%, from $12.9 million, or 0.25% of total loans, at December 31, 2019. Delinquency rates (excluding FHA/VA insured and guaranteed portion of SBA loans) were 0.28% at March 31, 2020 compared to 0.31% at December 31, 2019; the decrease was primarily related to lower consumer loan delinquencies.  

Net recoveries for the three months ended March 31, 2020 were $29 thousand compared to net recoveries of $123 thousand for the three months ended March 31, 2019.

At March 31, 2020, our loans held for investment portfolio, net of the allowance for credit losses, was $5.03 billion, a decrease of $37.9 million from December 31, 2019. The allowance for credit losses was $58.3 million, or 1.14% of loans held for investment, compared to $41.8 million, or 0.82% of loans held for investment, at December 31, 2019.

We recorded a provision for credit losses of $14.0 million for the three months ended March 31, 2020 compared to a provision for credit losses of $1.5 million for the three months ended March 31, 2019, respectively. Management considers the current level of the allowance for loan losses to be appropriate to cover estimated lifetime 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, 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 allowance for credit losses represents management's estimate of the expected lifetime credit losses inherent within our loan
portfolio. For further discussion related to credit policies and estimates see Adoption of New Accounting Standards -
Allowance for Credit Losses" within Note 1, Summary of Significant Accounting Policies and Note 4, Loans and Credit Quality of this Quarterly Report on Form 10-Q and "Critical Accounting Policies and Estimates - Allowance for Credit Losses for Loans Held for Investment" and within Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 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 sub class.

 At March 31, 2020
(in thousands)
Amount(1)
 Percent of
Allowance
to Total
Allowance
 Loan
Category
as a % of
Total Loans
      
Consumer loans     
Single family$8,587
 14% 20%
Home equity and other12,891
 21
 10
Total consumer loans21,478
 35
 30
Commercial real estate loans     
Non-owner occupied commercial real estate9,027
 15
 17
Multifamily4,275
 7
 23
Construction/land development     
Multifamily construction3,658
 6
 3
Commercial real estate construction396
 1
 1
Single family construction7,352
 12
 5
Single family construction to permanent1,985
 3
 3
Total commercial real estate loans26,693
 44
 52
Commercial and industrial loans     
Owner occupied commercial real estate4,166
 7
 9
Commercial business8,269
 14
 9
Total commercial and industrial loans12,435
 21
 18
Total allowance for credit losses including unfunded commitments$60,606
 100% 100%
(1)Excludes loans held for investment balances that are carried at fair value.

 At December 31, 2019
(in thousands)
Amount(1)
 Percent of
Allowance
to Total
Allowance
 Loan
Category
as a % of
Total Loans
      
Consumer loans     
Single family$6,450
 15% 21%
Home equity and other6,843
 16
 10
Total consumer loans13,293
 31
 31
Commercial real estate loans     
Non-owner occupied commercial real estate7,249
 17
 18
Multifamily7,015
 17
 20
Construction land development8,679
 20
 14
Total commercial real estate loans22,943
 54
 52
Commercial and industrial loans     
Owner occupied commercial real estate3,640
 8
 9
Commercial business2,961
 7
 8
Total commercial and industrial loans6,601
 15
 17
Total allowance for credit losses$42,837
 100% 100%
(1)Excludes loans held for investment balances that are carried at fair value.



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The following tables present the composition of TDRs by accrual and nonaccrual status.
 
 At March 31, 2020
(in thousands)Accrual Nonaccrual Total
      
Consumer     
Single family (1)
$57,504
 $1,251
 $58,755
Home equity and other786
 19
 805
 58,290
 1,270
 59,560
Commercial and industrial loans     
Owner occupied commercial real estate
 678
 678
Commercial business46
 1,342
 1,388
 46
 2,020
 2,066
 $58,336
 $3,290
 $61,626
(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $47.1 million at March 31, 2020.

 At December 31, 2019
(in thousands)Accrual Nonaccrual Total
      
Consumer     
Single family (1)
$59,809
 $1,694
 $61,503
Home equity and other853
 9
 862
 60,662
 1,703
 62,365
Commercial and industrial loans     
Commercial business48
 222
 270
 48
 222
 270
 $60,710
 $1,925
 $62,635
(1) Includes loan balances insured by the FHA or guaranteed by the VA of $48.9 million at December 31, 2019.

The Company had 300 loan relationships classified as TDRs totaling $61.6 million at March 31, 2020 with no related unfunded commitments. The Company had 305 loan relationships classified as TDRs totaling $62.6 million at December 31, 2019 with no related unfunded commitments. TDR loans within the loans held for investment portfolio and the related reserves are included in the allowance for credit losses tables above.

The CARES Act provides temporary relief from the accounting requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. In addition, interagency guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that borrowers who receive relief are not experiencing financial difficulty if they meet the following qualifying criteria:

The modification is in response to the National Emergency;
The borrower was current at the time the modification program was implemented; and
The modification is short-term

We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible short-term modifications and therefore will not treat qualifying loan modifications as TDRs for accounting or disclosure purposes. Additionally, eligible short-term loan modifications subject to the practical expedient in the interagency guidance will also not be treated as TDRs for accounting or disclosure purposes if they qualify.  Based on this, we do not expect the volume of TDRs to increase in the near term. However, there is a possibility that in the long run a meaningful number of the loans in our portfolio may ultimately be accounted for as a TDR in accordance with ASC Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, or migrate to an adverse risk rating because of lingering impacts of an economic recession.


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In addition, the regulatory agencies have also provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status.  

The Bank will exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by COVID-19. The Bank also will not designate loans with deferrals granted due to COVID-19 as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs we are offering as a result of the COVID-19 pandemic, we expect that borrowers granted relief under these programs will generally not be reported as nonaccrual. However, we are currently evaluating our policy for interest income recognition for loans that receive forbearance or deferral as a result of a hardship related to COVID-19.

Since the start of the COVID-19 crisis we have received requests for loan payment forbearance from our borrowers. We evaluate each request to determine current need. We are evaluating all loan modifications executed for eligibility under Section 4013 of the CARES Act and other interagency guidance. As of May 5, 2020 we have received the following forbearance requests.
  Requests Granted
(dollars in thousands) Number of loans Amount As a % of loan category Number of loans Amount As a % of loan category
Single family 230
 $88,742
 6% 230
 $88,742
 6%
Commercial real estate 18
 98,583
 4
 
 
 
Residential construction 11
 10,254
 2
(1) 

 
 
Commercial and industrial 307
 229,408
 25
(1) 
163
 134,223
 15
Total loans 566
 $426,987
 8% 393
 $222,965
 4%
(1) We have made Paycheck Protection Program loans for a portion of these loans, therefore forbearance may not be needed.

Delinquent loans and other real estate owned by loan type consisted of the following.
 
 At March 31, 2020
(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
            
Consumer loans           
Single family$5,872
 $2,501
 $5,489
 $20,845
(1) 
$34,707
 $1,343
Home equity and other1,210
 274
 1,253
 
 2,737
 
 7,082
 2,775
 6,742
 20,845
 37,444
 1,343
 
 
 
 
 
 
Commercial and industrial loans           
Owner-occupied commercial real estate
 
 3,050
 
 3,050
 
Commercial business
 
 3,183
 
 3,183
 
 
 
 6,233
 
 6,233
 
Total$7,082
 $2,775
 $12,975
 $20,845
 $43,677
 $1,343
 

(1)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. At March 31, 2020, these past due loans totaled $20.8 million.


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 At December 31, 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
            
Consumer loans           
Single family$5,694
 $4,261
 $5,364
 $19,702
(1) 
$35,021
 $1,393
Home equity and other837
 372
 1,160
 
 2,369
 
 6,531
 4,633
 6,524
 19,702
 37,390
 1,393
Commercial and industrial loans           
Owner occupied commercial real estate
 
 2,891
 
 2,891
 
Commercial business44
 
 3,446
 
 3,490
 
 44
 
 6,337
 
 6,381
 
Total$6,575
 $4,633
 $12,861
 $19,702
 $43,771
 $1,393
 

(1)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. At December 31, 2019, these past due loans totaled $19.7 million.

Loan Underwriting Standards

Our underwriting standards for single family and home equity loans require evaluating and understanding a borrower's credit, collateral and ability to repay the loan. Credit is determined based on how well a borrower manages current and prior debts as documented by a credit report that provides credit scores and current and past information about the borrower's credit history. Collateral is based on the type and use of property, occupancy and market value, largely determined by property appraisals or evaluations in accordance with our appraisal policy. A borrower's ability to repay the loan is based on several factors, including employment, income, current debt, assets and level of equity in the property. We also consider loan-to-property value, a debt-to-income ratios, amount of liquid financial reserves, loan amount and lien position in assessing whether to originate a loan. Single family and home equity borrowers are particularly susceptible to downturns in economic trends that negatively affect housing prices, demand and levels of unemployment.

For commercial, multifamily and construction loans, we consider the same factors with regard to the borrower and the guarantors. In addition, we evaluate liquidity, net worth, leverage, other outstanding indebtedness of the borrower, the quality and reliability of cash expected to flow through the borrower (including the outflow to other lenders) and prior known experience with the borrower. We use this information to assess financial capacity, profitability and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.

Additional considerations for commercial permanent loans secured by real estate:

Our underwriting standards for commercial permanent loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value or discounted cash flow value, as appropriate, and that commercial properties attain debt coverage ratios (net operating income divided by annual debt servicing) of 1.25 or better.

Our underwriting standards for multifamily residential permanent loans generally require that the loan-to-value ratio for these loans not exceed 80% of appraised value, cost, or discounted cash flow value, as appropriate, and that multifamily residential properties attain debt coverage ratios of 1.15 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

Additional considerations for commercial construction loans secured by real estate:

We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits, loan advance limits and pre-leasing requirements, as applicable.

Our underwriting guidelines for commercial real estate construction loans generally require that the loan-to-value ratio not exceed 75% and the stabilized debt coverage ratio attain a 1.25 or better.

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Our underwriting guidelines for multifamily residential construction loans generally require that the loan-to-value ratio not exceed 80% and the stabilized debt coverage ratio attain a 1.20 or better.

Our underwriting guidelines for single family residential construction loans to builders generally require that the loan-to-value ratio not exceed 85%.

As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.


Liquidity and Capital Resources

Liquidity risk management is primarily intended to ensure we are able to maintain sources of cash to adequately fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc., HSC and the Bank have established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity.

HomeStreet, Inc., HSC and the Bank have different funding needs and sources of liquidity and separate regulatory capital requirements.

HomeStreet, Inc.

The main source of liquidity for HomeStreet, Inc. is proceeds from dividends from the Bank and HSC. HomeStreet, Inc. has raised capital through the issuance of common stock, senior debt and trust preferred securities. In March 2020 we canceled our $30.0 million line of credit and at March 31, 2020 we did not have an outstanding balance on this line of credit.

Historically, the main cash outflows have been distributions to shareholders, interest and principal payments to creditors and payments of operating expenses. HomeStreet, Inc.'s ability to pay dividends to shareholders depends substantially on dividends received from the Bank. In January 2020, Our Board of Directors adopted a dividend policy for the consideration of regular quarterly cash dividends on shares of HomeStreet, Inc. common stock and declared a quarterly dividend for the first quarter of

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2020 at $0.15 per share, and was paid on February 21, 2020 to shareholders of record as of the close of market on February 5, 2020. In April 2020, our Board of Directors declared a quarterly dividend for the second quarter of 2020 of $0.15 per share to be paid on May 20, 2020 to shareholders of record as of the close of market on May 4, 2020.

In the first quarter of 2020, HomeStreet, Inc. approved two stock repurchase programs of up to $25.0 million and $10.0 million of our common stock. The Bank declared a dividend payable to HomeStreet, Inc. of $35.0 million as the primary source of liquidity to fund repurchases under this program, although repurchases may be funded from one or a combination of existing cash balances, free cash flow and other available liquidity sources. On March 20, 2020 we suspended our $25 million stock repurchase program with $17.1 million in authorized purchases remaining, and withdrew the subsequent $10 million additional repurchase authorization.

HomeStreet Capital Corporation

HomeStreet Capital generates positive cash flow from operations from its servicing fee income on the DUS® portfolio, net of its costs to service the DUS® portfolio. Additional uses are HomeStreet Capital's costs to purchase the servicing rights on new production from the Bank. Minimum liquidity and reporting requirements for DUS® lenders such as HomeStreet Capital are set by Fannie Mae. HomeStreet Capital's liquidity management therefore consists of meeting Fannie Mae requirements and its own operational requirements.

HomeStreet Bank

The Bank's primary sources of funds include deposits, advances from the FHLBs, repayments and prepayments of loans, proceeds from the sale of loans and investment securities, interest from our loans and investment securities and capital contributions from HomeStreet, Inc. We have also raised short-term funds through the sale of securities under agreements to repurchase and federal funds purchased. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit inflows and outflows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The Bank uses the primary liquidity ratio as a measure of liquidity. The primary liquidity ratio is defined as net cash, short-term investments and other marketable assets as a percent of net deposits and short-term borrowings. At March 31, 2020, our primary liquidity ratio was 19.1% compared to 18.7% at December 31, 2019.

At March 31, 2020 and December 31, 2019, the Bank had available borrowing capacity of $748.3 million and $943.3 million, respectively, from the FHLB, and $245.4 million and $267.1 million, respectively, from the Federal Reserve Bank of San Francisco.

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Cash Flows

For the three months ended March 31, 2020, cash, cash equivalents and restricted cash increased by $14.6 million compared to an increase of $9.1 million for the three months ended March 31, 2019. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.

Cash flows from operating activities

The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the three months ended March 31, 2020, net cash of $14.0 million was used in operating activities, primarily from cash used to fund loans held for sale production exceeding cash proceeds from the sale of loans. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt are sufficient to fund our operating liquidity needs. For the three months ended March 31, 2019, net cash of $12.2 million was used in operating activities primarily from the recognition of deferred taxes from the sale of mortgage servicing rights and the net fair value adjustment and gain on sale of loans held for sale partially offset by cash proceeds from the sale of loans exceeding cash used to fund loans held for sale production.

Cash flows from investing activities

The Company's investing activities primarily include available-for-sale securities and loans originated as held for investment. For the three months ended March 31, 2020, net cash of $49.0 million was provided by investing activities, primarily due to $244.7 million of proceeds from sale of loans originated as held for investment, $33.8 million proceeds from the sale of investment securities and $34.6 million from principal repayments and maturities of investment securities, partially offset by $166.5 million purchase of investment securities and $98.0 million of cash used for the origination of portfolio loans net of principal repayments. For the three months ended March 31, 2019, net cash of $62.4 million was provided by investing activities, primarily due to $166.3 million in proceeds from the sale of mortgage servicing rights, $148.6 million proceeds from sale of loans originated as held for investment and $95.0 million proceeds from the sale of investment securities, partially offset by $337.2 million of cash used for the origination of portfolio loans net of principal repayments.

Cash flows from financing activities

The Company's financing activities are primarily related to deposits and net proceeds from FHLB advances. For the three months ended March 31, 2020, net cash of $20.4 million was used in financing activities, primarily due to $117.0 million net repayments of FHLB advances, a $82.9 million reduction in deposits and $16.5 million from common stock repurchases. For the three months ended March 31, 2019, net cash of $41.0 million was used in financing activities, primarily due to $333.0 million net repayments from FHLB advances, partially offset by $271.5 million of growth in deposits.

Capital Management

HomeStreet Inc. is a bank holding company registered with the Federal Reserve and is subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. HomeStreet Bank, as a state-chartered, federally insured commercial bank, is subject to the capital requirements established by the FDIC.

The capital adequacy requirements are quantitative measures established by regulation that require HomeStreet, Inc. and HomeStreet Bank to maintain minimum amounts and ratios of capital. The Federal Reserve requires HomeStreet Inc. to maintain capital adequacy that generally parallels the FDIC requirements. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. (See Item 1, “Business-Regulation,” and Note 4, Regulatory Capital Requirements of the Notes to the Consolidated Financial Statements included in the 2019 Form 10-K for additional information regarding regulatory capital requirements for HomeStreet Inc. and HomeStreet Bank).

At March 31, 2020, our capital conservation buffers for the Company and the Bank were 5.50% and 5.95%, respectively.

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At March 31, 2020, the Company and the Bank's capital ratios exceeded all regulatory requirements and continued to meet the regulatory capital category of "well capitalized" as defined by the FDIC's prompt corrective action rules.

The following tables present regulatory capital information for HomeStreet, Inc. and HomeStreet Bank.
  At March 31, 2020
HomeStreet Bank Actual 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
"Well Capitalized" Under
Prompt Corrective
Action Provisions
(in thousands) Amount Ratio Amount Ratio Amount Ratio
             
             
Tier 1 leverage capital (to average assets) $671,528
 10.06% $267,050
 4.0% $333,812
 5.0%
Common equity Tier 1 capital (to risk-weighted assets) 671,528
 12.75
 237,045
 4.5
 342,398
 6.5
Tier 1 risk-based capital (to risk-weighted assets) 671,528
 12.75
 316,060
 6.0
 421,413
 8.0
Total risk-based capital (to risk-weighted assets) 734,616
 13.95
 421,413
 8.0
 526,767
 10.0
  At March 31, 2020
HomeStreet, Inc. Actual 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
"Well Capitalized" Under
Prompt Corrective
Action Provisions
(in thousands) Amount Ratio Amount Ratio Amount Ratio