HomeStreet, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2021

☐ 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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	HMST	Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated Filer

☐

Smaller Reporting Company

☐

Emerging growth Company

☐

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

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐

No ☒

The number of outstanding shares of the registrant's common stock as of November 1, 2021 was 20,450,012.


PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Balance Sheets at September 30, 2021 and December 31, 2020		3
Consolidated Income Statements for the Quarters and Nine Months Ended September 30, 2021 and 2020		4
Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2021 and 2020		5
Consolidated Statements of Shareholders’ Equity for the Quarters and Nine months Ended September 30, 2021 and 2020		6
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020		7
Notes to Consolidated Financial Statements		9
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	61

ITEM 4	CONTROLS AND PROCEDURES	64
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	64
ITEM 1A	RISK FACTORS	65
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	66
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	67
ITEM 4	MINE SAFETY DISCLOSURES	67
ITEM 5	OTHER INFORMATION	67
ITEM 6	EXHIBITS	68
SIGNATURES		69

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

PART I


ITEM 1 FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	September 30, 2021		December 31, 2020
(in thousands, except share data)	(Unaudited)

ASSETS
Cash and cash equivalents	$	218,662	$	58,049
Investment securities	983,038		1,076,364
Loans held for sale ("LHFS")	395,112		361,932
Loans held for investment ("LHFI") (net of allowance for credit losses of $54,516 and $64,294)	5,299,741		5,179,886
Mortgage servicing rights ("MSRs")	100,831		85,740
Premises and equipment, net	58,449		65,102
Other real estate owned ("OREO")	1,484		1,375
Goodwill and other intangible assets	32,002		32,880
Other assets	283,132		375,763

Total assets	$	7,372,451	$	7,237,091
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits	$	6,359,660	$	5,821,559
Borrowings	—		322,800
Long-term debt	125,979		125,838
Accounts payable and other liabilities	176,436		249,144

Total liabilities	6,662,075		6,519,341
Commitments and contingencies
Shareholders' equity:




Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 20,446,648 shares and 21,796,904 shares	256,081		278,505
Retained earnings	432,202		403,888
Accumulated other comprehensive income	22,093		35,357
Total shareholders' equity	710,376		717,750
Total liabilities and shareholders' equity	$	7,372,451	$	7,237,091

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited)


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2021		2020		2021		2020

Interest income:
Loans	$	56,117	$	57,538	$	166,763	$	172,275
Investment securities	5,130		5,667		16,091		16,053
Cash, Fed Funds and other	141		532		472		960
Total interest income	61,388		63,737		183,326		189,288
Interest expense:
Deposits	2,507		5,986		8,930		28,944
Borrowings	1,397		2,067		4,423		7,730
Total interest expense	3,904		8,053		13,353		36,674
Net interest income	57,484		55,684		169,973		152,614
Provision for credit losses	(5,000)		—		(9,000)		20,469
Net interest income after provision for credit losses	62,484		55,684		178,973		132,145
Noninterest income:
Net gain on loan origination and sale activities	17,509		33,130		72,239		85,698
Loan servicing income (loss)	2,014		(1,582)		4,693		6,921
Deposit fees	2,091		1,769		5,912		5,225

Other	2,684		2,838		8,511		7,543
Total noninterest income	24,298		36,155		91,355		105,387
Noninterest expense:
Compensation and benefits	31,175		34,570		101,388		101,429
Information services	6,902		7,401		20,635		22,330
Occupancy	5,705		8,354		18,170		23,082
General, administrative and other	8,167		7,732		21,179		24,052
Total noninterest expense	51,949		58,057		161,372		170,893
Income before income taxes	34,833		33,782		108,956		66,639
Income tax expense	7,663		7,433		22,966		14,247




Net income	$	27,170	$	26,349	$	85,990	$	52,392

Net income per share:

Basic	$	1.32	$	1.16	$	4.08	$	2.26




Diluted	$	1.31	$	1.15	$	4.03	$	2.24



Weighted average shares outstanding:
Basic	20,613,290		22,665,069		21,099,059		23,226,109
Diluted	20,819,601		22,877,226		21,352,715		23,403,729

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

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

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)


(in thousands, except share data)	Number of shares	Common stock		Retained earnings		Accumulated other comprehensive income (loss)		Total shareholders' equity

For the quarter ended September 30, 2020
Balance, June 30, 2020	23,007,400	$	290,871	$	375,268	$	28,510	$	694,649
Net income	—	—		26,349		—		26,349
Share-based compensation expense	—	846		—		—		846
Common stock issued - Option exercise; stock grants	5,576	—		—		—		—

Other comprehensive income	—	—		—		4,267		4,267
Dividends declared on common stock ($0.15 per share)	—	—		(3,450)		—		(3,450)
Common stock repurchased	(1,018,772)	(11,295)		(15,060)		—		(26,355)

Balance, September 30, 2020	21,994,204	$	280,422	$	383,107	$	32,777	$	696,306

For the nine months ended September 30, 2020
Balance, December 31, 2019	23,890,855	$	300,729	$	374,673	$	4,321	$	679,723
Net income	—	—		52,392		—		52,392
Share-based compensation expense	—	2,030		—		—		2,030
Common stock issued - Option exercise; stock grants	127,273	782		—		—		782
Cumulative effect of adoption of new accounting standards	—	—		(3,740)		—		(3,740)
Other comprehensive income	—	—		—		28,456		28,456
Dividends declared on common stock ($0.45 per share)				(10,556)				(10,556)
Common stock repurchased	(2,023,924)	(23,119)		(29,662)		—		(52,781)

Balance, September 30, 2020	21,994,204	$	280,422	$	383,107	$	32,777	$	696,306

For the quarter ended September 30, 2021
Balance, June 30, 2021	20,791,659	$	260,774	$	420,111	$	27,846	$	708,731
Net income	—	—		27,170		—		27,170
Share-based compensation expense	—	892		—		—		892
Common stock issued - Option exercise; stock grants	52,265	339		—		—		339
Other comprehensive income (loss)	—	—		—		(5,753)		(5,753)
Dividends declared on common stock ($0.25 per share)	—	—		(5,259)		—		(5,259)
Common stock repurchased	(397,276)	(5,924)		(9,820)		—		(15,744)

Balance, September 30, 2021	20,446,648	$	256,081	$	432,202	$	22,093	$	710,376

For the nine months ended September 30, 2021
Balance, December 31, 2020	21,796,904	$	278,505	$	403,888	$	35,357	$	717,750
Net income	—	—		85,990		—		85,990
Share-based compensation expense	—	2,557		—		—		2,557
Common stock issued - Option exercise; stock grants	245,630	2,383		—		—		2,383

Other comprehensive income (loss)	—	—		—		(13,264)		(13,264)
Dividends declared on common stock ($0.75 per share)	—	—		(16,171)		—		(16,171)
Common stock repurchased	(1,595,886)	(27,364)		(41,505)		—		(68,869)
Balance, September 30, 2021	20,446,648	$	256,081	$	432,202	$	22,093	$	710,376

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
(in thousands)	2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	85,990	$	52,392
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses	(9,000)		20,469
Depreciation and amortization, premises and equipment	7,294		6,955
Amortization of premiums and discounts: securities, deposits, debt	4,788		7,228
Operating leases: excess of payments over amortization	(3,015)		(2,731)
Amortization of finance leases	786		1,001
Amortization of core deposit intangibles	878		1,030
Amortization of deferred loan fees and costs	(7,544)		1,728
Share-based compensation expense	2,557		2,030

Lease impairment costs	248		4,623
Deferred income tax expense (benefit)	7,777		(6,998)
Origination of LHFS	(1,785,393)		(1,670,272)
Proceeds from sale of LHFS	1,932,447		1,605,064
Net fair value adjustment and gain on sale of LHFS	(36,359)		(55,443)
Origination of MSRs	(27,908)		(19,071)
Net gain on sale of loans originated as LHFI	(4,613)		(3,760)
Change in fair value of MSRs	8,267		34,033
Amortization of servicing rights	5,235		4,084




(Increase) decrease in other assets	528		(24,842)
Increase (decrease) in accounts payable and other liabilities	(489)		2,149
Net cash provided by (used in) operating activities	182,474		(40,331)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(112,146)		(348,384)
Proceeds from sale of investment securities	28,187		58,487
Principal payments on investment securities	159,037		152,643
Proceeds from sale of OREO	—		650
Proceeds from sale of loans originated as LHFI	251,474		349,498


Net cash provided by disposal of discontinued operations	—		2,759


Net increase in LHFI	(492,666)		(603,847)
Proceeds from sale of premises and equipment	—		1,460
Purchase of premises and equipment	(852)		(2,972)

Proceeds from sale of Federal Home Loan Bank stock	89,882		112,808
Purchases of Federal Home Loan Bank stock	(78,286)		(116,993)
Net cash provided by (used in) investing activities	(155,370)		(393,891)


	Nine Months Ended September 30,
(in thousands)	2021		2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net	538,005		475,639

Changes in short-term borrowings, net	(322,800)		43,000


Proceeds from other long-term borrowings	50,000		—
Repayment of other long-term borrowings	(50,000)		—



Repayment of finance lease principal	(787)		(973)
Repurchases of common stock	(65,001)		(51,939)
Proceeds from exercise of stock options	263		237
Dividends paid on common stock	(16,171)		(10,556)
Net cash provided by (used in) financing activities	133,509		455,408
Net increase in cash and cash equivalents	160,613		21,186

Cash and cash equivalents, beginning of year	58,049		57,880


Cash and cash equivalents, end of period	$	218,662	$	79,066


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	12,371	$	36,645
Federal and state income taxes	28,156		11,236
Non-cash activities:
Increase in lease assets and lease liabilities	910		—
Decrease in lease assets and lease liabilities	—		38,754

Loans transferred from LHFI to LHFS, net	390,521		412,219

Ginnie Mae loans recognized with the right to repurchase, net	—		105,727
Ginnie Mae loans derecognized with the right to repurchase, net	70,197		—
Repurchase of common stock-award shares	3,868		842

See accompanying notes to consolidated financial statements

HomeStreet, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

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

Recent Accounting Developments

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

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

NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost basis and fair values of our investment securities AFS and held-to-maturity ("HTM"):


	At September 30, 2021
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value

AFS
Mortgage backed securities ("MBS"):
Residential	$	33,046	$	719	$	(298)	$	33,467
Commercial	40,995		1,231		(176)		42,050
Collateralized mortgage obligations ("CMOs"):
Residential	182,060		3,283		(983)		184,360
Commercial	139,202		2,368		(246)		141,324
Municipal bonds	513,151		22,558		(1,308)		534,401
Corporate debt securities	18,990		859		—		19,849
U.S. Treasury securities	23,434		10		(52)		23,392

Total	$	950,878	$	31,028	$	(3,063)	$	978,843

HTM




Municipal bonds	$	4,195	$	154	$	—	$	4,349


	At December 31, 2020
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value

AFS
MBS:
Residential	$	50,001	$	1,237	$	(192)	$	51,046
Commercial	43,061		2,131		(8)		45,184
CMOs:
Residential	228,685		6,319		(95)		234,909
Commercial	155,645		3,719		(181)		159,183
Municipal bonds	533,719		31,321		(337)		564,703
Corporate debt securities	14,381		841		—		15,222

Agency debentures	1,846		—		—		1,846
Total	$	1,027,338	$	45,568	$	(813)	$	1,072,093

HTM




Municipal bonds	$	4,271	$	236	$	—	$	4,507

MBS and CMOs represent securities issued by government sponsored enterprises ("GSEs"). Most of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2021 and December 31, 2020, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor's Rating Services or Moody's Investors Services.

Investment securities AFS that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position:


	At September 30, 2021
	Less than 12 months				12 months or more				Total
(in thousands)	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value


MBS:
Residential	$	(70)	$	1,115	$	(228)	$	1,322	$	(298)	$	2,437
Commercial	(176)		10,954		—		—		(176)		10,954
CMOs:
Residential	(701)		21,942		(282)		7,159		(983)		29,101
Commercial	(184)		9,875		(62)		1,956		(246)		11,831
Municipal bonds	(1,163)		49,953		(145)		8,411		(1,308)		58,364

U.S. Treasury securities	(52)		17,873		—		—		(52)		17,873

Total	$	(2,346)	$	111,712	$	(717)	$	18,848	$	(3,063)	$	130,560


	At December 31, 2020
	Less than 12 months				12 months or more				Total
(in thousands)	Gross unrealized losses		Fair value		Gross unrealized losses		Fair value		Gross unrealized losses		Fair value


MBS:
Residential	$	(7)	$	1,196	$	(185)	$	1,432	$	(192)	$	2,628
Commercial	(8)		925		—		—		(8)		925
CMOs:
Residential	(95)		7,391		—		—		(95)		7,391
Commercial	(39)		6,687		(142)		15,358		(181)		22,045
Municipal bonds	(337)		10,512		—		—		(337)		10,512



Total	$	(486)	$	26,711	$	(327)	$	16,790	$	(813)	$	43,501

There were no HTM securities in an unrealized loss position at September 30, 2021 or December 31, 2020.

The Company has evaluated AFS securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of September 30, 2021 or December 31, 2020. In addition, as of September 30, 2021 and December 31, 2020, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.

The following tables present the fair value of investment securities AFS and HTM by contractual maturity along with the associated contractual yield:


	At September 30, 2021
	Within one 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

AFS






Municipal bonds	$	3,826	3.78	%	$	15,685	3.33	%	$	65,624	3.68	%	$	449,266	3.23	%	$	534,401	3.29	%
Corporate debt securities	—		—	%	6,701		3.64	%	13,148		5.06	%	—		—	%	19,849		4.58	%
U.S. Treasury securities	—		—	%	—		—	%	23,392		1.28	%	—		—	%	23,392		1.28	%

Total	$	3,826	3.78	%	$	22,386	3.43	%	$	102,164	3.28	%	$	449,266	3.23	%	$	577,642	3.25	%

HTM




Municipal bonds	$	1,034	2.50	%	$	3,315	2.40	%	$	—	—	%	$	—	—	%	$	4,349	2.43	%


	At December 31, 2020
	Within one 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







AFS
Municipal bonds	$	4,024	3.19	%	$	14,978	3.82	%	$	59,496	3.26	%	$	486,205	3.29	%	$	564,703	3.30	%
Corporate debt securities	183		4.27	%	7,059		3.74	%	7,980		4.78	%	—		—	%	15,222		4.30	%

Agency debentures	—		—	%	—		—	%	—		—	%	1,846		2.68	%	1,846		2.68	%
Total	$	4,207	3.24	%	$	22,037	3.80	%	$	67,476	3.45	%	$	488,051	3.29	%	$	581,771	3.33	%

HTM




Municipal bonds	$	—	—	%	$	4,507	2.47	%	$	—	—	%	$	—	—	%	$	4,507	2.47	%

The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis. MBS and CMOs are excluded from the tables above because such securities are not due on a single maturity date. The weighted average yield of MBS and CMOs as of September 30, 2021 and December 31, 2020 was 1.85% and 1.92%, respectively.

Sales of investment securities were as follows for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Proceeds	$	—	$	2,872	$	28,187	$	58,487
Gross gains	—		—		288		1,289
Gross losses	—		(15)		(226)		(973)

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


(in thousands)	At September 30, 2021		At December 31, 2020


Washington, Oregon and California State to secure public deposits	$	176,003	$	171,471

Other securities pledged	5,608		3,391
Total securities pledged as collateral	$	181,611	$	174,862

The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little credit risk.

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

NOTE 3 -LOANS AND CREDIT QUALITY:

The Company's LHFI is divided into two portfolio segments, commercial loans and consumer loans. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity and other loans within the consumer loan portfolio segment and non-owner occupied commercial real estate, multifamily, construction and land development, owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment. LHFI consists of the following:


(in thousands)	At September 30, 2021		At December 31, 2020

Commercial real estate loans
Non-owner occupied commercial real estate	$	754,031	$	829,538
Multifamily	2,090,156		1,428,092
Construction/land development	514,322		553,695
Total	3,358,509		2,811,325
Commercial and industrial loans
Owner occupied commercial real estate	450,350		467,256
Commercial business	435,756		645,723
Total	886,106		1,112,979
Consumer loans
Single family (1)	793,927		915,123
Home equity and other	315,715		404,753
Total	1,109,642		1,319,876
Total LHFI	5,354,257		5,244,180


Allowance for credit losses ("ACL")	(54,516)		(64,294)
Total LHFI less ACL	$	5,299,741	$	5,179,886

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

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

Credit Risk Concentrations

LHFI are primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At September 30, 2021 and December 31, 2020, multifamily loans in the state of California represented 29% and 19% of the total LHFI portfolio, respectively.

Credit Quality

Management considers the level of ACL to be appropriate to cover credit losses expected over the life of the loans for the LHFI portfolio. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Bank’s historical loss experience and eight qualitative factors for current and forecasted periods.

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

In addition to the ACL for LHFI, the Company maintains a separate allowance for unfunded loan commitments which is included in accounts payable and other liabilities on our consolidated balance sheets. The allowance for unfunded commitments was $2.5 million and $1.6 million at September 30, 2021 and December 31, 2020, respectively.

The Bank has elected to exclude accrued interest receivable from the evaluation of the ACL. Accrued interest on LHFI was $18.1 million and $21.2 million at September 30, 2021 and December 31, 2020, respectively, and was reported in other assets in the consolidated balance sheets.

Activity in the ACL for LHFI and the allowance for unfunded commitments was as follows for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	59,897	$	65,000	$	64,294	$	41,772
Provision for credit losses	(5,348)		273		(9,864)		21,633
Net (charge-offs) recoveries	(33)		(381)		86		(356)
Impact of ASC 326 adoption	—		—		—		1,843
Ending balance	$	54,516	$	64,892	$	54,516	$	64,892

Allowance for unfunded commitments:
Beginning balance	$	2,104	$	2,071	$	1,588	$	1,065
Provision for credit losses	348		(273)		864		(1,164)
Impact of ASC 326 adoption	—		—		—		1,897
Ending balance	$	2,452	$	1,798	$	2,452	$	1,798

Provision for credit losses:
Allowance for credit losses - loans	$	(5,348)	$	273	$	(9,864)	$	21,633
Allowance for unfunded commitments	348		(273)		864		(1,164)
Total	$	(5,000)	$	—	$	(9,000)	$	20,469

Activity in the ACL for LHFI by loan portfolio and loan sub-class was as follows for the periods indicated:


	Quarter Ended September 30, 2021
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance

Commercial real estate loans
Non-owner occupied commercial real estate	$	9,077	$	—	$	—	$	559	$	9,636
Multifamily	7,245		—		—		(1,788)		5,457
Construction/land development
Multifamily construction	500		—		—		544		1,044
Commercial real estate construction	2,022		—		—		(1,671)		351
Single family construction	5,653		—		—		638		6,291
Single family construction to permanent	1,047		—		—		15		1,062
Total	25,544		—		—		(1,703)		23,841
Commercial and industrial loans
Owner occupied commercial real estate	5,518		—		—		(233)		5,285
Commercial business	15,874		(116)		24		(1,309)		14,473
Total	21,392		(116)		24		(1,542)		19,758
Consumer loans
Single family	7,163		(13)		33		(1,426)		5,757
Home equity and other	5,798		(341)		380		(677)		5,160
Total	12,961		(354)		413		(2,103)		10,917
Total ACL	$	59,897	$	(470)	$	437	$	(5,348)	$	54,516


	Quarter Ended September 30, 2020
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance

Commercial real estate loans
Non-owner occupied commercial real estate	$	7,325	$	—	$	—	$	1,598	$	8,923
Multifamily	5,387		—		—		(516)		4,871
Construction/land development
Multifamily construction	3,811		—		—		2,109		5,920
Commercial real estate construction	440		—		—		1,269		1,709
Single family construction	5,869		—		—		(362)		5,507
Single family construction to permanent	1,515		—		—		(309)		1,206
Total	24,347		—		—		3,789		28,136
Commercial and industrial loans
Owner occupied commercial real estate	5,641		—		—		47		5,688
Commercial business	15,816		(447)		24		2,951		18,344
Total	21,457		(447)		24		2,998		24,032
Consumer loans
Single family	8,070		(3)		2		(1,349)		6,720
Home equity and other	11,126		(39)		82		(5,165)		6,004
Total	19,196		(42)		84		(6,514)		12,724
Total ACL	$	65,000	$	(489)	$	108	$	273	$	64,892


	Nine Months Ended September 30, 2021
(in thousands)	Beginning balance		Charge-offs		Recoveries		Provision		Ending balance

Commercial real estate loans
Non-owner occupied commercial real estate	$	8,845	$	—	$	—	$	791	$	9,636
Multifamily	6,072		—		—		(615)		5,457
Construction/land development
Multifamily construction	4,903		—		—		(3,859)		1,044
Commercial real estate construction	1,670		—		—		(1,319)		351
Single family construction	5,130		—		—		1,161		6,291
Single family construction to permanent	1,315		—		—		(253)		1,062
Total	27,935		—		—		(4,094)		23,841
Commercial and industrial loans
Owner occupied commercial real estate	4,994				—		291		5,285
Commercial business	17,043		(116)		122		(2,576)		14,473
Total	22,037		(116)		122		(2,285)		19,758
Consumer loans
Single family	6,906		(127)		155		(1,177)		5,757
Home equity and other	7,416		(432)		484		(2,308)		5,160
Total	14,322		(559)		639		(3,485)		10,917
Total ACL	$	64,294	$	(675)	$	761	$	(9,864)	$	54,516


	Nine Months Ended September 30, 2020
(in thousands)	Prior to adoption of ASC 326		Impact of ASC 326 adoption		Charge-offs		Recoveries		Provision		Ending balance

Commercial real estate loans
Non-owner occupied commercial real estate	$	7,245	$	(3,392)	$	—	$	—	$	5,070	$	8,923
Multifamily	7,015		(2,977)		—		—		833		4,871
Construction/land development
Multifamily construction	2,848		693		—		—		2,379		5,920
Commercial real estate construction	624		(115)		—		—		1,200		1,709
Single family construction	3,800		4,280		—		163		(2,736)		5,507
Single family construction to permanent	1,003		200		—		—		3		1,206
Total	22,535		(1,311)		—		163		6,749		28,136
Commercial and industrial loans
Owner occupied commercial real estate	3,639		(2,459)		—		—		4,508		5,688
Commercial business	2,915		510		(590)		72		15,437		18,344
Total	6,554		(1,949)		(590)		72		19,945		24,032
Consumer loans
Single family	6,450		468		(3)		56		(251)		6,720
Home equity and other	6,233		4,635		(345)		291		(4,810)		6,004
Total	12,683		5,103		(348)		347		(5,061)		12,724
Total ACL	$	41,772	$	1,843	$	(938)	$	582	$	21,633	$	64,892

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


	At September 30, 2021
(in thousands)	2021		2020		2019		2018		2017		2016 and prior		Revolving		Revolving-term		Total
COMMERCIAL PORTFOLIO
Non-owner occupied commercial real estate
1-6 Pass	$	35,832	$	50,863	$	172,296	$	133,472	$	132,238	$	225,012	$	1,189	$	915	$	751,817
7- Special Mention	—		—		—		—		—		2,214		—		—		2,214
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	35,832		50,863		172,296		133,472		132,238		227,226		1,189		915		754,031



Multifamily
1-6 Pass	972,806		557,201		289,164		65,618		29,218		176,093		56		—		2,090,156
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	972,806		557,201		289,164		65,618		29,218		176,093		56		—		2,090,156



Multifamily construction
1-6 Pass	4,194		25,363		20,748		—		—		—		—		—		50,305
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	4,194		25,363		20,748		—		—		—		—		—		50,305



Commercial real estate construction
1-6 Pass	2,712		3,961		—		1,998		—		563		8,672		—		17,906
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	2,712		3,961		—		1,998		—		563		8,672		—		17,906



Single family construction
1-6 Pass	151,418		42,188		17,677		—		—		78		91,915		—		303,276
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	151,418		42,188		17,677		—		—		78		91,915		—		303,276



Single family construction to permanent
Current	62,456		55,561		21,067		3,751		—		—		—		—		142,835
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		—		—		—		—		—		—
Total	62,456		55,561		21,067		3,751		—		—		—		—		142,835



Owner occupied commercial real estate
1-6 Pass	45,688		47,907		59,378		50,584		72,188		113,575		549		2,878		392,747
7- Special Mention	—		—		—		2,206		6,063		212		—		63		8,544
8 - Substandard	—		—		18,826		1,111		10,591		18,531		—		—		49,059
Total	45,688		47,907		78,204		53,901		88,842		132,318		549		2,941		450,350



Commercial business
1-6 Pass	128,807		58,648		49,889		27,876		16,780		23,331		88,636		2,341		396,308
7- Special Mention	—		—		9,145		1,518		4,503		57		5,500		142		20,865
8 - Substandard	3,002		46		3,407		8,129		1,567		2,608		(282)		106		18,583
Total	131,809		58,694		62,441		37,523		22,850		25,996		93,854		2,589		435,756



Total commercial portfolio	$	1,406,915	$	841,738	$	661,597	$	296,263	$	273,148	$	562,274	$	196,235	$	6,445	$	4,244,615

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


	At September 30, 2021
(in thousands)	2021		2020		2019		2018		2017		2016 and prior		Revolving		Revolving-term		Total

CONSUMER PORTFOLIO
Single family
Current	$	139,731	$	162,824	$	78,130	$	83,770	$	108,684	$	217,957	$	—	$	—	$	791,096
Past due:
30-59 days	—		—		—		—		212		766		—		—		978
60-89 days	—		—		—		—		315		277		—		—		592
90+ days	—		—		—		858		—		403		—		—		1,261
Total (1)	139,731		162,824		78,130		84,628		109,211		219,403		—		—		793,927



Home equity and other
Current	1,184		707		496		607		537		2,930		301,977		6,373		314,811
Past due:
30-59 days	—		2		—		—		—		248		183		—		433
60-89 days	3		2		—		—		—		1		—		—		6
90+ days	—		—		—		—		—		64		401		—		465
Total	1,187		711		496		607		537		3,243		302,561		6,373		315,715



Total consumer portfolio	140,918		163,535		78,626		85,235		109,748		222,646		302,561		6,373		1,109,642
Total LHFI	$	1,547,833	$	1,005,273	$	740,223	$	381,498	$	382,896	$	784,920	$	498,796	$	12,818	$	5,354,257

(1) Includes $4.5 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.

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


	At December 31, 2020
(in thousands)	2020		2019		2018		2017		2016		2015 and prior		Revolving		Revolving-term		Total
COMMERCIAL PORTFOLIO
Non-owner occupied commercial real estate
1-6 Pass	$	53,782	$	176,556	$	165,268	$	147,719	$	150,221	$	131,935	$	796	$	1,031	$	827,308
7- Special Mention	—		—		—		—		—		2,230		—		—		2,230
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	53,782		176,556		165,268		147,719		150,221		134,165		796		1,031		829,538



Multifamily
1-6 Pass	711,009		324,246		100,572		32,693		166,937		92,255		380		—		1,428,092
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	711,009		324,246		100,572		32,693		166,937		92,255		380		—		1,428,092



Multifamily construction
1-6 Pass	12,182		21,366		45,256		11,823		—		—		—		—		90,627
7- Special Mention	—		—		—		—		24,702		—		—		—		24,702
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	12,182		21,366		45,256		11,823		24,702		—		—		—		115,329



Commercial real estate construction
1-6 Pass	3,963		—		2,104		14,721		—		614		5,883		—		27,285
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	3,963		—		2,104		14,721		—		614		5,883		—		27,285



Single family construction
1-6 Pass	121,233		47,539		14,055		—		—		600		75,743		—		259,170
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	121,233		47,539		14,055		—		—		600		75,743		—		259,170



Single family construction to permanent
Current	62,955		72,825		15,443		688		—		—		—		—		151,911
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		—		—		—		—		—		—
Total	62,955		72,825		15,443		688		—		—		—		—		151,911



Owner occupied commercial real estate
1-6 Pass	48,647		60,872		58,582		85,275		98,046		50,596		—		4,354		406,372
7- Special Mention	—		—		5,977		3,529		—		—		—		69		9,575
8 - Substandard	—		19,407		1,111		10,750		17,122		2,919		—		—		51,309
Total	48,647		80,279		65,670		99,554		115,168		53,515		—		4,423		467,256



Commercial business
1-6 Pass	345,540		63,020		47,710		22,556		18,411		14,972		76,218		2,577		591,004
7- Special Mention	—		10,837		2,058		6,653		—		—		3,975		166		23,689
8 - Substandard	—		5,923		11,327		2,338		1,891		1,001		8,438		112		31,030
Total	345,540		79,780		61,095		31,547		20,302		15,973		88,631		2,855		645,723



Total commercial portfolio	$	1,359,311	$	802,591	$	469,463	$	338,745	$	477,330	$	297,122	$	171,433	$	8,309	$	3,924,304

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


	At December 31, 2020
(in thousands)	2020		2019		2018		2017		2016		2015 and prior		Revolving		Revolving-term		Total

CONSUMER PORTFOLIO
Single family
Current	$	174,994	$	111,143	$	154,757	$	168,412	$	59,161	$	242,444	$	—	$	—	$	910,911
Past due:
30-59 days	—		570		—		318		—		390		—		—		1,278
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	824		335		405		386		—		984		—		—		2,934
Total (1)	175,818		112,048		155,162		169,116		59,161		243,818		—		—		915,123




Home equity and other
Current	1,878		1,230		1,311		1,363		431		5,126		384,005		8,147		403,491
Past due:
30-59 days	98		22		—		—		—		11		66		31		228
60-89 days	—		13		—		—		—		—		129		—		142
90+ days	—		9		—		—		275		24		584		—		892
Total	1,976		1,274		1,311		1,363		706		5,161		384,784		8,178		404,753



Total consumer portfolio	177,794		113,322		156,473		170,479		59,867		248,979		384,784		8,178		1,319,876
Total LHFI	$	1,537,105	$	915,913	$	625,936	$	509,224	$	537,197	$	546,101	$	556,217	$	16,487	$	5,244,180

(1) Includes $7.1 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes in fair value recognized in the consolidated income statements.

Collateral Dependent Loans

The following table presents the amortized cost basis of collateral-dependent loans by loan sub-class and collateral type:


	At September 30, 2021
(in thousands)	Land		1-4 Family		Non-residential real estate		Other non-real estate		Total










Commercial and industrial loans
Owner occupied commercial real estate	$	1,111	$	—	$	2,763	$	—	$	3,874
Commercial business	387		—		—		2,681		3,068
Total	1,498		—		2,763		2,681		6,942
Consumer loans
Single family	—		2,957		—		—		2,957
Home equity loans and other	—		923		—		—		923
Total	—		3,880		—		—		3,880
Total collateral-dependent loans	$	1,498	$	3,880	$	2,763	$	2,681	$	10,822


	At December 31, 2020
(in thousands)	Land		1-4 Family		Non-residential real estate		Other non-real estate		Total










Commercial and industrial loans
Owner occupied commercial real estate	$	1,789	$	—	$	3,133	$	—	$	4,922
Commercial business	1,787		545		—		2,882		5,214
Total	3,576		545		3,133		2,882		10,136
Consumer loans
Single family	—		2,457		—		—		2,457

Total	—		2,457		—		—		2,457
Total collateral-dependent loans	$	3,576	$	3,002	$	3,133	$	2,882	$	12,593

Nonaccrual and Past Due Loans

The following table presents nonaccrual status for loans:


	At September 30, 2021					At December 31, 2020
(in thousands)		Nonaccrual with no related ACL		Total Nonaccrual		Nonaccrual with no related ACL		Total Nonaccrual










Commercial and industrial loans
Owner occupied commercial real estate		$	3,874	$	3,874	$	4,922	$	4,922
Commercial business		1,360		7,249		3,100		9,183
Total		5,234		11,123		8,022		14,105
Consumer loans
Single family		$	2,907	$	4,602	$	2,173	$	4,883
Home equity and other		928		1,987		2		1,734
Total		3,835		6,589		2,175		6,617
Total nonaccrual loans		$	9,069	$	17,712	$	10,197	$	20,722

The following tables present an aging analysis of past due loans by loan portfolio segment and loan sub-class:


	At September 30, 2021
	Past Due and Still Accruing
(in thousands)	30-59 days			60-89 days			90 days or more				Nonaccrual			Total past due and nonaccrual (3)			Current			Total loans

Commercial real estate loans
Non-owner occupied commercial real estate	$	—		$	—		$	—			$	—		$	—		$	754,031		$	754,031
Multifamily	—			—			—				—			—			2,090,156			2,090,156
Construction/land development
Multifamily construction	—			—			—				—			—			50,305			50,305
Commercial real estate construction	—			—			—				—			—			17,906			17,906
Single family construction	—			—			—				—			—			303,276			303,276
Single family construction to permanent	—			—			—				—			—			142,835			142,835
Total	—			—			—				—			—			3,358,509			3,358,509
Commercial and industrial loans
Owner occupied commercial real estate	—			—			—				3,874			3,874			446,476			450,350
Commercial business	—			—			—				7,249			7,249			428,507			435,756
Total	—			—			—				11,123			11,123			874,983			886,106
Consumer loans
Single family	1,294			1,198			8,361			(2)	4,602			15,455			778,472			793,927			(1)
Home equity and other	260			4			—				1,987			2,251			313,464			315,715
Total	1,554			1,202			8,361				6,589			17,706			1,091,936			1,109,642
Total loans	$	1,554		$	1,202		$	8,361			$	17,712		$	28,829		$	5,325,428		$	5,354,257
%	0.03		%	0.02		%	0.16		%		0.33		%	0.54		%	99.46		%	100.00		%


	At December 31, 2020
	Past Due and Still Accruing
(in thousands)	30-59 days			60-89 days			90 days or more				Nonaccrual			Total past due and nonaccrual (3)			Current			Total loans

Commercial real estate loans
Non-owner occupied commercial real estate	$	—		$	—		$	—			$	—		$	—		$	829,538		$	829,538
Multifamily	—						—				—			—			1,428,092			1,428,092
Construction and land development
Multifamily construction	—			—			—				—			—			115,329			115,329
Commercial real estate construction	—			—			—				—			—			27,285			27,285
Single family construction	—			—			—				—			—			259,170			259,170
Single family construction to permanent	—			—			—				—			—			151,911			151,911
Total	—			—			—				—			—			2,811,325			2,811,325
Commercial and industrial loans
Owner occupied commercial real estate	—						—				4,922			4,922			462,334			467,256
Commercial business	—						—				9,183			9,183			636,540			645,723
Total	—			—			—				14,105			14,105			1,098,874			1,112,979
Consumer loans
Single family	2,161			418			11,476			(2)	4,883			18,938			896,185			915,123			(1)
Home equity and other	228			135			—				1,734			2,097			402,656			404,753
Total	2,389			553			11,476				6,617			21,035			1,298,841			1,319,876
Total loans	$	2,389		$	553		$	11,476			$	20,722		$	35,140		$	5,209,040		$	5,244,180
%	0.05		%	0.01		%	0.22		%		0.40		%	0.67		%	99.33		%	100.00		%

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

(2)FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

(3)Includes loans whose repayments are insured by the FHA or guaranteed by the VA or SBA of $10.8 million and $14.7 million at September 30, 2021 and December 31, 2020, respectively.

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


	Quarter Ended September 30, 2021					Nine Months Ended September 30, 2021
(dollars in thousands)	Number of loan modifications	Recorded investment		Related charge- offs		Number of loan modifications	Recorded investment		Related charge- offs

























Consumer loans
Single family
Interest rate reduction	10	$	3,284	$	—	15	$	4,599	$	—
Payment restructure	4	1,005		—		6	2,145
	14	4,289		—		21	6,744		—



Total loans
Interest rate reduction	10	3,284		—		15	4,599		—
Payment restructure	4	1,005		—		6	2,145		—
Total	14	$	4,289	$	—	21	$	6,744	$	—


	Quarter Ended September 30, 2020					Nine Months Ended September 30, 2020
(dollars in thousands)	Number of loan modifications	Recorded investment		Related charge- offs		Number of loan modifications	Recorded investment		Related charge- offs












Commercial and industrial loans
Owner occupied commercial real estate

Payment restructure	—	$	—	$	—	1	$	678	$	—
Commercial business

Payment restructure	—	—		—		1	1,125		—

Total commercial and industrial

Payment restructure	—	—		—		2	1,803		—
Total	—	—		—		2	1,803		—
Consumer loans
Single family
Interest rate reduction	8	1,642		—		23	4,878		—
Payment restructure	1	411		—		10	2,067		—
Total	9	2,053		—		33	6,945		—
Total loans
Interest rate reduction	8	1,642		—		23	4,878		—
Payment restructure	1	411		—		12	3,870		—

Total	9	$	2,053	$	—	35	$	8,748	$	—

A TDR loan is considered re-defaulted when it becomes doubtful that the objectives of the modifications will be met, generally when a consumer loan TDR becomes 60 days or more past due on principal or interest payments or when a commercial loan TDR becomes 90 days or more past due on principal or interest payments. The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted for the periods indicated:


	Quarter Ended September 30,
	2021			2020
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment











Consumer loans - single family	2	$	422	6	$	1,038


Total	2	$	422	6	$	1,038


	Nine Months Ended September 30,
	2021			2020
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment






Commercial and industrial loans
Owner occupied commercial real estate	1	$	678	—	$	—

	1	678		—	—
Consumer loans
Consumer loans - single family	7	$	1,764	16	$	3,237

	7	1,764		16	3,237
Total	8	$	2,442	16	$	3,237

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

•The modification is in response to the National Emergency related to the COVID-19 pandemic;

•The borrower was current at the time the modification program was implemented; and

•The modification is short-term

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

As of September 30, 2021, excluding any SBA guaranteed loans or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of $43 million on 100 loans that were approved for and are still in forbearance under this program, including $18 million in commercial loans and $25 million in single family and consumer loans.

NOTE 4–DEPOSITS:

Deposit balances, including stated rates, were as follows:


	At September 30, 2021				At December 31, 2020
(dollars in thousands)	Amount		Weighted Average Rate		Amount		Weighted Average Rate

Noninterest-bearing demand deposits	$	1,706,550	—	%	$	1,337,010	—	%
Interest-bearing demand deposits	555,716		0.10	%	484,265		0.10	%
Savings	305,395		0.06	%	264,024		0.07	%
Money market	2,796,524		0.15	%	2,596,453		0.21	%
Certificates of deposit	995,475		0.50	%	1,139,807		0.93	%
Total	$	6,359,660	0.15	%	$	5,821,559	0.29	%

Certificates of deposit outstanding at September 30, 2021 mature as follows:


(in thousands)

Within one year	$	785,798
One to two years	182,878
Two to three years	19,005
Three to four years	4,843
Four to five years	2,951
Thereafter	—
Total	$	995,475

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

NOTE 5–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as single family mortgage LHFS and MSRs, the Company utilizes derivatives as economic hedges. The notional amounts and fair values for derivatives, which are included in other assets or accounts payable and other liabilities on the consolidated balance sheet, consist of the following:


	At September 30, 2021
	Notional amount		Fair value derivatives
(in thousands)			Asset		Liability

Forward sale commitments	$	651,906	$	1,419	$	(1,017)

Interest rate lock commitments	194,587		4,612		(3)
Interest rate swaps	399,788		8,772		(10,521)
Eurodollar futures	355,000		—		(9)
Total derivatives before netting	$	1,601,281	14,803		(11,550)
Netting adjustment/Cash collateral (1)			(4,348)		9,909
Carrying value on consolidated balance sheet			$	10,455	$	(1,641)


	At December 31, 2020
	Notional amount		Fair value derivatives
(in thousands)			Asset		Liability

Forward sale commitments	$	977,974	$	1,035	$	(3,714)

Interest rate lock commitments	493,873		17,395		(3)
Interest rate swaps	536,969		17,459		(20,511)
Eurodollar futures	314,000		—		(4)
Total derivatives before netting	$	2,322,816	35,889		(24,232)
Netting adjustment/Cash collateral (1)			(8,250)		21,447
Carrying value on consolidated balance sheet			$	27,639	$	(2,785)

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

The following tables present gross fair value and net carrying value information about derivative instruments:


(in thousands)	Gross fair value		Netting adjustments/ Cash collateral (1)		Carrying value





At September 30, 2021
Derivative assets	$	14,803	$	(4,348)	$	10,455
Derivative liabilities	(11,550)		9,909		(1,641)
At December 31, 2020
Derivative assets	$	35,889	$	(8,250)	$	27,639
Derivative liabilities	(24,232)		21,447		(2,785)

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

The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets. Payables related to cash collateral that has been received from counterparties is included in accounts payable and other liabilities. Interest is owed on amounts received from counterparties and we earn interest on cash paid to counterparties. Any securities pledged to counterparties as collateral remain on the consolidated balance sheets. At September 30, 2021 and December 31, 2020, the Company had liabilities of $2.6 million and $3.3 million, respectively, in cash collateral received from counterparties and receivables of $8.2 million and $16.5 million, respectively, in cash collateral paid to counterparties.

The following table presents the net gain (loss) recognized on economic hedge derivatives, within the respective line items in the consolidated income statements for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)	$	(1,165)	$	(3,810)	$	(4,574)	$	583
Loan servicing income (loss) (2)	(293)		(91)		(7,860)		22,148
Other (3)	41		632		305		(84)

(1)Comprised of IRLCs and forward contracts used as an economic hedge of loans held for sale.

(2)Comprised of interest rate swaps, interest rate swaptions, futures and forward contracts used as economic hedges of single family MSRs.

(3)Comprised of interest rate swaps used as economic hedges of loans held for investment.

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

NOTE 6–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following:


(in thousands)	At September 30, 2021		At December 31, 2020

Single family	$	135,942	$	194,643
Commercial real estate, multifamily and SBA	259,170		167,289
Total	$	395,112	$	361,932

Loans sold consisted of the following for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Single family	$	469,090	$	686,280	$	1,669,412	$	1,393,283
Commercial real estate, multifamily and SBA	69,810		170,980		465,948		502,059
Total	$	538,900	$	857,260	$	2,135,360	$	1,895,342

Gain on loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Single family	$	14,249	$	27,632	$	56,272	$	73,751
Commercial real estate, multifamily and SBA	3,260		5,498		15,967		11,947
Total	$	17,509	$	33,130	$	72,239	$	85,698

The Company's portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. The unpaid principal balance of loans serviced for others is as follows:


(in thousands)	At September 30, 2021		At December 31, 2020

Single family	$	5,625,386	$	5,914,592
Commercial real estate, multifamily and SBA	2,064,492		1,844,241
Total	$	7,689,878	$	7,758,833

The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud. The following is a summary of changes in the Company's liability for estimated single-family mortgage repurchase losses for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Balance, beginning of period	$	1,612	$	2,083	$	2,122	$	2,871
Additions, net of adjustments (1)	(183)		252		(229)		(275)
Realized (losses) recoveries, net (2)	14		(240)		(450)		(501)
Balance, end of period	$	1,443	$	2,095	$	1,443	$	2,095

(1) Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.

(2) Includes principal losses and accrued interest on repurchased loans, "make-whole" settlements, settlements with claimants and certain related expenses.

The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $2.5 million and $3.0 million were recorded in other assets as of September 30, 2021 and December 31, 2020, respectively.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company records the balance of the loans as other assets and other liabilities. At September 30, 2021 and December 31, 2020, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated balance sheets totaled $32 million and $102 million, respectively.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Servicing income, net:
Servicing fees and other	$	7,897	$	7,220	$	26,055	$	23,073
Amortization of single family MSRs (1)	(4,579)		(4,401)		(15,453)		(12,246)
Amortization of multifamily and SBA MSRs	(1,758)		(1,350)		(5,235)		(4,084)
Total	1,560		1,469		5,367		6,743
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)	747		(2,960)		7,186		(21,970)
Net gain (loss) from derivative hedging	(293)		(91)		(7,860)		22,148
Total	454		(3,051)		(674)		178

Loan servicing income (loss)	$	2,014	$	(1,582)	$	4,693	$	6,921

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily reflected by changes in mortgage interest rates.

The changes in single family MSRs measured at fair value are as follows for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	59,872	$	47,804	$	49,966	$	68,109
Additions and amortization:
Originations	5,166		6,569		19,507		12,942

Amortization (1)	(4,579)		(4,401)		(15,453)		(12,246)
Net additions and amortization	587		2,168		4,054		696
Changes in fair value assumptions (2)	747		(2,954)		7,186		(21,787)
Ending balance	$	61,206	$	47,018	$	61,206	$	47,018

(1) Represents changes due to collection/realization of expected cash flows and curtailments.

(2) Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily reflected by changes in mortgage interest rates.

Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(rates per annum) (1)	2021		2020		2021		2020

Constant prepayment rate ("CPR") (2)	9.84	%	20.0% - 30.0%		8.75	%	17.1% - 30.0%
Discount rate	7.77	%	7.71	%	8.25	%	7.78	%

(1) Based on a weighted average.

(2) Represents an expected lifetime average CPR used in the model.

For single family MSRs, we use a discounted cash flow valuation technique which utilizes CPRs and discount rates as significant unobservable inputs as noted in the table below:


	At September 30, 2021			At December 31, 2020
	Range of Inputs	Average (1)		Range of Inputs	Average (1)

CPRs	7.98% - 17.43%	10.74	%	8.13% - 19.70%	12.81	%
Discount Rates	6.54% - 13.78%	7.84	%	6.50% - 13.14%	8.27	%

(1) Averages of all the inputs within the range.

To compute hypothetical sensitivities of the value of our single family MSRs to immediate adverse changes in key assumptions, we computed the impact of changes to CPRs and in discount rates as outlined below:


(dollars in thousands)	At September 30, 2021

Fair value of single family MSR	$	61,206
Expected weighted-average life (in years)	5.87
CPR
Impact on fair value of 25 basis points adverse change in interest rates	$	(3,490)
Impact on fair value of 50 basis points adverse change in interest rates	$	(7,016)
Discount rate
Impact on fair value of 100 basis points increase	$	(2,949)
Impact on fair value of 200 basis points increase	$	(5,675)

The changes in multifamily and SBA MSRs measured at the lower of amortized cost or fair value were as follows for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	39,113	$	30,583	$	35,774	$	29,494
Originations	2,270		2,524		9,086		6,129
Amortization	(1,758)		(1,301)		(5,235)		(3,817)
Ending balance	$	39,625	$	31,806	$	39,625	$	31,806

NOTE 7–GUARANTEES AND MORTGAGE REPURCHASE LIABILITY:

In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program ("DUS"®) that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of September 30, 2021 and December 31, 2020, the total unpaid principal balance of loans sold under this program was $1.9 billion and $1.8 billion, respectively. The Company's reserve liability related to this arrangement totaled $0.7 million and $2.1 million at September 30, 2021 and December 31, 2020, respectively. There were no actual losses incurred under this arrangement during the quarters and nine months ended September 30, 2021 and 2020.

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. Under the terms of these sales agreements, the Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud. The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $5.6 billion and $6.0 billion as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities on the consolidated balance sheets, of $1.4 million and $2.1 million, respectively.

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.

Asset/Liability class

Valuation methodology, inputs and assumptions

Classification

Investment securities

Investment securities AFS

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.

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 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 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.

The following tables presents the levels of the fair value hierarchy for the Company's assets and liabilities measured at fair value on a recurring basis:


	At September 30, 2021
(in thousands)	Fair Value		Level 1		Level 2		Level 3

Assets:
Investment securities AFS
Mortgage backed securities:
Residential	$	33,467	$	—	$	31,030	$	2,437
Commercial	42,050		—		42,050		—
Collateralized mortgage obligations:
Residential	184,360		—		184,360		—
Commercial	141,324		—		141,324		—
Municipal bonds	534,401		—		534,401		—
Corporate debt securities	19,849		—		19,772		77
U.S. Treasury securities	23,392		—		23,392		—

Single family LHFS	135,942		—		135,942		—
Single family LHFI	4,507		—		—		4,507
Single family mortgage servicing rights	61,206		—		—		61,206
Derivatives

Forward sale commitments	1,419		—		1,419		—

Interest rate lock commitments	4,612		—		—		4,612
Interest rate swaps	8,772		—		8,772		—
Total assets	$	1,195,301	$	—	$	1,122,462	$	72,839
Liabilities:
Derivatives
Eurodollar futures	$	9	$	9	$	—	$	—
Forward sale commitments	1,017		—		1,017		—

Interest rate lock commitments	3		—		—		3
Interest rate swaps	10,521		—		10,521
Total liabilities	$	11,550	$	9	$	11,538	$	3


	At December 31, 2020
(in thousands)	Fair Value		Level 1		Level 2		Level 3

Assets:
Investment securities AFS
Mortgage backed securities:
Residential	$	51,046	$	—	$	48,417	$	2,629
Commercial	45,184		—		45,184		—
Collateralized mortgage obligations:
Residential	234,909		—		234,909		—
Commercial	159,183		—		159,183		—
Municipal bonds	564,703		—		564,703		—
Corporate debt securities	15,222		—		15,141		81

Agency debentures	1,846		—		1,846		—
Single family LHFS	194,643		—		194,643		—
Single family LHFI	7,108		—		—		7,108
Single family mortgage servicing rights	49,966		—		—		49,966
Derivatives

Forward sale commitments	1,035		—		1,035		—

Interest rate lock commitments	17,395		—		—		17,395
Interest rate swaps	17,459		—		17,459		—
Total assets	$	1,359,699	$	—	$	1,282,520	$	77,179
Liabilities:
Derivatives
Eurodollar futures	$	4	$	4	$	—	$	—
Forward sale commitments	3,714		—		3,714		—

Interest rate lock commitments	3		—		—		3
Interest rate swaps	20,511		—		20,511		—
Total liabilities	$	24,232	$	4	$	24,225	$	3

There were no transfers between levels of the fair value hierarchy during the quarters and nine months ended September 30, 2021 and 2020.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of investment securities AFS, single family MSRs, single family LHFI where fair value option was elected, certain single family LHFS and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the quarters and nine months ended September 30, 2021 and 2020, see Note 6, Mortgage Banking Operations of this Quarterly Report on Form 10-Q.

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

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

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

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $4.5 million and $7.1 million at September 30, 2021 and December 31, 2020, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of certain assets:



(dollars in thousands)	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average

September 30, 2021
Investment securities AFS	$	2,514	Income approach	Implied spread to benchmark interest rate curve	2.00%	2.00%	2.00%
Single family LHFI	4,507		Income approach	Implied spread to benchmark interest rate curve	3.14%	8.59%	4.73%
Interest rate lock commitments, net	4,609		Income approach	Fall-out factor	0.87%	24.05%	12.18%
				Value of servicing	0.39%	1.52%	1.19%
December 31, 2020
Investment securities AFS	$	2,710	Income approach	Implied spread to benchmark interest rate curve	2.00%	2.00%	2.00%
Single family LHFI	7,108		Income approach	Implied spread to benchmark interest rate curve	3.96%	10.64%	6.23%
Interest rate lock commitments, net	17,392		Income approach	Fall-out factor	1.97%	38.38%	15.53%
				Value of servicing	0.41%	1.44%	0.97%

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

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



(in thousands)	Beginning balance		Additions		Transfers		Payoffs/Sales		Change in mark to market (1)		Ending balance

Quarter Ended September 30, 2021
Investment securities AFS	$	2,550	$	—	$	—	$	(48)	$	12	$	2,514
Single family LHFI	5,207		284		—		(1,088)		104		4,507
Quarter Ended September 30, 2020
Investment securities AFS	$	2,861	$	—	$	—	$	(48)	$	(16)	$	2,797
Single family LHFI	5,847		2,169		—		(352)		(26)		7,638
Nine Months Ended September 30, 2021
Investment securities AFS	$	2,710	$	—	$	—	$	(144)	$	(52)	$	2,514
Single family LHFI	7,108		1,429		—		(4,279)		249		4,507
Nine Months Ended September 30, 2020
Investment securities AFS	$	1,952	$	985	$	—	$	(387)	$	247	$	2,797
Single family LHFI	3,468		5,515		—		(1,135)		(210)		7,638

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

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020

Beginning balance, net	$	5,893	$	17,967	$	17,392	$	2,223
Total realized/unrealized gains (losses)	5,299		18,285		9,112		46,313
Settlements	(6,583)		(15,292)		(21,895)		(27,576)
Ending balance, net	$	4,609	$	20,960	$	4,609	$	20,960

Nonrecurring Fair Value Measurements

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

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

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

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

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

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


(in thousands)	Fair Value		Level 1		Level 2		Level 3		Total Gains (Losses)

At or for the Quarter Ended September 30, 2021
LHFI (1)	$	1,121	$	—	$	—	$	1,121	$	(8)
At or for the Quarter Ended September 30, 2020
LHFI (1)	$	3,302	$	—	$	—	$	3,302	$	(2,054)
At or for the Nine Months Ended September 30, 2021
LHFI (1)	$	1,121	$	—	$	—	$	1,121	$	(70)
At or for the Nine Months Ended September 30, 2020
LHFI (1)	$	3,302	$	—	$	—	$	3,302	$	(2,184)

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

Fair Value of Financial Instruments

The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company's financial instruments other than assets and liabilities measured at fair value on a recurring basis:


	At September 30, 2021
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	218,662	$	218,662	$	218,662	$	—	$	—
Investment securities HTM	4,195		4,349		—		4,349		—
LHFI	5,295,234		5,337,837		—		—		5,337,837

LHFS – multifamily and other	259,170		267,688		—		267,688		—
Mortgage servicing rights – multifamily	39,625		43,166		—		—		43,166
Federal Home Loan Bank stock	8,723		8,723		—		8,723		—
Other assets - GNMA EBO loans	31,553		31,553		—		—		31,553
Liabilities:
Certificates of deposit	$	995,475	$	996,743	$	—	$	996,743	$	—




Long-term debt	125,979		117,577		—		117,577		—


	At December 31, 2020
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	58,049	$	58,049	$	58,049	$	—	$	—
Investment securities HTM	4,271		4,507		—		4,507		—
LHFI	5,172,778		5,327,711		—		—		5,327,711

LHFS – multifamily and other	167,289		167,289		—		167,289		—
Mortgage servicing rights – multifamily	35,774		38,423		—		—		38,423
Federal Home Loan Bank stock	20,319		20,319		—		20,319		—
Other assets-GNMA EBO loans	101,750		101,750		—		—		101,750
Liabilities:
Certificates of deposit	$	1,139,807	$	1,143,747	$	—	$	1,143,747	$	—
Borrowings	322,800		322,876		—		322,876		—
Long-term debt	125,838		116,893		—		116,893		—

NOTE 9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share for the periods indicated:


	Quarter Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2021		2020		2021		2020


Net income	$	27,170	$	26,349	$	85,990	$	52,392


Weighted average shares:
Basic weighted-average number of common shares outstanding	20,613,290		22,665,069		21,099,059		23,226,109
Dilutive effect of outstanding common stock equivalents	206,311		212,157		253,656		177,620
Diluted weighted-average number of common shares outstanding	20,819,601		22,877,226		21,352,715		23,403,729
Net income per share:
Basic earnings per share	$	1.32	$	1.16	$	4.08	$	2.26
Diluted earnings per share	$	1.31	$	1.15	$	4.03	$	2.24

NOTE 10–RESTRUCTURING:

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

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 costs		Personnel-related costs		Other costs		Total

Quarter ended September 30, 2021 activity


Costs paid or otherwise settled	$	(334)	$	(2)	$	—	$	(336)
Balance, September 30, 2021	$	1,963	$	99	$	—	$	2,062
Quarter ended September 30, 2020 activity

Restructuring charges	$	1,736	$	164	$	232	$	2,132
Costs paid or otherwise settled	(1,640)		(150)		(229)		(2,019)
Balance, September 30, 2020	$	1,791	$	185	$	89	$	2,065
Nine months ended September 30, 2021 activity


Costs paid or otherwise settled	$	(900)	$	(55)	$	(116)	$	(1,071)
Balance, September 30, 2021	$	1,963	$	99	$	—	$	2,062
Nine months ended September 30, 2020 activity

Restructuring charges	$	4,183	$	299	$	1,018	$	5,500
Costs paid or otherwise settled	(3,627)		(624)		(1,088)		(5,339)
Balance, September 30, 2020	$	1,791	$	185	$	89	$	2,065

NOTE 11–SUBSEQUENT EVENT:

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

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

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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.

Summary Financial Data


	Quarter Ended			Nine Months Ended September 30,
(in thousands, except per share data and FTE data)	September 30, 2021				June 30, 2021			2021			2020

Select Income Statement data:
Net interest income	$	57,484			$	57,972		$	169,973		$	152,614
Provision for credit losses	(5,000)				(4,000)			(9,000)			20,469
Noninterest income	24,298				28,224			91,355			105,387
Noninterest expense	51,949				52,815			161,372			170,893
Net income:
Before income taxes	34,833				37,381			108,956			66,639
Total	27,170				29,157			85,990			52,392
Net income per share - diluted	$	1.31			$	1.37		$	4.03		$	2.24

















Select Performance Ratios:
Return on average equity - annualized	14.8		%		16.3		%	15.8		%	10.0		%
Return on average tangible equity - annualized (1)	15.6		%		17.2		%	16.7		%	10.6		%
Return on average assets - annualized	1.48		%		1.59		%	1.57		%	0.97		%
Efficiency ratio (1)	62.8		%		62.8		%	61.8		%	63.4		%
Net interest margin	3.42		%		3.45		%	3.39		%	3.09		%
Other data
Full time equivalent employees	983				997			983			999

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


	As of
(in thousands, except share and per share data)		September 30, 2021			December 31, 2020

Selected Balance Sheet Data
Loans held for sale		$	395,112		$	361,932
Loans held for investment, net		5,299,741			5,179,886
ACL		54,516			64,294
Investment securities		983,038			1,076,364

Total assets		7,372,451			7,237,091
Deposits		6,359,660			5,821,559

Borrowings		—			322,800
Long-term debt		125,979			125,838
Total shareholders' equity		710,376			717,750
Other data:
Book value per share		$	34.74		$	32.93
Tangible book value per share (1)		$	33.18		$	31.42
Total equity to total assets		9.6		%	9.9		%
Tangible common equity to tangible assets (1)		9.2		%	9.5		%
Shares outstanding at period end		20,446,648			21,796,904
Loans to deposit ratio		90.4		%	96.3		%

Credit Quality:
ACL to total loans (2)		1.06		%	1.33		%
ACL to nonaccrual loans		307.8		%	310.3		%
Nonaccrual loans to total loans		0.33		%	0.40		%
Nonperforming assets to total assets		0.26		%	0.31		%
Nonperforming assets		$	19,196		$	22,097
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio		10.17		%	9.79		%
Total risk-based capital		13.71		%	14.76		%
Company
Tier 1 leverage ratio		10.00		%	9.65		%
Total risk-based capital		13.01		%	14.00		%

(1)Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures. For a reconciliation to the nearest comparable GAAP financial measure, see “Non-GAAP Financial Measures” elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(2)This ratio excludes balances insured by the FHA or guaranteed by the VA or SBA, including PPP loans.

Current Developments

COVID-19 Pandemic Update

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

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

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

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

Other Items

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

Management's Overview of the Third Quarter 2021 Financial Performance

Third Quarter of 2021 Compared to the Second Quarter of 2021

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

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

Net Interest Income: The following tables set forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets; (ii) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities; (iii) net interest income; (iv) net interest rate spread; and (v) net yield on interest-earning assets:


	Quarter Ended
	September 30, 2021						June 30, 2021
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets:
Loans (1)	$	5,577,149	$	56,303	3.98	%	$	5,664,187	$	57,265	4.02	%
Investment securities (1)	994,593		5,816		2.34	%	1,032,995		5,677		2.20	%
FHLB Stock, Fed Funds and other	147,516		141		0.38	%	86,525		159		0.73	%
Total interest-earning assets	6,719,258		62,260		3.65	%	6,783,707		63,101		3.70	%
Noninterest-earning assets	545,675						558,568
Total assets	$	7,264,933					$	7,342,275
Liabilities and shareholders' equity:
Deposits: (2)
Demand deposits	$	529,690	$	188	0.14	%	$	540,784	$	186	0.14	%
Money market and savings	2,990,902		1,054		0.14	%	2,958,761		1,058		0.14	%

Certificates of deposit	1,005,138		1,265		0.50	%	1,077,959		1,529		0.57	%
Total deposits	4,525,730		2,507		0.22	%	4,577,504		2,773		0.24	%
Borrowings:
Borrowings	32,167		43		0.54	%	179,543		142		0.31	%
Long-term debt	125,948		1,354		4.28	%	125,901		1,360		4.31	%
Total interest-bearing liabilities	4,683,845		3,904		0.33	%	4,882,948		4,275		0.35	%
Noninterest-bearing liabilities
Demand deposits (2)	1,679,086						1,541,317
Other liabilities	175,179						199,172
Total liabilities	6,538,110						6,623,437

Shareholders' equity	726,823						718,838
Total liabilities and shareholders' equity	$	7,264,933					$	7,342,275
Net interest income			$	58,356					$	58,826
Net interest rate spread					3.32	%					3.35	%

Net interest margin					3.42	%					3.45	%

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $0.9 million for both the quarters ended September 30, 2021 and June 30, 2021. The estimated federal statutory tax rate was 21% for the periods presented.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 0.16% and 0.18% for the quarter ended September 30, 2021 and June 30, 2021, respectively.

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

Provision for Credit Losses: As a result of the continued favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $5 million recovery of our allowance for credit losses in the third quarter of 2021, as compared to a $4 million recovery of our allowance for credit losses in the second quarter of 2021.

Noninterest Income consisted of the following for the periods indicated:


	Quarter Ended
(in thousands)	September 30, 2021		June 30, 2021

Noninterest income
Gain on loan origination and sale activities (1)
Single family	$	14,249	$	15,836
Commercial real estate, multifamily and SBA	3,260		5,435
Loan servicing income	2,014		1,931

Deposit fees	2,091		1,997
Other	2,684		3,025
Total noninterest income	$	24,298	$	28,224

(1) May include loans originated as held for investment.

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


	Quarter Ended
(in thousands)	September 30, 2021		June 30, 2021

Single family servicing income, net
Servicing fees and other	$	3,878	$	3,975
Changes - amortization (1)	(4,579)		(5,181)
Net	(701)		(1,206)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)	747		(5,024)
Net gain (loss) from derivatives hedging	(293)		5,024
Subtotal	454		—
Single Family servicing income (loss)	(247)		(1,206)

Commercial loan servicing income:
Servicing fees and other	$	4,019	$	5,270
Amortization of capitalized MSRs	(1,758)		(2,133)
Total	2,261		3,137
Total loan servicing income	$	2,014	$	1,931

(1)Represents changes due to collection/realization of expected cash flows and curtailments.

(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

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

Noninterest Expense consisted of the following for the periods indicated:


	Quarter Ended
(in thousands)	September 30, 2021		June 30, 2021

Noninterest expense
Compensation and benefits	$	31,175	$	34,378
Information services	6,902		6,949
Occupancy	5,705		5,973
General, administrative and other	8,167		5,515
Total noninterest expense	$	51,949	$	52,815

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

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

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

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


	Nine Months Ended September 30,
	2021						2020
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets:
Loans (1)	$	5,615,624	$	167,322	3.95	%	$	5,490,900	$	172,897	4.16	%
Investment securities (1)	1,030,726		18,084		2.34	%	1,082,402		18,061		2.22	%
FHLB Stock, Fed Funds and other	100,972		472		0.62	%	59,901		960		2.11	%
Total interest-earning assets	6,747,322		185,878		3.65	%	6,633,203		191,918		3.82	%
Noninterest-earning assets	558,224						545,890
Total assets	$	7,305,546					$	7,179,093
Interest-bearing liabilities:
Deposits: (2)
Demand deposits	$	521,579	$	543	0.14	%	$	419,833	$	755	0.24	%
Money market and savings	2,955,153		3,338		0.15	%	2,612,536		10,593		0.54	%
Certificates of deposit	1,087,195		5,049		0.62	%	1,261,376		17,770		1.88	%
Total deposits	4,563,927		8,930		0.26	%	4,293,745		29,118		0.90	%
Borrowings:
Borrowings	137,754		347		0.33	%	648,836		3,150		0.64	%
Long-term debt	125,902		4,076		4.31	%	125,713		4,407		4.66	%
Total interest-bearing liabilities	4,827,583		13,353		0.37	%	5,068,294		36,675		0.96	%
Noninterest-bearing liabilities
Demand deposits (2)	1,552,201						1,228,295
Other liabilities	200,032						180,207
Total liabilities	6,579,816						6,476,796
Shareholders' equity	725,730						702,297
Total liabilities and shareholders' equity	$	7,305,546					$	7,179,093
Net interest income			$	172,525					$	155,243
Net interest spread					3.28	%					2.86	%
Net interest margin					3.39	%					3.09	%

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

(2) Cost of deposits including noninterest-bearing deposits, was 0.20% and 0.70% for the nine months ended September 30, 2021 and 2020, respectively.

Net interest income was higher in the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 due to a $114 million increase in interest earning assets and an increase in our net interest margin from 3.09% in the nine months ended September 30, 2020 to 3.39% in the nine months ended September 30, 2021. The increase in interest earning assets was due to an increase in total loans. The increase in our net interest margin was due to a 42 basis point increase in our net interest rate spread as decreases in the rates paid on interest bearing liabilities were greater than the decreases in yields on our interest earning assets. The 17 basis point decrease in yield on interest earning assets was due to the origination of loans and purchases of securities at current market rates which were below our portfolio rates, the repricing down of variable rate loans and the prepayment and paydown of higher yielding loans and investments in our portfolios. Our cost of interest-bearing

liabilities decreased from 0.96% in the nine months ended September 30, 2020 to 0.37% in the nine months ended September 30, 2021 due to a decrease in market interest rates which allowed us to reprice our deposits and borrowings at lower rates.

Provision for Credit Losses: As a result of the favorable performance of our loan portfolio, a stable low level of nonperforming assets and an improved outlook of the estimated impact of COVID-19 on our loan portfolio, we recorded a $9 million recovery of our allowance for credit losses in the nine months ended September 30, 2021. Due to adverse economic conditions related to the COVID-19 pandemic, in the nine months ended September 30, 2020 we recorded a $20.5 million provision for credit losses as an estimate of the potential adverse impact of those conditions on our loan portfolio.

Noninterest Income consisted of the following for the periods indicated:


	Nine Months Ended September 30,
(in thousands)	2021	2020

Noninterest income
Gain on loan origination and sale activities (1)
Single family		$	56,272	$	73,751
Commercial		15,967		11,947
Loan servicing income		4,693		6,921
Deposit fees		5,912		5,225
Other		8,511		7,543
Total noninterest income		$	91,355	$	105,387

(1) May include loans originated as held for investment.

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


	Nine Months Ended September 30,
(in thousands)		2021		2020

Single family servicing income, net
Servicing fees and other		$	11,788	$	13,357
Changes - amortization (1)		(15,453)		(12,246)
Net		(3,665)		1,111
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)		7,186		(21,970)
Net loss from derivatives hedging		(7,860)		22,148
Subtotal		(674)		178
Single Family servicing income (loss)		(4,339)		1,289

Commercial loan servicing income:
Servicing fees and other		14,267		9,716
Amortization of capitalized MSRs		(5,235)		(4,084)
Total		9,032		5,632
Total loan servicing income		$	4,693	$	6,921

(1)Represents changes due to collection/realization of expected cash flows and curtailments.

(2)Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

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

Noninterest Expense consisted of the following for the periods indicated:


	Nine Months Ended September 30,
(in thousands)	2021	2020

Noninterest expense
Compensation and benefits		$	101,388	$	101,429
Information services		20,635		22,330
Occupancy		18,170		23,082
General, administrative and other		21,179		24,052
Total noninterest expense		$	161,372	$	170,893

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

Financial Condition

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

Credit Risk Management

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

As a result of the COVID-19 pandemic, the Company has approved forbearances for some of its borrowers. The status of these forbearances as of September 30, 2021 is as follows:


		Forbearances Approved (2)(3)
	Total	Expired			Outstanding
(in thousands)		Number of loans	Amount		Number of loans	Amount		Number of loans	Amount

Loan type:
Commercial and CRE:
Commercial business		110	$	59,403	110	$	59,403	—	$	—
CRE owner occupied		27	69,302		27	69,302		—	—
CRE nonowner occupied		15	75,751		13	57,843		2	17,908

Total		152	$	204,456	150	$	186,548	2	$	17,908

Single family and consumer (1)
Single family								68	$	20,880
HELOCs and consumer								30	4,016
Total								98	$	24,896

(1) Does not include any single family loans that are guaranteed by Ginnie Mae.

(2) Does not include construction loans that were modified as a result of COVID-19 related construction delays to extend the construction or lease-up periods. Each of these loans continued to make monthly payments under the existing or modified payment terms. At September 30, 2021, two of these loans with $2 million in balances were still operating under the terms of their modification.

(3) There were no forbearances initiated in the third quarter of 2021.

The forbearances approved for commercial and industrial loans and CRE nonowner occupied loans were generally for a period of three months while the forbearances for single family, HELOCs and consumer loans were generally for a period of three to six months. As of September 30, 2021, excluding the loans with forbearances still in place, 99% of the commercial and CRE loans approved for a forbearance have completed their forbearance period and have resumed payments. The forbearance periods for the majority of single family and consumer loans granted forbearance that were not complete as of September 30, 2021 are scheduled to be completed in the fourth quarter of 2021.

Management considers the current level of the ACL to be appropriate to cover estimated lifetime losses within our LHFI portfolio. The following table presents the ACL by product type:


	At September 30, 2021				At December 31, 2020
(in thousands)	Amount		Rate (1)		Amount		Rate (1)

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

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

Liquidity and Sources of Funds

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

The Company's primary sources of liquidity include deposits, loan payments and investment securities payments, both principal and interest, borrowings, and proceeds from the sale of loans and investment securities. Borrowings include advances from the FHLB, federal funds purchased and borrowing from other financial institutions. Additionally, the Company may sell stock or issue long-term debt to raise funds. While scheduled principal repayments on loans and investment securities are a relatively predictable source of funds, deposit inflows and outflows and prepayments of loans and investment securities are greatly influenced by interest rates, economic conditions and competition.

The Company’s contractual cash flow obligations include the maturity of certificates of deposit, short-term and long-term borrowings, interest on certificates of deposit and borrowings, operating leases and fees for information technology related services and professional services. Obligations for certificates of deposit and short-term borrowings are typically satisfied through the renewal of these instruments or the generation of new deposits or use of available short-term borrowings. Interest payments and obligations related to leases and services are typically met by cash generated from our operations. The Company does not have any obligation to repay long term debt within the next five years.

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

Cash Flows

For the nine months ended September 30, 2021, cash and cash equivalents increased by $161 million compared to an increase of $21 million during the nine months ended September 30, 2020. As excess liquidity can reduce the Company’s earnings and returns, the Company manages its cash positions to minimize the level of excess liquidity and does not attempt to maximize the level of cash and cash equivalents. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.

Cash flows from operating activities

The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the nine months ended September 30, 2021, net cash of $182 million was provided by operating activities, primarily from cash proceeds from the sale of loans exceeding cash used to fund LHFS. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt are sufficient to fund our operating liquidity needs. For the nine months ended September 30, 2020, net cash of $40 million was used in operating activities, primarily from cash used to fund LHFS production exceeding cash proceeds from the sale of loans.

Cash flows from investing activities

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

Cash flows from financing activities

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

Off-Balance Sheet Arrangements

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

These commitments include the following:


(in thousands)	At September 30, 2021		At December 31, 2020

Unused consumer portfolio lines	$	394,694	$	389,122
Commercial portfolio lines (1)	801,632		656,065
Commitments to fund loans	64,456		68,345


Total	$	1,260,782	$	1,113,532

(1) Within the commercial portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction

progress payments, were $564 million and $395 million at September 30, 2021 and December 31, 2020, respectively.

Capital Resources and Dividend Policy

The capital rules applicable to United States based bank holding companies and federally insured depository institutions (“Capital Rules”) require the Company (on a consolidated basis) and the Bank (on a stand-alone basis) to meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. In addition, prompt corrective action regulations place a federally insured depository institution, such as the Bank, into one of five capital categories on the basis of its capital ratios: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; or (v) critically undercapitalized. A depository institution’s primary federal regulatory agency may determine that, based on certain qualitative assessments, the depository institution should be assigned to a lower capital category than the one indicated by its capital ratios. At each successive lower capital category, a depository institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of HomeStreet Inc. (on a consolidated basis) and HomeStreet Bank as compared to the respective regulatory requirements applicable to them:


	At September 30, 2021
	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As "Well Capitalized"
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

HomeStreet, Inc.
Tier 1 leverage capital (to average assets)	$	717,110	10.00	%	$	286,945	4.0	%	NA		NA
Common equity Tier 1 capital (to risk-weighted assets)	657,110		11.02	%	268,398		4.5	%	NA		NA
Tier 1 risk-based capital (to risk-weighted assets)	717,110		12.02	%	357,864		6.0	%	NA		NA
Total risk-based capital (to risk-weighted assets)	776,218		13.01	%	477,152		8.0	%	NA		NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)	$	721,955	10.17	%	$	283,867	4.0	%	$	354,834	5.0	%
Common equity Tier 1 capital (to risk-weighted assets)	721,955		12.68	%	256,155		4.5	%	370,002		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	721,955		12.68	%	341,540		6.0	%	455,387		8.0	%
Total risk-based capital (to risk-weighted assets)	780,488		13.71	%	455,387		8.0	%	569,233		10.0	%


	At December 31, 2020
	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As "Well Capitalized"
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

HomeStreet, Inc.
Tier 1 leverage capital (to average assets)	$	709,655	9.65	%	$	294,211	4.0	%	NA		NA
Common equity Tier 1 capital (to risk-weighted assets)	649,655		11.67	%	250,537		4.5	%	NA		NA
Tier 1 risk-based capital (to risk-weighted assets)	709,655		12.75	%	334,050		6.0	%	NA		NA
Total risk-based capital (to risk-weighted assets)	779,254		14.00	%	445,400		8.0	%	NA		NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)	$	712,533	9.79	%	$	291,114	4.0	%	$	363,893	5.0	%
Common equity Tier 1 capital (to risk-weighted assets)	712,533		13.51	%	237,307		4.5	%	342,777		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	712,533		13.51	%	316,410		6.0	%	421,880		8.0	%
Total risk-based capital (to risk-weighted assets)	778,479		14.76	%	421,880		8.0	%	527,350		10.0	%

As of each of the dates set forth in the above table, the Company exceeded the minimum required capital ratios applicable to it and the Bank’s capital ratios exceeded the minimums necessary to qualify as a well-capitalized depository institution under the prompt corrective action regulations. In addition to the minimum capital ratios, both HomeStreet Inc. and HomeStreet Bank are required to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 Capital of more than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses. The required ratios for capital adequacy set forth in the above table do not include the Capital Rules’ additional capital conservation buffer, though each of the Company and Bank maintained capital ratios necessary to satisfy the capital conservation buffer requirements as of the dates indicated. At September 30, 2021, capital conservation buffers for the Company and the Bank were 5.01% and 5.71%, respectively.

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

We had no material commitments for capital expenditures as of September 30, 2021. However, we intend to take advantage of opportunities that may arise in the future to grow our businesses, which may include opening additional offices or acquiring complementary businesses that we believe will provide us with attractive risk-adjusted returns. As a result, we may seek to obtain additional borrowings and to sell additional shares of our common stock to raise funds which we might need for these purposes. There is no assurance, however, that, if required, we will succeed in obtaining additional borrowings or selling additional shares of our common stock on terms that are acceptable to us, if at all, as this will depend on market conditions and other factors outside of our control, as well as our future results of operations.

Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented in accordance with GAAP, we use certain non-GAAP measures of financial performance. These supplemental performance measures may vary from, and may not be comparable to, similarly titled measures provided by other companies in our industry. Non-GAAP financial measures are not in accordance with, or an alternative for, GAAP. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. A non-GAAP financial measure may also be a financial metric that is not required by GAAP or other applicable requirement.

We believe that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding our performance by providing additional information used by management that is not otherwise required by GAAP or other applicable requirements. Our management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing our operating results and when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate a comparison of our performance to prior periods. We believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. However, these non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, financial measures prepared in accordance with GAAP. In the information below, we have provided a reconciliation of, where applicable, the most comparable GAAP financial measures to the non-GAAP measures used in this quarterly report on Form 10-Q, or a reconciliation of the non-GAAP calculation of the financial measure.

In this quarterly report on Form 10-Q, we use (i) tangible common equity and tangible assets and ratios calculated using these measures as we believe this information is consistent with the treatment by bank regulatory agencies, which exclude intangible assets from the calculation of capital ratios; and (ii) an efficiency ratio which is the ratio of noninterest expense to the sum of net interest income and noninterest income, excluding certain items of income or expense and excluding taxes incurred and payable to the state of Washington as such taxes are not classified as income taxes and we believe including them in noninterest expense impacts the comparability of our results to those companies whose operations are in states where assessed taxes on business are classified as income taxes.

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


	As of or for the quarter ended						As of or for the nine months ended September 30,
(in thousands)	September 30, 2021			June 30, 2021				2021			2020

Return on average tangible equity (annualized)
Average shareholders' equity	$	726,823		$	718,838			$	725,730		$	702,297
Less: Average goodwill and other intangibles	(32,195)			(32,487)				(32,484)			(33,784)
Average tangible equity	$	694,628		$	686,351			$	693,246		$	668,513

Net income	$	27,170		$	29,157			$	85,990		$	52,392
Adjustments (tax effected)
Amortization on core deposit intangibles	229			229				694			815
Tangible income applicable to shareholders	$	27,399		$	29,386			$	86,684		$	53,207
Ratio	15.6		%	17.2		%		16.7		%	10.6		%



Efficiency ratio
Noninterest expense
Total	$	51,949		$	52,815			$	161,372		$	170,893
Adjustments:
Restructuring related charges	—			—				—			(5,725)
Legal fees recovery	—			1,900				1,900			—

State of Washington taxes	(578)			(602)				(1,759)			(1,864)
Adjusted total	$	51,371		$	54,113			$	161,513		$	163,304

Total revenues
Net interest income	$	57,484		$	57,972			$	169,973		$	152,614
Noninterest income	24,298			28,224				$	91,355		$	105,387
Adjustments
Contingent payout	—			—				—			(566)
Adjusted total	$	81,782		$	86,196			$	261,328		$	257,435

Ratio	62.8		%	62.8		%		61.8		%	63.4		%


	As of
(in thousands, except share data)	September 30, 2021			December 31, 2020

Tangible book value per share
Shareholders' equity	$	710,376		$	717,750
Less: goodwill and other intangibles	(32,002)			(32,880)
Tangible shareholder's equity	$	678,374		$	684,870
Common shares outstanding	20,446,648			21,796,904
Computed amount	$	33.18		$	31.42

Tangible common equity to tangible assets
Tangible shareholder's equity (per above)	$	678,374		$	684,870
Tangible assets
Total assets	7,372,451			7,237,091
Less: Goodwill and other intangibles	(32,002)			(32,880)
Net	$	7,340,449		$	7,204,211
Ratio	9.2		%	9.5		%


ITEM 3			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks that we are exposed to are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital arising from movements in interest rates.

For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes loans, MSRs, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due to the nature of our current operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets, in particular, the regional economy of the western United States, including Hawaii.

The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest rates (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.

We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps.

The following table presents sensitivity gaps for these different intervals:


	At September 30, 2021
(in thousands)	3 Mos. or Less			More Than 3 Mos. to 6 Mos.			More Than 6 Mos. to 12 Mos.			More Than 12 Mos. to 3 Yrs.			More Than 3 Yrs. to 5 Yrs.			More Than 5 to 15 Yrs.			More Than 15 Yrs.			Non-Rate- Sensitive		Total

Interest-earning assets:
Cash & cash equivalents	$	218,662		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	218,662
FHLB Stock	95			—			—			—			—			—			8,628			—		8,723
Investment securities (1)	120,632			21,146			36,453			118,009			120,928			416,996			148,874			—		983,038
LHFS	395,112			—			—			—			—			—			—			—		395,112
LHFI (1)	1,172,337			354,571			562,031			1,144,541			1,231,826			871,547			17,404			—		5,354,257
Total	1,906,838			375,717			598,484			1,262,550			1,352,754			1,288,543			174,906			—		6,959,792
Non-interest-earning assets	—			—			—			—			—			—			—			412,659		412,659

Total assets	$	1,906,838		$	375,717		$	598,484		$	1,262,550		$	1,352,754		$	1,288,543		$	174,906		$	412,659	$	7,372,451
Interest-bearing liabilities:
Demand deposit accounts (2)	$	555,716		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	555,716
Savings accounts (2)	305,395			—			—			—			—			—			—			—		305,395
Money market accounts (2)	2,796,524			—			—			—			—			—			—			—		2,796,524
Certificates of deposit	371,789			184,080			229,929			201,883			7,794			—			—			—		995,475



Long-term debt (3)	60,979			—			—			—			65,000			—			—			—		125,979
Total	4,090,403			184,080			229,929			201,883			72,794			—			—			—		4,779,089
Non-interest bearing liabilities	—			—			—			—			—			—			—			1,882,986		1,882,986

Shareholders' Equity	—			—			—			—			—			—			—			710,376		710,376
Total liabilities and shareholders' equity	$	4,090,403		$	184,080		$	229,929		$	201,883		$	72,794		$	—		$	—		$	2,593,362	$	7,372,451
Interest sensitivity gap	$	(2,183,565)		$	191,637		$	368,555		$	1,060,667		$	1,279,960		$	1,288,543		$	174,906
Cumulative interest sensitivity gap
Total	$	(2,183,565)		$	(1,991,928)		$	(1,623,373)		$	(562,706)		$	717,254		$	2,005,797		$	2,180,703
As a % of total assets	(30)		%	(27)		%	(22)		%	(8)		%	10		%	27		%	30		%
As a % of cumulative interest-bearing liabilities	47		%	53		%	64		%	88		%	115		%	142		%	146		%

(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.

(2)Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.

(3)Based on contractual maturity.

As of September 30, 2021, the Company is considered liability-sensitive as exhibited by the gap table but our net interest income sensitivity analysis shows positive results in the increasing interest rate scenarios. This is because of the impact of our historical deposit repricing betas which result in an assumed delay in repricing of deposits in an increasing interest rate scenario and a lower magnitude of repricing compared to the repricing of loans and other interest-earning assets. Net interest income would be expected to rise in the long term if interest rates were to rise due to the Bank’s cumulative asset-sensitive position.

Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest

income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.

The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of September 30, 2021 and December 31, 2020 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.


	At September 30, 2021				At December 31, 2020
Change in Interest Rates (basis points) (1)	Percentage Change
	Net Interest Income (2)		Net Portfolio Value (3)		Net Interest Income (2)		Net Portfolio Value (3)

+200	7.0	%	(7.1)	%	3.5	%	(9.3)	%
+100	3.0	%	(4.7)	%	1.2	%	(4.3)	%
-100	(4.2)	%	(3.7)	%	(3.8)	%	(3.7)	%
-200	(5.8)	%	(11.5)	%	(4.7)	%	(5.7)	%

(1)For purposes of our model, we assume interest rates will not go below zero. This "floor" limits the effect of a potential negative interest rate shock in a low rate environment like the one we are currently experiencing.

(2)This percentage change represents the impact to net interest income for a one-year period, assuming there is no change in the structure of the balance sheet.

(3)This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.

At September 30, 2021, we believe our net interest income sensitivity did not exhibit a strong bias to either an increase in interest rates or a decline in interest rates. The changes in interest rate sensitivity between December 31, 2020 and September 30, 2021 reflected the impact of higher market interest rates, a steeper yield curve and changes to overall balance sheet composition. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. We do not allow for negative rate assumptions in our model, but actual results in extreme interest rate decline scenarios may result in negative rate assumptions which may cause the modeling results to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.

ITEM 4CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control over Financial Reporting

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

There were no changes to our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1LEGAL PROCEEDINGS

Because the nature of our business involves, among other things, the collection of numerous accounts, the validity of liens and compliance with various state and federal laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment and other consumer matters, including purported class and collective actions. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated balance sheet, results of operation or liquidity, or for which there would be a reasonable possibility of such a loss based on information known at this time.

ITEM 1ARISK FACTORS

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

ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

Shares repurchased, on a settlement-date basis, pursuant to the common equity repurchase program during the quarter ended September 30, 2021 were as follows:


(in thousands, except share and per share information)	Total shares of common stock purchased	Average price paid per share of common stock		Dollar value of remaining authorized repurchase

July	—	$	—	$	15,000
August	372,622	40.26		—
September	—	—		—
Total	372,622	$	—

Sales of Unregistered Securities

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

ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5OTHER INFORMATION

Not applicable.

ITEM 6EXHIBITS

EXHIBIT INDEX


Exhibit Number						Description

31.1						Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2						Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32 (1)						Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
101 INS						Inline XBRL Instance Document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Label Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Definitions Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


(1)			This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on November 5, 2021.


			HomeStreet, Inc.

			By:			/s/ Mark K. Mason
						Mark K. Mason
						President and Chief Executive Officer
						(Principal Executive Officer)


			HomeStreet, Inc.

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