HomeStreet, Inc. - Quarter Report: 2021 June (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: June 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 August 2, 2021 was 20,794,666.


PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Balance Sheets at June 3 0 , 2021 and December 31, 2020		3
Consolidated Income Statements for the Quarters and Six Months Ended June 30, 2021 and 2020		4
Consolidated Statements of Comprehensive Income for the Quarters an d Six Months Ended June 30 , 2021 and 2020		5
Consolidated Statements of Shareholders’ Equity for the Quarters and Six months Ended June 30 , 2021 and 2020		6
Consolidated Statements of Cash Flows for the Six Months Ended June 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	40
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60

ITEM 4	CONTROLS AND PROCEDURES	63
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	63
ITEM 1A	RISK FACTORS	64
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	66
ITEM 4	MINE SAFETY DISCLOSURES	66
ITEM 5	OTHER INFORMATION	66
ITEM 6	EXHIBITS	67
SIGNATURES		68

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



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

ASSETS
Cash and cash equivalents	$	88,471	$	58,049
Investment securities	1,007,658		1,076,364
Loans held for sale ("LHFS")	225,241		361,932
Loans held for investment ("LHFI") (net of allowance for credit losses of $59,897 and $64,294)	5,332,626		5,179,886
Mortgage servicing rights ("MSRs")	98,985		85,740
Premises and equipment, net	60,725		65,102
Other real estate owned ("OREO")	1,484		1,375
Goodwill and other intangible assets	32,295		32,880
Other assets	320,466		375,763

Total assets	$	7,167,951	$	7,237,091
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits	$	6,086,527	$	5,821,559
Borrowings	50,000		322,800
Long-term debt	125,932		125,838
Accounts payable and other liabilities	196,761		249,144

Total liabilities	6,459,220		6,519,341
Commitments and contingencies
Shareholders' equity:




Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 20,791,659 shares and 21,796,904 shares	260,774		278,505
Retained earnings	420,111		403,888
Accumulated other comprehensive income	27,846		35,357
Total shareholders' equity	708,731		717,750
Total liabilities and shareholders' equity	$	7,167,951	$	7,237,091

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Unaudited)


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

Interest income:
Loans	$	57,078	$	55,728	$	110,646	$	114,737
Investment securities	5,010		5,999		10,961		10,386
Cash, Fed Funds and other	159		75		331		428
Total interest income	62,247		61,802		121,938		125,551
Interest expense:
Deposits	2,773		8,175		6,423		22,958
Borrowings	1,502		2,131		3,026		5,663
Total interest expense	4,275		10,306		9,449		28,621
Net interest income	57,972		51,496		112,489		96,930
Provision for credit losses	(4,000)		6,469		(4,000)		20,469
Net interest income after provision for credit losses	61,972		45,027		116,489		76,461
Noninterest income:
Net gain on loan origination and sale activities	21,271		30,027		54,730		52,568
Loan servicing income	1,931		2,402		2,679		8,503
Deposit fees	1,997		1,566		3,821		3,456

Other	3,025		2,607		5,827		4,705
Total noninterest income	28,224		36,602		67,057		69,232
Noninterest expense:
Compensation and benefits	34,378		34,427		70,213		66,859
Information services	6,949		7,405		13,733		14,929
Occupancy	5,973		7,959		12,465		14,728
General, administrative and other	5,515		7,861		13,012		16,320
Total noninterest expense	52,815		57,652		109,423		112,836
Income before income taxes	37,381		23,977		74,123		32,857
Income tax expense	8,224		5,073		15,303		6,814




Net income	$	29,157	$	18,904	$	58,820	$	26,043

Net income per share:

Basic	$	1.38	$	0.81	$	2.76	$	1.11




Diluted	$	1.37	$	0.81	$	2.72	$	1.10



Weighted average shares outstanding:
Basic	21,057,473		23,330,494		21,345,969		23,509,712
Diluted	21,287,974		23,479,845		21,623,298		23,670,063

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Net income	$	29,157	$	18,904	$	58,820	$	26,043
Other comprehensive income:
Unrealized gain (loss) on investment securities available for sale ("AFS")	10,236		13,866		(9,445)		30,950
Reclassification for net (gains) losses included in income	(62)		(219)		(62)		(331)
Other comprehensive income (loss) before tax	10,174		13,647		(9,507)		30,619
Income tax impact of:
Unrealized gain (loss) on investment securities AFS	2,150		2,912		(1,983)		6,499
Reclassification for net (gains) losses included in income	(13)		(46)		(13)		(69)
Total	2,137		2,866		(1,996)		6,430
Other comprehensive income (loss)	8,037		10,781		(7,511)		24,189
Total comprehensive income	$	37,194	$	29,685	$	51,309	$	50,232

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 June 30, 2020
Balance, March 31, 2020	23,376,793	$	294,302	$	365,283	$	17,729	$	677,314
Net income	—	—		18,904		—		18,904
Share-based compensation expense	2,796	707		—		—		707
Common stock issued - Option exercise; stock grants	29,394	169		—		—		169

Other comprehensive income	—	—		—		10,781		10,781
Dividends declared on common stock ($0.15 per share)	—	—		(3,532)		—		(3,532)
Common stock repurchased	(401,583)	(4,307)		(5,387)		—		(9,694)

Balance, June 30, 2020	23,007,400	$	290,871	$	375,268	$	28,510	$	694,649

For the six months ended June 30, 2020
Balance, December 31, 2019	23,890,855	$	300,729	$	374,673	$	4,321	$	679,723
Net income	—	—		26,043		—		26,043
Share-based compensation expense	4,944	1,184		—		—		1,184
Common stock issued - Option exercise; stock grants	116,753	782		—		—		782
Cumulative effect of adoption of new accounting standards	—	—		(3,740)		—		(3,740)
Other comprehensive income	—	—		—		24,189		24,189
Dividends declared on common stock ($0.30 per share)				(7,106)				(7,106)
Common stock repurchased	(1,005,152)	(11,824)		(14,602)		—		(26,426)

Balance, June 30, 2020	23,007,400	$	290,871	$	375,268	$	28,510	$	694,649

For the quarter ended June 30, 2021
Balance, March 31, 2021	21,360,514	$	269,942	$	411,712	$	19,809	$	701,463
Net income	—	—		29,157		—		29,157
Share-based compensation expense	2,796	855		—		—		855
Common stock issued - Option exercise; stock grants	2,312	195		—		—		195
Other comprehensive income (loss)	—	—		—		8,037		8,037
Dividends declared on common stock ($0.25 per share)	—	—		(5,378)		—		(5,378)
Common stock repurchased	(573,963)	(10,218)		(15,380)		—		(25,598)

Balance, June 30, 2021	20,791,659	$	260,774	$	420,111	$	27,846	$	708,731

For the six months ended June 30, 2021
Balance, December 31, 2020	21,796,904	$	278,505	$	403,888	$	35,357	$	717,750
Net income	—	—		58,820		—		58,820
Share-based compensation expense	5,612	1,665		—		—		1,665
Common stock issued - Option exercise; stock grants	187,753	2,044		—		—		2,044

Other comprehensive income (loss)	—	—		—		(7,511)		(7,511)
Dividends declared on common stock ($0.50 per share)	—	—		(10,912)		—		(10,912)
Common stock repurchased	(1,198,610)	(21,440)		(31,685)		—		(53,125)
Balance, June 30, 2021	20,791,659	$	260,774	$	420,111	$	27,846	$	708,731

See accompanying notes to consolidated financial statements

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(in thousands)	2021		2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	58,820	$	26,043
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses	(4,000)		20,469
Depreciation and amortization, premises and equipment	4,788		4,299
Amortization of premiums and discounts: AFS securities, deposits, debt	3,204		5,011
Operating leases: excess of payments over amortization	(2,016)		(1,813)
Amortization of finance leases	546		709
Amortization of core deposit intangibles	587		689
Amortization of deferred loan fees and costs	(4,825)		1,536
Share-based compensation expense	1,665		1,184

Lease impairment costs	180		2,617
Deferred income tax expense (benefit)	5,353		(8,188)
Origination of LHFS	(1,336,342)		(983,212)
Proceeds from sale of LHFS	1,380,651		820,312
Net fair value adjustment and gain on sale of LHFS	(25,441)		(32,701)
Origination of MSRs	(20,472)		(9,978)
Net gain on sale of LHFI	(4,613)		(1,864)
Change in fair value of mortgage servicing rights	4,434		26,678
Amortization of MSRs	3,477		2,734




(Increase) decrease in other assets	(6,414)		(20,022)
Increase (decrease) in accounts payable and other liabilities	(4,407)		183
Net cash provided by (used in) operating activities	55,175		(145,314)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(86,333)		(335,037)
Proceeds from sale of investment securities	28,187		55,615
Principal payments on investment securities	114,367		77,845
Proceeds from sale of OREO	—		650
Proceeds from sale of LHFI	251,474		244,723


Net cash provided by disposal of discontinued operations	—		2,758


Net increase in LHFI	(272,051)		(423,497)

Purchase of premises and equipment	(827)		(1,145)

Proceeds from sale of Federal Home Loan Bank stock	86,321		97,646
Purchases of Federal Home Loan Bank stock	(76,726)		(90,913)
Net cash provided by (used in) investing activities	44,412		(371,355)


	Six Months Ended June 30,
(in thousands)	2021		2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits, net	264,898		316,301

Changes in short-term borrowings, net	(322,800)		242,000


Proceeds from other long-term borrowings	50,000		—




Repayment of finance lease principal	(613)		(724)
Repurchases of common stock	(50,001)		(26,001)
Proceeds from exercise of stock options	263		237
Dividends paid on common stock	(10,912)		(7,106)
Net cash provided by (used in) financing activities	(69,165)		524,707
Net increase in cash and cash equivalents	30,422		8,038

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


Cash and cash equivalents, end of period	$	88,471	$	65,918


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	9,517	$	29,532
Federal and state income taxes	23,367		516
Non-cash activities:
Increase in lease assets and lease liabilities	467		—
Decrease in lease assets and lease liabilities	—		38,754

Loans transferred from LHFI to LHFS	146,270		120,691
Loans transferred from LHFS to LHFI	17,446		4,340
Ginnie Mae loans recognized with the right to repurchase, net	—		12,341
Ginnie Mae loans derecognized with the right to repurchase, net	44,680		—
Repurchase of common stock-award settlement	3,124		425

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.

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

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results 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 relationship, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)," which clarifies certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the transition to alternative rates. The ASUs are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is in the process of evaluating the provisions of these ASUs, but does not expect them to have a material impact on the Company’s financial position, results of operations or financial statement disclosures.

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

AFS
Mortgage backed securities ("MBS"):
Residential	$	37,116	$	763	$	(292)	$	37,587
Commercial	41,333		1,499		(94)		42,738
Collateralized mortgage obligations ("CMOs"):
Residential	191,914		4,261		(841)		195,334
Commercial	141,061		2,704		(365)		143,400
Municipal bonds	519,186		27,010		(379)		545,817
Corporate debt securities	14,060		915		—		14,975
U.S. Treasury securities	23,519		67		—		23,586

Total	$	968,189	$	37,219	$	(1,971)	$	1,003,437

HTM




Municipal bonds	$	4,221	$	177	$	—	$	4,398


	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 June 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 June 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	$	(65)	$	1,126	$	(227)	$	1,346	$	(292)	$	2,472
Commercial	(94)		8,932		—		—		(94)		8,932
CMOs:
Residential	(841)		31,525		—		—		(841)		31,525
Commercial	(196)		8,595		(169)		16,550		(365)		25,145
Municipal bonds	(317)		26,835		(62)		3,868		(379)		30,703



Total	$	(1,513)	$	77,013	$	(458)	$	21,764	$	(1,971)	$	98,777


	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 June 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 June 30, 2021 or December 31, 2020. In addition, as of June 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 June 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	$	1,726	6.12	%	$	16,014	3.67	%	$	62,276	3.30	%	$	465,801	3.30	%	$	545,817	3.32	%
Corporate debt securities	—		—	%	6,918		3.73	%	8,057		4.87	%	—		—	%	14,975		4.34	%
U.S. Treasury securities	—		—	%	—		—	%	23,586		1.29	%	—		—	%	23,586		1.29	%

Total	$	1,726	6.12	%	$	22,932	3.69	%	$	93,919	2.90	%	$	465,801	3.30	%	$	584,378	3.26	%

HTM




Municipal bonds	$	1,046	2.51	%	$	3,352	2.41	%	$	—	—	%	$	—	—	%	$	4,398	2.44	%


	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 June 30, 2021 and December 31, 2020 was 1.88% and 1.92%, respectively.

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


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Proceeds	$	28,187	$	21,823	$	28,187	$	55,615
Gross gains	288		544		288		1,289
Gross losses	(226)		(325)		(226)		(958)

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 June 30, 2021		At December 31, 2020


Washington, Oregon and California State to secure public deposits	$	167,177	$	171,471

Other securities pledged	6,075		3,391
Total securities pledged as collateral	$	173,252	$	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 $2.5 million and $2.8 million for the quarters ended June 30, 2021 and 2020, respectively and $5.0 million and $5.1 million for the six months ended June 30, 2021 and 2020, respectively.

NOTE 3 -LOANS AND CREDIT QUALITY:

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


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

Commercial real estate loans
Non-owner occupied commercial real estate	$	761,754	$	829,538
Multifamily	1,966,995		1,428,092
Construction/land development	484,282		553,695
Total	3,213,031		2,811,325
Commercial and industrial loans
Owner occupied commercial real estate	457,504		467,256
Commercial business	575,122		645,723
Total	1,032,626		1,112,979
Consumer loans
Single family (1)	812,287		915,123
Home equity and other	334,579		404,753
Total	1,146,866		1,319,876
Total LHFI	5,392,523		5,244,180


Allowance for credit losses ("ACL")	(59,897)		(64,294)
Total LHFI less ACL	$	5,332,626	$	5,179,886

(1) Includes $5.2 million and $7.1 million at June 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 $1.5 billion and $1.4 billion at June 30, 2021 and December 31, 2020, respectively, were pledged to secure borrowings from the Federal Home Loan Bank ("FHLB") and loans totaling $582 million and $569 million at June 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 June 30, 2021 and December 31, 2020, multifamily loans in the state of California represented 27% 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 $4 million recovery of the allowance for credit losses in the second quarter of 2021. As of June 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 $2.1 million and $1.6 million at June 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 $19.6 million and $21.2 million at June 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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	64,047	$	58,299	$	64,294	$	41,772
Provision for credit losses	(4,145)		6,705		(4,516)		21,360
Net (charge-offs) recoveries	(5)		(4)		119		25
Impact of ASC 326 adoption	—		—		—		1,843
Ending balance	$	59,897	$	65,000	$	59,897	$	65,000

Allowance for unfunded commitments:
Beginning balance	$	1,959	$	2,307	$	1,588	$	1,065
Provision for credit losses	145		(236)		516		(891)
Impact of ASC 326 adoption	—		—		—		1,897
Ending balance	$	2,104	$	2,071	$	2,104	$	2,071

Provision for credit losses:
Allowance for credit losses - loans	$	(4,145)	$	6,705	$	(4,516)	$	21,360
Allowance for unfunded commitments	145		(236)		516		(891)
Total	$	(4,000)	$	6,469	$	(4,000)	$	20,469

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


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

Commercial real estate loans
Non-owner occupied commercial real estate	$	9,218	$	—	$	—	$	(141)	$	9,077
Multifamily	6,969		—		—		276		7,245
Construction/land development
Multifamily construction	3,936		—		—		(3,436)		500
Commercial real estate construction	1,908		—		—		114		2,022
Single family construction	5,007		—		—		646		5,653
Single family construction to permanent	1,124		—		—		(77)		1,047
Total	28,162		—		—		(2,618)		25,544
Commercial and industrial loans
Owner occupied commercial real estate	5,266		—		—		252		5,518
Commercial business	17,105		—		24		(1,255)		15,874
Total	22,371		—		24		(1,003)		21,392
Consumer loans
Single family	6,735		(44)		2		470		7,163
Home equity and other	6,779		(35)		48		(994)		5,798
Total	13,514		(79)		50		(524)		12,961
Total ACL	$	64,047	$	(79)	$	74	$	(4,145)	$	59,897


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

Commercial real estate loans
Non-owner occupied commercial real estate	$	9,021	$	—	$	—	$	(1,696)	$	7,325
Multifamily	4,265		—		—		1,122		5,387
Construction/land development
Multifamily construction	3,218		—		—		593		3,811
Commercial real estate construction	382		—		—		58		440
Single family construction	6,585		—		—		(716)		5,869
Single family construction to permanent	1,512		—		—		3		1,515
Total	24,983		—		—		(636)		24,347
Commercial and industrial loans
Owner occupied commercial real estate	4,160		—		—		1,481		5,641
Commercial business	8,161		—		24		7,631		15,816
Total	12,321		—		24		9,112		21,457
Consumer loans
Single family	8,587		—		1		(518)		8,070
Home equity and other	12,408		(88)		59		(1,253)		11,126
Total	20,995		(88)		60		(1,771)		19,196
Total ACL	$	58,299	$	(88)	$	84	$	6,705	$	65,000


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

Commercial real estate loans
Non-owner occupied commercial real estate	$	8,845	$	—	$	—	$	232	$	9,077
Multifamily	6,072		—		—		1,173		7,245
Construction/land development
Multifamily construction	4,903		—		—		(4,403)		500
Commercial real estate construction	1,670		—		—		352		2,022
Single family construction	5,130		—		—		523		5,653
Single family construction to permanent	1,315		—		—		(268)		1,047
Total	27,935		—		—		(2,391)		25,544
Commercial and industrial loans
Owner occupied commercial real estate	4,994				—		524		5,518
Commercial business	17,043		—		98		(1,267)		15,874
Total	22,037		—		98		(743)		21,392
Consumer loans
Single family	6,906		(114)		122		249		7,163
Home equity and other	7,416		(91)		104		(1,631)		5,798
Total	14,322		(205)		226		(1,382)		12,961
Total ACL	$	64,294	$	(205)	$	324	$	(4,516)	$	59,897


	Six Months Ended June 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)	$	—	$	—	$	3,472	$	7,325
Multifamily	7,015		(2,977)		—		—		1,349		5,387
Construction/land development
Multifamily construction	2,848		693		—		—		270		3,811
Commercial real estate construction	624		(115)		—		—		(69)		440
Single family construction	3,800		4,280		—		163		(2,374)		5,869
Single family construction to permanent	1,003		200		—		—		312		1,515
Total	22,535		(1,311)		—		163		2,960		24,347
Commercial and industrial loans
Owner occupied commercial real estate	3,639		(2,459)				—		4,461		5,641
Commercial business	2,915		510		(143)		48		12,486		15,816
Total	6,554		(1,949)		(143)		48		16,947		21,457
Consumer loans
Single family	6,450		468		—		54		1,098		8,070
Home equity and other	6,233		4,635		(305)		208		355		11,126
Total	12,683		5,103		(305)		262		1,453		19,196
Total ACL	$	41,772	$	1,843	$	(448)	$	473	$	21,360	$	65,000

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


	At June 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	$	22,128	$	51,228	$	175,162	$	142,411	$	124,528	$	242,014	$	1,120	$	939	$	759,530
7- Special Mention	—		—		—		—		—		2,224		—		—		2,224
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	22,128		51,228		175,162		142,411		124,528		244,238		1,120		939		761,754



Multifamily
1-6 Pass	784,331		595,349		292,927		65,883		30,049		198,350		106		—		1,966,995
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	784,331		595,349		292,927		65,883		30,049		198,350		106		—		1,966,995



Multifamily construction
1-6 Pass	2,464		21,512		19,324		—		—		—		—		—		43,300
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	2,464		21,512		19,324		—		—		—		—		—		43,300



Commercial real estate construction
1-6 Pass	—		3,962		—		2,034		15,844		570		7,546		—		29,956
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	—		3,962		—		2,034		15,844		570		7,546		—		29,956



Single family construction
1-6 Pass	104,065		54,198		20,889		3,106		—		78		93,870		—		276,206
7- Special Mention	—		—		—		—		—		—		—		—		—
8 - Substandard	—		—		—		—		—		—		—		—		—
Total	104,065		54,198		20,889		3,106		—		78		93,870		—		276,206



Single family construction to permanent
Current	32,993		69,627		28,544		3,656		—		—		—		—		134,820
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		—		—		—		—
90+ days	—		—		—		—		—		—		—		—		—
Total	32,993		69,627		28,544		3,656		—		—		—		—		134,820



Owner occupied commercial real estate
1-6 Pass	35,512		49,056		59,779		52,134		76,314		122,161		550		2,917		398,423
7- Special Mention	—		—		—		2,221		6,032		307		—		65		8,625
8 - Substandard	—		—		18,985		1,111		10,658		19,702		—		—		50,456
Total	35,512		49,056		78,764		55,466		93,004		142,170		550		2,982		457,504



Commercial business
1-6 Pass	162,998		135,045		51,533		31,019		18,680		27,178		96,584		2,241		525,278
7- Special Mention	—		—		9,600		2,255		6,115		—		9,106		150		27,226
8 - Substandard	4,503		70		3,569		9,862		1,874		2,857		(227)		110		22,618
Total	167,501		135,115		64,702		43,136		26,669		30,035		105,463		2,501		575,122



Total commercial portfolio	$	1,148,994	$	980,047	$	680,312	$	315,692	$	290,094	$	615,441	$	208,655	$	6,422	$	4,245,657

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


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

CONSUMER PORTFOLIO
Single family
Current	$	84,439	$	165,157	$	95,791	$	104,237	$	121,245	$	238,575	$	—	$	—	$	809,444
Past due:
30-59 days	—		—		—		—		—		—		—		—		—
60-89 days	—		—		—		—		—		123		—		—		123
90+ days	—		—		971		857		157		735		—		—		2,720
Total (1)	84,439		165,157		96,762		105,094		121,402		239,433		—		—		812,287



Home equity and other
Current	1,217		1,023		704		791		657		3,682		317,713		7,123		332,910
Past due:
30-59 days	—		3		3		—		—		—		—		—		6
60-89 days	—		—		—		—		—		—		7		—		7
90+ days	—		—		—		—		2		52		1,602		—		1,656
Total	1,217		1,026		707		791		659		3,734		319,322		7,123		334,579



Total consumer portfolio	$	85,656	$	166,183	$	97,469	$	105,885	$	122,061	$	243,167	$	319,322	$	7,123	$	1,146,866
Total LHFI	$	1,234,650	$	1,146,230	$	777,781	$	421,577	$	412,155	$	858,608	$	527,977	$	13,545	$	5,392,523

(1) Includes $5.2 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 June 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	$	1,789	$	—	$	3,120	$	—	$	4,909
Commercial business	1,537		545		—		2,623		4,705
Total	3,326		545		3,120		2,623		9,614
Consumer loans
Single family	—		2,361		—		—		2,361
Home equity loans and other	—		904		—		—		904
Total	—		3,265		—		—		3,265
Total collateral-dependent loans	$	3,326	$	3,810	$	3,120	$	2,623	$	12,879


	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 June 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		$	4,910	$	4,910	$	4,922	$	4,922
Commercial business		2,488		8,890		3,100		9,183
Total		7,398		13,800		8,022		14,105
Consumer loans
Single family		$	1,929	$	4,944	$	2,173	$	4,883
Home equity and other		908		2,091		2		1,734
Total		2,837		7,035		2,175		6,617
Total nonaccrual loans		$	10,235	$	20,835	$	10,197	$	20,722

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


	At June 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	$	—		$	—		$	—			$	—		$	—		$	761,754		$	761,754
Multifamily	—			—			—				—			—			1,966,995			1,966,995
Construction/land development
Multifamily construction	—			—			—				—			—			43,300			43,300
Commercial real estate construction	—			—			—				—			—			29,956			29,956
Single family construction	—			—			—				—			—			276,206			276,206
Single family construction to permanent	—			—			—				—			—			134,820			134,820
Total	—			—			—				—			—			3,213,031			3,213,031
Commercial and industrial loans
Owner occupied commercial real estate	—			—			—				4,910			4,910			452,594			457,504
Commercial business	—			—			—				8,890			8,890			566,232			575,122
Total	—			—			—				13,800			13,800			1,018,826			1,032,626
Consumer loans
Single family	1,461			796			9,731			(2)	4,944			16,932			795,355			812,287			(1)
Home equity and other	6			7			—				2,091			2,104			332,475			334,579
Total	1,467			803			9,731				7,035			19,036			1,127,830			1,146,866
Total loans	$	1,467		$	803		$	9,731			$	20,835		$	32,836		$	5,359,687		$	5,392,523
%	0.03		%	0.01		%	0.18		%		0.39		%	0.61		%	99.39		%	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 $5.2 million and $7.1 million of loans at June 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 $13.3 million and $14.7 million at June 30, 2021 and December 31, 2020, respectively.

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


	Quarter Ended June 30, 2021					Six Months Ended June 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	3	$	807	$	—	5	$	1,315	$	—
Payment restructure	2	1,140		—		2	1,140
	5	1,947		—		7	2,455		—



Total loans
Interest rate reduction	3	807		—		5	1,315		—
Payment restructure	2	1,140		—		2	1,140		—
Total	5	$	1,947	$	—	7	$	2,455	$	—


	Quarter Ended June 30, 2020					Six Months Ended June 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	4	1,023		—		15	3,236		—
Payment restructure	6	1,202		—		9	1,656		—
Total	10	2,225		—		24	4,892		—
Total loans
Interest rate reduction	4	1,023		—		15	3,236		—
Payment restructure	6	1,202		—		11	3,459		—

Total	10	$	2,225	$	—	26	$	6,695	$	—

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 June 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	1	$	123	4	$	918


Total	1	$	123	4	$	918


	Six Months Ended June 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	5	$	1,342	10	$	2,199

	5	1,342		10	2,199
Total	6	$	2,020	10	$	2,199

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

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

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

•The modification is short-term

We have elected to apply temporary relief under Section 4013 of the CARES Act to certain eligible 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 June 30, 2021, excluding any SBA guaranteed loans or single family loans that are guaranteed by FHA or VA, the Company has outstanding balances of $56 million on 133 loans that were approved for and are still in forbearance under this program.

NOTE 4–DEPOSITS:

Deposit balances, including stated rates, were as follows:


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

Noninterest-bearing demand deposits	$	1,561,756	—	%	$	1,337,010	—	%
Interest-bearing demand deposits	557,677		0.10	%	484,265		0.10	%
Savings	293,563		0.06	%	264,024		0.07	%
Money market	2,650,564		0.15	%	2,596,453		0.21	%
Certificates of deposit	1,022,967		0.50	%	1,139,807		0.93	%
Total	$	6,086,527	0.16	%	$	5,821,559	0.29	%

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


(in thousands)

Within one year	$	725,238
One to two years	268,035
Two to three years	17,026
Three to four years	8,773
Four to five years	3,646
Thereafter	249
Total	$	1,022,967

The aggregate amount of certificate of deposits in denominations of more than $250 thousand at June 30, 2021 and December 31, 2020 were $113 million and $130 million, respectively. There were $205 million and $210 million of brokered deposits at June 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 June 30, 2021
	Notional amount		Fair value derivatives
(in thousands)			Asset		Liability

Forward sale commitments	$	828,832	$	1,100	$	(1,069)

Interest rate lock commitments	234,046		5,901		(8)
Interest rate swaps	487,816		9,783		(14,143)
Eurodollar futures	725,000		—		(14)
Total derivatives before netting	$	2,275,694	16,784		(15,234)
Netting adjustment/Cash collateral (1)			(4,197)		14,116
Carrying value on consolidated balance sheet			$	12,587	$	(1,118)


	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 $9.9 million and $13.2 million at June 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 June 30, 2021
Derivative assets	$	16,784	$	(4,197)	$	12,587
Derivative liabilities	(15,234)		14,116		(1,118)
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 $9.9 million and $13.2 million at June 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 June 30, 2021 and December 31, 2020, the Company had liabilities of $1.7 million and $3.3 million, respectively, in cash collateral received from counterparties and receivables of $11.6 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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities (1)	$	(7,267)	$	(747)	$	(3,409)	$	4,393
Loan servicing income (loss) (2)	5,024		2,318		(7,567)		22,239
Other (3)	(35)		(222)		264		(716)

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

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

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

The notional amount of open interest rate swap agreements executed with commercial banking customers at June 30, 2021 and December 31, 2020 were $278 million and $246 million, respectively.

NOTE 6–MORTGAGE BANKING OPERATIONS:

LHFS consisted of the following:


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

Single family	$	182,790	$	194,643
Commercial real estate, multifamily and SBA	42,451		167,289
Total	$	225,241	$	361,932

Loans sold consisted of the following for the periods indicated:


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Single family	$	627,282	$	397,150	$	1,200,322	$	707,003
Commercial real estate, multifamily and SBA	138,421		48,622		396,138		331,079
Total	$	765,703	$	445,772	$	1,596,460	$	1,038,082

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


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Single family	$	15,836	$	28,288	$	42,023	$	46,119
Commercial real estate, multifamily and SBA	5,435		1,739		12,707		6,449
Total	$	21,271	$	30,027	$	54,730	$	52,568

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 June 30, 2021		At December 31, 2020

Single family	$	5,699,802	$	5,914,592
Commercial real estate, multifamily and SBA	2,033,126		1,844,241
Total	$	7,732,928	$	7,758,833

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


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Balance, beginning of period	$	1,941	$	2,482	$	2,122	$	2,871
Additions, net of adjustments (1)	(26)		(211)		(46)		(527)
Realized losses (2)	(303)		(188)		(464)		(261)
Balance, end of period	$	1,612	$	2,083	$	1,612	$	2,083

(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 $2.8 million and $3.0 million were recorded in other assets as of June 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 June 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 $57 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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Servicing income, net:
Servicing fees and other	$	9,245	$	7,860	$	18,158	$	15,853
Amortization of single family MSRs(1)	(5,181)		(4,351)		(10,874)		(7,845)
Amortization of multifamily and SBA MSRs	(2,133)		(1,259)		(3,477)		(2,734)
Total	1,931		2,250		3,807		5,274
Risk management, single family MSRs:
Changes in fair value of MSRs due to assumptions (2)	(5,024)		(2,166)		6,439		(19,010)
Net gain (loss) from derivative hedging	5,024		2,318		(7,567)		22,239
Total	—		152		(1,128)		3,229

Loan servicing income	$	1,931	$	2,402	$	2,679	$	8,503

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

(2) Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates, both of which affect future prepayment speeds and cash flow projections.

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


	Quarter Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	62,352	$	49,933	$	49,966	$	68,109
Additions and amortization:
Originations	7,725		4,211		14,341		6,373

Amortization (1)	(5,181)		(4,351)		(10,874)		(7,845)
Net additions and amortization	2,544		(140)		3,467		(1,472)
Changes in fair value assumptions (2)	(5,024)		(1,989)		6,439		(18,833)
Ending balance	$	59,872	$	47,804	$	59,872	$	47,804

(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 June 30,				Six Months Ended June 30,
(rates per annum) (1)	2021		2020		2021		2020

Constant prepayment rate ("CPR") (2)	8.33	%	12.64	%	8.35	%	13.76	%
Discount rate	8.48	%	7.88	%	8.43	%	7.86	%

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

CPRs	8.80% - 17.73%	11.04	%	8.13% - 19.70%	12.81	%
Discount Rates	6.47% - 13.67%	7.78	%	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 June 30, 2021

Fair value of single family MSR	$	59,872
Expected weighted-average life (in years)	5.64
CPR
Impact on fair value of 25 basis points adverse change in interest rates	$	(3,366)
Impact on fair value of 50 basis points adverse change in interest rates	$	(6,677)
Discount rate
Impact on fair value of 100 basis points increase	$	(2,803)
Impact on fair value of 200 basis points increase	$	(5,394)

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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Beginning balance	$	39,626	$	30,120	$	35,774	$	29,494
Origination	1,620		1,648		6,816		3,605
Amortization	(2,133)		(1,185)		(3,477)		(2,516)
Ending balance	$	39,113	$	30,583	$	39,113	$	30,583

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 June 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 June 30, 2021 and December 31, 2020, respectively. There were no actual losses incurred under this arrangement during the quarters and six months ended June 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 $5.7 billion and $6.0 billion as of June 30, 2021 and December 31, 2020, respectively. At June 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 $1.6 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 June 30, 2021
(in thousands)	Fair Value		Level 1		Level 2		Level 3

Assets:
Investment securities AFS
Mortgage backed securities:
Residential	$	37,587	$	—	$	35,115	$	2,472
Commercial	42,738		—		42,738		—
Collateralized mortgage obligations:
Residential	195,334		—		195,334		—
Commercial	143,400		—		143,400		—
Municipal bonds	545,817		—		545,817		—
Corporate debt securities	14,975		—		14,897		78
U.S. Treasury securities	23,586		—		23,586		—

Single family LHFS	182,790		—		182,790		—
Single family LHFI	5,207		—		—		5,207
Single family mortgage servicing rights	59,872		—		—		59,872
Derivatives

Forward sale commitments	1,100		—		1,100		—

Interest rate lock commitments	5,901		—		—		5,901
Interest rate swaps	9,783		—		9,783		—
Total assets	$	1,268,090	$	—	$	1,194,560	$	73,530
Liabilities:
Derivatives
Eurodollar futures	$	14	$	14	$	—	$	—
Forward sale commitments	1,069		—		1,069		—

Interest rate lock commitments	8		—		—		8
Interest rate swaps	14,143		—		14,143
Total liabilities	$	15,234	$	14	$	15,212	$	8


	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 six months ended June 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 six months ended June 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 $5.2 million and $7.1 million at June 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

June 30, 2021
Investment securities AFS	$	2,550	Income approach	Implied spread to benchmark interest rate curve	2.00%	2.00%	2.00%
Single family LHFI	5,207		Income approach	Implied spread to benchmark interest rate curve	3.34%	10.88%	5.44%
Interest rate lock commitments, net	5,893		Income approach	Fall-out factor	1.00%	25.76%	12.46%
				Value of servicing	0.36%	1.46%	1.09%
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 June 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 June 30, 2021
Investment securities AFS	$	2,490	$	—	$	—	$	(48)	$	108	$	2,550
Single family LHFI	4,324		785		—		—		98		5,207
Quarter Ended June 30, 2020
Investment securities AFS	$	2,885	$	—	$	—	$	(48)	$	24	$	2,861
Single family LHFI	4,926		1,667		—		(536)		(210)		5,847
Six Months Ended June 30, 2021
Investment securities AFS	$	2,710	$	—	$	—	$	(96)	$	(64)	$	2,550
Single family LHFI	7,108		1,145		—		(3,191)		145		5,207
Six Months Ended June 30, 2020
Investment securities AFS	$	1,952	$	985	$	—	$	(339)	$	263	$	2,861
Single family LHFI	3,468		3,346		—		(783)		(184)		5,847

(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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020

Beginning balance, net	$	6,488	$	13,502	$	17,392	$	2,223
Total realized/unrealized gains (losses)	7,282		12,266		3,813		28,028
Settlements	(7,877)		(7,801)		(15,312)		(12,284)
Ending balance, net	$	5,893	$	17,967	$	5,893	$	17,967

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 June 30, 2021
LHFI (1)	$	741	$	—	$	—	$	741	$	(62)
At or for the Quarter Ended June 30, 2020
LHFI (1)	$	1,027	$	—	$	—	$	1,027	$	(437)
At or for the Six Months Ended June 30, 2021
LHFI (1)	$	741	$	—	$	—	$	741	$	(62)
At or for the Six Months Ended June 30, 2020
LHFI (1)	$	1,027	$	—	$	—	$	1,027	$	(567)

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

Assets:
Cash and cash equivalents	$	88,471	$	88,471	$	88,471	$	—	$	—
Investment securities HTM	4,221		4,398		—		4,398		—
LHFI	5,327,419		5,398,146		—		—		5,398,146

LHFS – multifamily and other	42,451		42,757		—		42,757		—
Mortgage servicing rights – multifamily	39,113		42,222		—		—		42,222
Federal Home Loan Bank stock	10,724		10,724		—		10,724		—
Other assets - GNMA EBO loans	57,071		57,071		—		—		57,071
Liabilities:
Certificates of deposit	$	1,022,967	$	1,024,499	$	—	$	1,024,499	$	—



Borrowings	50,000		49,996				49,996
Long-term debt	125,932		118,233		—		118,233		—


	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 June 30,				Six Months Ended June 30,
(in thousands, except share and per share data)	2021		2020		2021		2020


Net income	$	29,157	$	18,904	$	58,820	$	26,043


Weighted average shares:
Basic weighted-average number of common shares outstanding	21,057,473		23,330,494		21,345,969		23,509,712
Dilutive effect of outstanding common stock equivalents	230,501		149,351		277,329		160,351
Diluted weighted-average number of common shares outstanding	21,287,974		23,479,845		21,623,298		23,670,063
Net income per share:
Basic earnings per share	$	1.38	$	0.81	$	2.76	$	1.11
Diluted earnings per share	$	1.37	$	0.81	$	2.72	$	1.10

NOTE 10–RESTRUCTURING:

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

The following table summarizes the restructuring charges and the liability for restructuring costs still to be paid in the periods indicated:


(in thousands)	Facility-related costs		Personnel-related costs		Other costs		Total

Quarter ended June 30, 2021 activity


Costs paid or otherwise settled	$	(333)	$	(38)	$	—	$	(371)
Balance, June 30, 2021	$	2,297	$	101	$	—	$	2,398
Quarter ended June 30, 2020 activity

Restructuring charges	$	1,867	$	(12)	$	298	$	2,153
Costs paid or otherwise settled	(1,412)		(109)		(337)		(1,858)
Balance, June 30, 2020	$	1,695	$	171	$	86	$	1,952
Six months ended June 30, 2021 activity



Costs paid or otherwise settled	$	(566)	$	(53)	$	(116)	$	(735)
Balance, June 30, 2021	$	2,297	$	101	$	—	$	2,398
Six months ended June 30, 2020 activity

Restructuring charges	$	2,447	$	135	$	786	$	3,368
Costs paid or otherwise settled	(1,987)		(474)		(859)		(3,320)
Balance, June 30, 2020	$	1,695	$	171	$	86	$	1,952

NOTE 11–SUBSEQUENT EVENT:

On July 29, 2021 the Board authorized a dividend of $0.25 per share, payable on August 24, 2021 to shareholders of record on August 10, 2021. On the same day, the Board approved an expansion of the Company's share repurchase program for up to $15 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, 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			Six Months Ended June 30,
(in thousands, except per share data and FTE data)	June 30, 2021				March 31, 2021			2021			2020

Select Income Statement data:
Net interest income	$	57,972			$	54,517		$	112,489		$	96,930
Provision for credit losses	(4,000)				—			(4,000)			20,469
Noninterest income	28,224				38,833			67,057			69,232
Noninterest expense	52,815				56,608			109,423			112,836
Net income:
Before income taxes	37,381				36,742			74,123			32,857
Total	29,157				29,663			58,820			26,043
Net income per share - diluted	$	1.37			$	1.35		$	2.72		$	1.10

















Select Performance Ratios:
Return on average equity - annualized	16.3		%		16.4		%	16.4		%	7.5		%
Return on average tangible equity - annualized (1)	17.2		%		17.3		%	17.3		%	8.1		%
Return on average assets - annualized	1.59		%		1.65		%	1.62		%	0.75		%
Efficiency ratio (1)	62.8		%		60.0		%	61.3		%	65.4		%
Net interest margin	3.45		%		3.29		%	3.37		%	3.03		%
Other data
Full time equivalent employees	997				1,013			997			987

(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)		June 30, 2021			December 31, 2020

Selected Balance Sheet Data
Loans held for sale		$	225,241		$	361,932
Loans held for investment, net		5,332,626			5,179,886
ACL		59,897			64,294
Investment securities		1,007,658			1,076,364

Total assets		7,167,951			7,237,091
Deposits		6,086,527			5,821,559

Borrowings		50,000			322,800
Long-term debt		125,932			125,838
Total shareholders' equity		708,731			717,750
Other data:
Book value per share		$	34.09		$	32.93
Tangible book value per share (1)		$	32.53		$	31.42
Total equity to total assets		9.9		%	9.9		%
Tangible common equity to tangible assets (1)		9.5		%	9.5		%
Shares outstanding at period end		20,791,659			21,796,904
Loans to deposit ratio		92.3		%	96.3		%

Credit Quality:
ACL to total loans (2)		1.18		%	1.33		%
ACL to nonaccrual loans		287.5		%	310.3		%
Nonaccrual loans to total loans		0.39		%	0.40		%
Nonperforming assets to total assets		0.31		%	0.31		%
Nonperforming assets		$	22,319		$	22,097
Regulatory Capital Ratios:
Bank
Tier 1 leverage ratio		9.95		%	9.79		%
Total risk-based capital		14.36		%	14.76		%
Company
Tier 1 leverage ratio		9.78		%	9.65		%
Total risk-based capital		13.59		%	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. At June 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 1,383 loans with balances of $145 million under the PPP. As of June 30, 2021, PPP outstanding loan balances were $204 million. The loans funded through the PPP program are fully guaranteed by the U.S. government. Through June 30, 2021, cumulative PPP loans forgiven totaled $242 million.

Other Items

As part of our capital management strategy, during the first six months of 2021, we repurchased a total of 1,126,352 shares of our common stock at an average price of $44.39 per share. On July 29, 2021, the Board of Directors approved an expansion of the Company's share repurchase program for up to $15 million of its common stock.

Management's Overview of the Second Quarter 2021 Financial Performance

Second Quarter of 2021 Compared to the First Quarter of 2021

General: Our net income and income before taxes were $29.2 million and $37.4 million, respectively, in the second quarter of 2021, as compared to $29.7 million and $36.7 million, respectively, in the first quarter of 2021. The $0.6 million increase in income before taxes was due to an increase in net interest income, a lower provision for credit losses and lower noninterest expense, partially offset by lower noninterest income.

Income Taxes: Our effective tax rate in the second quarter of 2021 was 22.0% as compared to 19.3% in the first quarter of 2021 and a statutory rate of 23.5%. Our effective tax rate was lower than our statutory rate due to the benefits of tax advantaged investments. Our effective tax rate in the second quarter of 2021 was higher than the first quarter of 2021 due to reductions in taxes on income related to excess tax benefits resulting from the exercise or vesting of stock awards during the first quarter.

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


	Quarter Ended
	June 30, 2021						March 31, 2021
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets:
Loans (1)	$	5,664,187	$	57,265	4.02	%	$	5,605,868	$	53,755	3.85	%
Investment securities (1)	1,032,995		5,677		2.20	%	1,065,423		6,591		2.47	%
FHLB Stock, Fed Funds and other	86,525		159		0.73	%	68,044		172		1.01	%
Total interest-earning assets	6,783,707		63,101		3.70	%	6,739,335		60,518		3.60	%
Noninterest-earning assets	558,568						571,073
Total assets	$	7,342,275					$	7,310,408
Liabilities and shareholders' equity:
Deposits: (2)
Demand deposits	$	540,784	$	186	0.14	%	$	493,831	$	169	0.14	%
Money market and savings	2,958,761		1,058		0.14	%	2,915,005		1,228		0.17	%

Certificates of deposit	1,077,959		1,529		0.57	%	1,180,290		2,253		0.77	%
Total deposits	4,577,504		2,773		0.24	%	4,589,126		3,650		0.32	%
Borrowings:
Borrowings	179,543		142		0.31	%	203,621		161		0.32	%
Long-term debt	125,901		1,360		4.31	%	125,854		1,363		4.33	%
Total interest-bearing liabilities	4,882,948		4,275		0.35	%	4,918,601		5,174		0.42	%
Noninterest-bearing liabilities
Demand deposits (2)	1,541,317						1,433,765
Other liabilities	199,172						226,323
Total liabilities	6,623,437						6,578,689

Shareholders' equity	718,838						731,719
Total liabilities and shareholders' equity	$	7,342,275					$	7,310,408
Net interest income			$	58,826					$	55,344
Net interest rate spread					3.35	%					3.18	%

Net interest margin					3.45	%					3.29	%

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $0.9 million and $0.8 million for the quarters ended June 30, 2021 and March 31, 2021. The estimated federal statutory tax rate was 21% for the periods presented.

(2) Cost of all deposits, including noninterest-bearing demand deposits was 0.18% and 0.25% for the quarter ended June 30, 2021 and March 31, 2021, respectively.

Net interest income was higher in the second quarter of 2021 due to an increase in our net interest margin and a higher level of interest-earnings assets. The higher balances of interest-earning assets were due primarily to an increase in our loan balances. Our net interest margin increased to 3.45% primarily due to a 17 basis point increase in our net interest rate spread. The increase in our net interest rate spread was due to a lower cost of interest-bearing liabilities and higher yields on interest-earning assets. The 10 basis point increase in yield on interest-earning assets was primarily due to increased PPP loan forgiveness, resulting in accelerated amortization of deferred origination fees. The seven basis point decrease in our costs of interest-bearing liabilities was the result of repricing our deposit products to lower market rates, the maturity of higher-rate time deposits and lower borrowing costs.

of our allowance for credit losses in the second quarter of 2021, as compared to no provision for credit losses in the first quarter of 2021.

Noninterest Income consisted of the following for the periods indicated:


	Quarter Ended
(in thousands)	June 30, 2021		March 31, 2021

Noninterest income
Gain on loan origination and sale activities (1)
Single family	$	15,836	$	26,187
Commercial real estate, multifamily and SBA	5,435		7,272
Loan servicing income	1,931		748

Deposit fees	1,997		1,824
Other	3,025		2,802
Total noninterest income	$	28,224	$	38,833

(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)	June 30, 2021		March 31, 2021

Single family servicing income, net
Servicing fees and other	$	3,975	$	3,935
Changes - amortization (1)	(5,181)		(5,693)
Net	(1,206)		(1,758)
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)	(5,024)		11,463
Net gain (loss) from derivatives hedging	5,024		(12,591)
Subtotal	—		(1,128)
Single Family servicing income (loss)	(1,206)		(2,886)

Commercial loan servicing income:
Servicing fees and other	$	5,270	$	4,978
Amortization of capitalized MSRs	(2,133)		(1,344)
Total	3,137		3,634
Total loan servicing income	$	1,931	$	748

(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 second quarter of 2021 as compared to the first quarter of 2021 was due to a $12.2 million decrease in gain on loan origination and sales which was partially offset by a $1.2 million increase in loan servicing income. The decrease in gain on loan origination and sales was primarily due to lower volumes and profit margins on our single family mortgage origination and sales in the second quarter of 2021 as compared to the first quarter of 2021. The increase in loan servicing income was due to improved mortgage servicing rights ("MSRs") risk management results in the second quarter of 2021, as the first quarter of 2021 had unfavorable risk management results for single family MSRs, due in part to unanticipated volatility in the shape of the yield curve.

Noninterest Expense consisted of the following for the periods indicated:


	Quarter Ended
(in thousands)	June 30, 2021		March 31, 2021

Noninterest expense
Compensation and benefits	$	34,378	$	35,835
Information services	6,949		6,784
Occupancy	5,973		6,492
General, administrative and other	5,515		7,497
Total noninterest expense	$	52,815	$	56,608

The $3.8 million decrease in noninterest expense in the second quarter of 2021 as compared to the first quarter of 2021 was primarily due to a reduction in compensation and benefits costs and general, administrative and other costs. The reduction in compensation and benefit costs was due to a $1.1 million decrease in payroll taxes and reduced staffing, partially offset by the impact of merit increases effective in the latter part of the first quarter of 2021. General, administrative and other costs decreased due to a $1.9 million reimbursement of legal costs received from our insurance carrier in the second quarter of 2021.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

General: Our net income and income before taxes were $58.8 million and $74.1 million, respectively, in the six months ended June 30, 2021, as compared to $26.0 million and $32.9 million, respectively, in the six months ended June 30, 2020. The $41.3 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 six months ended June 30, 2021 was 20.6% as compared to 20.7% in the six months ended June 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.


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

Assets:
Interest-earning assets:
Loans (1)	$	5,635,181	$	111,020	3.93	%	$	5,362,124	$	115,166	4.26	%
Investment securities (1)	1,049,091		12,268		2.34	%	1,048,637		11,668		2.23	%
FHLB Stock, Fed Funds and other	77,315		331		0.85	%	50,865		427		1.68	%
Total interest-earning assets	6,761,587		123,619		3.65	%	6,461,626		127,261		3.91	%
Noninterest-earning assets	564,602						555,346
Total assets	$	7,326,189					$	7,016,972
Interest-bearing liabilities:
Deposits: (2)
Demand deposits	$	517,456	$	355	0.14	%	$	394,148	$	559	0.29	%
Money market and savings	2,936,982		2,285		0.16	%	2,559,373		8,965		0.70	%
Certificates of deposit	1,128,904		3,783		0.68	%	1,323,511		13,572		2.06	%
Total deposits	4,583,342		6,423		0.28	%	4,277,032		23,096		1.08	%
Borrowings:
Borrowings	191,422		303		0.32	%	605,031		2,500		0.82	%
Long-term debt	125,878		2,723		4.32	%	125,690		3,025		0.48	%
Total interest-bearing liabilities	4,900,642		9,449		0.39	%	5,007,753		28,621		1.15	%
Noninterest-bearing liabilities
Demand deposits (2)	1,487,708						1,142,186
Other liabilities	212,664						172,117
Total liabilities	6,601,014						6,322,056
Shareholders' equity	725,175						694,916
Total liabilities and shareholders' equity	$	7,326,189					$	7,016,972
Net interest income			$	114,170					$	98,640
Net interest spread					3.26	%					2.76	%
Net interest margin					3.37	%					3.03	%

(1) Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.7 million in both the six months ended June 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 0.21% and 0.86% for the six months ended June 30, 2021 and 2020, respectively.

Net interest income was higher in the six months ended June 30, 2021 as compared to six months ended June 30, 2020 due to a $300 million increase in interest-earning assets and an increase in our net interest margin from 3.03% in the six months ended June 30, 2020 to 3.37% in the six months ended June 30, 2021. The increase in interest-earning assets was due to the growth of our loan portfolio. The increase in our net interest margin was due to a 50 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 26 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

1.15% in the six months ended June 30, 2020 to 0.39% in the six months ended June 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 $4 million recovery of our allowance for credit losses in the six months ended June 30, 2021. Due to adverse economic conditions related to the COVID-19 pandemic, in the six months ended June 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:


	Six Months Ended June 30,
(in thousands)	2021	2020

Noninterest income
Gain on loan origination and sale activities (1)
Single family		$	42,023	$	46,119
Commercial		12,707		6,449
Loan servicing income		2,679		8,503
Deposit fees		3,821		3,456
Other		5,827		4,705
Total noninterest income		$	67,057	$	69,232

(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:


	Six Months Ended June 30,
(in thousands)		2021		2020

Single family servicing income, net
Servicing fees and other		$	7,910	$	9,233
Changes - amortization (1)		(10,874)		(7,845)
Net		(2,964)		1,388
Risk management, single family MSRs:
Changes in fair value due to assumptions (2)		6,439		(19,010)
Net loss from derivatives hedging		(7,567)		22,239
Subtotal		(1,128)		3,229
Single Family servicing income (loss)		(4,092)		4,617

Commercial loan servicing income:
Servicing fees and other		10,248		6,620
Amortization of capitalized MSRs		(3,477)		(2,734)
Total		6,771		3,886
Total loan servicing income		$	2,679	$	8,503

(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 six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was due to a decrease in loan servicing income, which was partially offset by an increase in gain on loan origination and sale activities. The $2.2 million increase in gain on loan origination and sale activities was due to increased volume and gain on sale margins of multifamily loans, partially offset by lower single family rate locks. The $5.8 million decrease in loan servicing income was due to increased amortization of single family MSRs due to higher levels of prepayments and a $4.4 million decrease in risk management results for single family MSRs which was partially offset by a $2.9 million increase in commercial loan servicing income due to an increase in prepayment fees. The decrease in the risk management results reflected the benefits realized in the six months ended June 30, 2020 related to the high levels of volatility in market interest rates that occurred at the start of the COVID-19 pandemic and the costs recognized in the six months ended June 30, 2021 due in part to unanticipated volatility in the shape of the yield curve.

Noninterest Expense consisted of the following for the periods indicated:


	Six Months Ended June 30,
(in thousands)	2021	2020

Noninterest expense
Compensation and benefits		$	70,213	$	66,859
Information services		13,733		14,929
Occupancy		12,465		14,728
General, administrative and other		13,012		16,320
Total noninterest expense		$	109,423	$	112,836

The $3.4 million decrease in noninterest expense in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 was due to lower information services expense, occupancy expense and general, administrative and other expenses, which were partially offset by higher compensation and benefits costs. The higher compensation and benefits costs were due to increased commissions and incentives on higher loan production in the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The decrease in information services costs is primarily related to the renegotiation of our core system processing contract. The decrease in occupancy expenses was due to lower rent expense as a result of a reduction in rental space and $1.8 million impairment related to vacant rental space recognized in the six months ended June 30, 2020, with no similar charges in 2021. The decrease in general, administrative and other costs primarily relates to a $1.9 million reimbursement of legal costs received from our insurance carrier in the second quarter of 2021.

Financial Condition

During the six months ended June 30, 2021, total assets decreased by $69 million as decreases in investments, loans held for sale and other assets were partially offset by a $153 million increase in loans held for investment. Loans held for investment increased due to $1.7 billion of originations, which were partially offset by prepayments and scheduled payments of $1.3 billion and loan sales of $247 million. Total liabilities decreased primarily due to a $273 million decrease in borrowings, which was partially offset by a $265 million increase in deposits. 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 June 30, 2021, our ratio of nonperforming assets to total assets remained low at 0.31% while our ratio of total loans delinquent over 30 days to total loans was 0.61%. The Company recorded a $4 million recovery of our allowance for credit losses for the six months ended June 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 June 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		118	$	65,128	118	$	65,128	—	$	—
CRE owner occupied		28	70,295		28	70,295		—	—
CRE nonowner occupied		15	61,883		13	43,974		2	17,909

Total		161	$	197,306	159	$	179,397	2	$	17,909

Single family and consumer (1)
Single family								93	$	33,793
HELOCs and consumer								38	4,774
Total								131	$	38,567

(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 June 30, 2021, three of these loans with $18 million in balances were still operating under the terms of their modification.

(3) There were no forbearances initiated in the second 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 June 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 June 30, 2021 are scheduled to be completed in the third 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 June 30, 2021				At December 31, 2020
(in thousands)	Amount		Rate (1)		Amount		Rate (1)

Commercial real estate loans
Non-owner occupied commercial real estate	$	9,077	1.19	%	$	8,845	1.07	%
Multifamily	7,245		0.37	%	6,072		0.43	%
Construction/land development
Multifamily construction	500		1.15	%	4,903		4.25	%
Commercial real estate construction	2,022		6.75	%	1,670		6.12	%
Single family construction	5,653		2.05	%	5,130		1.98	%
Single family construction to permanent	1,047		0.78	%	1,315		0.87	%
Total	25,544		0.80	%	27,935		0.99	%
Commercial and industrial loans
Owner occupied commercial real estate	5,518		1.21	%	4,994		1.08	%
Commercial business	15,874		4.36	%	17,043		4.72	%
Total	21,392		2.61	%	22,037		2.67	%
Consumer loans
Single family	7,163		1.02	%	6,906		0.85	%
Home equity and other	5,798		1.74	%	7,416		1.83	%
Total	12,961		1.25	%	14,322		1.18	%
Total ACL	$	59,897	1.18	%	$	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 June 30, 2021 and December 31, 2020, the Bank had available borrowing capacity of $908 million and $550 million, respectively, from the FHLB, and $430 million and $406 million, respectively, from the Federal Reserve Bank of San Francisco and $1.4 billion and $1.2 billion under borrowing lines established with other financial institutions.

Cash Flows

For the six months ended June 30, 2021, cash and cash equivalents increased by $30 million compared to an increase of $8 million during the six months ended June 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 six months ended June 30, 2021, net cash of $55 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 six months ended June 30, 2020, net cash of $145 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 six months ended June 30, 2021, net cash of $44 million was provided by investing activities primarily from principal payments and the proceeds from the sale of LHFI and AFS securities, which were partially offset by the origination of LHFI and the purchase of AFS securities For the six months ended June 30, 2020, net cash of $371 million was used by investing activities, primarily due to the purchase of investment securities, the origination of loans net of principal payments, partially offset by proceeds from the sale of loans originated as LHFI and investment securities and principal repayments 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 six months ended June 30, 2021, net cash of $69 million was used in financing activities, primarily due to net repayment of short-term borrowings, repurchases of and dividends paid on our common stock, which was partially offset by growth in deposits. For the six months ended June 30, 2020, net cash of $525 million was provided by financing activities, primarily due to net proceeds on 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 June 30, 2021		At December 31, 2020

Unused consumer portfolio lines	$	380,906	$	389,122
Commercial portfolio lines (1)	718,235		656,065
Commitments to fund loans	55,198		68,345


Total	$	1,154,339	$	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 $475 million and $395 million at June 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 June 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)	$	709,419	9.78	%	$	290,099	4.0	%	NA		NA
Common equity Tier 1 capital (to risk-weighted assets)	649,419		11.41	%	256,215		4.5	%	NA		NA
Tier 1 risk-based capital (to risk-weighted assets)	709,419		12.46	%	341,620		6.0	%	NA		NA
Total risk-based capital (to risk-weighted assets)	773,779		13.59	%	455,494		8.0	%	NA		NA
HomeStreet Bank
Tier 1 leverage capital (to average assets)	$	713,225	9.95	%	$	286,821	4.0	%	$	358,526	5.0	%
Common equity Tier 1 capital (to risk-weighted assets)	713,225		13.18	%	243,525		4.5	%	351,759		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	713,225		13.18	%	324,701		6.0	%	432,934		8.0	%
Total risk-based capital (to risk-weighted assets)	776,944		14.36	%	432,934		8.0	%	541,168		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 June 30, 2021, capital conservation buffers for the Company and the Bank were 5.59% and 6.36%, respectively.

The Company paid a quarterly cash dividend of $0.25 per common share in each of the first and second quarters of 2021. It is our current intention to continue to pay quarterly dividends, and on July 29, 2021 we declared another cash dividend of $0.25 per common share payable on August 24, 2021 to shareholders of record as of the close of business on August 10, 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 June 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 six months ended June 30,
(in thousands)	June 30, 2021			March 31, 2021				2021			2020

Return on average tangible equity (annualized)
Average shareholders' equity	$	718,838		$	731,719			$	725,175		$	694,916
Less: Average goodwill and other intangibles	(32,487)			(32,777)				(32,631)			(33,955)
Average tangible equity	$	686,351		$	698,942			$	692,544		$	660,961

Net income	$	29,157		$	29,663			$	58,820		$	26,043
Adjustments (tax effected)
Amortization on core deposit intangibles	229			236				465			549
Tangible income applicable to shareholders	$	29,386		$	29,899			$	59,285		$	26,592
Ratio	17.2		%	17.3		%		17.3		%	8.1		%



Efficiency ratio
Noninterest expense
Total	$	52,815		$	56,608			$	109,423		$	112,836
Adjustments:
Restructuring related charges	—			—				—			(3,368)
Legal fees recovery	1,900			—				1,900			—
Prepayment fee on FHLB advances	—			—				—			—
State of Washington taxes	(602)			(579)				(1,181)			(1,187)
Adjusted total	$	54,113		$	56,029			$	110,142		$	108,281

Total revenues
Net interest income	$	57,972		$	54,517			$	112,489		$	96,930
Noninterest income	28,224			38,833				$	67,057		$	69,232
Adjustments
Contingent payout	—			—				—			(566)
Adjusted total	$	86,196		$	93,350			$	179,546		$	165,596

Ratio	62.8		%	60.0		%		61.3		%	65.4		%


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

Tangible book value per share
Shareholders' equity	$	708,731		$	717,750
Less: goodwill and other intangibles	(32,295)			(32,880)
Tangible shareholder's equity	$	676,436		$	684,870
Common shares outstanding	20,791,659			21,796,904
Computed amount	$	32.53		$	31.42

Tangible common equity to tangible assets
Tangible shareholder's equity (per above)	$	676,436		$	684,870
Tangible assets
Total assets	7,167,951			7,237,091
Less: Goodwill and other intangibles	(32,295)			(32,880)
Net	$	7,135,656		$	7,204,211
Ratio	9.5		%	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 June 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	$	88,471		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	88,471
FHLB Stock	2,096			—			—			—			—			—			8,628			—		10,724
Investment securities (1)	123,579			22,035			46,349			102,498			112,590			438,063			162,544			—		1,007,658
LHFS	225,241			—			—			—			—			—			—			—		225,241
LHFI (1)	1,173,247			394,187			598,080			1,115,974			1,258,035			837,172			15,828			—		5,392,523
Total	1,612,634			416,222			644,429			1,218,472			1,370,625			1,275,235			187,000			—		6,724,617
Non-interest-earning assets	—			—			—			—			—			—			—			443,334		443,334

Total assets	$	1,612,634		$	416,222		$	644,429		$	1,218,472		$	1,370,625		$	1,275,235		$	187,000		$	443,334	$	7,167,951
Interest-bearing liabilities:
Demand deposit accounts (2)	$	557,677		$	—		$	—		$	—		$	—		$	—		$	—		$	—	$	557,677
Savings accounts (2)	293,563			—			—			—			—			—			—			—		293,563
Money market accounts (2)	2,650,564			—			—			—			—			—			—			—		2,650,564
Certificates of deposit	126,405			365,996			232,837			285,061			12,419			—			249			—		1,022,967

FHLB advances	50,000			—			—			—			—			—			—			—		50,000

Long-term debt (3)	60,932			—			—			—			65,000			—			—			—		125,932
Total	3,739,141			365,996			232,837			285,061			77,419			—			249			—		4,700,703
Non-interest bearing liabilities	—			—			—			—			—			—			—			1,758,517		1,758,517

Shareholders' Equity	—			—			—			—			—			—			—			708,731		708,731
Total liabilities and shareholders' equity	$	3,739,141		$	365,996		$	232,837		$	285,061		$	77,419		$	—		$	249		$	2,467,248	$	7,167,951
Interest sensitivity gap	$	(2,126,507)		$	50,226		$	411,592		$	933,411		$	1,293,206		$	1,275,235		$	186,751
Cumulative interest sensitivity gap
Total	$	(2,126,507)		$	(2,076,281)		$	(1,664,689)		$	(731,278)		$	561,928		$	1,837,163		$	2,023,914
As a % of total assets	(30)		%	(29)		%	(23)		%	(10)		%	8		%	26		%	28		%
As a % of cumulative interest-bearing liabilities	43		%	49		%	62		%	84		%	112		%	139		%	143		%

(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 June 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 June 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 June 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	5.4	%	(11.1)	%	3.5	%	(9.3)	%
+100	2.2	%	(6.0)	%	1.2	%	(4.3)	%
-100	(3.6)	%	(2.5)	%	(3.8)	%	(3.7)	%
-200	(4.9)	%	(7.6)	%	(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 June 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 June 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 June 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 June 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 June 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 June 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

April	—	$	—	$	25,000
May	565,356	44.22		—
June	—	—		—
Total	565,356	$	44.22

Sales of Unregistered Securities

There were no sales of unregistered securities during the second 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 August 6, 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)