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HMST HomeStreet

Filed: 7 May 21, 1:07pm

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, 2021
OR
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _____ to _____

Commission file number: 001-35424
________________________________ 
HOMESTREET, INC.
(a Washington Corporation)
91-0186600
________________________________ 

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

Telephone Number - Area Code (206) 623-3050

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


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

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



Large Accelerated Filer Accelerated Filer 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 
 No 
The number of outstanding shares of the registrant's common stock as of May 3, 2021 was 21,355,032.





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

2


PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)March 31,
2021
December 31,
2020
(Unaudited)
ASSETS
Cash and cash equivalents$69,101 $58,049 
Investment securities1,049,105 1,076,364 
Loans held for sale ("LHFS")390,223 361,932 
Loans held for investment ("LHFI") (net of allowance for credit losses of $64,047 and $64,294)5,227,727 5,179,886 
Mortgage servicing rights ("MSRs")101,978 85,740 
Premises and equipment, net63,049 65,102 
Other real estate owned ("OREO")1,484 1,375 
Goodwill and other intangible assets32,587 32,880 
Other assets329,937 375,763 
Total assets$7,265,191 $7,237,091 
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits$6,131,233 $5,821,559 
Borrowings84,500 322,800 
Long-term debt125,885 125,838 
Accounts payable and other liabilities222,110 249,144 
Total liabilities6,563,728 6,519,341 
Commitments and contingencies00
Shareholders' equity:
Common stock, 0 par value, authorized 160,000,000 shares, issued and outstanding, 21,360,514 shares and 21,796,904 shares269,942 278,505 
Retained earnings411,712 403,888 
Accumulated other comprehensive income19,809 35,357 
Total shareholders' equity701,463 717,750 
Total liabilities and shareholders' equity$7,265,191 $7,237,091 

See accompanying notes to consolidated financial statements
3









HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
 Quarter Ended March 31,
(in thousands, except share and per share data)20212020
Interest income:
Loans$53,568 $59,009 
Investment securities5,951 4,387 
Cash, Fed Funds and other172 353 
Total interest income59,691 63,749 
Interest expense:
Deposits3,650 14,783 
Borrowings1,524 3,532 
Total interest expense5,174 18,315 
Net interest income54,517 45,434 
Provision for credit losses14,000 
Net interest income after provision for credit losses54,517 31,434 
Noninterest income:
Net gain on loan origination and sale activities33,459 22,541 
Loan servicing income748 6,101 
Deposit fees1,824 1,890 
Other2,802 2,098 
Total noninterest income38,833 32,630 
Noninterest expense:
Compensation and benefits35,835 32,432 
Information services6,784 7,524 
Occupancy6,492 6,769 
General, administrative and other7,497 8,459 
Total noninterest expense56,608 55,184 
Income before income taxes36,742 8,880 
Income tax expense7,079 1,741 
Net income$29,663 $7,139 
Net income per share:
Basic$1.37 $0.30 
Diluted$1.35 $0.30 
Weighted average shares outstanding:
Basic21,637,67123,688,930
Diluted21,961,82823,860,280

See accompanying notes to consolidated financial statements
4









HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 Quarter Ended March 31,
(in thousands)20212020
Net income$29,663 $7,139 
Other comprehensive income:
Unrealized gain (loss) investment securities available for sale ("AFS")(19,681)17,083 
Reclassification for net (gains) losses included in income(112)
Other comprehensive income (loss) before tax(19,681)16,971 
Income tax impact of:
Unrealized gain (loss) investment securities AFS(4,133)3,587 
Reclassification for net (gains) losses included in income(24)
Total(4,133)3,563 
Other comprehensive income (loss)(15,548)13,408 
Total comprehensive income$14,115 $20,547 


See accompanying notes to consolidated financial statements
5









HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
(in thousands, except share data)Number
of shares
Common stockRetained
earnings
Accumulated
other
comprehensive
income (loss)
Total shareholders' equity
For the quarter ended March 31, 2020
Balance, December 31, 201923,890,855 $300,729 $374,673 $4,321 $679,723 
Net income— — 7,139 — 7,139 
Share-based compensation expense2,148 477 — — 477 
Common stock issued - Option exercise; stock grants87,359 613 — — 613 
Cumulative effect of adoption of new accounting standards— — (3,740)— (3,740)
Other comprehensive income— — — 13,408 13,408 
Dividends declared on common stock ($0.15 per share)— — (3,574)— (3,574)
Common stock repurchased(603,569)(7,517)(9,215)— (16,732)
Balance, March 31, 202023,376,793 $294,302 $365,283 $17,729 $677,314 
For the quarter ended March 31, 2021
Balance, December 31, 202021,796,904 $278,505 $403,888 $35,357 $717,750 
Net income— — 29,663 — 29,663 
Share-based compensation expense2,816 810 — — 810 
Common stock issued - Option exercise; stock grants185,441 1,849 — — 1,849 
Other comprehensive income (loss)— — — (15,548)(15,548)
Dividends declared on common stock ($0.25 per share)— — (5,534)— (5,534)
Common stock repurchased(624,647)(11,222)(16,305)— (27,527)
Balance, March 31, 202121,360,514 $269,942 $411,712 $19,809 $701,463 

See accompanying notes to consolidated financial statements

6









HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
Quarter Ended March 31,
(in thousands)20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$29,663 $7,139 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses14,000 
Depreciation and amortization, premises and equipment2,408 2,224 
Amortization of premiums and discounts: AFS securities, deposits, debt1,234 2,958 
Operating leases: excess of payments over amortization(990)(1,063)
Amortization of finance leases269 374 
Amortization of core deposit intangibles294 345 
Amortization of deferred loan fees and costs(818)635 
Share-based compensation expense810 477 
Lease impairment costs194 645 
Deferred income tax expense (benefit)4,448 (7,031)
Origination of LHFS(734,572)(378,996)
Proceeds from sale of LHFS719,448 358,839 
Net fair value adjustment and gain on sale of LHFS(12,799)(10,430)
Origination of MSRs(11,126)(4,119)
Net gain on sale of LHFI(2,795)(1,864)
Change in fair value of mortgage servicing rights(5,770)20,338 
Amortization of MSRs1,344 1,475 
(Increase) decrease in other assets11,519 (17,064)
Increase (decrease) in accounts payable and other liabilities(4,942)(2,920)
Net cash provided by (used in) operating activities(2,181)(14,038)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities(49,433)(166,533)
Proceeds from sale of investment securities33,792 
Principal payments on investment securities55,863 34,605 
Proceeds from sale of LHFI132,694 244,725 
Net cash provided by disposal of discontinued operations1,464 
Net increase in LHFI(176,655)(98,023)
Purchase of premises and equipment(531)(1,002)
Proceeds from sale of Federal Home Loan Bank stock53,880 57,877 
Purchases of Federal Home Loan Bank stock(43,412)(62,273)
Net cash provided by (used in) investing activities(27,594)44,632 
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Quarter Ended March 31,
(in thousands)20212020
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net309,634 (82,936)
Changes in short term borrowings, net(238,300)87,000 
Repayment of finance lease principal(235)(285)
Repurchases of common stock(25,001)(16,476)
Proceeds from exercise of stock options263 238 
Dividends paid on common stock(5,534)(3,574)
Net cash provided by (used in) financing activities40,827 (16,033)
Net increase in cash and cash equivalents11,052 14,561 
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, beginning of year58,049 57,880 
Cash and cash equivalents, end of period$69,101 $72,441 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest$4,291 $17,876 
Federal and state income taxes50 
Non-cash activities:
Increase in lease assets and lease liabilities283 352 
Loans transferred from LHFI to LHFS131,081 120,530 
Loans transferred from LHFS to LHFI863 2,087 
Ginnie Mae loans derecognized with the right to repurchase, net19,576 298 
Repurchase of common stock-award settlement2,526 256 

See accompanying notes to consolidated financial statements
8









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

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc., a State of Washington corporation organized in 1921 (the "Corporation"), is a Washington-based diversified financial services holding company whose operations are primarily conducted through its wholly owned subsidiaries (collectively the "Company") HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank's subsidiaries, HomeStreet Reinsurance, Ltd., Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, and Union Street Holdings LLC. The Company is principally engaged in commercial banking, mortgage banking and consumer/retail banking activities serving customers primarily in the Western United States.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

Immaterial Restatement: Subsequent to issuance of the June 30, 2020 financial statements, management concluded that purchases of and proceeds from the sale of Federal Home Loan Bank stock were incorrectly classified as financing activities, rather than investing activities, in the consolidated statements of cash flows. To correct this classification error, amounts previously reported for the purchases of and proceeds from the sale of Federal Home Loan Bank stock for the quarter ended March 31, 2020 as financing activities are reported as investing activities in the consolidated statement of cash flows.

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, 2020, filed with the Securities and Exchange Commission ("2020 Annual Report on Form 10-K").

Recent Accounting Developments

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in GAAP. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company adopted this ASU on January 1, 2021 and it did not have a material effect on the Company’s financial position, results of operations or financial statement disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). This ASU provides optional expedients and exceptions for contracts, hedging relationship, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of these ASUs, but does not expect them to have a material impact on the Company’s financial position, results of operations or financial statement disclosures.

9


NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"). 
At March 31, 2021
(in thousands)Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
AFS
Mortgage backed securities ("MBS"):
Residential$42,819 $803 $(384)$43,238 
Commercial42,198 1,109 (282)43,025 
Collateralized mortgage obligations ("CMOs"):
Residential227,257 4,871 (1,630)230,498 
Commercial150,775 2,217 (841)152,151 
   Municipal bonds542,608 21,345 (2,942)561,011 
   Corporate debt securities14,129 807 14,936 
Total$1,019,786 $31,152 $(6,079)$1,044,859 
HTM
   Municipal bonds$4,246 $185 $$4,431 

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

MBS and CMOs represent securities issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of March 31, 2021 and December 31, 2020, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor's Rating Services or Moody's Investors Services.

10


Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.
At March 31, 2021
 Less than 12 months12 months or moreTotal
(in thousands)Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
Gross
unrealized
losses
Fair
value
MBS:
Residential$(114)$4,725 $(270)$1,325 $(384)$6,050 
Commercial(282)16,968 (282)16,968 
CMOs:
Residential(1,630)29,231 (1,630)29,231 
Commercial(696)25,184 (145)15,355 (841)40,539 
Municipal bonds(2,344)97,048 (598)3,333 (2,942)100,381 
Total$(5,066)$173,156 $(1,013)$20,013 $(6,079)$193,169 

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

There were 0 HTM securities in an unrealized loss position at March 31, 2021 or December 31, 2020.

The Company has evaluated AFS securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of March 31, 2021 or December 31, 2020. In addition, as of March 31, 2021 and December 31, 2020, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.

The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield for the periods indicated below. The weighted-average yield is computed using the contractual
11


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, 2021
 Within one yearAfter one year
through five years
After five years
through ten years
After
ten years
Total
(dollars in thousands)Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
AFS          
   Municipal bonds$1,735 4.57 %$14,787 3.79 %$58,652 3.20 %$485,837 3.24 %$561,011 3.26 %
   Corporate debt securities%7,004 3.74 %7,932 4.78 %%14,936 4.30 %
Total$1,735 4.57 %$21,791 3.77 %$66,584 3.39 %$485,837 3.24 %$575,947 3.28 %
HTM
   Municipal bonds$%$4,431 2.44 %$%$%$4,431 2.44 %


 At December 31, 2020
 Within one yearAfter one year
through five years
After five years
through ten years
After
ten years
Total
(dollars in thousands)Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
AFS
   Municipal bonds$4,024 3.19 %$14,978 3.82 %$59,496 3.26 %$486,205 3.29 %$564,703 3.30 %
   Corporate debt securities183 4.27 %7,059 3.74 %7,980 4.78 %%15,222 4.30 %
Agency debentures%%%1,846 2.68 %1,846 2.68 %
Total$4,207 3.24 %$22,037 3.80 %$67,476 3.45 %$488,051 3.29 %$581,771 3.33 %
HTM
   Municipal bonds$%$4,507 2.47 %$%$%$4,507 2.47 %

MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of March 31, 2021 and December 31, 2020 was 1.86% and 1.92%, respectively.

Sales of investment securities was as follows for the period indicated:
Quarter Ended March 31,
(in thousands)2020
Proceeds$33,792 
Gross gains745 
Gross losses(633)


0The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:
(in thousands)At March 31,
2021
At December 31,
2020
Washington, Oregon and California State to secure public deposits$163,248 $171,471 
Other securities pledged3,257 3,391 
Total securities pledged as collateral$166,505 $174,862 

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The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk. There were no securities pledged under repurchase agreements at March 31, 2021 and December 31, 2020.

Tax-exempt interest income on investment securities was $2.4 million and $2.3 million for the quarters ended March 31, 2021 and 2020, respectively.

NOTE 3 -LOANS AND CREDIT QUALITY:
The Company's LHFI is divided into 2 portfolio segments, consumer loans and commercial loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity and other loans within the consumer loan portfolio segment and non-owner occupied commercial real estate, multifamily, construction and land development, owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment.
LHFI consist of the following:
(in thousands)At March 31,
2021
At December 31,
2020
Commercial real estate loans
Non-owner occupied commercial real estate$766,002 $829,538 
Multifamily1,521,349 1,428,092 
Construction/land development532,202 553,695 
Total2,819,553 2,811,325 
Commercial and industrial loans
Owner occupied commercial real estate473,273 467,256 
Commercial business757,231 645,723 
Total1,230,504 1,112,979 
Consumer loans
Single family (1)
875,417 915,123 
Home equity and other366,300 404,753 
Total1,241,717 1,319,876 
                  Total LHFI5,291,774 5,244,180 
Allowance for credit losses ("ACL")(64,047)(64,294)
Total LHFI less ACL$5,227,727 $5,179,886 
(1)    Includes $4.3 million and $7.1 million at March 31, 2021 and December 31, 2020, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.

Loans totaling $1.5 billion and $1.4 billion at March 31, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $576 million and $569 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Reserve Bank.

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.

LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At March 31, 2021 and December 31, 2020, multifamily loans in the state of California represented 20.2% and 18.5% of the total portfolio, respectively.

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Credit Quality
Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio as of March 31, 2021. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.
During 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, 2021, 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 ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $2.0 million and $1.6 million at March 31, 2021 and December 31, 2020, respectively.
The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $21.1 million and $21.2 million at March 31, 2021 and December 31, 2020, respectively, and was reported in other assets in the consolidated balance sheets.
Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows:
 Quarter Ended March 31,
(in thousands)20212020
Beginning balance$64,294 $41,772 
Provision for credit losses(371)14,655
Net (charge-offs) recoveries124 29
Impact of ASC 326 adoption
— 1,843
Ending balance$64,047 $58,299 
Allowance for unfunded commitments:
Beginning balance$1,588 $1,065 
Provision for credit losses371 (655)
Impact of ASC 326 adoption
— 1,897 
Ending balance$1,959 $2,307 
Provision for credit losses:
Allowance for credit losses - loans$(371)$14,655 
Allowance for unfunded commitments371 (655)
Total$$14,000 


















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Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows:
Quarter Ended March 31, 2021
(in thousands)Beginning balanceCharge-offsRecoveriesProvisionEnding balance
Commercial real estate loans
Non-owner occupied commercial real estate$8,845 $$$373 $9,218 
Multifamily6,072 897 6,969 
Construction/land development
Multifamily construction4,903 (967)3,936 
Commercial real estate construction1,670 238 1,908 
Single family construction5,130 (123)5,007 
Single family construction to permanent1,315 (191)1,124 
     Total27,935 227 28,162 
Commercial and industrial loans
Owner occupied commercial real estate4,994 272 5,266 
Commercial business17,043 74 (12)17,105 
     Total22,037 74 260 22,371 
Consumer loans
Single family6,906 (70)120 (221)6,735 
Home equity and other7,416 (56)56 (637)6,779 
     Total14,322 (126)176 (858)13,514 
Total ACL$64,294 $(126)$250 $(371)$64,047 

Quarter Ended March 31, 2020
(in thousands)Prior to adoption of ASC 326Impact of ASC 326 adoptionCharge-offsRecoveriesProvisionEnding
balance
Commercial real estate loans
Non-owner occupied commercial real estate$7,245 $(3,392)$$$5,168 $9,021 
Multifamily7,015 (2,977)227 4,265 
Construction/land development
Multifamily construction2,848 693 (323)3,218 
Commercial real estate construction624 (115)(127)382 
Single family construction3,800 4,280 163 (1,658)6,585 
Single family construction to permanent1,003 200 309 1,512 
     Total22,535 (1,311)163 3,596 24,983 
Commercial and industrial loans
Owner occupied commercial real estate3,639 (2,459)2,980 4,160 
Commercial business2,915 510 (143)24 4,855 8,161 
     Total6,554 (1,949)(143)24 7,835 12,321 
Consumer loans
Single family6,450 468 53 1,616 8,587 
Home equity and other6,233 4,635 (217)149 1,608 12,408 
     Total12,683 5,103 (217)202 3,224 20,995 
Total ACL$41,772 $1,843 $(360)$389 $14,655 $58,299 
    
The following table presents a vintage analysis of the commercial portfolio segment by loan sub-class, risk rating and delinquency status.
15


At March 31, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Non-owner occupied commercial real estate
1-6 Pass$8,218 $51,510 $175,601 $142,870 $125,194 $258,427 $956 $986 $763,762 
7- Special Mention2,240 2,240 
8 - Substandard
Total8,218 51,510 175,601 142,870 125,194 260,667 956 986 766,002 
Multifamily
1-6 Pass284,229 592,391 303,960 72,892 30,232 233,376 100 1,517,180 
7- Special Mention4,169 4,169 
8 - Substandard
Total284,229 596,560 303,960 72,892 30,232 233,376 100 1,521,349 
Multifamily construction
1-6 Pass16,233 17,650 45,502 79,385 
7- Special Mention27,395 27,395 
8 - Substandard
Total16,233 17,650 45,502 27,395 106,780 
Commercial real estate construction
1-6 Pass3,962 2,069 15,527 583 6,469 28,610 
7- Special Mention
8 - Substandard
Total3,962 2,069 15,527 583 6,469 28,610 
Single family construction
1-6 Pass48,025 92,914 41,299 9,255 79 77,929 269,501 
7- Special Mention
8 - Substandard
Total48,025 92,914 41,299 9,255 79 77,929 269,501 
Single family construction to permanent
Current11,230 63,159 46,239 5,995 688 127,311 
Past due:
30-59 days
60-89 days
90+ days
Total11,230 63,159 46,239 5,995 688 127,311 
Owner occupied commercial real estate
1-6 Pass31,113 50,309 60,212 56,448 80,832 130,457 (2)4,298 413,667 
7- Special Mention2,241 6,066 409 67 8,783 
8 - Substandard19,145 1,111 10,697 19,870 50,823 
Total31,113 50,309 79,357 59,800 97,595 150,736 (2)4,365 473,273 
Commercial business
1-6 Pass138,740 326,005 54,143 42,042 20,677 30,725 92,346 2,351 707,029 
7- Special Mention9,936 1,647 6,385 1,507 158 19,633 
8 - Substandard6,495 9,891 2,113 2,909 9,049 112 30,569 
Total138,740 326,005 70,574 53,580 29,175 33,634 102,902 2,621 757,231 
Total commercial portfolio$521,555 $1,200,652 $734,680 $391,963 $298,411 $706,470 $188,354 $7,972 $4,050,057 
16



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

At March 31, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Current$35,295 $172,695 $111,355 $142,166 $137,942 $270,902 $$$870,355 
Past due:
30-59 days532 00532 
60-89 days317 327 644 
90+ days823 1,251 857 386 569 3,886 
Total (1)
35,295 173,518 112,606 143,023 138,645 272,330 875,417 
Home equity and other
Current599 1,351 937 955 752 4,684 347,690 7,634 364,602 
Past due:
30-59 days199 212 
60-89 days11 12 
90+ days54 1,418 1,474 
Total599 1,352 951 957 752 4,740 349,307 7,642 366,300 
Total consumer portfolio$35,894 $174,870 $113,557 $143,980 $139,397 $277,070 $349,307 $7,642 $1,241,717 
Total LHFI$557,449 $1,375,522 $848,237 $535,943 $437,808 $983,540 $537,661 $15,614 $5,291,774 

(1)    Includes $4.3 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated income statements.

The following tables present a vintage analysis of year to date charge-offs and year to date recoveries of the commercial portfolio and consumer portfolio segment by loan sub-class.
At March 31, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
COMMERCIAL PORTFOLIO
Commercial business
Charge-offs$$$$$$$$$
Recoveries74 74 
Net74 74 
Commercial portfolio
Charge-offs
Recoveries74 74 
Total net$$$$$$74 $$$74 


17


At March 31, 2021
(in thousands)202120202019201820172016 and priorRevolvingRevolving-termTotal
CONSUMER PORTFOLIO
Single family
Charge-offs$$$$(38)$(24)$(8)$$$(70)
Recoveries120 120 
Net(38)(24)112 50 
Home equity and other
Charge-offs(1)(16)00(39)(56)
Recoveries36 14 56 
Net(1)(12)36 (25)
Consumer Portfolio
Charge-offs(1)(16)(38)(24)(8)(39)(126)
Recoveries156 14 176 
Total net$$(1)$(12)$(36)$(24)$148 $(25)$$50 
All loans
Charge-offs(1)(16)(38)(24)(8)(39)(126)
Recoveries230 14 250 
Total net$$(1)$(12)$(36)$(24)$222 $(25)$$124 

Collateral Dependent Loans
The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type.
At March 31, 2021
(in thousands)Land1-4 FamilyMultifamilyNon-residential real estateOther non-real estateTotal
Commercial and industrial loans
Owner occupied commercial real estate$1,789 $$$3,123 $$4,912 
Commercial business1,787 545 2,562 4,894 
   Total3,576 545 3,123 2,562 9,806 
Consumer loans
Single family
2,453 2,453 
Home equity loans and other897 897 
   Total3,350 3,350 
  Total collateral-dependent loans$3,576 $3,895 $$3,123 $2,562 $13,156 












18


Nonaccrual and Past Due Loans
The following table presents nonaccrual status for loans as of the dates indicated.
At March 31, 2021At December 31, 2020
(in thousands)Nonaccrual with no related ACLTotal NonaccrualNonaccrual with no related ACLTotal Nonaccrual
Commercial and industrial loans
Owner occupied commercial real estate$4,913 $4,913 $4,922 $4,922 
        Commercial business3,100 9,224 3,100 9,183 
Total8,013 14,137 8,022 14,105 
Consumer loans
Single family$2,300 $5,583 $2,173 $4,883 
Home equity and other899 1,821 1,734 
Total3,199 7,404 2,175 6,617 
Total nonaccrual loans$11,212 $21,541 $10,197 $20,722 

The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class.
At March 31, 2021
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more
Nonaccrual
Total past
due and nonaccrual (3)
CurrentTotal
loans
Commercial real estate loans
Non-owner occupied commercial real estate$$$$$$766,002 $766,002 
Multifamily1,521,349 1,521,349 
Construction/land development
Multifamily construction106,780 106,780 
Commercial real estate construction28,610 28,610 
Single family construction269,501 269,501 
Single family construction to permanent127,311 127,311 
Total2,819,553 2,819,553 
Commercial and industrial loans
Owner occupied commercial real estate4,913 4,913 468,360 473,273 
Commercial business9,224 9,224 748,007 757,231 
Total14,137 14,137 1,216,367 1,230,504 
Consumer loans
Single family653 1,153 10,676 (2)5,583 18,065 857,352 875,417 (1)
Home equity and other205 1,821 2,029 364,271 366,300 
Total858 1,156 10,676 7,404 20,094 1,221,623 1,241,717 
Total loans$858 $1,156 $10,676 $21,541 $34,231 $5,257,543 $5,291,774 
%0.02 %0.02 %0.20 %0.41 %0.65 %99.35 %100.00 %

19


At December 31, 2020
Past Due and Still Accruing
(in thousands)30-59 days60-89 days90 days or
more
Nonaccrual
Total past
due and nonaccrual (3)
CurrentTotal
loans
Commercial real estate loans
Non-owner occupied commercial real estate$$$$$$829,538 $829,538 
Multifamily1,428,092 1,428,092 
Construction and land development
Multifamily construction00000115,329 115,329 
Commercial real estate construction27,285 27,285 
Single family construction259,170 259,170 
Single family construction to permanent151,911 151,911 
Total2,811,325 2,811,325 
Commercial and industrial loans
Owner occupied commercial real estate4,922 4,922 462,334 467,256 
Commercial business9,183 9,183 636,540 645,723 
Total14,105 14,105 1,098,874 1,112,979 
Consumer loans
Single family2,161 418 11,476 (2)4,883 18,938 896,185 915,123 (1)
Home equity and other228 135 1,734 2,097 402,656 404,753 
Total2,389 553 11,476 6,617 21,035 1,298,841 1,319,876 
Total loans$2,389 $553 $11,476 $20,722 $35,140 $5,209,040 $5,244,180 
%0.05 %0.01 %0.22 %0.40 %0.67 %99.33 %100.00 %

(1)Includes $4.3 million and $7.1 million of loans at March 31, 2021 and December 31, 2020, respectively, where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in our consolidated income statements.
(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.
(3)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $13.5 million and $14.7 million at March 31, 2021 and December 31, 2020, respectively.

The following tables present information about troubled debt restructuring ("TDR") activity during the periods indicated.
Quarter Ended March 31, 2021
(dollars in thousands)Number of loan
modifications
Recorded
investment
Related charge-
offs
Consumer loans
Single family
Interest rate reduction$508 $
Total consumer
Interest rate reduction508 
Total508 
Total loans
Interest rate reduction508 
Total$508 $
20


Quarter Ended March 31, 2020
(dollars in thousands)Number of loan
modifications
Recorded
investment
Related charge-
offs
Commercial and industrial loans
Owner occupied commercial real estate
Payment restructure$678 $
Commercial business
Payment restructure1,125 
Total commercial and industrial
Payment restructure1,803 
Total1,803 
Consumer loans
Single family
Interest rate reduction11 2,213 
Payment restructure454 
Total consumer
Interest rate reduction11 2,213 
Payment restructure454 
Total14 2,667 
Total loans
Interest rate reduction11 2,213 
Payment restructure2,257 
Total16 $4,470 $

The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the quarter ended March 31, 2021 and 2020, 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.
Quarter Ended March 31,
20212020
(dollars in thousands)Number of loan relationships that re-defaultedRecorded
investment
Number of loan relationships that re-defaultedRecorded
investment
Commercial loans - Owner occupied commercial real estate1$678 $
Consumer loans - single family1,219 1,281 
Total$1,897 $1,281 
The CARES Act provides temporary relief from the accounting and disclosure requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. In addition, interagency guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that borrowers who receive relief are not experiencing financial difficulty if they meet the following qualifying criteria:

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

We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible short-term modifications and will not treat qualifying loan modifications as TDRs for accounting or disclosure purposes. Additionally, eligible short-term loan modifications subject to the practical expedient in the interagency guidance will not be treated as TDRs for accounting or disclosure purposes if they qualify. 
21



As of March 31, 2021, excluding any SBA guaranteed loans for which the government is making payments as provided for under the CARES Act, or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of $86 million on 195 loans that were approved for and are still in forbearance under this program.

NOTE 4–DEPOSITS:

Deposit balances, including stated rates, were as follows: 
(in thousands)At March 31,
2021
Weighted Average RateAt December 31,
2020
Weighted Average Rate
Noninterest-bearing demand deposits$1,441,716 — %$1,337,010 — %
Interest-bearing demand deposits557,900 0.10 %484,265 0.10 %
Savings287,028 0.07 %264,024 0.07 %
Money market2,665,875 0.18 %2,596,453 0.21 %
Certificates of deposit1,178,714 0.64 %1,139,807 0.93 %
     Total$6,131,233 0.21 %$5,821,559 0.29 %

Certificates of deposit outstanding mature as follows: 
(in thousands)At March 31,
2021
Within one year$926,062 
One to two years220,423 
Two to three years14,734 
Three to four years13,093 
Four to five years4,098 
Thereafter304 
Total$1,178,714 

The aggregate amount of certificate of deposits in denominations of more than $250 thousand at March 31, 2021 and December 31, 2020 were $129 million and $130 million, respectively. There were $285 million and $210 million of brokered deposits at March 31, 2021 and December 31, 2020, respectively.

NOTE 5–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges. The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheet, consist of the following: 
At March 31, 2021
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$1,542,507 $13,509 $(6,215)
Interest rate lock commitments401,181 6,686 (198)
Interest rate swaps495,990 8,182 (16,784)
Eurodollar futures492,000 
Total derivatives before netting$2,931,678 28,383 (23,197)
Netting adjustment/Cash collateral (1)
(9,611)19,596 
Carrying value on consolidated balance sheet$18,772 $(3,601)

22


At December 31, 2020
Notional amountFair value derivatives
(in thousands) AssetLiability
Forward sale commitments$977,974 $1,035 $(3,714)
Interest rate lock commitments493,873 17,395 (3)
Interest rate swaps536,969 17,459 (20,511)
Eurodollar futures314,000 (4)
Total derivatives before netting$2,322,816 35,889 (24,232)
Netting adjustment/Cash collateral (1)
(8,250)21,447 
Carrying value on consolidated balance sheet$27,639 $(2,785)
(1)    Includes net cash collateral paid of $10.0 million and $13.2 million at March 31, 2021 and December 31, 2020, respectively.

The following tables present gross fair value and net carrying value information about derivative instruments.
(in thousands)Gross fair value
Netting adjustments/ Cash collateral (1)
Carrying value
At March 31, 2021
Derivative assets$28,383 $(9,611)$18,772 
Derivative liabilities(23,197)19,596 (3,601)
At December 31, 2020
Derivative assets$35,889 $(8,250)$27,639 
Derivative liabilities(24,232)21,447 (2,785)
(1)    Includes net cash collateral paid of $10.0 million and $13.2 million at March 31, 2021 and December 31, 2020, respectively.
The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At March 31, 2021 and December 31, 2020, the Company had liabilities of $3.8 million and $3.3 million, respectively, in cash collateral received from counterparties and receivables of $13.8 million and $16.5 million, respectively, in cash collateral paid to counterparties.
The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated.
 Quarter Ended March 31,
(in thousands)20212020
Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)
$3,858 $5,140 
Loan servicing income (loss) (2)
(12,591)19,921 
Other (3)
299 (494)
 
(1)Comprised of IRLCs and forward contracts used as an economic hedge of single family mortgage loans held for sale.
(2)Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as economic hedges of single family MSRs.
(3)Comprised of interest rate swaps used as economic hedges of loans held for investment.

The notional amount of open interest rate swap agreements executed with commercial banking customers at March 31, 2021 and December 31, 2020 were $281 million and $246 million, respectively. 


23


NOTE 6–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following. 
(in thousands)At March 31, 2021At December 31, 2020
Single family$241,600 $194,643 
Commercial real estate, multifamily and SBA148,623 167,289 
Total$390,223 $361,932 

Loans sold consisted of the following for the periods indicated: 
 Quarter Ended March 31,
(in thousands)20212020
Single family$573,040 $309,853 
Commercial real estate, multifamily and SBA257,717 282,457 
Total$830,757 $592,310 

Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following. 
 Quarter Ended March 31,
(in thousands)20212020
Single family$26,187 $17,831 
Commercial real estate, multifamily and SBA7,272 4,710 
Total$33,459 $22,541 

The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows:
(in thousands)At March 31,
2021
At December 31,
2020
Single family$5,691,682 $5,914,592 
Commercial real estate, multifamily and SBA1,962,005 1,844,241 
Total$7,653,687 $7,758,833 

The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud.

The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.
 Quarter Ended March 31,
(in thousands)20212020
Balance, beginning of period$2,122 $2,871 
Additions, net of adjustments (1)
(20)(316)
Realized losses (2)
(161)(73)
Balance, end of period$1,941 $2,482 
 
(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
24


amounts from investors or borrowers. Advances of $3.0 million were recorded in other assets as of both March 31, 2021 and December 31, 2020.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At March 31, 2021 and December 31, 2020, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $82 million and $102 million, respectively. 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. 
 Quarter Ended March 31,
(in thousands)20212020
Servicing income, net:
Servicing fees and other$8,913 $7,993 
Amortization of single family MSRs(1)
(5,693)(3,494)
Amortization of multifamily and SBA MSRs(1,344)(1,475)
Total1,876 3,024 
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)
11,463 (16,844)
Net gain (loss) from derivative hedging(12,591)19,921 
Total(1,128)3,077 
               Loan servicing income$748 $6,101 
(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 speeds and cash flow projections.

The changes in single family MSRs measured at fair value are as follows:
Quarter Ended March 31,
(in thousands)20212020
Beginning balance$49,966 $68,109 
Additions and amortization:
Originations6,616 2,162 
Amortization (1)
(5,693)(3,494)
Net additions and amortization923 (1,332)
Changes in fair value assumptions (2)
11,463 (16,844)
Ending balance$62,352 $49,933 
(1)Represents changes due to collection/realization of expected cash flows and curtailments.
(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily reflected by changes in mortgage interest rates.

Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows: 
Quarter Ended March 31, (2)
(rates per annum)20212020
Constant prepayment rate ("CPR") (1)
8.37 %15.61 %
Discount rate8.37 %7.83 %
(1)Represents an expected lifetime average CPR used in the model.
(2)Based on a weighted average.

25


For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below.
At March 31, 2021At December 31, 2020
Range of Inputs
Average(1)
Range of Inputs
Average(1)
CPRs7.96% - 14.08%9.96 %8.13% - 19.70%12.81 %
Discount Rates7.33% - 13.85%8.98 %6.50% - 13.14%8.27 %
(1)Averages of all the inputs within the range.

To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below:
(dollars in thousands)At March 31, 2021
Fair value of single family MSR$62,352 
Expected weighted-average life (in years)6.28
CPR
Impact on fair value of 25 basis points adverse change in interest rates$(3,129)
Impact on fair value of 50 basis points adverse change in interest rates$(6,450)
Discount rate
Impact on fair value of 100 basis points increase$(3,006)
Impact on fair value of 200 basis points increase$(5,783)

The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows: 
Quarter Ended March 31,
(in thousands)20212020
Beginning balance$35,774 $29,494 
Origination5,196 1,957 
Amortization(1,344)(1,331)
Ending balance$39,626 $30,120 


NOTE 7–GUARANTEES AND MORTGAGE REPURCHASE LIABILITY:

In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of March 31, 2021 and December 31, 2020, the total unpaid principal balance of loans sold under this program was $1.9 billion and $1.8 billion, respectively. The Company's reserve liability related to this arrangement totaled $2.7 million and $2.1 million at March 31, 2021 and December 31, 2020, respectively. There were 0 actual losses incurred under this arrangement during the quarters ended March 31, 2021 and 2020.

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $5.8 billion and $6.0 billion as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021 and December 31, 2020, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $1.9 million and $2.1 million, respectively.
26


NOTE 8–FAIR VALUE MEASUREMENT:

The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company's approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

Fair Value Hierarchy

A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity
can access at the measurement date. An active market for the asset or liability is a market in which transactions for
the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing
basis.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and
inputs that are observable for the asset or liability for substantially the full term of the financial instrument.

• Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company's assumptions of what
market participants would use in pricing the asset or liability.

The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period.                 
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions and classification of the Company's assets and liabilities valued at fair value on a recurring basis.
27


Asset/Liability classValuation methodology, inputs and assumptionsClassification
Investment securities
Investment securities AFSObservable market prices of identical or similar securities are used where available.Level 2 recurring fair value measurement.
If market prices are not readily available, value is based on discounted cash flows using the following significant inputs:
 
•      Expected prepayment speeds 
•      Estimated credit losses 
•      Market liquidity adjustments
Level 3 recurring fair value measurement.
LHFS
Single family loans, excluding loans transferred from held for investment
Fair value is based on observable market data, including:
 
•       Quoted market prices, where available 
•       Dealer quotes for similar loans 
•       Forward sale commitments
Level 2 recurring fair value measurement.
When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs:
•       Benchmark yield curve  
•       Estimated discount spread to the benchmark yield curve 
•       Expected prepayment speeds
Estimated fair value classified as Level 3.
Mortgage servicing rights
Single family MSRs
For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 6, Mortgage Banking Operations.
Level 3 recurring fair value measurement.
Derivatives
Eurodollar futuresFair value is based on closing exchange prices.Level 1 recurring fair value measurement.
Interest rate swaps
Interest rate swaptions
Forward sale commitments
Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including:
 
            •       Forward interest rates 
            •       Interest rate volatilities
Level 2 recurring fair value measurement.
Interest rate lock commitments
The fair value considers several factors including:

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

 



28


The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis. 
At March 31, 2021
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Investment securities AFS
Mortgage backed securities:
Residential$43,238 $$40,828 $2,410 
Commercial43,025 43,025 
Collateralized mortgage obligations:
Residential230,498 230,498 
Commercial152,151 — 152,151 
Municipal bonds561,011 561,011 
Corporate debt securities14,936 14,856 80 
Single family LHFS241,600 241,600 
Single family LHFI4,324 4,324 
Single family mortgage servicing rights62,352 62,352 
Derivatives
Eurodollar futures
Forward sale commitments13,509 13,509 
Interest rate lock commitments6,686 06,686 
Interest rate swaps8,182 8,182 
Total assets$1,381,518 $$1,305,660 $75,852 
Liabilities:
Derivatives
Forward sale commitments$6,215 $$6,215 $
Interest rate lock commitments198 198 
Interest rate swaps16,784 16,784 0
Total liabilities$23,197 $$22,999 $198 

29


At December 31, 2020
(in thousands)Fair ValueLevel 1Level 2Level 3
Assets:
Investment securities AFS
Mortgage backed securities:
Residential$51,046 $$48,417 $2,629 
Commercial45,184 45,184 
Collateralized mortgage obligations:
Residential234,909 234,909 
Commercial159,183 159,183 
Municipal bonds564,703 564,703 
Corporate debt securities15,222 15,141 81 
Agency debentures1,846 1,846 
Single family LHFS194,643 194,643 
Single family LHFI7,108 7,108 
Single family mortgage servicing rights49,966 49,966 
Derivatives
Forward sale commitments1,035 1,035 
Interest rate lock commitments17,395 17,395 
Interest rate swaps17,459 17,459 
Total assets$1,359,699 $$1,282,520 $77,179 
Liabilities:
Derivatives
Eurodollar futures$$$$
Forward sale commitments3,714 3,714 
Interest rate lock commitments
Interest rate swaps20,511 20,511 
Total liabilities$24,232 $$24,225 $

There were 0 transfers between levels of the fair value hierarchy during the quarters ended March 31, 2021 and 2020.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarter ended March 31, 2021 and 2020, see Note 6, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.

The fair value of IRLCs considers several factors, including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in other significant unobservable inputs.

30


The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period.

The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been transferred from held for sale to held for investment and single family LHFS when the fair value of the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived from third party pricing which is based on market information from comparable loan pools. The fair value estimate of single family loans that have been transferred from held for sale to held for investment are sensitive to changes in the benchmark interest rate which might result in a significantly higher or lower fair value measurement.

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $4.3 million and $7.1 million at March 31, 2021 and December 31, 2020, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets.
(dollars in thousands)Fair ValueValuation
Technique
Significant Unobservable
Input
LowHighWeighted Average
March 31, 2021
Investment securities AFS$2,490 Income approachImplied spread to benchmark interest rate curve2.00%2.00%2.00%
Single family LHFI4,324 Income approachImplied spread to benchmark interest rate curve3.98%9.53%5.83%
Interest rate lock commitments, net6,488 Income approachFall-out factor0.29%21.00%9.54%
Value of servicing0.36%1.47%1.16%
December 31, 2020
Investment securities AFS$2,710 Income approachImplied spread to benchmark interest rate curve2.00%2.00%2.00%
Single family LHFI7,108 Income approachImplied spread to benchmark interest rate curve3.96%10.64%6.23%
Interest rate lock commitments, net17,392 Income approachFall-out factor1.97%38.38%15.53%
Value of servicing0.41%1.44%0.97%


31




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

The following table presents fair value changes and activity for certain Level 3 assets.
Beginning balanceAdditionsTransfersPayoffs/Sales
Change in mark to market (1)
Ending balance
(in thousands)
Quarter Ended March 31, 2021
Investment securities AFS$2,710 $$$(48)$(172)$2,490 
Single family LHFI7,108 360 (3,191)47 4,324 
Quarter Ended March 31, 2020
Investment securities AFS$1,952 $985 $$(291)$239 $2,885 
Single family LHFI3,468 1,679 (247)26 4,926 
(1) Changes in fair value for single LHFI are recorded in other noninterest income on the consolidated income statement.

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments.
Quarter Ended March 31,
(in thousands)20212020
Beginning balance, net$17,392 $2,223 
Total realized/unrealized gains (losses)(3,469)15,762 
Settlements(7,435)(4,483)
Ending balance, net$6,488 $13,502 

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a periodic basis. These assets include certain LHFI and OREO that are carried at the lower of cost or fair value of the underlying collateral, less the estimated costs to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. We have omitted disclosure related to quantitative inputs given the insignificance of assets measured on a nonrecurring basis.

The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial LHFI that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial LHFI that are not collateralized by real estate and to the appraisal value of OREO.

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

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

32



The following table present assets classified as Level 3 assets that had changes in their recorded fair value during the quarter ended March 31, 2020 and what we still held at the end of the respective reporting period.
(in thousands)Fair ValueTotal Gains (Losses)
At or for the Quarter Ended March 31, 2020
      LHFI (1)
$890 $113 
(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, 2021
(in thousands)Carrying
Value
Fair
Value
Level 1Level 2Level 3
Assets:
Cash and cash equivalents$69,101 $69,101 $69,101 $$
Investment securities HTM4,246 4,431 4,431 
LHFI5,223,403 5,305,705 5,305,705 
LHFS – multifamily and other148,623 151,946 151,946 
Mortgage servicing rights – multifamily39,626 41,882 41,882 
Federal Home Loan Bank stock9,851 9,851 9,851 
Other assets - GNMA EBO loans82,174 82,174 82,174 
Liabilities:
Certificates of deposit$1,178,714 $1,180,956 $$1,180,956 $
Borrowings84,500 84,500 084,500 0
Long-term debt125,885 116,395 116,395 

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

33


NOTE 9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share. 
 Quarter Ended March 31,
(in thousands, except share and per share data)20212020
EPS numerator:
Net income$29,663 $7,139 
EPS denominator:
Weighted average shares:
Basic weighted-average number of common shares outstanding21,637,671 23,688,930 
Dilutive effect of outstanding common stock equivalents324,157 171,350 
Diluted weighted-average number of common shares outstanding21,961,828 23,860,280 
Net income per share:
Basic earnings per share$1.37 $0.30 
Diluted earnings per share1.35 0.30 
 

NOTE 10–RESTRUCTURING:

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

The following table summarizes the restructuring charges and the liability for restructuring costs still to be paid in the periods indicated:
(in thousands)Facility-related costsPersonnel-related costsOther costsTotal
Quarter ended March 31, 2020 activity
Restructuring charges$580 $147 $488 $1,215 
Costs paid or otherwise settled(575)(365)(522)(1,462)
Balance, March 31, 2020$1,240 $292 $125 $1,657 
Quarter ended March 31, 2021 activity
Costs paid or otherwise settled(233)(15)(116)(364)
Balance, March 31, 2021$2,630 $139 $$2,769 
NOTE 11–SUBSEQUENT EVENT:

On April 29, 2021 the Board authorized a dividend of $0.25 per share, payable on May 26, 2021 to shareholders of record on May 11, 2021. On the same day, the Board approved an expansion of the Company's share repurchase program for up to $25 million of its common stock
34


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


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

FORWARD-LOOKING STATEMENTS

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

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

Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation 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.

35


Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP and accounting practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets. Those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the events, trends or other circumstances on which our estimates or assumptions were based, these changes could have a material adverse effect on the carrying value of assets and liabilities and on our results of operations. We have identified two policies and estimates as being critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These policies relate to the allowance for credit losses and the valuation of single family mortgage servicing rights.

These policies and estimates are described in further detail in Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies, within our 2020 Annual Report on Form 10-K.
36


Summary Financial Data

 Quarter Ended
(dollars in thousands, except per share data)March 31, 2021December 31, 2020March 31, 2020
Select Income Statement data:
Net interest income$54,517 $56,048 $45,434 
Provision for credit losses— — 14,000 
Noninterest income38,833 43,977 32,630 
Noninterest expense56,608 64,770 55,184 
Net income:
Before income taxes36,742 35,255 8,880 
Total29,663 27,598 7,139 
Income per share - diluted1.35 1.25 0.30 
Select Performance Ratios:
Return on average equity - annualized16.4 %15.3 %4.1 %
Return on average tangible equity - annualized (1)
17.3 %16.2 %4.5 %
Return on average assets - annualized1.65 %1.47 %0.42 %
Efficiency ratio (1)
60.0 %56.1 %68.5 %
Net interest margin3.29 %3.26 %2.93 %
Other data
Full time equivalent employees1,013 1,013 996 

(1)Return on average tangible equity and the efficiency ratio are non-GAAP financial measures. For a reconciliation or return on average tangible equity to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.




37


 As of
(dollars in thousands, except per share data)March 31, 2021December 31, 2020
Selected Balance Sheet Data
Loans held for sale$390,223 $361,932 
Loans held for investment, net5,227,727 5,179,886 
ACL64,047 64,294 
Investment securities1,049,105 1,076,364 
Total assets7,265,191 7,237,091 
Deposits6,131,233 5,821,559 
Borrowings84,500 322,800 
Long-term debt125,885 125,838 
Total shareholders' equity701,463 717,750 
Other data:
Book value per share$32.84 $32.93 
Tangible book value per share (1)
31.31 31.42 
Total equity to total assets9.7 %9.9 %
Tangible common equity to tangible assets (1)
9.2 %9.5 %
Shares outstanding at period end21,360,514 21,796,904 
Loans to deposit ratio92.7 %96.3 %
Credit Quality:
ACL to total loans (2)
1.34 %1.33 %
ACL to nonaccrual loans
297.3 %310.3 %
Nonaccrual loans to total loans0.41 %0.40 %
Nonperforming assets to total assets0.32 %0.31 %
Nonperforming assets$23,025 $22,097 
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio10.01 %9.79 %
Total risk-based capital14.84 %14.76 %
Company
Tier 1 leverage ratio9.83 %9.65 %
Total risk-based capital14.05 %14.00 %

(1)Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA, including PPP loans.


38



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

Our initial response included a business continuity plan with a remote working strategy, social distancing and sanitation plan. We continue to monitor this plan to adapt to recent developments. We continue to take significant measures to protect our employees, such as having most work remotely and where remote work is not viable, implementing a social distancing and sanitation plan. At March 31, 2021, all of our retail deposit branches were open to serve our customers and communities.

We continue to participate in the Small Business Administration’s ("SBA") Paycheck Protection Program (“PPP”) including processing loan requests. During the first quarter of 2021 we funded 1,170 loans with balances of $123 million under the PPP. As of March 31, 2021, PPP outstanding loan balances were $381 million. The loans funded through the PPP program are fully guaranteed by the U.S. government. Through March 31, 2021, cumulative PPP loans forgiven totaled $42 million.

Other Items
As part of our capital management strategy, during the first quarter of 2021, we repurchased a total of 560,996 shares of our common stock at an average price of $44.56 per share. On April 29, 2021, the Board of Directors approved an expansion of the Company's share repurchase program for up to $25 million of its common stock.





39



Management's Overview of the First Quarter 20201 Financial Performance

First Quarter of 2021 Compared to the Fourth Quarter of 2020

General: Our net income and income before income taxes were $29.7 million and $36.7 million, respectively, in the first quarter of 2021, as compared to $27.6 million and $35.3 million, respectively, during the fourth quarter of 2020. The $1.5 million increase in income before taxes was due to lower noninterest expense, partially offset by lower net interest income and lower noninterest income.

Income Taxes: Our effective tax rate during the first quarter of 2021 was 19.3% as compared to 21.7% in the fourth quarter of 2020 and a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due primarily to the benefits of tax advantaged investments. Our effective tax rate in the first quarter of 2021 was lower than the fourth quarter of 2020 due to reductions in taxes on income related to excess tax benefits resulting from the exercise or vesting of stock awards during the quarter.

Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets:
Quarter Ended
 March 31, 2021December 31, 2020
(in thousands)Average
Balance
InterestAverage
Yield/Cost
Average
Balance
InterestAverage
Yield/Cost
      
Assets:
Interest-earning assets:
Loans (1)
$5,605,868 $53,755 3.85 %$5,705,512 $56,916 3.93 %
Investment securities (1)
1,065,423 6,591 2.47 %1,098,367 6,446 2.35 %
FHLB Stock, Fed Funds and other68,044 172 1.01 %73,993 267 1.41 %
Total interest-earning assets6,739,335 60,518 3.60 %6,877,872 63,629 3.65 %
Noninterest-earning assets571,073 585,830 
Total assets$7,310,408 $7,463,702 
Interest-bearing liabilities:
Deposits: (2)
Demand deposits$493,831 $169 0.14 %$483,474 $174 0.14 %
Money market and savings2,915,005 1,228 0.17 %2,809,302 1,493 0.21 %
Certificates of deposit1,180,290 2,253 0.77 %1,198,664 3,218 1.07 %
Total deposits4,589,126 3,650 0.32 %4,491,440 4,885 0.43 %
Borrowings:
Borrowings203,621 161 0.32 %471,175 417 0.35 %
Long-term debt125,854 1,363 4.33 %125,807 1,373 4.35 %
Total interest-bearing liabilities4,918,601 5,174 0.42 %5,088,422 6,675 0.52 %
Noninterest-bearing liabilities
Demand deposits (2)
1,433,765 1,421,182 
Other liabilities226,323 236,432 
Total liabilities6,578,689 6,746,036 
Shareholders' equity731,719 717,666 
Total liabilities and shareholders' equity$7,310,408 $7,463,702 
Net interest income
$55,344 $56,954 
Net interest spread3.18 %3.13 %
Net interest margin3.29 %3.26 %

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $827 thousand and $905 thousand for the quarters ended March 31, 2021 and December 31, 2020, respectively. The estimated federal statutory tax rate was 21% for the periods presented.
(2) Cost of deposits including noninterest-bearing deposits, was 0.25% and 0.33% for the quarters ended March 31, 2021 and December 31, 2020, respectively.

40


Net interest income was lower in the first quarter of 2021 due to a lower level of interest earnings assets which was partially offset by an increase in our net interest margin. The lower balances of interest earning assets was due primarily to continuing high prepayments on loans in our portfolio and the sale of multifamily loans. Our net interest margin increased to 3.29% primarily due to a five basis point increase in our net interest rate spread. The increase in our net interest rate spread was due to a lower cost of interest-bearing liabilities which was partially offset by lower yields on interest-earning assets. The five basis point decrease in yield on interest earning assets was due to the origination of loans, including PPP loans, at current market rates which were below our portfolio rates and the prepayment and paydown of higher yielding loans. The ten basis point decrease in our costs of interest-bearing liabilities was the result of repricing our deposit products to lower market rates, the maturity of higher rate time deposits and lower borrowing costs.

Provision for Credit Losses: As a result of the favorable performance of our loan portfolio and a stable low level of nonperforming assets, we recorded no provision for credit losses in either the first quarter of 2021 or the fourth quarter of 2020.

Noninterest Income consisted of the following.  
 Quarter Ended
(in thousands)March 31, 2021December 31, 2020
Noninterest income
Gain on loan origination and sale activities (1)
Single family$26,187 $27,044 
Commercial7,272 9,822 
Loan servicing income748 2,570 
Deposit fees1,824 1,858 
Other2,802 2,683 
Total noninterest income$38,833 $43,977 
(1) May include loans originated as held for investment.


Loan servicing income, a component of noninterest income, consisted of the following.
 Quarter Ended
(in thousands)March 31, 2021December 31, 2020
Single family servicing income, net
Servicing fees and other$3,935 $4,120 
Changes - amortization (1)
(5,693)(5,508)
Net