HomeStreet Annual Report 2017

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FY2017 Annual Report · HomeStreet

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outside back cover

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Home Ofﬁce
601 Union Street, Suite 2000
Seattle, WA 98101

206.623.3050
800.654.1075
ir.homestreet.com

Investor Relations
ir@homestreet.com
206.389.6303

2017 Annual Report to Shareholders

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HomeStreet, Inc., a Washington corporation, is a diversified financial services company founded in 1921,
headquartered in Seattle, Washington which serves customers primarily in the western United States, including
Hawaii. We are principally engaged in commercial and consumer banking and real estate lending, including
commercial real estate and single family mortgage banking operations. Our primary subsidiaries are
HomeStreet Bank and HomeStreet Capital Corporation.

HomeStreet Bank is a Washington state-chartered commercial bank that provides commercial, consumer and
mortgage loans, deposit products, other banking services, non-deposit investment products, private banking and
cash management services. Our loan products include commercial business loans, agriculture loans, consumer
loans, single family residential mortgages, loans secured by commercial real estate and construction loans for
residential and commercial real estate projects. We also offer single family home loans through our partial
ownership of WMS Series LLC, an affiliated business arrangement with various owners of Windermere Real Estate
Company franchises whose home loan businesses are known as Penrith Home Loans (some of which were
formerly known as Windermere Mortgage Services).

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

Doing business as HomeStreet Insurance Agency, we provide insurance products and services for consumers.

1 DUS® is a registered trademark of Fannie Mae

Retail deposit branches (59)

Primary stand-alone
home loan centers (44)

Primary stand-alone
commercial lending centers (3)

Primary stand-alone commercial
real estate lending center (1)

Primary stand-alone residential
construction lending center (2)

Primary stand-alone
insurance ofﬁce (1)

SEATTLE
METRO

WASHINGTON

OREGON

IDAHO

HAWAII

NEVADA

CALIFORNIA

UTAH

ARIZONA

SOUTHERN
CALIFORNIA

Board of Directors1

Mark K. Mason, Chairman
Scott M. Boggs, Lead Director
David A. Ederer, Chairman Emiritus
Victor H. Indiek
Thomas E. King

Executive Ofﬁcers

Mark K. Mason
Chairman, President
and Chief Executive Officer 2,3

Mark R. Ruh
Executive Vice President
and Chief Financial Officer 2,3,4

Rose Marie David
Senior Executive Vice President,
Mortgage Lending Director 3

David Straus
Senior Executive Vice President,
Commercial Banking 3

George “Judd” Kirk
Mark R. Patterson
Douglas I. Smith
Donald R. Voss

Jay C. Iseman
Executive Vice President,
Chief Credit Officer 2,3

Paulette Lemon
Executive Vice President,
Retail Banking Director 3

Edward C. Schultz
Executive Vice President,
Director of Commercial Banking 3

Pamela J. Taylor
Executive Vice President,
Human Resources Director 2,3

Richard W. H. Bennion
Executive Vice President,
Residential Construction and Affiliated Businesses 3

Jeff Todhunter
Executive Vice President,
Residential Construction Lending Director 3

William D. Endresen
Executive Vice President,
Commercial Real Estate and
Commercial Capital President 3

Godfrey B. Evans
Executive Vice President, General Counsel,
Chief Adminstrative Officer and Corporate Secretary 2,3

Troy Harper
Executive Vice President,
Chief Information Officer 2,3

General Corporate and Shareholders’ Information

Home Office
601 Union Street, Suite 2000
Seattle, WA 98101
206.623.3050

Stock Transfer Agent
Broadridge Financial Solutions
51 Mercedes Way
Edgewood, NY 11717
720.414.6867
E-mail: shareholder@broadridge.com
Shareholder portal:
http://shareholder.broadridge.com/hmst

Darrell S. van Amen
Executive Vice President,
Chief Investment Officer and Treasurer 2,3

Mary L. Vincent
Executive Vice President,
Chief Risk Officer 2,3

1 Members of the Board of HomeStreet, Inc. are also members of the Board of

HomeStreet Bank.

2 HomeStreet, Inc.
3 HomeStreet Bank
4 Mark Ruh was the interim CFO from 4/24/2017 to 9/10/2017, and the CFO

starting on 9/11/2017.

Annual Meeting
The annual meeting of the shareholders will be held
on May 24, 2018, at 10:00 am, Pacific Daylight Time.

Hilton Hotel (downtown Seattle)
1301 Sixth Avenue
Seattle, WA 98101

Independent Accountants
Deloitte, LLP
Seattle, WA

The number of offices listed above does not include satellite offices with a limited number of staff who report to a manager located in a separate
primary office.

HomeStreet, Inc. trades on the Nasda Global Select Market under the symbol HMST.

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To our fellow Shareholders,

Thank you for your investment in HomeStreet. 2017 was a year of meeting challenges: we grew our Commercial
and Consumer Banking business in a very competitive environment , further diversifying our earnings; and we
restructured our mortgage operations to better align origination capacity and our cost structure with falling demand
for mortgages, as interest rates rose and housing inventories in our primary markets contracted.

We are proud of the results our strategic plan has shown to date. This plan has transformed HomeStreet from a
troubled thrift into a regional community bank with a diversiﬁ ed array of products and services and has produced
substantial growth and shareholder value since our IPO in 2012.

The primary components of our strategic plan are to:

•

Grow and diversify earnings by expanding our Commercial and Consumer Banking business;

Focus growth in major western metropolitan markets;

Maintain strong credit qualit y through strict underwriting guidelines and actively monitoring the
economi c health of our markets; and

Invest in proﬁ table growt h through growing revenues faster than operating expenses.

Our Commercial and Consumer Banking business grew in 2017 , primarily through organic growth but also through
our acquisition of a retail deposit branch and relate d deposits in El Cajon, California, which brought approximately
$21.5 million in customer deposits. During 2017, we also opened three de novo retail deposit branches in Baldwin
Park, California and Spokane and Redmond, Washington. These branches should aid us in continuing to fund our
growth and increase market share for our products and services.

HomeStreet’s Mortgage Banking business remains an important part of our heritage an d the Company’s business
strategy going forward. We believe tha t our 2017 restructuring has aligned our cost structure with our current
production opportunities and wil l allow the Mortgage Banking Segment t o achieve levels of expected proﬁ tabilit y
available in our markets today. Our retail focus, broad product mix, and competitive pricing have continued to attract
some of the best retail originators in our markets and reinforce our position as a market-leading mortgage originator
and servicer.

Highlights from 2017 include:

•

Our Commercial and Consumer Banking Segment increased net income from $30.8 million in 2016 to
$42.1 million in 2017 driven primarily by an 18% increase in loans held for investment as compared to
2016, all of which was from organic growth.

Loans held for investment grew to $4.53 billion, an increase of $680.2 million from $3.85 billion at
year-end 2016.

Increased net gain on the sale of commercial real estate and SBA loans contributed to 19% growth in
non-interest income in our Commercial and Consumer Banking Segment during the year.

Asset quality continued to be strong, with nonperforming assets decreasing to 0.23% of total assets,
representing our lowest absolute and relative levels of problem assets since 2006.

• While the results of our Mortgage Banking Segment continued to be adversely impacte d by rising

interest rates and the limited supply of new and resale housing in our primary markets, we began to see
the beneﬁ ts of the restructuring we implemented in 2017.

•

Direct origination expenses are lower, and the successful implementation of our new loan
origination system during 2017 should create opportunities for additional operating effi ciencies
going forward.

• We continue to focus on optimizing our mortgage banking capacity within our existing geographic
footprint and remain committed to being a leading mortgage originator and servicer in our
markets.

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•

The Tax Cuts and Jobs Act legislation enacted in December 2017 resulted in the recognition of a
one-time, non-cash tax beneﬁ t of $23.3 million for 2017; our 2018 estimated consolidated eff ective tax
rate is projected to be between 21% and 22%.

• We placed 80th on Fortune Magazine’s 100 Fastest Growing Companies list of 2017.

Looking forward, the Board of Directors and management team at HomeStreet are focused on ensuring that we have
sound corporate governance policies in place to protect the interests of all shareholders. As part of this commitment,
the Board regularly reviews the skills, experience, and performance of its members and management to ensure that
th ey are well-positioned to lead the Company for the beneﬁ t of all shareholders. To this end, we recently appointed
a new director, Mark Patterson. Mark brings valuable perspectives as a sophisticated institutional investor with
extensive operational experience in the ﬁ nancial services sector, as well as intimate knowledge of HomeStreet as a
substantial individual shareholder.

We have also commenced a public search for an additional qualiﬁ ed candidate for the Board who meets the stated
diversity goals set out in the Company’s Principles of Corporate Governance. We have met with some highly
qualiﬁ ed candidates and expect to be able to appoint that additional director this year.

We are very proud of the hard work and dedication of our employees in ach ieving many of our str ategic goals
in 2017. The Board of Directors, management, and our great employees are excited to work together to enhance
shareholder value through continuing our g rowth, maintaining low credit risk, improving ope rating effi ciency,
serving our clients, giving back to our communities, and being a great place to work.

Finally, I want to thank you, our shareholders, for your continued support and conﬁ dence in our company.

Mark K. Mason
Chairman, President, & Chief Executive Offi cer
HomeStreet, Inc.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this letter are “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
including statements relating to the impact of new branches on our growth and market share, the eff ects of our
2017 restructuring, the eff ects of implementation of our new loan origination system, our 2018 estimated tax rate
and the expected timing of the appointment of a new director to our board. When used in this letter, terms such
as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predicts,” “should” or “will” or the negative of those terms or other comparable terms are intended to identify
forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors
that may cause us to fall short of our expectations or may cause us to deviate from our current plans, as expressed or
implied by these statements. The known risks that could cause our results to diff er, or may cause us to take actions
that are not currently planned or expected, are described in the Company’s reports and ﬁ lings with the Securities
and Exchange Commission including, without limitation, the Company’s Annual Report on Form 10-K for the year
ended December 31, 2017, under the heading Item 1A — “Risk Factors.” Unless required by law, the Company
does not intend, and undertakes no obligation, to update or publicly release any revision to any forward-looking
statements, whether as a result of the receipt of new information, the occurrence of subsequent events, the change
of circumstance or otherwise. Each forward-looking statement contained in this letter is speciﬁ cally qualiﬁ ed in its
entirety by the aforementioned factors. Readers are cautioned not to place undue reliance on these forward-looking
statements, which apply only as of the date of this letter.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________

FORM 10-K
_____________

(Mark One)

(cid:54) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the ﬁ scal year ended December 31, 2017
OR
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
Commission ﬁ le number: 001-35424
_________________________________
HOMESTREET, INC.
(Exact name of registrant as speciﬁ ed in its charter)
_________________________________

Washington
(State or other jurisdiction of
incorporation or organization)

91-0186600
(I.R.S. Employer
Identiﬁcation Number)

601 Union Street, Ste. 2000
Seattle, WA 98101
(Address of principal executive offi ces) (Zip Code)
Registrant’s telephone number, including area code: (206) 623-3050
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, no par value

Name of each exchange on which registered
Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None.
_________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁ ned in Rule 405 of the Securities Act. Yes (cid:133) No (cid:54)
Indicate by check mark if the registrant is not required to ﬁ le reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:54)
Indicate by check mark whether the Registrant (1) has ﬁ led all reports required to be ﬁ led 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 ﬁ le such reports), and (2) has been subject to such ﬁ ling
requirements for the past 90 days. Yes (cid:54) No (cid:133)
Indicate by check mark if disclosure of delinquent ﬁ lers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant’s knowledge, in deﬁ nitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.(cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such ﬁ les). Yes (cid:54) No (cid:133)
Indicate by check mark whether the registrant is a large accelerated ﬁ ler, an accelerated ﬁ ler, a non-accelerated ﬁ ler, a smaller reporting company or
an emerging growth company. See the deﬁ nitions of “large accelerated ﬁ ler,” “accelerated ﬁ ler”, “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act. (Check one):

(cid:133)
(cid:133) (Do not check if a smaller reporting company)
(cid:133)

Large accelerated ﬁler
Non-accelerated ﬁler
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 ﬁ nancial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:133)
Indicate by check mark whether the registrant is a shell company (as deﬁ ned in Rule 12b-2 of the Act). Yes (cid:133) No (cid:54)
As of June 30, 2017, the last business day of the registrant’s most recently completed second ﬁ scal quarter, the aggregate market value of common stock
held by non-affi liates was approximately $635.4 million, based on a closing price of $27.68 per share of common stock on the Nasdaq Global Select
Market on such date. Shares of common stock held by each executive offi cer and director and by each person known to the Company who beneﬁ cially
owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be
affi liates. This determination of executive offi cer or affi liate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock as of March 2, 2018 was 26,941,533.6.

Accelerated ﬁler
(cid:54)
Smaller reporting company (cid:133)

DOCUMENTS INCORPORATED BY REFERENCE
Certain information that will be contained in the deﬁ nitive proxy statement for the registrant’s annual meeting to be held in May 2018 is incorporated by
reference into Part III of this Form 10-K.

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PART 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1
ITEM 1A RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2
ITEM 3
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4 MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ITEM 6
ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
ITEM 9
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . .
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

1
1
2
19
38
38
39
39
40

40
42

45
96
100

180
180
181
182
182
182

AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

182

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTIFICATIONS
EXHIBIT 21
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

183
183
184
184
188

Unless we state otherwise or the content otherwise requires, references in this Annual Report on Form 10-K 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.

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FORWARD-LOOKING STATEMENTS

PART I

This Annual Report on Form 10-K (“Form 10-K”) and the documents incorporated by reference contain, in addition
to historical information, “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). including statements relating to projections of revenues, estimated operating expenses or other
ﬁ nancial items; management’s plans and objectives for future operations or programs; future operations, plans,
regulatory compliance or approvals; expected cost savings from restructuring or resource optimization activities;
proposed new products or services; expected or estimated performance of our loan portfolio; pending or potential
expansion activities; pending or future mergers, acquisitions or other transactions; future economic conditions or
performance; and underlying assumptions of any of the foregoing.

All statements other than statements of historical fact are “forward-looking statements” for the purpose of these
provisions. When used in this Form 10-K, terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of those terms or other
comparable terms are intended to identify such forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause us to fall short of our expectations or may cause us to
deviate from our current plans, as expressed or implied by these statements. The known risks that could cause our
results to diff er, or may cause us to take actions that are not currently planned or expected, are described below and
in Item 1A, Risk Factors.

Unless required by law, we do not intend to update any of the forward-looking statements after the date of this
Form 10-K to conform these statements to actual results or changes in our expectations. Readers are cautioned not to
place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K.

Except as otherwise noted, references to “we,” “our,” “us” or “the Company” refer to HomeStreet, Inc. and its
subsidiaries that are consolidated for ﬁ nancial reporting purposes.

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ITEM 1 BUSINESS

General

HomeStreet, Inc. (together with its consolidated subsidiaries, “HomeStreet,” the “Company,” “we,” “our” or “us”),
a Washington corporation, is a diversiﬁ ed ﬁ nancial services company founded in 1921, headquartered in Seattle,
Washington which serves customers primarily in the western United States, including Hawaii. We are principally
engaged in commercial and consumer banking and real estate lending, including commercial real estate and single
family mortgage banking operations. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital
Corporation.

HomeStreet Bank (the “Bank”) is a Washington state-chartered commercial bank that provides commercial,
consumer and mortgage loans, deposit products, other banking services, non-deposit investment products, private
banking and cash management services. Our loan products include commercial business loans, agriculture loans,
consumer loans, single family residential mortgages, loans secured by commercial real estate and construction
loans for residential and commercial real estate projects. We also off er single family home loans through our partial
ownership of WMS Series LLC, an affi liated business arrangement with various owners of Windermere Real Estate
Company franchises whose home loan businesses are known as Penrith Home Loans (some of which were formerly
known as Windermere Mortgage Services).

Doing business as HomeStreet Insurance Agency, we provide insurance products and services for consumers.

Shares of our common stock are traded on the Nasdaq Global Select Market under the symbol “HMST.” We also
have outstanding $65.0 million in aggregate principal amount of 6.5% senior notes due 2026, of which $64.8 million
in aggregate principal amount is registered pursuant to Section 15(d) of the Securities Exchange Act of 1934, as
amended.

At December 31, 2017, we had total assets of $6.74 billion, net loans held for investment of $4.51 billion, deposits
of $4.76 billion and shareholders’ equity of $704.4 million. Our operations are currently grouped into two reportable
segments: our Commercial and Consumer Banking Segment and our Mortgage Banking Segment.

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

Since our initial public off ering (“IPO”) in February 2012, we have grown considerably, from 20 retail deposit
branches, nine stand-alone home loan centers and 553 full-time employees at the time of our IPO to 59 retail
deposit branches, six stand-alone commercial lending centers, 44 primary stand-alone home loan centers and 2,419
employees as of December 31, 2017. We experienced considerable success in our single family mortgage banking
business from 2012 through the ﬁ rst half of 2016 and used a substantial portion of the income generated by those
operations to restart and grow our commercial lending operations, which had been largely shuttered during the
recession. We believe the strategic development of our consumer and commercial banking operations will help to
off set the volatility of our mortgage business which, while being a core part of our overall operations, is historically
cyclical and seasonal. In 2016 we converted the charter of HomeStreet Bank from a Washington state chartered
savings bank to a Washington state chartered commercial bank.

At December 31, 2017, our 59 retail deposit branches were located in the State of Washington, Southern California,
the Portland, Oregon area and the State of Hawaii, and our 44 primary stand-alone home loan centers and six
primary commercial lending centers were located within our retail deposit branch footprint as well as in Phoenix,
Arizona; Northern California (including the San Francisco Bay Area); Eugene, Salem and Bend, Oregon; Boise and
northern Idaho; and Salt Lake City, Utah. An affi liated business arrangement, WMS Series LLC, doing business as
Penrith Home Loans, provides point-of-sale loan origination services at certain Windermere Real Estate offi ces in

DUS® is a registered trademark of Fannie Mae

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Washington and Oregon, and two stand-alone offi ces. We also have one stand-alone insurance agency offi ce located
in Spokane, Washington. The number of lending offi ces listed above does not include satellite offi ces with a limited
number of staff who report to a manager located in a separate primary offi ce.

Commercial and Consumer Banking. We provide diversiﬁ ed ﬁ nancial products and services to our commercial
and consumer customers through bank branches, lending centers, ATMs, online, mobile and telephone banking.
These products and services include deposit products; residential, consumer, business and agricultural portfolio
loans; non-deposit investment products; insurance products and cash management services. We originate
construction loans, bridge loans, and permanent loans for the

Company’s portfolio on single family residences, and on offi ce, retail, industrial and multifamily properties. We also
have a commercial lending team specializing in U.S. Small Business Administration (“SBA”) lending. We pool a
portion of our permanent commercial real estate loans, primarily up to $10 million in principal amount, to sell into
the secondary market. We also originate multifamily real estate loans for Fannie Mae under the DUS® Program,
whereby loans are sold to or securitized by Fannie Mae, while we generally retain the servicing rights. This segment
is also responsible for managing our investment securities portfolio.

Mortgage Banking. We originate single family residential mortgage loans for sale in the secondary markets
and perform mortgage servicing on a substantial portion of those loans. The majority of our mortgage loans are
sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans.
We are a rated originator and servicer of jumbo nonconforming mortgage loans, allowing us to sell the loans
we originate to other entities for inclusion in securities. Additionally, we purchase loans from WMS Series LLC
through a correspondent arrangement. We also sell loans on a servicing-released and servicing-retained basis to
securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders or sold on a
servicing-released basis to correspondent lenders. On occasion, we may sell a portion of our mortgage servicing
rights (“MSR”) portfolio. We hedge the loan funding and the interest rate risk associated with the secondary market
loan sales and the retained single family mortgage servicing rights using a combination of risk management tools.

Investing in Growth

Our IPO, in February 2012, was part of a plan by our management team to transform HomeStreet from a troubled
thrift institution to a regional community bank. Operating under cease and desist orders from our primary regulators,
management instituted a plan in 2009 to reduce troubled assets in a strategic and measured way, in order to return
the Bank to proﬁ tability and raise capital. Our successful IPO restored the institution’s Well-Capitalized status with
our regulators and supported growth in our banking operations. In the same quarter that we completed our IPO, we
were able to take advantage of a competitor’s exit from the single family mortgage lending market to hire highly
experienced management talent and loan production and operations personnel, doubling the size of our single
family mortgage lending operation during 2012. This hiring opportunity positioned the Bank to take advantage of
a resurgence in mortgage borrowing in our primary markets and to expand our business into Northern California,
increasing both our market share and our market footprint. Resolution of our regulatory concerns and increased
income from our mortgage lending operations allowed us to focus on growing our commercial and consumer
banking operations, geographic footprint and expertise.

We began opening de novo branches to expand our retail deposit branch network and increase our core deposit base,
while off ering expanded community banking products and services. We have also grown and diversiﬁ ed the Bank
through acquisitions of whole banks and retail deposit branches in attractive growth markets on the West Coast,
to increase our scale in existing markets and to enter new markets where we can leverage our existing network
of single family home loan centers. Our acquisitions have accelerated our growth of interest earning commercial
banking assets, strengthened our core deposit base, increased our geographic diversiﬁ cation and added experienced
commercial and consumer banking professionals in key target markets. We evaluate acquisition opportunities
using certain ﬁ nancial criteria, including: (1) the acquisition must meet a minimum internal rate of return; (2) the
return on invested capital must exceed our cost of capital; (3) the acquisition must provide suffi cient earnings to be
immediately accretive to earnings per share; and (4) the acquisition must off set the initial dilution of tangible book
value within four years.

We made our ﬁ rst two whole bank acquisitions — Fortune Bank (“Fortune”) and Yakima National Bank
(“YNB”) — simultaneously in the fall of 2013. The Fortune acquisition increased our commercial business loan
portfolio and added experienced commercial lending offi cers and managers in the Seattle area. The YNB acquisition

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expanded our retail and commercial presence into Eastern Washington. We also acquired two branches and certain
related assets in the Seattle metropolitan area from another commercial bank, further increasing our consumer
banking presence in our home market.

The next acquisition was Simplicity Bancorp, Inc. (“Simplicity”) and its subsidiary, Simplicity Bank, which
we acquired by merger on March 1, 2015. Through this acquisition we leveraged our existing home loan center
network in Southern California by adding seven retail deposit branches and related branch and loan production
staff in the Los Angeles area. We had already expanded our home loan operations into Southern California by
adding stand-alone home loan centers and a dedicated home loan processing center in that area. The Simplicity
acquisition gave our Southern California operations a signiﬁ cant retail deposit customer base, reduced our reliance
on time deposits and increased our portfolios of multifamily and single family mortgages and consumer loans.
Interest-earning assets of $803.7 million (including $664.1 million of loans) and $651.2 million of deposits were
added to the Bank from the Simplicity merger.

Alongside this expansion of real estate and consumer lending and retail bank deposits in Southern California,
we also began to build out our commercial business lending operations in that state. In early 2015, we launched
both a commercial real estate lending group through creation of a division of the Bank we refer to as HomeStreet
Commercial Capital and a commercial lending team specializing in SBA loans.

In February 2016, we further expanded our presence in Southern California through the acquisition of Orange
County Business Bank (“OCBB”), located in Irvine, California. This acquisition complemented our expansion
of commercial and consumer banking activities in Southern California, providing us with an additional portfolio
of commercial loans and deposits, considerable commercial lending talent, and an additional customer base of
commercial banking customers.

In August 2016, we acquired substantially all of the assets, including two retail deposit branches, and certain
liabilities from The Bank of Oswego to expand our presence in the Portland, Oregon area, increasing the number
of our retail branches in the metropolitan area to ﬁ ve. Entry into the Lake Oswego, Oregon market supported our
well-established single family mortgage lending presence and built our retail banking convenience and scale in
Oregon.

We have also acquired individual retail bank branches from time to time when we have found bank branches that
were attractive, available, well-priced and within our strategic growth footprint. In addition to the acquisition of two
bank branches in Seattle in 2013, shortly after the Fortune and YNB acquisition, we acquired a retail bank branch
and certain related assets in Dayton, Washington on December 11, 2015, which expanded our presence and retail
deposit taking capabilities in Eastern Washington; and two branches in Southern California in November 2016, in
Granada and Burbank, expanding our presence and retail deposit base in desirable areas of the Los Angeles region.
In September 2017, we acquired a retail deposit branch in El Cajon, California, a fast growing suburb in eastern San
Diego County.

In addition to these acquisitions, we have opened de novo branches in markets that we believe are underserved by
community banks. From 2012 to 2015, we opened 10 de novo branches in the greater Seattle area. In 2016, we
added six de novo branches in San Diego, Hawaii and Eastern Washington and in 2017 we opened three de novo
branches in Southern California, Eastern Washington and the greater Seattle area. Overall, from our IPO through
December 31, 2017, we added 19 de novo branches and acquired eight branches.

We remain focused on minimizing credit risk and on increasing operating effi ciency by growing assets and revenues
at a faster pace than expenses through measured growth within our existing markets, while managing costs and
improving effi ciencies.

Restructuring of Single Family Lending

At the end of 2016 and again in 2017, our Mortgage Banking Segment experienced lower than expected single
family loan origination volume due to a lack of housing inventory in our primary markets, compounded by interest
rate increases that reduced demand for mortgage reﬁ nances. In response to this environment, we implemented a
restructuring plan in our Mortgage Banking Segment. During this period, we continued to maintain a signiﬁ cant
market share in mortgage banking in our primary markets, and we expect mortgage banking to remain an important
part of our overall strategy.

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The restructuring of our Mortgage Banking Segment during 2017 included a reduction in full time equivalent staffi ng
of 106 employees; closure of three production offi ces, consolidation of six offi ces into three offi ces, and space
reductions in three additional offi ces; and streamlining of the single family leadership team. Although we anticipate
that this restructuring will scale our operations to ﬁ t our market opportunities, we will continue to monitor market
conditions and assess our mortgage banking offi ce locations and staffi ng levels to focus on the segment’s proﬁ tability.

Recent Developments

On December 22, 2017, President Trump signed into law major tax legislation commonly referred to as the Tax
Cuts and Jobs Act (“Tax Reform Act”). The Tax Reform Act reduces the U.S. federal corporate income tax rate from
35 percent to 21 percent and makes many other sweeping changes to the U.S. tax code. We were required to revalue
our deferred tax assets and liabilities at the new statutory tax rate upon enactment. As a result of this revaluation, in
2017, we recognized a one-time, non-cash, $23.3 million income tax beneﬁ t. Additionally, we expect our estimated
eff ective tax rate to fall to between 21% and 22% for 2018.

On September 27, 2017, the federal banking regulatory agencies issued a joint notice of proposed rulemaking
regarding several proposed simpliﬁ cations of the capital rules related to certain standards initially adopted by
the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as
“Basel III”). If adopted as currently drafted, these proposed changes would signiﬁ cantly beneﬁ t our Mortgage
Banking business model by reducing the amount of regulatory capital that would be required to be held related to
our mortgage servicing assets. Other proposed changes, if adopted, would require an increase in capital related to
commercial and residential acquisition, development, and construction lending activity and would off set a portion of
the beneﬁ t we would expect to receive with respect to our mortgage servicing assets under the

proposed rules. The ﬁ nal rules have yet to be published following the end of the comment period, but if they are
adopted as currently proposed, we would expect to beneﬁ t from a reduction in the regulatory capital requirements
beginning sometime in 2018.

Business Strategy

During 2017, we focused our business strategy on continuing to expand our Commercial and Consumer Banking
Segment while improving our operating effi ciency throughout our operations, following a period of substantial
growth in both Mortgage Banking and Commercial and Consumer Banking. In 2017, we added four retail deposit
branches within our existing geographic footprint, including three de novo branches and one branch obtained
through acquisition. The new branches increase the scale and density of our retail bank branch network, improving
convenience for our customers and building brand awareness.

In 2017, in the Mortgage Banking Segment, we continued to build on our heritage as a leading single family
mortgage lender by hiring proven loan production offi cers. During 2017, however, our primary goals were focused
on cost containment, including restructuring the organization to right-size for the current market opportunity and
developing more effi cient processes in our Mortgage Banking operations. These initiatives included substantial
investments in increased automation, including implementation of an upgraded loan origination system and
improvements to other processing and information systems.

We are pursuing the following strategies in our business segments:

Commercial and Consumer Banking. We believe there is a signiﬁ cant opportunity for a well-capitalized,
community-focused bank to compete eff ectively in West Coast markets, especially those that are not well served by
existing community banks. Our strategy is to off er responsive and personalized service while providing a full range of
ﬁ nancial services to small- and middle-market commercial and consumer customers, to build loyalty and grow market
share. We have grown organically and through strategic acquisitions. Between our IPO in 2012 and December 31,
2017, we have added a total of 16 retail deposit branches through acquisitions in the States of Washington and Oregon
and in Southern California, and opened 19 de novo retail deposit branches. We also expanded our commercial lending
footprint into California by acquiring experienced commercial lending personnel and growing our commercial
loan portfolio, in part through acquisitions such as OCBB. In addition to our acquisitions, we added HomeStreet
Commercial Capital, a commercial real estate lending division of the Bank based in Orange County, and a commercial
lending team in Northern California. We expect to continue to grow our commercial lending (including SBA lending),
commercial real estate and residential construction lending throughout our primary markets.

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We plan to expand our commercial real estate business with a focus on multifamily mortgage origination, through
our existing commercial banking network as well as through our Fannie Mae DUS® origination and servicing
relationships. We expect to continue to beneﬁ t from being one of only 25 companies nationally that is an approved
Fannie Mae DUS® seller and servicer. We plan to continue supporting our DUS® program by providing new
construction and short-term bridge loans to experienced borrowers who intend to build or purchase apartment
buildings for renovation, which we then seek to replace with permanent ﬁ nancing upon completion of the projects.
We also originate commercial real estate construction loans, bridge loans and permanent loans for our portfolio,
primarily on offi ce, retail, industrial and multifamily property types located within our geographic footprint and may
in the future sell those types of loans to other investors.

We seek to meet the ﬁ nancial needs of our consumer and small business customers by providing targeted banking
products and services, investment services and products, and insurance products through our bank branches and
through dedicated investment advisors, insurance agents and business banking offi cers. During 2017, we invested
in enhanced mobile banking and web-based off erings to further grow our core deposits. We intend to continue to
grow our retail deposit branch network, primarily focusing on the high-growth areas of Puget Sound in Washington,
Portland, Oregon, the San Francisco Bay Area and Southern California.

Mortgage Banking. We have leveraged our reputation for high quality service and reliable loan closing to increase
our single family mortgage market share signiﬁ cantly over the last six years. In 2017, single family loan origination
volume was lower than expected due to a lack of housing inventory in our primary markets that reduced demand
for purchase mortgages. Demand for mortgage reﬁ nances was also lower than expected, due to higher interest
rates. Therefore, we implemented the restructuring plan mentioned above. We have maintained a signiﬁ cant market
share in mortgage banking in our primary markets and expect mortgage banking to remain an important part of the
Company’s overall strategy. However, the contraction in the total number of mortgage loans being originated in our
markets has led us to focus on building a more effi cient operation while enhancing the ability to meet the origination
and servicing needs of our mortgage lending clients. We intend to continue to focus on conventional conforming and
government insured or guaranteed single family mortgage origination. We also off er home equity, jumbo and other
portfolio loan products to complement secondary market lending, particularly for well-qualiﬁ ed borrowers with loan
sizes greater than the conventional conforming limits.

We retain the right to service a majority of the mortgage loans that we originate, which we believe gives us a
competitive advantage over many of our competitors because we have the opportunity to maintain a relationship
with our customer after closing, while minimizing the potential for disruptions that are often inherent in transferring
servicing and collection activities to a third party. Maintaining an ongoing relationship with our customers allows
us to market additional products and services and remarket potential reﬁ nance opportunities with a goal of retaining
the customer relationship. We believe that our ability to retain the servicing on our mortgage originations has made
us a preferred lender for some of our customers. HomeStreet has the capital, liquidity, and infrastructure necessary
to successfully retain the rights to service the mortgages we originate, and we believe this provides us with a
competitive advantage over many of our competitors.

Our single family mortgage origination and servicing business is highly dependent upon compliance with
underwriting and servicing guidelines of Fannie Mae, Freddie Mac, Federal Housing Administration (“FHA”),
Department of Veterans Aff airs (“VA”) and Ginnie Mae as well as a myriad of federal and state consumer
compliance regulations. Our demonstrated expertise in these activities, our signiﬁ cant volume of lending in low-
and moderate-income areas, and our direct community investments, have allowed us to maintain a Community
Reinvestment Act (“CRA”) rating of “Satisfactory” or better every year since the program was implemented in
1986. We believe our historically strong compliance culture represents a signiﬁ cant competitive advantage in today’s
market, especially in the face of increasing regulatory compliance requirements.

For a discussion of operating results of these lines of business, see “Business Segments” within Management’s
Discussion and Analysis of this Form 10-K and Note 19 — Business Segment in the notes to our consolidated
ﬁ nancial statements for the ﬁ scal year ended December 31, 2017 included in Item 8 of Part II of this Form 10-K.

Market and Competition

We view our market as the major metropolitan areas in the Western United States, including Hawaii. These
metropolitan areas share a number of key demographic factors that are characteristic of growth markets, such as
large and growing populations with above-average household incomes, a signiﬁ cant number of large and mid-sized

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companies, and diverse economies. These markets all share large populations that we believe are underserved due to
the rapid consolidation of community banks since the ﬁ nancial crisis. We believe these markets can be well served
by a strong regional bank that is focused on providing consumers and businesses with quality customer service and a
competitive array of deposit, lending and investment products.

As of December 31, 2017, we operated full service bank branches, as well as stand-alone commercial and residential
lending centers, in the Puget Sound and eastern regions of Washington, the Portland, Oregon metropolitan area,
the Hawaiian Islands, and Southern California. As of that date, we also had primary stand-alone commercial and
residential lending centers in the metropolitan areas of San Francisco, California; Phoenix, Arizona; and Salt Lake
City, Utah; as well as central California and Idaho. Over time, we expect to effi ciently expand our full service bank
branches, on a prudent and opportunistic basis, to areas being served only by stand-alone lending centers.

The ﬁ nancial services industry is highly competitive. We compete with other banks, savings and loan associations,
credit unions, mortgage banking companies, insurance companies, ﬁ nance companies, and investment and mutual
fund companies. In particular, we compete with many ﬁ nancial institutions with greater resources, including the
capacity to make larger loans, fund extensive advertising campaigns and off er a broader array of products and
services. The number of competitors for lower and middle-market business customers has, however, decreased in
recent years primarily due to consolidations. At the same time, national banks have been focused on larger customers
to achieve economies of scale in lending and depository relationships and have also consolidated business banking
operations and support and reduced service levels in many of our markets. We have taken advantage of industry
consolidation by recruiting well-qualiﬁ ed employees and attracting new customers who seek long-term stability,
local decision-making, quality products and outstanding expertise and customer service.

We believe we are well positioned to take advantage of changes in the single family mortgage origination
and servicing industry that have helped to reduce the number of competitors. The mortgage industry is
compliance-intensive and requires signiﬁ cant expertise and internal control systems to ensure mortgage loan
origination and servicing providers meet all origination, processing, underwriting, servicing and disclosure
requirements. We believe our compliance-centered culture aff ords us a competitive advantage even as the growing
complexity of the regulatory landscape poses a barrier to entry for many of our would-be competitors. For example,
the Truth in Lending Act-Real Estate Settlement Procedures Act (“TILA-RESPA”) Integrated Disclosure (commonly
known as “TRID”) requirements substantially increased documentation requirements and responsibilities for the
mortgage industry, further complicating work ﬂ ow and increasing training costs, thereby increasing barriers to entry
and costs of operations across the mortgage industry. These rules added to the work involved in originating mortgage
loans and added to processing costs for all mortgage originators. In some cases, these rules have lengthened the time
needed to close loans. Increased costs and additional compliance burdens are causing some competitors to exit the
industry. Mortgage lenders must make signiﬁ cant investments in experienced personnel and specialized systems to
manage the compliance process, which creates a signiﬁ cant barrier to entry. In addition, lending in conventional and
government guaranteed or insured mortgage products, including FHA and VA loans, requires signiﬁ cantly higher
capitalization than had previously been required for mortgage brokers and non-bank mortgage companies.

Employees

As of December 31, 2017, we employed 2,419 full-time equivalent employees, compared to 2,552 full-time
equivalent employees at December 31, 2016.

Where You Can Obtain Additional Information

We ﬁ le annual, quarterly, current and other reports with the Securities and Exchange Commission (the “SEC”).
We make available free of charge on or through our website http://www.homestreet.com all of these reports (and
all amendments thereto), as soon as reasonably practicable after we ﬁ le these materials with the SEC. Please note
that the contents of our website do not constitute a part of our reports, and those contents are not incorporated by
reference into this report or any of our other securities ﬁ lings. You may review a copy of our reports, including
exhibits and schedules ﬁ led therewith, and obtain copies of such materials at the SEC’s Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding registrants, such as HomeStreet, that ﬁ le
electronically with the SEC.

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REGULATION AND SUPERVISION

The following is a brief description of certain laws and regulations that are applicable to us. The description of these
laws and regulations, as well as descriptions of laws and regulations contained elsewhere in this Form 10-K, does
not purport to be complete and is qualiﬁ ed in its entirety by reference to the applicable laws and regulations.

The bank regulatory framework to which we are subject is intended primarily for the protection of bank depositors
and the Deposit Insurance Fund and not for the protection of shareholders or other security holders.

General

The Company is a bank holding company which has made an election to be a ﬁ nancial holding company. It is
regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Washington
State Department of Financial Institutions, Division of Banks (the “WDFI”). The Company is required to register
and ﬁ le reports with, and otherwise comply with, the rules and regulations of the Federal Reserve and the WDFI.

The Bank is a Washington state-chartered commercial bank. The Bank is subject to regulation, examination and
supervision by the WDFI and the Federal Deposit Insurance Corporation (the “FDIC”).

New statutes, regulations and guidance are considered regularly that could contain wide-ranging potential changes
to the competitive landscape for ﬁ nancial institutions operating in our markets and in the United States generally.
We cannot predict whether or in what form any proposed statute, regulation or other guidance will be adopted or
promulgated, or the extent to which our business may be aff ected. Any change in policies, legislation or regulation,
whether by the Federal Reserve, the WDFI, the FDIC, the Washington legislature, the United States Congress or
any other federal, state or local government branch or agency with authority over us, could have a material adverse
impact on us and our operations and shareholders. In addition, the Federal Reserve, the WDFI and the FDIC have
signiﬁ cant discretion in connection with their supervisory and enforcement activities and examination policies,
including, among other things, policies with respect to the Bank’s capital levels, the classiﬁ cation of assets and
establishment of adequate loan loss reserves for regulatory purposes.

Our operations and earnings will be aff ected by domestic economic conditions and the monetary and ﬁ scal policies
of the United States government and its agencies. In addition to its role as the regulator of bank holding companies,
the Federal Reserve has, and is likely to continue to have, an important impact on the operating results of ﬁ nancial
institutions through its power to implement national monetary and ﬁ scal policy including, among other things,
actions taken in order to curb inﬂ ation or combat a recession. The Federal Reserve aff ects the levels of bank
loans, investments and deposits in various ways, including through its control over the issuance of United States
government securities, its regulation of the discount rate applicable to member banks and its inﬂ uence over reserve
requirements to which banks are subject. Beginning in December 2015, the Federal Reserve has increased short-term
interest rates ﬁ ve times and is expected to consider additional increases in 2018. We cannot predict the ultimate
impact of these rate changes on the economy or our institution, or the nature or impact of future changes in monetary
policies of the Federal Reserve.

Regulation of the Company

General

As a bank holding company, the Company is subject to Federal Reserve regulations, examinations, supervision and
reporting requirements relating to bank holding companies. Among other things, the Federal Reserve is authorized
to restrict or prohibit activities that are determined to be a serious risk to the ﬁ nancial safety, soundness or stability
of a subsidiary bank. Since the Bank is chartered under Washington law, the WDFI has authority to regulate the
Company generally relating to its conduct aff ecting the Bank.

Capital/Source of Strength

During 2015, the Company was a savings and loan holding company and as such became subject to capital
requirements under the Dodd-Frank Act, beginning in 2015. Following its conversion to a bank holding company,
the Company continues to be subject to these capital requirements. See “Regulation and Supervision of HomeStreet
Bank — Capital and Prompt Corrective Action Requirements — Capital Requirements.”

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Regulations and historical practices of the Federal Reserve have required bank holding companies to serve as a
“source of strength” for their subsidiary banks. The Dodd-Frank Act codiﬁ es this requirement and extends it to all
companies that control an insured depository institution. Accordingly, the Company is required to act as a source of
strength for the Bank.

Restrictions Applicable to Bank Holding Companies

Federal law prohibits a bank holding company, including the Company, directly or indirectly (or through one or more
subsidiaries), from acquiring:

•

control of another depository institution (or a holding company parent) without prior approval of the
Federal Reserve (as “control” is deﬁ ned under the Bank Holding Company Act);

another depository institution (or a holding company thereof), through merger, consolidation or purchase
of all or substantially all of the assets of such institution (or holding company) without prior approval
from the Federal Reserve or FDIC;

more than 5.0% of the voting shares of a non-subsidiary depository institution or a holding company
subject to certain exceptions; or

control of any depository institution not insured by the FDIC (except through a merger with and into the
holding company’s bank subsidiary that is approved by the FDIC).

In evaluating applications by holding companies to acquire depository institutions or holding companies, the
Federal Reserve must consider the ﬁ nancial and managerial resources and future prospects of the company and the
institutions involved, the eff ect of the acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.

Acquisition of Control

Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve if any person
(including a company), or group acting in concert, seeks to acquire “control” of a bank holding company. An
acquisition of control can occur upon the acquisition of 10.0% or more of the voting stock of a bank holding
company or as otherwise deﬁ ned by the Federal Reserve. Under the Change in Bank Control Act, the Federal
Reserve has 60 days from the ﬁ ling of a complete notice to act (the 60-day period may be extended), taking into
consideration certain factors, including the ﬁ nancial and managerial resources of the acquirer and the antitrust eff ects
of the acquisition. Control can also exist if an individual or company has, or exercises, directly or indirectly or by
acting in concert with others, a controlling inﬂ uence over the Bank. Washington law also imposes certain limitations
on the ability of persons and entities to acquire control of banking institutions and their parent companies.

Dividend Policy

Under Washington law, the Company is generally permitted to make a distribution, including payments of dividends,
only if, after giving eff ect to the distribution, in the judgment of the board of directors, (1) the Company would
be able to pay its debts as they become due in the ordinary course of business and (2) the Company’s total assets
would at least equal the sum of its total liabilities plus the amount that would be needed if the Company were to
be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. In addition, it is the policy of the Federal Reserve
that bank holding companies generally should pay dividends only out of net income generated over the past year
and only if the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset
quality and overall ﬁ nancial condition. The policy also provides that bank holding companies should not maintain
a level of cash dividends that places undue pressure on the capital of its subsidiary bank or that may undermine its
ability to serve as a source of strength.

The Company’s ability to pay dividends to shareholders is signiﬁ cantly dependent on the Bank’s ability to pay
dividends to the Company. Capital rules as well as regulatory policy impose additional requirements on the ability of
the Company and the Bank to pay dividends. See “Regulation and Supervision of HomeStreet Bank — Capital and
Prompt Corrective Action Requirements — Capital Requirements.”

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Compensation Policies

Compensation policies and practices at the Company and the Bank are subject to regulation by their respective
banking regulators and the SEC.

Guidance on Sound Incentive Compensation Policies. Eff ective on June 25, 2010, federal banking regulators
adopted Sound Incentive Compensation Policies Final Guidance (the “Final Guidance”) designed to help ensure that
incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent
with the safety and soundness of the organization. The Final Guidance applies to senior executives and others who
are responsible for oversight of HomeStreet’s company-wide activities and material business lines, as well as other
employees who, either individually or as a part of a group, have the ability to expose the Bank to material amounts
of risk.

Dodd-Frank Act.
In addition to the Final Guidance, the Dodd-Frank Act contains a number of provisions relating to
compensation applying to public companies such as the Company. The Dodd-Frank Act added a new Section 14A(a)
to the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) that requires companies to include
a separate non-binding resolution subject to shareholder vote in their proxy materials approving the executive
compensation disclosed in the materials. In addition, a new Section 14A(b) to the Exchange Act requires any proxy
or consent solicitation materials for a meeting seeking shareholder approval of an acquisition, merger, consolidation
or disposition of all or substantially all of the company’s assets to include a separate non-binding shareholder
resolution approving certain “golden parachute” payments made in connection with the transaction. A new
Section 10D to the Exchange Act requires the SEC to direct the national securities exchanges to require companies
to implement a policy to “claw back” certain executive payments that were made based on improper ﬁ nancial
statements.

In addition, Section 956 of the Dodd-Frank Act requires certain regulators (including the FDIC, SEC and Federal
Reserve) to adopt regulations or guidelines prohibiting excessive compensation or compensation that could lead to
material loss as well as rules relating to disclosure of compensation. On April 14, 2011, these regulators published
a joint proposed rulemaking to implement Section 956 of Dodd-Frank for depository institutions, their holding
companies and various other ﬁ nancial institutions with $1 billion or more in assets. On June 10, 2016, these
regulators published a modiﬁ ed proposed rule. Under the new proposed rule, the requirements and prohibitions
will vary depending on the size and complexity of the covered institution. Generally, for covered institutions with
less than $50 billion in consolidated assets (such as the Company), the new proposed rule would (1) prohibit
incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by
providing excessive compensation or by providing compensation that could lead to a material ﬁ nancial loss,
(2) require oversight of an institution’s incentive-based compensation arrangements by the institution’s board of
directors or a committee and approval by the board or committee of certain payments and awards and (3) require the
creation on an annual basis and maintenance for at least seven years of records that (a) document the institution’s
incentive compensation arrangements, (b) demonstrate compliance with the regulation and (c) are disclosed to the
institution’s appropriate federal regulator upon request.

FDIC Regulations. We are further restricted in our ability to make certain “golden parachute” and
“indemniﬁ cation” payments under Part 359 of the FDIC regulations, and the FDIC also regulates payments to
executives under Part 364 of its regulations relating to excessive executive compensation.

Regulation and Supervision of HomeStreet Bank

General

As a commercial bank chartered under the laws of the State of Washington, HomeStreet Bank is subject to
applicable provisions of Washington law and regulations of the WDFI. As a state-chartered commercial bank that
is not a member of the Federal Reserve System, the Bank’s primary federal regulator is the FDIC. It is subject to
regulation and examination by the WDFI and the FDIC, as well as enforcement actions initiated by the WDFI and
the FDIC, and its deposits are insured by the FDIC.

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Washington Banking Regulation

As a Washington bank, the Bank’s operations and activities are substantially regulated by Washington law and
regulations, which govern, among other things, the Bank’s ability to take deposits and pay interest, make loans on
or invest in residential and other real estate, make consumer and commercial loans, invest in securities, off er various
banking services to its customers and establish branch offi ces. Under state law, commercial banks in Washington
also generally have, subject to certain limitations or approvals, all of the powers that Washington chartered savings
banks have under Washington law and that federal savings banks and national banks have under federal laws and
regulations.

Washington law also governs numerous corporate activities relating to the Bank, including the Bank’s ability to
pay dividends, to engage in merger activities and to amend its articles of incorporation, as well as limitations on
change of control of the Bank. Under Washington law, the board of directors of the Bank generally may not declare
a cash dividend on its capital stock if payment of such dividend would cause its net worth to be reduced below the
net worth requirements, if any, imposed by the WDFI and dividends may not be paid in an amount greater than its
retained earnings without the approval of the WDFI. These restrictions are in addition to restrictions imposed by
federal law. Mergers involving the Bank and sales or acquisitions of its branches are generally subject to the approval
of the WDFI. No person or entity may acquire control of the Bank until 30 days after ﬁ ling an application with the
WDFI, which has the authority to disapprove the application. Washington law deﬁ nes “control” of an entity to mean
directly or indirectly, alone or in concert with others, to own, control or hold the power to vote 25.0% or more of the
outstanding stock or voting power of the entity. Any amendment to the Bank’s articles of incorporation requires the
approval of the WDFI.

The Bank is subject to periodic examination by and reporting requirements of the WDFI, as well as enforcement
actions initiated by the WDFI. The WDFI’s enforcement powers include the issuance of orders compelling or
restricting conduct by the Bank and the authority to bring actions to remove the Bank’s directors, offi cers and
employees. The WDFI has authority to place the Bank under supervisory direction or to take possession of the Bank
and to appoint the FDIC as receiver.

Insurance of Deposit Accounts and Regulation by the FDIC

The FDIC is the Bank’s principal federal bank regulator. As such, the FDIC is authorized to conduct examinations
of, and to require reporting by the Bank. The FDIC may prohibit the Bank from engaging in any activity determined
by law, regulation or order to pose a serious risk to the institution, and may take a variety of enforcement actions in
the event the Bank violates a law, regulation or order or engages in an unsafe or unsound practice or under certain
other circumstances. The FDIC also has the authority to appoint itself as receiver of the Bank or to terminate the
Bank’s deposit insurance if it were to determine that the Bank has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.

The Bank is a member of the Deposit Insurance Fund (“DIF”) administered by the FDIC, which insures customer
deposit accounts. Under the Dodd-Frank Act, the amount of federal deposit insurance coverage was permanently
increased from $100,000 to $250,000, per depositor, for each account ownership category at each depository
institution. This change made permanent the coverage increases that had been in eff ect since October 2008.

In order to maintain the DIF, member institutions, such as the Bank, are assessed insurance premiums. The
Dodd-Frank Act required the FDIC to make numerous changes to the DIF and the manner in which assessments
are calculated. The minimum ratio of assets in the DIF to the total of estimated insured deposits was increased from
1.15% to 1.35%, and the FDIC is given until September 30, 2020 to meet the reserve ratio. In December 2010,
the FDIC adopted a ﬁ nal rule setting the reserve ratio of the DIF at 2.0%. As required by the Dodd-Frank Act,
assessments are now based on an insured institution’s average consolidated assets less tangible equity capital.

Each institution is provided an assessment rate, which is generally based on the risk that the institution presents to
the DIF. Institutions with less than $10 billion in assets generally have an assessment rate that can range from 1.5 to
30 basis points. However, the FDIC does have ﬂ exibility to adopt assessment rates without additional rule-making
provided that the total base assessment rate increase or decrease does not exceed 2 basis points. The assessment rates
were lowered eff ective July 1, 2016, since the reserve ratio reached 1.15% as of June 30, 2016. In the future, if the
reserve ratio reaches certain levels, these assessment rates will generally be further lowered. As of December 31,
2017, the Bank’s assessment rate was 5 basis points on average assets less average tangible equity capital.

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In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations
issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution
Trust Corporation. The Financing Corporation rate is adjusted quarterly to reﬂ ect changes in assessment bases of the
DIF. These assessments will continue until the Financing Corporation bonds mature in 2019. The annual rate for the
ﬁ rst quarter of 2018 is 0.46 basis points.

Capital and Prompt Corrective Action Requirements

Capital Requirements

In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital rules (the “Rules”).
The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the
Company). The Rules reﬂ ect, in part, certain standards initially adopted by the Basel Committee on Banking
Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements
contemplated by the Dodd-Frank Act. The Rules applied to both the Company and the Bank beginning in 2015.

The Rules recognize three components, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital
and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock
instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”) except
to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components
of AOCI. Both the Company and the Bank made this election in 2015. Additional Tier 1 capital generally includes
non-cumulative preferred stock and related surplus subject to certain adjustments and limitations. Tier 2 capital
generally includes certain capital instruments (such as subordinated debt) and portions of the amounts of the
allowance for loan and lease losses, subject to certain requirements and deductions. The term “Tier 1 capital” means
common equity Tier 1 capital plus additional Tier 1 capital, and the term “total capital” means Tier 1 capital plus
Tier 2 capital.

The Rules generally measure an institution’s capital using four capital measures or ratios. The common equity Tier 1
capital ratio is the ratio of the institution’s common equity Tier 1 capital to its Tier 1 risk-weighted assets. The Tier 1
capital ratio is the ratio of the institution’s Tier 1 capital to its total risk-weighted assets. The total capital ratio is the
ratio of the institution’s total capital to its total risk-weighted assets. The leverage ratio is the ratio of the institution’s
Tier 1 capital to its average total consolidated assets. To determine risk-weighted assets, assets of an institution are
generally placed into a risk category as prescribed by the regulations and given a percentage weight based on the
relative risk of that category. The percentage weights range from 0% to 1,250%. An asset’s risk-weighted value will
generally be its percentage weight multiplied by the asset’s value as determined under generally accepted accounting
principles. In addition, certain off -balance-sheet items are converted to balance-sheet credit equivalent amounts,
and each amount is then assigned to one of the risk categories. An institution’s federal regulator may require the
institution to hold more capital than would otherwise be required under the Rules if the regulator determines that
the institution’s capital requirements under the Rules are not commensurate with the institution’s credit, market,
operational or other risks.

To be adequately capitalized both the Company and the Bank are required to have a common equity Tier 1 capital
ratio of at least 4.5% or more, a Tier 1 leverage ratio of 4.0% or more, a Tier 1 risk-based ratio of 6.0% or more and
a total risk-based ratio of 8.0% or more. In addition to the preceding requirements, all ﬁ nancial institutions subject to
the Rules, including both the Company and the Bank, are required to establish a “conservation buff er,” consisting of
common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio,
the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buff er will
be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary
bonuses to executive offi cers.

The Rules set forth the manner in which certain capital elements are determined, including but not limited to,
requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking
regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities
as a component of Tier 1 capital. As ﬁ nally adopted, however, the Rules permit holding companies with less than
$15 billion in total assets as of December 31, 2009 (which includes the Company) to continue to include trust
preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital.

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The Rules made changes in the methods of calculating certain risk-based assets, which in turn aff ects the calculation
of risk-based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which
are commercial real estate, credit facilities that ﬁ nance the acquisition, development or construction of real property,
certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate
exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax
assets.

Both the Company and the Bank were generally required to be in compliance with the Rules on January 1, 2015. The
conservation buff er began being phased in beginning in 2016 and would have taken full eff ect on January 1, 2019.
However, in August 2017, the rules were halted at 2017 levels. Certain calculations under the Rules will also have
phase-in periods. We believe that the current capital levels of the Company and the Bank are in compliance with the
standards under the Rules including the conservation buff er.

On September 27, 2017, the federal banking regulatory agencies issued a joint notice of proposed rulemaking
regarding several proposed simpliﬁ cations of the Basel III capital rules. If adopted as currently drafted, these proposed
changes would signiﬁ cantly beneﬁ t our Mortgage Banking business model by reducing the amount of regulatory
capital that would be required to be held related to our mortgage servicing assets. Other proposed changes, if adopted,
would require an increase in capital related to commercial and residential acquisition, development, and construction
lending activity and would off set a portion of the beneﬁ t we would expect to receive with respect to our mortgage
servicing assets. The ﬁ nal rules have yet to be published following the end of the comment period, but if they are
adopted without any material changes to the September 2017 proposal, the Company and the Bank would expect to
beneﬁ t from a reduction in the regulatory capital requirements beginning sometime in 2018.

Prompt Corrective Action Regulations

Section 38 of the Federal Deposit Insurance Act establishes a framework of supervisory actions for insured
depository institutions that are not adequately capitalized, also known as “prompt corrective action” regulations.
All of the federal banking agencies have promulgated substantially similar regulations to implement a system of
prompt corrective action. These regulations apply to the Bank but not the Company. As modiﬁ ed by the Rules, the
framework establishes ﬁ ve capital categories; under the Rules, a bank is:

•

“well capitalized” if it has a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital
ratio of 8.0% or more, a common equity Tier 1 risk-based ratio of 6.5% or more, and a leverage capital
ratio of 5.0% or more, and is not subject to any written agreement, order or capital directive to meet and
maintain a speciﬁ c capital level for any capital measure;

“adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 6.0% or more, a common equity Tier 1 risk-based ratio of 4.5% or more, and a leverage
capital ratio of 4.0% or more;

“undercapitalized” if it has a total risk-based capital ratio less than 8.0%, a Tier 1 risk-based capital ratio
less than 6.0%, a common equity risk-based ratio less than 4.5% or a leverage capital ratio less than
4.0%;

“signiﬁ cantly undercapitalized” if it has a total risk-based capital ratio less than 6.0%, a Tier 1 risk-based
capital ratio less than 4.0%, a common equity risk-based ratio less than 3.0% or a leverage capital ratio
less than 3.0%; and

“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

A bank that, based upon its capital levels, is classiﬁ ed as “well capitalized,” “adequately capitalized” or
“undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an
unsafe or unsound practice, warrants such treatment.

At each successive lower capital category, an insured bank is subject to increasingly severe supervisory actions.
These actions include, but are not limited to, restrictions on asset growth, interest rates paid on deposits, branching,
allowable transactions with affi liates, ability to pay bonuses and raises to senior executives and pursuing new

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lines of business. Additionally, all “undercapitalized” banks are required to implement capital restoration plans to
restore capital to at least the “adequately capitalized” level, and the FDIC is generally required to close “critically
undercapitalized” banks within a 90-day period.

Limitations on Transactions with Affi liates

Transactions between the Bank and any affi liate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affi liate of the Bank is any company or entity which controls, is controlled by or is under common control
with the Bank but which is not a subsidiary of the Bank. The Company and its non-bank subsidiaries are affi liates
of the Bank. Generally, Section 23A limits the extent to which the Bank or its subsidiaries may engage in “covered
transactions” with any one affi liate to an amount equal to 10.0% of the Bank’s capital stock and surplus, and
imposes an aggregate limit on all such transactions with all affi liates in an amount equal to 20.0% of such capital
stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires
that all transactions be on terms substantially the same, or at least as favorable to the Bank, as those provided
to a non-affi liate. The term “covered transaction” includes the making of loans to an affi liate, the purchase of or
investment in the securities issued by an affi liate, the purchase of assets from an affi liate, the acceptance of securities
issued by an affi liate as collateral security for a loan or extension of credit to any person or company, the issuance
of a guarantee, acceptance or letter of credit on behalf of an affi liate, or certain transactions with an affi liate that
involves the borrowing or lending of securities and certain derivative transactions with an affi liate.

In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans, derivatives, repurchase
agreements and securities lending to executive offi cers, directors and principal shareholders of the Bank and its
affi liates.

Standards for Safety and Soundness

The federal banking regulatory agencies have prescribed, by regulation, a set of guidelines for all insured depository
institutions prescribing safety and soundness standards. These guidelines establish general standards for internal
controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, asset quality, earnings standards, compensation, fees and beneﬁ ts. In general, the guidelines
require appropriate systems and practices to identify and manage the risks and exposures speciﬁ ed in the guidelines
before capital becomes impaired. The guidelines prohibit excessive compensation as an unsafe and unsound practice
and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services
performed by an executive offi cer, employee, director, or principal shareholder.

Each insured depository institution must implement a comprehensive written information security program that
includes administrative, technical and physical safeguards appropriate to the institution’s size and complexity and
the nature and scope of its activities. The information security program also must be designed to ensure the security
and conﬁ dentiality of customer information, protect against any unanticipated threats or hazards to the security or
integrity of such information, protect against unauthorized access to or use of such information that could result
in substantial harm or inconvenience to any customer and ensure the proper disposal of customer and consumer
information. Each insured depository institution must also develop and implement a risk-based response program
to address incidents of unauthorized access to customer information in customer information systems. If the FDIC
determines that the Bank fails to meet any standard prescribed by the guidelines, it may require the Bank to submit
an acceptable plan to achieve compliance with the standard. The Bank maintains a program to meet the information
security requirements.

Real Estate Lending Standards

FDIC regulations require the Bank to adopt and maintain written policies that establish appropriate limits and
standards for real estate loans. These standards, which must be consistent with safe and sound banking practices,
must establish loan portfolio diversiﬁ cation standards, prudent underwriting standards (including loan-to-value ratio
limits) that are clear and measurable, loan administration procedures and documentation, approval and reporting
requirements. The Bank is obligated to monitor conditions in its real estate markets to ensure that its standards
continue to be appropriate for market conditions. The Bank’s board of directors is required to review and approve the
Bank’s standards at least annually.

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The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on
loan-to-value ratios for diff erent categories of real estate loans. Under the guidelines, the aggregate amount of all
loans in excess of the supervisory loan-to-value ratios should not exceed 100.0% of total capital, and the total of
all loans for commercial, agricultural, multifamily or other non-one-to-four family residential properties in excess
of such ratios should not exceed 30.0% of total capital. Loans in excess of the supervisory loan-to-value ratio
limitations must be identiﬁ ed in the Bank’s records and reported at least quarterly to the Bank’s board of directors.

The FDIC and the federal banking agencies have also issued guidance on sound risk management practices for
concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate
loans that are dependent on the cash ﬂ ow from the real estate held as collateral and that are likely to be sensitive
to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source
of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank’s commercial real
estate lending but to guide banks in developing risk management practices and capital levels commensurate with the
level and nature of real estate concentrations.

Risk Retention

The Dodd-Frank Act requires that, subject to certain exemptions, securitizers of mortgage and other asset-backed
securities retain not less than ﬁ ve percent of the credit risk of the mortgages or other assets and that the securitizer
not hedge or otherwise transfer the risk it is required to retain. In December 2014, the federal banking regulators,
together with the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban
Development, published a ﬁ nal rule implementing this requirement. Generally, the ﬁ nal rule provides various
ways in which the retention of risk requirement can be satisﬁ ed and also describes exemptions from the retention
requirements for various types of assets, including mortgages. Compliance with the ﬁ nal rule with respect to
residential mortgage securitizations was required beginning in December 2015 and was required beginning in
December 2016 for all other securitizations.

Volcker Rule

In December 2013, the FDIC, the FRB and various other federal agencies issued ﬁ nal rules to implement certain
provisions of the Dodd-Frank Act commonly known as the “Volcker Rule.” Subject to certain exceptions, the ﬁ nal
rules generally prohibit banks and affi liated companies from engaging in short-term proprietary trading of certain
securities, derivatives, commodity futures and options on those instruments, for their own account. The ﬁ nal rules
also impose restrictions on banks and their affi liates from acquiring or retaining an ownership interest in, sponsoring
or having certain other relationships with hedge funds or private equity funds.

Activities and Investments of Insured State-Chartered Financial Institutions

Federal law generally prohibits FDIC-insured state banks from engaging as a principal in activities, and from making
equity investments, other than those that are permissible for national banks. An insured state bank is not prohibited
from, among other things, (1) acquiring or retaining a majority interest in certain subsidiaries, (2) investing as
a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualiﬁ ed housing project, provided that such limited partnership investments
may not exceed 2.0% of the bank’s total assets, (3) acquiring up to 10.0% of the voting stock of a company that
solely provides or reinsures directors’, trustees’ and offi cers’ liability insurance coverage or bankers’ blanket bond
group insurance coverage for insured depository institutions and (4) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.

Washington State has enacted a law regarding ﬁ nancial institution parity. The law generally provides that
Washington-chartered commercial banks may exercise any of the powers of Washington-chartered savings banks,
national banks or federally-chartered savings banks, subject to the approval of the Director of the WDFI in certain
situations.

Environmental Issues Associated With Real Estate Lending

The Comprehensive Environmental Response, Compensation and Liability Act, or (the “CERCLA”), is a federal
statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing
hazardous waste. However, Congress has acted to protect secured creditors by providing that the term “owner

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and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since
the enactment of the CERCLA, this “secured creditor” exemption has been the subject of judicial interpretations
which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that
they hold as collateral for a loan. To the extent that legal uncertainty exists in this area, all creditors, including the
Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum
contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the
collateral property.

Reserve Requirements

The Bank is subject to Federal Reserve regulations pursuant to which depositary institutions may be required to
maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Reserves must be
maintained against transaction accounts (primarily negotiable order of withdrawal and regular checking accounts).
The regulations generally required in 2017 that reserves be maintained as follows:

•

Net transaction accounts up to $15.5 million were exempt from reserve requirements.

A reserve of 3.0% of the aggregate is required for transaction accounts over $15.5 million up to
$115.1 million.

A reserve of 10% is required for any transaction accounts over $115.1 million.

In 2018, the regulations generally require that reserves be maintained as follows:

•

Net transaction accounts up to $16.0 million were exempt from reserve requirements.

A reserve of 3.0% of the aggregate is required for transaction accounts over $16.0 million up to
$122.3 million.

A reserve of 10% is required for any transaction accounts over $122.3 million.

Federal Home Loan Bank System

The Federal Home Loan Bank system consists of 11 regional Federal Home Loan Banks. Among other beneﬁ ts,
each of these serves as a reserve or central bank for its members within its assigned region. Each of the Federal
Home Loan Banks makes available loans or advances to its members in compliance with the policies and procedures
established by its board of directors. The Bank is a member of the Federal Home Loan Bank of Des Moines (the
“Des Moines FHLB”) and is a borrowing non-member ﬁ nancial institution with the Federal Home Loan Bank of
San Francisco (“San Francisco FHLB”). As a member of the Des Moines FHLB, the Bank is required to own stock
in the Des Moines FHLB. Separately, pursuant to a non-member lending agreement with the San Francisco FHLB
that we entered into at the time of the Simplicity Acquisition, we are required to own stock of the San Francisco
FHLB so long as we continue to be a borrower from the San Francisco FHLB. As of December 31, 2017, we owned
$46.6 million of stock in the FHLB in the aggregate based on these obligations.

Community Reinvestment Act of 1977

Banks are subject to the provisions of the CRA of 1977, which requires the appropriate federal bank regulatory
agency to assess a bank’s record in meeting the credit needs of the assessment areas serviced by the bank, including
low and moderate income neighborhoods. The regulatory agency’s assessment of the bank’s record is made available
to the public. Further, these assessments are considered by regulators when evaluating mergers, acquisitions and
applications to open or relocate a branch or facility. The Bank currently has a rating of “Satisfactory” under the CRA.

Dividends

Dividends from the Bank constitute an important source of funds for dividends that may be paid by the Company to
shareholders. The amount of dividends payable by the Bank to the Company depends upon the Bank’s earnings and
capital position and is limited by federal and state laws. Under Washington law, the Bank may not declare or pay a
cash dividend on its capital stock if this would cause its net worth to be reduced below the net worth requirements, if

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any, imposed by the WDFI. In addition, dividends on the Bank’s capital stock may not be paid in an amount greater
than its retained earnings without the approval of the WDFI.

The amount of dividends actually paid during any one period will be strongly aff ected by the Bank’s policy of
maintaining a strong capital position. Federal law prohibits an insured depository institution from paying a cash
dividend if this would cause the institution to be “undercapitalized,” as deﬁ ned in the prompt corrective action
regulations. Moreover, the federal bank regulatory agencies have the general authority to limit the dividends paid by
insured banks if such payments are deemed to constitute an unsafe and unsound practice. Capital rules that went into
eff ect in 2015 impose additional requirements on the Bank’s ability to pay dividends. See “— Capital and Prompt
Corrective Action Requirements — Capital Requirements.”

Liquidity

The Bank is required to maintain a suffi cient amount of liquid assets to ensure its safe and sound operation. See
“Management’s Discussion and Analysis — Liquidity Risk and Capital Resources.”

Compensation

The Bank is subject to regulation of its compensation practices. See “Regulation and Supervision — Regulation of
the Company — Compensation Policies.”

Bank Secrecy Act and USA Patriot Act

The Company and the Bank are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which
gives the federal government powers to address money laundering and terrorist threats through enhanced domestic
security measures, expanded surveillance powers and mandatory transaction reporting obligations. By way of
example, the Bank Secrecy Act imposes an affi rmative obligation on the Bank to report currency transactions that
exceed certain thresholds and to report other transactions determined to be suspicious. Beginning in May 2018, the
Bank Secrecy Act will also require ﬁ nancial institutions, including the Bank, to meet certain customer due diligence
requirements, including obtaining a certiﬁ cation from the individual opening the account on behalf of the legal entity
that identiﬁ es the beneﬁ cial owner(s) of the entity. The purpose of these requirements is to enable the Bank to be
able to predict with relative certainty the types of transactions in which a customer is likely to engage which should
in turn assist in determining when transactions are potentially suspicious.

Like all United States companies and individuals, the Company and the Bank are prohibited from transacting
business with certain individuals and entities named on the Offi ce of Foreign Asset Control’s list of Specially
Designated Nationals and Blocked Persons. Failure to comply may result in ﬁ nes and other penalties. The Offi ce of
Foreign Asset Control (“OFAC”) has issued guidance directed at ﬁ nancial institutions in which it asserted that it may,
in its discretion, examine institutions determined to be high-risk or to be lacking in their eff orts to comply with these
prohibitions.

The Bank maintains a program to meet the requirements of the Bank Secrecy Act, USA PATRIOT Act and OFAC.

Identity Theft

Section 315 of the Fair and Accurate Credit Transactions Act (“FACT Act”) requires each ﬁ nancial institution or
creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate
identity theft “red ﬂ ags” in connection with the opening of certain accounts or certain existing accounts.

The Bank maintains a program to meet the requirements of Section 315 of the FACT Act.

Consumer Protection Laws and Regulations

The Bank and its affi liates are subject to a broad array of federal and state consumer protection laws and regulations
that govern almost every aspect of its business relationships with consumers. While this list is not exhaustive,
these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Secure and Fair Enforcement in
Mortgage Licensing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members’ Civil Relief Act, the Right to

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Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit
Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing ﬂ ood
insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws
prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement some
or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner
in which ﬁ nancial institutions must deal with customers when taking deposits, making loans, collecting loans and
providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties,
including but not limited to, enforcement actions, injunctions, ﬁ nes, civil liability, criminal penalties, punitive
damages and the loss of certain contractual rights. The Bank has a compliance governance structure in place to help
ensure its compliance with these requirements.

The Dodd-Frank Act established the Bureau of Consumer Financial Protection (“CFPB”) as a new independent
bureau that is responsible for regulating consumer ﬁ nancial products and services under federal consumer ﬁ nancial
laws. The CFPB has broad rulemaking authority with respect to these laws and exclusive examination and primary
enforcement authority with respect to banks with assets of more than $10 billion.

The Dodd-Frank Act also contains a variety of provisions intended to reform consumer mortgage practices. The
provisions include (1) a requirement that lenders make a determination that at the time a residential mortgage
loan is consummated the consumer has a reasonable ability to repay the loan and related costs, (2) a ban on loan
originator compensation based on the interest rate or other terms of the loan (other than the amount of the principal),
(3) a ban on prepayment penalties for certain types of loans, (4) bans on arbitration provisions in mortgage loans
and (5) requirements for enhanced disclosures in connection with the making of a loan. The Dodd-Frank Act also
imposes a variety of requirements on entities that service mortgage loans and signiﬁ cantly expanded mortgage loan
application data collection and reporting requirements under the Home Mortgage Disclosure Act.

The Dodd-Frank Act contains provisions further regulating payment card transactions. The Dodd-Frank Act required
the Federal Reserve to adopt regulations limiting any interchange fee for a debit transaction to an amount which is
“reasonable and proportional” to the costs incurred by the issuer. The Federal Reserve has adopted ﬁ nal regulations
limiting the amount of debit interchange fees that large bank issuers may charge or receive on their debit card
transactions. There is an exemption from the rules for issuers with assets of less than $10 billion and the Federal
Reserve has stated that it will monitor and report to Congress on the eff ectiveness of the exemption.

Future Legislation or Regulation

The Trump administration, Congress, the regulators and various states continue to focus attention on the ﬁ nancial
services industry. Proposals that aff ect the industry will likely continue to be introduced. In particular, the
Trump administration and various members of Congress have expressed a desire to modify or repeal parts of the
Dodd-Frank Act. We cannot predict whether any of these proposals will be enacted or adopted or, if they are, the
eff ect they would have on our business, our operations or our ﬁ nancial condition or on the ﬁ nancial services industry
generally.

ITEM 1A RISK FACTORS

This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could
diff er materially from those anticipated in these forward-looking statements as a result of certain factors, including
the risks faced by us described below and elsewhere in this report.

Risks Related to Our Operations

We may not be able to continue to grow at our recent pace.

Since our initial public off ering (“IPO”) in February 2012, we have included targeted and opportunistic growth
as a key component of our business strategy for both our Mortgage Banking Segment and our Commercial and
Consumer Banking Segment and have expanded our operations at a relatively accelerated pace. We have grown
our retail branch presence from 20 branches in 2012 to 59 as of December 31, 2017, including expansion into new
geographic regions. Simultaneously, we have added substantially to our mortgage operations in both existing and
new markets and continued to expand our commercial lending operations, resulting in substantial growth overall in
total assets, total deposits, total loans and employees.

While we expect to continue both strategic and opportunistic growth in the Commercial and Consumer Banking
Segment, we recently undertook a restructuring of our Mortgage Banking Segment, where production has been
negatively impacted by increasing interest rates and a reduced supply of homes for sale in our primary markets. For the
near term, we expect to focus primarily on measured and effi cient growth and optimization of our existing mortgage
banking operations, which may lead to a substantially slower growth rate than we have experienced in recent years.

We may not recognize the full beneﬁ ts of our recent restructuring.

In the second and third quarter of 2017, we implemented a restructuring plan to bring our costs and the size of our
mortgage banking operations in line with our decreased expectations for origination opportunities for mortgage
loans, given both the interest rate environment and the lack of housing inventory in our primary markets. We recorded
restructuring expenses totaling $3.7 million in 2017, with an expectation that our annual costs will be reduced
signiﬁ cantly going forward. These expenses are associated primarily with a reduction in staffi ng in the Mortgage Banking
Segment, the closure or consolidation of several of our stand-alone home loan centers and other effi ciency measures.
However, there is no guarantee that we will recognize all or a substantial portion of the anticipated cost savings. Further,
if the demand for mortgage loans continues to decline in our markets, we may not recognize the expected income beneﬁ t
and may have to take additional steps to streamline our mortgage operations further. Conversely, if the demand for
mortgage loans increases precipitously in our markets, we may not be able to meet the full amount of the demand with
our leaner operations and may ﬁ nd it necessary to increase costs to provide for the necessary staffi ng and resources.

Volatility in mortgage markets, changes in interest rates, operational costs and other factors beyond our control
may adversely impact our proﬁ tability.

We have sustained signiﬁ cant losses in the past, and we cannot guarantee that we will remain proﬁ table or be able
to maintain proﬁ tability at a given level. Changes in the mortgage market, including an increase in interest rates
and a sustained and sizable disparity between the supply and demand of houses available for sale in our primary
markets, have caused a stagnation in mortgage originations throughout our markets, which adversely impacted
our proﬁ tability in 2017. This decline in proﬁ tability occurred even as our relative market share for mortgage
originations remained substantially unchanged. While we have implemented a restructuring of our Mortgage
Banking Segment in response, continued volatility in the market could have additional negative eff ects on our
ﬁ nancial results. In addition, our hedging activities may be impacted by unforeseen or unexpected changes. For
example, in the fourth quarter of 2016, unexpected increases in interest rates and asymmetrical changes in the values
of mortgage servicing rights and certain derivative hedging instruments impacted our earnings for that quarter.
We cannot be certain that similar asymmetries may not arise in the future. These and many other factors aff ect our
proﬁ tability, and our ability to remain proﬁ table is threatened by a myriad of issues, including:

•

Volatility in interest rates may limit our ability to make loans, decrease our net interest income and
noninterest income, create disparity between actual and expected closed loan volumes based on historical
fallout rates, reduce demand for loans, diminish the value of our loan servicing rights, aff ect the value of our
hedging instruments, increase the cost of deposits and otherwise negatively impact our ﬁ nancial situation;

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•

Volatility in mortgage markets, which is driven by factors outside of our control such as interest rate
changes, imbalances in housing supply and demand and general economic conditions, may negatively
impact our ability to originate loans and change the fair value of our existing loans and servicing rights;

Our hedging strategies to off set risks related to interest rate changes may not be successful and may
result in unanticipated losses for the Company;

Changes in regulations or in regulators’ interpretations of existing regulations may negatively impact the
Company or the Bank and may limit our ability to off er certain products or services, increase our costs of
compliance or restrict our growth initiatives, branch expansion and acquisition activities;

Increased costs from growth through acquisition could exceed the income growth anticipated from these
opportunities, especially in the short term as these acquisitions are integrated into our business;

Increased costs for controls over data conﬁ dentiality, integrity, and availability due to growth or as may
be necessary to strengthen the security proﬁ le of our computer systems and computer networks may
have a negative impact on our net income;

Changes in government-sponsored enterprises and their ability to insure or to buy our loans in the
secondary market may result in signiﬁ cant changes in our ability to recognize income on sale of our
loans to third parties;

Competition in the mortgage market industry may drive down the interest rates we are able to off er on
our mortgages, which would negatively impact our net interest income; and

Changes in the cost structures and fees of government-sponsored enterprises to whom we sell many of
these loans may compress our margins and reduce our net income and proﬁ tability.

These and other factors may limit our ability to generate revenue in excess of our costs, and in some circumstances
may aff ect the carrying value of our mortgage servicing, either of which in turn may result in a lower rate of
proﬁ tability or even substantial losses for the Company.

Proxy contests threatened or commenced against the Company could cause us to incur substantial costs, divert
the attention of the Board of Directors and management, take up management’s attention and resources, cause
uncertainty about the strategic direction of our business and adversely aff ect our business, operating results and
ﬁ nancial condition.

In November 2017, an activist investor, Roaring Blue Lion Capital Management, L.P., and its managing member,
Charles W. Griege, Jr., ﬁ led a Schedule 13D with the SEC with respect to the Company. In December 2017, the
Company’s Board of Directors met with Mr. Griege, and, at Mr. Griege’s request, in January 2018, the Company’s
Human Resources and Corporate Governance Committee, which acts as our nominating committee, interviewed
Mr. Griege to consider him for a position on our Board of Directors. On January 11, 2018, we announced that we
would not be off ering Mr. Griege a seat on our Board of Directors. On February 26, 2018, Mr. Griege publicly
disclosed that he had provided notice to the Company that he intended to nominate directors in opposition to the
slate of the Board of Directors at our 2018 Annual Meeting of Shareholders.

A proxy contest or other activist campaign and related actions, such as the ones discussed above, could have a
material and adverse eff ect on us for the following reasons:

•

Activist investors may attempt to eff ect changes in the Company’s strategic direction and how the
Company is governed, or to acquire control over the Company. In particular, the above mentioned
activist investor has suggested changes to our business that conﬂ ict with our strategic direction and could
cause uncertainty amongst employees, customers, investors and other constituencies about the strategic
direction of our business.

• While the Company welcomes the opinions of all shareholders, responding to proxy contests and related
actions by activist investors could be costly and time-consuming, disrupt our operations, and divert
the attention of our Board of Directors and senior management and employees away from their regular
duties and the pursuit of business opportunities. In addition, there may be litigation in connection with a

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proxy contest, which would serve as a further distraction to our Board of Directors, senior management
and employees and could require the Company to incur signiﬁ cant additional costs.

Perceived uncertainties as to our future direction as a result of potential changes to the composition of
the Board of Directors may lead to the perception of a change in the strategic direction of the business,
instability or lack of continuity which may be exploited by our competitors; may cause concern to our
existing or potential customers and employees; may result in the loss of potential business opportunities;
and may make it more diffi cult to attract and retain qualiﬁ ed personnel and business partners.

Proxy contests and related actions by activist investors could cause signiﬁ cant ﬂ uctuations in our stock
price based on temporary or speculative market perceptions or other factors that do not necessarily
reﬂ ect the underlying fundamentals and prospects of our business.

•

The integration of recent and future acquisitions could consume signiﬁ cant resources and may not be successful.

We have completed four whole-bank acquisitions and acquired eight stand-alone branches between September 2013
and December 31, 2017, all of which have required substantial resources and costs related to the acquisition and
integration process. For example, we incurred $391 thousand and $4.6 million of acquisition related expenses, net of
tax, in the ﬁ scal years ended December 31, 2017 and 2016, respectively. We may in the future undertake additional
growth through acquisition. There are certain risks related to the integration of operations of acquired banks and
branches, which we may continue to encounter if we acquire other banks or branches in the future.

Any future acquisition we may undertake may involve numerous risks related to the investigation and consideration
of the potential acquisition and the costs of undertaking such a transaction, as well as integrating acquired businesses
into HomeStreet and HomeStreet Bank, including risks that arise after the transaction is completed. These risks
include, but are not limited to, the following:

•

Diversion of management’s attention from normal daily operations of the business;

Diffi culties in integrating the operations, technologies, and personnel of the acquired companies;

Diffi culties in implementing, upgrading and maintaining our internal controls over ﬁ nancial reporting
and our disclosure controls and procedures;

Increased risk of compliance errors related to regulatory requirements, including customer notices and
other related disclosures;

Inability to maintain the key business relationships and the reputations of acquired businesses;

Entry into markets in which we have limited or no prior experience and in which competitors have
stronger market positions;

Potential responsibility for the liabilities of acquired businesses;

Increased operating costs associated with addressing the foregoing risks;

Inability to maintain our internal standards, procedures and policies at the acquired companies or
businesses; and

Potential loss of key employees of the acquired companies.

In addition, in certain cases our acquisition of a whole bank or a branch includes the acquisition of all or a
substantial portion of the target bank’s or branch’s assets and liabilities, including all or a substantial portion of
its loan portfolio. There may be instances where we, under our normal operating procedures, may ﬁ nd after the
acquisition that there may be additional losses or undisclosed liabilities with respect to the assets and liabilities of
the target bank or branch, and, with respect to its loan portfolio, that the ability of a borrower to repay a loan may
have become impaired, the quality of the value of the collateral securing a loan may fall below our standards, or the
allowance for loan losses may not be adequate. One or more of these factors might cause us to have additional losses
or liabilities, additional loan charge-off s or increases in allowances for loan losses.

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Diffi culties in pursuing or integrating any new acquisitions, and potential discoveries of additional losses or
undisclosed liabilities with respect to the assets and liabilities of acquired companies, may increase our costs and
adversely impact our ﬁ nancial condition and results of operations. Further, even if we successfully address these
factors and are successful in closing acquisitions and integrating our systems with the acquired systems, we may
nonetheless experience customer losses, or we may fail to grow the acquired businesses as we intend or to operate
the acquired businesses at a level that would avoid losses or justify our investments in those companies.

In addition, we may choose to issue additional common stock for future acquisitions, or we may instead choose to
pay the consideration in cash or a combination of stock and cash. Any issuances of stock relating to an acquisition
may have a dilutive eff ect on earnings per share, book value per share or the percentage ownership of existing
shareholders depending on the value of the assets or entity acquired. Alternatively, the use of cash as consideration in
any such acquisitions could impact our capital position and may require us to raise additional capital.

Natural disasters in our geographic markets may impact our ﬁ nancial results.

In the fourth quarter of 2017, certain communities in California suff ered signiﬁ cant losses from natural disasters,
including devastating wildﬁ res in Northern California in October 2017 that destroyed many homes and forced a
short closure of four of our stand-alone home loan centers in those areas. While the impact of these recent natural
disasters on our business do not appear to be material, we anticipate that our mortgage banking operations in areas
impacted by future disasters may experience an adverse ﬁ nancial impact due to offi ce closures, customers who as
a result of their losses may not be able to meet their loan commitments in a timely manner, a further reduction in
housing inventory due to the number of structures destroyed in the ﬁ re and negative impacts to the local economy as
it seeks to recover from these disasters.

Most of our primary markets are located in geographic regions that are at a risk for earthquakes, wildﬁ res, ﬂ oods,
mudslides and other natural disasters. In the event future catastrophic events impact our major markets, our
operations and ﬁ nancial results may be adversely impacted.

Our business is geographically conﬁ ned to certain metropolitan areas of the Western United States, and events
and conditions that disproportionately aff ect those areas may pose a more pronounced risk for our business.

Although we presently have operations in eight states, a substantial majority of our revenues are derived from
operations in the Puget Sound region of Washington, the Portland, Oregon metropolitan area, the San Francisco Bay
Area, and the Los Angeles and San Diego metropolitan areas in Southern California. All of our markets are located
in the Western United States. Each of our primary markets is subject to various types of natural disasters, and each
has experienced disproportionately signiﬁ cant economic volatility compared to the rest of the United States in the
past decade. In addition, many of these areas are currently experiencing a constriction in the availability of houses
for sale as new home construction has not kept pace with population growth in our primary markets, in part due to
limitations on permitting and land availability. Economic events or natural disasters that aff ect the Western United
States and our primary markets in that region in particular, or more signiﬁ cantly, may have an unusually pronounced
impact on our business and, because our operations are not more geographically diversiﬁ ed, we may lack the ability
to mitigate those impacts from operations in other regions of the United States.

The signiﬁ cant concentration of real estate secured loans in our portfolio has had a negative impact on our asset
quality and proﬁ tability in the past and there can be no assurance that it will not have such impact in the future.

A substantial portion of our loans are secured by real property, a characteristic we expect to continue indeﬁ nitely.
Our real estate secured lending is generally sensitive to national, regional and local economic conditions, making
loss levels diffi cult to predict. Declines in real estate sales and prices, signiﬁ cant increases in interest rates,
unforeseen natural disasters and a degeneration in prevailing economic conditions may result in higher than expected
loan delinquencies, foreclosures, problem loans, other real estate owned (“OREO”), net charge-off s and provisions
for credit and OREO losses. Although real estate prices are currently stable in the markets in which we operate, if
market values decline, the collateral for our loans may provide less security and our ability to recover the principal,
interest and costs due on defaulted loans by selling the underlying real estate will be diminished, leaving us more
likely to suff er additional losses on defaulted loans. Such declines may have a greater eff ect on our earnings and
capital than on the earnings and capital of ﬁ nancial institutions whose loan portfolios are more diversiﬁ ed.

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Worsening conditions in the real estate market and higher than normal delinquency and default rates on loans could
cause other adverse consequences for us, including:

•

Reduced cash ﬂ ows and capital resources, as we are required to make cash advances to meet contractual
obligations to investors, process foreclosures, and maintain, repair and market foreclosed properties;

Declining mortgage servicing fee revenues because we recognize these revenues only upon collection;

Increasing mortgage servicing costs;

Declining fair value on our mortgage servicing rights; and

Declining fair values and liquidity of securities held in our investment portfolio that are collateralized by
mortgage obligations.

We may incur signiﬁ cant losses as a result of ineff ective hedging of interest rate risk related to our loans sold with
retained servicing rights.

Both the value of our single family mortgage servicing rights, or MSRs, and the value of our single family loans
held for sale change with ﬂ uctuations in interest rates, among other things, reﬂ ecting the changing expectations
of mortgage prepayment activity. To mitigate potential losses of fair value of single family loans held for sale and
MSRs related to changes in interest rates, we actively hedge this risk with ﬁ nancial derivative instruments. Hedging
is a complex process, requiring sophisticated models, experienced and skilled personnel and continual monitoring.
Changes in the value of our hedging instruments may not correlate with changes in the value of our single family
loans held for sale and MSRs, as occurred in the fourth quarter of 2016, and we could incur a net valuation loss as a
result of our hedging activities. As the volume of single family loans held for sale and MSRs increases, our exposure
to the risks associated with the impact of interest rate ﬂ uctuations on single family loans held for sale and MSRs also
increases. Further, in times of signiﬁ cant ﬁ nancial disruption, as in 2008, hedging counterparties have been known to
default on their obligations. Any such events or conditions may harm our results of operations.

We have previously had deﬁ ciencies in our internal controls over ﬁ nancial reporting, and those deﬁ ciencies or
others that we have not discovered may result in our inability to maintain control over our assets or to identify
and accurately report our ﬁ nancial condition, results of operations, or cash ﬂ ows.

Our internal controls over ﬁ nancial reporting are intended to assure we maintain accurate records, promote the
accurate and timely reporting of our ﬁ nancial information, maintain adequate control over our assets, and detect
unauthorized acquisition, use or disposition of our assets. Eff ective internal and disclosure controls are necessary for
us to provide reliable ﬁ nancial reports and eff ectively prevent fraud and to operate successfully as a public company.
If we cannot provide reliable ﬁ nancial reports or prevent fraud, our reputation and operating results may be harmed.

As part of our ongoing monitoring of internal control from time to time we have discovered deﬁ ciencies in our
internal controls that have required remediation. In the past, these deﬁ ciencies have included “material weaknesses,”
deﬁ ned as a deﬁ ciency or combination of deﬁ ciencies that results in more than a remote likelihood that a material
misstatement of the annual or interim ﬁ nancial statements will not be prevented or detected, and “signiﬁ cant
deﬁ ciencies,” deﬁ ned as a deﬁ ciency or combination of deﬁ ciencies in internal control over ﬁ nancial reporting that
is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of
the Company’s ﬁ nancial reporting.

Management has in place a process to document and analyze all identiﬁ ed internal control deﬁ ciencies and
implement remedial measures suffi cient to resolve those deﬁ ciencies. To support our growth initiatives and to create
operating effi ciencies we have implemented, and will continue to implement, new systems and processes. If our
project management processes are not sound and adequate resources are not deployed to these implementations,
we may experience additional internal control lapses that could expose the Company to operating losses. However,
any failure to maintain eff ective controls or timely eff ect any necessary improvement of our internal and disclosure
controls in the future could harm operating results or cause us to fail to meet our reporting obligations.

If our internal controls over ﬁ nancial reporting are subject to additional defects we have not identiﬁ ed, we may
be unable to maintain adequate control over our assets, or we may experience material errors in recording our
assets, liabilities and results of operations. Repeated or continuing deﬁ ciencies may cause investors to question

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the reliability of our internal controls or our ﬁ nancial statements, and may result in an erosion of conﬁ dence
in our management or result in penalties or other potential enforcement action by the Securities and Exchange
Commission (the “SEC”). On January 19, 2017, we ﬁ nalized a settlement agreement with the SEC and paid a ﬁ ne
of $500,000 related to an SEC investigation into errors disclosed in 2014 in our fair value hedge accounting for
certain commercial real estate loans and swaps. Neither the errors nor the amount of the settlement was ultimately
material to our ﬁ nancial statements in any period. However, inquiries by the SEC took the time and attention of
management for signiﬁ cant periods of time and may have had an adverse impact on investor conﬁ dence in us and, in
turn, the market value of our common stock in the near term. If we were to have future failures of a similar nature,
such failures may have a more signiﬁ cant impact than might generally be expected, both because of a potential for
enhanced regulatory scrutiny and the potential for further reputational harm.

Our allowance for loan losses may prove inadequate or we may be negatively aff ected by credit risk exposures.
Future additions to our allowance for loan losses, as well as charge-off s in excess of reserves, will reduce our
earnings.

Our business depends on the creditworthiness of our customers. As with most ﬁ nancial institutions, we maintain
an allowance for loan losses to reﬂ ect potential defaults and nonperformance, which represents management’s
best estimate of probable incurred losses inherent in the loan portfolio. Management’s estimate is based on our
continuing evaluation of speciﬁ c credit risks and loan loss experience, current loan portfolio quality, present
economic, political and regulatory conditions, industry concentrations and other factors that may indicate future
loan losses. The determination of the appropriate level of the allowance for loan losses inherently involves a high
degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of
which may undergo material changes. Generally, our nonperforming loans and OREO reﬂ ect operating diffi culties of
individual borrowers and weaknesses in the economies of the markets we serve. This allowance may not be adequate
to cover actual losses, and future provisions for losses could materially and adversely aff ect our ﬁ nancial condition,
results of operations and cash ﬂ ows.

In addition, as we have acquired new operations, we have added the loans previously held by the acquired companies
or related to the acquired branches to our books. In the event that we make additional acquisitions in the future, we
may bring additional loans originated by other institutions onto our books. Although we review loan quality as part
of our due diligence in considering any acquisition involving loans, the addition of such loans may increase our
credit risk exposure, require an increase in our allowance for loan losses, and adversely aff ect our ﬁ nancial condition,
results of operations and cash ﬂ ows stemming from losses on those additional loans.

Our accounting policies and methods are fundamental to how we report our ﬁ nancial condition and results of
operations, and we use estimates in determining the fair value of certain of our assets, which estimates may prove
to be imprecise and result in signiﬁ cant changes in valuation.

A portion of our assets are carried on the balance sheet at fair value, including investment securities available for
sale, mortgage servicing rights related to single family loans and single family loans held for sale. Generally, for
assets that are reported at fair value, we use quoted market prices or internal valuation models that use observable
market data inputs to estimate their fair value. In certain cases, observable market prices and data may not be readily
available or their availability may be diminished due to market conditions. We use ﬁ nancial models to value certain
of these assets. These models are complex and use asset-speciﬁ c collateral data and market inputs for interest rates.
Although we have processes and procedures in place governing internal valuation models and their testing and
calibration, such assumptions are complex as we must make judgments about the eff ect of matters that are inherently
uncertain. Diff erent assumptions could result in signiﬁ cant changes in valuation, which in turn could aff ect earnings
or result in signiﬁ cant changes in the dollar amount of assets reported on the balance sheet. As we grow the
expectation for the sophistication of our models will increase and we may need to hire additional personnel with
suffi cient expertise.

Our funding sources may prove insuffi cient to replace deposits and support our future growth.

We must maintain suffi cient funds to respond to the needs of depositors and borrowers. As a part of our liquidity
management, we use a number of funding sources in addition to core deposit growth and repayments and maturities
of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which
may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and

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brokered certiﬁ cates of deposit. Adverse operating results or changes in industry conditions could lead to diffi culty
or an inability to access these additional funding sources and could make our existing funds more volatile. Our
ﬁ nancial ﬂ exibility may be materially constrained if we are unable to maintain our access to funding or if adequate
ﬁ nancing is not available to accommodate future growth at acceptable interest rates. As rates increase, the cost of our
funding often increases faster than we can increase our interest income. For example, in recent periods the FHLB has
increased rates on their advances in a quick response to increases in rates by the Federal Reserve and implemented
those increased costs earlier than we have been able to increase our own interest income. This asymmetry of the
speed at which interests rates rise on our liabilities as opposed to our assets may have a negative impact on our net
interest income and, in turn, our ﬁ nancial results. If we are required to rely more heavily on more expensive funding
sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case,
our operating margins and proﬁ tability would be adversely aff ected. Further, the volatility inherent in some of these
funding sources, particularly brokered deposits, may increase our exposure to liquidity risk.

Our management of capital could adversely aff ect proﬁ tability measures and the market price of our common
stock and could dilute the holders of our outstanding common stock.

Our capital ratios are higher than regulatory minimums. We may choose to have a lower capital ratio in the future in
order to take advantage of growth opportunities, including acquisition and organic loan growth, or in order to take
advantage of a favorable investment opportunity. On the other hand, we may again in the future elect to raise capital
through a sale of our debt or equity securities in order to have additional resources to pursue our growth, including
by acquisition, fund our business needs and meet our commitments, or as a response to changes in economic
conditions that make capital raising a prudent choice. In the event the quality of our assets or our economic position
were to deteriorate signiﬁ cantly, as a result of market forces or otherwise, we may also need to raise additional
capital in order to remain compliant with capital standards.

We may not be able to raise such additional capital at the time when we need it, or on terms that are acceptable to
us. Our ability to raise additional capital will depend in part on conditions in the capital markets at the time, which
are outside our control, and in part on our ﬁ nancial performance. Further, if we need to raise capital in the future,
especially if it is in response to changing market conditions, we may need to do so when many other ﬁ nancial
institutions are also seeking to raise capital, which would create competition for investors. An inability to raise
additional capital on acceptable terms when needed could have a material adverse eff ect on our business, ﬁ nancial
condition, results of operations and prospects. In addition, any capital raising alternatives could dilute the holders of
our outstanding common stock and may adversely aff ect the market price of our common stock.

If we breach any of the representations or warranties we make to a purchaser or securitizer of our mortgage loans
or MSRs, we may be liable to the purchaser or securitizer for certain costs and damages.

When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain
representations and warranties to the purchaser about the mortgage loans and the manner in which they were
originated. Our agreements require us to repurchase mortgage loans if we have breached any of these representations
or warranties, in which case we may be required to repurchase such loan and record a loss upon repurchase and/or
bear any subsequent loss on the loan. We may not have any remedies available to us against a third party for such
losses, or the remedies available to us may not be as broad as the remedies available to the purchaser of the mortgage
loan against us. In addition, if there are remedies against a third party available to us, we face further risk that such
third party may not have the ﬁ nancial capacity to perform remedies that otherwise may be available to us. Therefore,
if a purchaser enforces remedies against us, we may not be able to recover our losses from a third party and may be
required to bear the full amount of the related loss.

If repurchase and indemnity demands increase on loans or MSRs that we sell from our portfolios, our liquidity,
results of operations and ﬁ nancial condition will be adversely aff ected.

If we breach any representations or warranties or fail to follow guidelines when originating an FHA/HUD-
insured loan or a VA-guaranteed loan, we may lose the insurance or guarantee on the loan and suff er losses, pay
penalties, and/or be subjected to litigation from the federal government.

We originate and purchase, sell and thereafter service single family loans, some of which are insured by FHA/HUD
or guaranteed by the VA. We certify to the FHA/HUD and the VA that the loans meet their requirements and

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guidelines. The FHA/HUD and VA audit loans that are insured or guaranteed under their programs, including
audits of our processes and procedures as well as individual loan documentation. Violations of guidelines can result
in monetary penalties or require us to provide indemniﬁ cations against loss or loans declared ineligible for their
programs. In the past, monetary penalties and losses from indemniﬁ cations have not created material losses to the
Bank. As a result of the housing crisis that began in 2008, the FHA/HUD stepped up enforcement initiatives. In
addition to regular FHA/HUD audits, HUD’s Inspector General has become active in enforcing FHA regulations
with respect to individual loans and has partnered with the Department of Justice (“DOJ”) in ﬁ ling lawsuits against
lenders for systemic violations. The penalties resulting from such lawsuits can be much more severe, since systemic
violations can be applied to groups of loans and penalties may be subject to treble damages. The DOJ has used
the Federal False Claims Act and other federal laws and regulations in prosecuting these lawsuits. Because of our
signiﬁ cant origination of FHA/HUD insured and VA guaranteed loans, if the DOJ were to ﬁ nd potential violations
by the Bank, we could be subject to material monetary penalties and/or losses, and may even be subject to lawsuits
alleging systemic violations which could result in treble damages.

We may face risk of loss if we purchase loans from a seller that fails to satisfy its indemniﬁ cation obligations.

We generally receive representations and warranties from the originators and sellers from whom we purchase loans
and servicing rights such that if a loan defaults and there has been a breach of such representations and warranties,
we may be able to pursue a remedy against the seller of the loan for the unpaid principal and interest on the defaulted
loan. However, if the originator and/or seller breaches such representations and warranties and does not have the
ﬁ nancial capacity to pay the related damages, we may be subject to the risk of loss for such loan as the originator
or seller may not be able to pay such damages or repurchase loans when called upon by us to do so. Currently, we
only purchase loans from WMS Series LLC, an affi liated business arrangement with certain Windermere real estate
brokerage franchise owners.

Changes in fee structures by third party loan purchasers and mortgage insurers may decrease our loan
production volume and the margin we can recognize on conforming home loans, and may adversely impact our
results of operations.

Changes in the fee structures by Fannie Mae, Freddie Mac or other third party loan purchasers, such as an increase
in guarantee fees and other required fees and payments, may increase the costs of doing business with them and,
in turn, increase the cost of mortgages to consumers and the cost of selling conforming loans to third party loan
purchasers. Increases in those costs could in turn decrease our margin and negatively impact our proﬁ tability.
Additionally, increased costs for premiums from mortgage insurers, extensions of the period for which private
mortgage insurance is required on a loan purchased by third party purchasers and other changes to mortgage
insurance requirements could also increase our costs of completing a mortgage and our margins for home loan
origination. Were any of our third party loan purchasers to make such changes in the future, it may have a negative
impact on our ability to originate loans to be sold because of the increased costs of such loans and may decrease our
proﬁ tability with respect to loans held for sale. In addition, any signiﬁ cant adverse change in the level of activity in
the secondary market or the underwriting criteria of these third party loan purchasers could negatively impact our
results of business, operations and cash ﬂ ows.

We may incur additional costs in placing loans if our third party purchasers discontinue doing business with us
for any reason.

We rely on third party purchasers with whom we place loans as a source of funding for the loans we make to
consumers. Occasionally, third party loan purchasers may go out of business, elect to exit the market or choose
to cease doing business with us for a myriad of reasons, including but not limited to the increased burdens on
purchasers related to compliance, adverse market conditions or other pressures on the industry. In the event that one
or more third party purchasers goes out of business, exits the market or otherwise ceases to do business with us at a
time when we have loans that have been placed with such purchaser but not yet sold, we may incur additional costs
to sell those loans to other purchasers or may have to retain such loans, which could negatively impact our results of
operations and our capital position.

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Our real estate lending may expose us to environmental liabilities.

In the course of our business, it is necessary to foreclose and take title to real estate, which could subject us to
environmental liabilities with respect to these properties. Hazardous substances or waste, contaminants, pollutants
or sources thereof may be discovered on properties during our ownership or after a sale to a third party. We could
be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and
clean-up costs incurred in connection with environmental contamination, or may be required to investigate or clean
up hazardous or toxic substances or chemical releases at such properties. The costs associated with investigation or
remediation activities could be substantial and could substantially exceed the value of the real property. In addition,
as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating from the property. We may be unable
to recover costs from any third party. These occurrences may materially reduce the value of the aff ected property, and
we may ﬁ nd it diffi cult or impossible to use or sell the property prior to or following any environmental remediation.
If we ever become subject to signiﬁ cant environmental liabilities, our business, ﬁ nancial condition and results of
operations could be materially and adversely aff ected.

Market-Related Risks

Restrictions on new home construction and lack of inventory of homes for sale in our primary markets may
negatively impact our ability to originate mortgage loans at the volumes we have experienced in the past.

While a desire to purchase single family real estate remains strong in our primary markets, as is evidenced by
a continued demand from customers for mortgage loan applications and pre-approvals, new and resale home
availability in those markets has not kept pace with demand. Despite sustained job and population growth, Redﬁ n.
com reported the number of homes listed for sale in the Seattle and Portland metropolitan area and in California had
once again decreased year over year as of December 31, 2017, and there has been no indication that there will be any
near-term meaningful change in this imbalance.

While this limit of supply has not negatively impacted our market share to date, it has negatively impacted our
loan volume and despite the restructuring of our Mortgage Banking Segment to scale our operations to demand, if
this trend continues to increase, the lack of inventory may continue to impair both our volume and earnings in the
Mortgage Banking Segment.

The housing supply constraint is complicated by a slow development of new home construction, which is itself
constrained by the geography of the West Coast and the lingering eff ects of the last recession. Newly constructed
single family home inventory remains extremely low as homebuilders struggle to ﬁ nd and develop available and
appropriate land for new housing and meet increased land use regulations which increase costs and limit the number
of lots per parcel. In addition, because the timeline for converting raw land to ﬁ nished development may exceed
ﬁ ve years in many of our markets, the curtailment of development following the recession means that inventory will
likely remain low for the foreseeable future.

The demand for houses and ﬁ nancing to purchase houses remains strong in our primary markets due to continued
strong job growth and in-migration. As a result, our application volume without property information, which
represents customers seeking pre-qualiﬁ cation to shop for a home, is a substantial part of our single family mortgage
loan pipeline. The partial underwriting associated with these applications without property information creates
expenses without the revenue associated with a closed mortgage loan, which in turn provides a further negative
impact on our mortgage banking results.

Fluctuations in interest rates could adversely aff ect the value of our assets and reduce our net interest income and
noninterest income, thereby adversely aff ecting our earnings and proﬁ tability.

Interest rates may be aff ected by many factors beyond our control, including general and economic conditions
and the monetary and ﬁ scal policies of various governmental and regulatory authorities. For example, unexpected
increases in interest rates can result in an increased percentage of rate lock customer closing loans, which would in
turn increase our costs relative to income. In addition, increases in interest rates in recent periods has reduced our
mortgage revenues by reducing the market for reﬁ nancings, which has negatively impacted demand for certain of
our residential loan products and the revenue realized on the sale of loans which, in turn, may negatively impact our
noninterest income and, to a lesser extent, our net interest income. Market volatility in interest rates can be diffi cult

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to predict, as unexpected interest rate changes may result in a sudden impact while anticipated changes in interest
rates generally impact the mortgage rate market prior to the actual rate change.

Our earnings are also dependent on the diff erence between the interest earned on loans and investments and the
interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans and
investment securities and the rates paid on deposits and borrowings and may negatively impact our ability to attract
deposits, make loans and achieve satisfactory interest rate spreads, which could adversely aff ect our ﬁ nancial
condition or results of operations. In addition, changes to market interest rates may impact the level of loans,
deposits and investments and the credit quality of existing loans.

Asymmetrical changes in interest rates, for example a greater increase in short term rates than in long term rates,
could adversely impact our net interest income because our liabilities, including advances from the FHLB which
typically carry a rate based on 30-day LIBOR and interest payable on our deposits, tend to be more sensitive to short
term rates while our assets, which tend to be more sensitive to long term rates. In addition, it may take longer for
our assets to reprice to adjust to a new rate environment because ﬁ xed rate loans do not ﬂ uctuate with interest rate
changes and adjustable rate loans often have a speciﬁ ed period of readjustment. As a result, a ﬂ attening of the yield
curve is likely to have a negative impact on our net interest income.

Our securities portfolio also includes securities that are insured or guaranteed by U.S. government agencies or
government-sponsored enterprises and other securities that are sensitive to interest rate ﬂ uctuations. The unrealized
gains or losses in our available-for-sale portfolio are reported as a separate component of shareholders’ equity until
realized upon sale. Interest rate ﬂ uctuations may impact the value of these securities and as a result, shareholders’
equity, and may cause material ﬂ uctuations from quarter to quarter. Failure to hold our securities until maturity or
until market conditions are favorable for a sale could adversely aff ect our ﬁ nancial condition.

A signiﬁ cant portion of our noninterest income is derived from originating residential mortgage loans and selling
them into the secondary market. That business has beneﬁ ted from a long period of historically low interest rates.
To the extent interest rates rise, particularly if they rise substantially, we may experience a reduction in mortgage
ﬁ nancing of new home purchases and reﬁ nancing. These factors have negatively aff ected our mortgage loan
origination volume and our noninterest income in the past and may do so again in the future.

Our mortgage operations are impacted by changes in the housing market, including factors that impact housing
aff ordability and availability.

Housing aff ordability is directly aff ected by both the level of mortgage interest rates and the inventory of houses
available for sale. The housing market recovery was aided by a protracted period of historically low mortgage
interest rates that has made it easier for consumers to qualify for a mortgage and purchase a home, however,
mortgage rates are now rising again. Should mortgage rates substantially increase over current levels, it would
become more diffi cult for many consumers to qualify for mortgage credit. This could have a dampening eff ect on
home sales and on home values.

In addition, constraints on the number of houses available for sale in some of our largest markets are driving up
home prices, which may also make it harder for our customer to qualify for a mortgage, adversely impact our ability
to originate mortgages and, as a consequence, our results of operations. Any return to a recessionary economy could
also result in ﬁ nancial stress on our borrowers that may result in volatility in home prices, increased foreclosures
and signiﬁ cant write-downs of asset values, all of which would adversely aff ect our ﬁ nancial condition and results of
operations.

The price of our common stock is subject to volatility.

The price of our common stock has ﬂ uctuated in the past and may face additional and potentially substantial
ﬂ uctuations in the future. Among the factors that may impact our stock price are the following:

•

Variances in our operating results;

Disparity between our operating results and the operating results of our competitors;

Changes in analyst’s estimates of our earnings results and future performance, or variances between our
actual performance and that forecast by analysts;

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•

News releases or other announcements of material events relating to the Company, including but not
limited to mergers, acquisitions, expansion plans, restructuring activities or other strategic developments;

Statements made by activist investors criticizing our strategy, our management team or our Board of
Directors;

Future securities off erings by us of debt or equity securities;

Addition or departure of key personnel;

Market-wide events that may be seen by the market as impacting the Company;

The presence or absence of short-selling of our common stock;

General ﬁ nancial conditions of the country or the regions in which we operate;

Trends in real estate in our primary markets; or

Trends relating to the economic markets generally.

The stock markets in general experience substantial price and trading ﬂ uctuations, and such changes may create
volatility in the market as a whole or in the stock prices of securities related to particular industries or companies
that is unrelated or disproportionate to changes in operating performance of the Company. Such volatility may have
an adverse eff ect on the trading price of our common stock.

Current economic conditions continue to pose signiﬁ cant challenges for us and could adversely aff ect our
ﬁ nancial condition and results of operations.

We generate revenue from the interest and fees we charge on the loans and other products and services we sell, and
a substantial amount of our revenue and earnings comes from the net interest and noninterest income that we earn
from our mortgage banking and commercial lending businesses. Our operations have been, and will continue to be,
materially aff ected by the state of the U.S. economy, particularly unemployment levels and home prices. A prolonged
period of slow growth or a pronounced decline in the U.S. economy, or any deterioration in general economic
conditions and/or the ﬁ nancial markets resulting from these factors, or any other events or factors that may signal a
return to a recessionary economic environment, could dampen consumer conﬁ dence, adversely impact the models
we use to assess creditworthiness, and materially adversely aff ect our ﬁ nancial results and condition. If the economy
worsens and unemployment rises, which also would likely result in a decrease in consumer and business conﬁ dence
and spending, the demand for our credit products, including our mortgages, may fall, reducing our net interest and
noninterest income and our earnings. Signiﬁ cant and unexpected market developments may also make it more
challenging for us to properly forecast our expected ﬁ nancial results.

A change in federal monetary policy could adversely impact our mortgage banking revenues.

The Federal Reserve is responsible for regulating the supply of money in the United States, and as a result its
monetary policies strongly inﬂ uence our costs of funds for lending and investing as well as the rate of return we are
able to earn on those loans and investments, both of which impact our net interest income and net interest margin.
Changes in interest rates may increase our cost of capital or decrease the income we receive from interest bearing
assets, and asymmetrical changes in short term and long term interest rates may result in a more rapid increase in
the costs related to interest-bearing liabilities such as FHLB advances and interest-bearing deposit accounts without
a correlated increase in the income from interest-bearing assets which are typically more sensitive to long-term
interest rates. The Federal Reserve Board’s interest rate policies can also materially aff ect the value of ﬁ nancial
instruments we hold, including debt securities, mortgage servicing rights, or MSRs and derivative instruments
used to hedge against changes in the value of our MSRs. These monetary policies can also negatively impact our
borrowers, which in turn may increase the risk that they will be unable to pay their loans according to the terms or
be unable to pay their loans at all. We have no control over the Federal Reserve Board’s policies and cannot predict
when changes are expected or what the magnitude of such changes may be.

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A substantial portion of our revenue is derived from residential mortgage lending which is a market sector that
experiences signiﬁ cant volatility.

While we have simultaneously grown our Commercial and Consumer Banking Segment revenue and downsized
our mortgage lending operations, a substantial portion of our consolidated net revenues (net interest income plus
noninterest income) are still derived from originating and selling residential mortgages. Residential mortgage
lending in general has experienced substantial volatility in recent periods due to changes in interest rates, a
signiﬁ cant lack of housing inventory caused by an increase in demand for housing at a time of decreased supply, and
other market forces beyond our control. Lack of housing inventory limits our ability to originate purchase mortgages
as it may take longer for loan applicants to ﬁ nd a home to buy after being pre-approved for a loan, which results in
the Company incurring costs related to the pre-approval without being able to book the revenue from an actual loan.
In addition, interest rate changes may result in lower rate locks and higher closed loan volume which can negatively
impact our ﬁ nancial results because we book revenue at the time we enter into rate lock agreements after adjusting
for the estimated percentage of loans that are not expected to actually close, which we refer to as “fallout”. When
interest rates rise, the level of fallout as a percentage of rate locks declines, which results in higher costs relative to
income for that period, which may adversely impact our earnings and results of operations. In addition, an increase
in interest rates may materially and adversely aff ect our future loan origination volume, margins, and the value of the
collateral securing our outstanding loans, may increase rates of borrower default, and may otherwise adversely aff ect
our business.

We may incur losses due to changes in prepayment rates.

Our mortgage servicing rights carry interest rate risk because the total amount of servicing fees earned, as well as
changes in fair-market value, ﬂ uctuate based on expected loan prepayments (aff ecting the expected average life of
a portfolio of residential mortgage servicing rights). The rate of prepayment of residential mortgage loans may be
inﬂ uenced by changing national and regional economic trends, such as recessions or stagnating real estate markets,
as well as the diff erence between interest rates on existing residential mortgage loans relative to prevailing residential
mortgage rates. During periods of declining interest rates, many residential borrowers reﬁ nance their mortgage
loans. Changes in prepayment rates are therefore diffi cult for us to predict. The loan administration fee income
(related to the residential mortgage loan servicing rights corresponding to a mortgage loan) decreases as mortgage
loans are prepaid. Consequently, in the event of an increase in prepayment rates, we would expect the fair value of
portfolios of residential mortgage loan servicing rights to decrease along with the amount of loan administration
income received.

Regulatory-Related Risks

We are subject to extensive regulation that may restrict our activities, including declaring cash dividends or
capital distributions or pursuing growth initiatives and acquisition activities, and imposes ﬁ nancial requirements
or limitations on the conduct of our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities, including
the FDIC, the Washington Department of Financial Institutions and the Federal Reserve Board, and to various laws
and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations.
The laws, rules and regulations to which we are subject evolve and change frequently, including changes that come
from judicial or regulatory agency interpretations of laws and regulations outside of the legislative process that
may be more diffi cult to anticipate. We are subject to various examinations by our regulators during the course of
the year. Regulatory authorities who conduct these examinations have extensive discretion in their supervisory and
enforcement activities, including the authority to restrict our operations, our growth and our acquisition activity,
adversely reclassify our assets, determine the level of deposit premiums assessed, require us to increase our
allowance for loan losses, require customer restitution and impose ﬁ nes or other penalties. The level of discretion,
and the extent of potential penalties and other remedies, have increased substantially during recent years. We have,
in the past, been subject to speciﬁ c regulatory orders that constrained our business and required us to take measures
that investors may have deemed undesirable, and we may again in the future be subject to such orders if banking
regulators were to determine that our operations require such restrictions or if they determine that remediation of
operational deﬁ ciencies is required.

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In addition, recent political shifts in the United States may result in additional signiﬁ cant changes in legislation
and regulations that impact us. Dodd-Frank’s level of oversight and compliance obligations increase signiﬁ cantly
for banks with total assets in excess of $10 billion, which may limit our ability to grow beyond that level or may
signiﬁ cantly increase the cost and regulatory burden of doing so. While the Trump administration and Republicans
controlling Congress have announced that they intend to repeal or revise signiﬁ cant portions of Dodd-Frank and
other regulation impacting ﬁ nancial institutions, the nature and extent of such repeals or revisions are not presently
known and readers should not rely on the assumption that these changes will come to pass. These circumstances lead
to additional uncertainty regarding our regulatory environment and the cost and requirements for compliance. We
are unable to predict whether U.S. federal, or, state authorities, or other pertinent bodies, will enact legislation, laws,
rules or regulations. Further, an increasing amount of the regulatory authority that pertains to ﬁ nancial institutions
comes in the form of informal “guidance”, such as handbooks, guidelines, ﬁ eld interpretations by regulators or
similar provisions that will aff ect our business or require changes in our practices in the future even if they are not
formally adopted as laws or regulations. Any such changes could adversely aff ect our cost of doing business and our
proﬁ tability.

Changes in regulation of our industry has the potential to create higher costs of compliance, including short-term
costs to meet new compliance standards, limit our ability to pursue business opportunities and increase our exposure
to the judicial system and the plaintiff ’s bar.

Policies and regulations enacted by CFPB may negatively impact our residential mortgage loan business and
compliance risk.

Our consumer business, including our mortgage, credit card, and other consumer lending and non-lending
businesses, may be adversely aff ected by the policies enacted or regulations adopted by the Consumer Financial
Protection Bureau (“CFPB”) which under the Dodd-Frank Act has broad rulemaking authority over consumer
ﬁ nancial products and services. For example, in January 2014 new federal regulations promulgated by the CFPB
took eff ect which impact how we originate and service residential mortgage loans. Those regulations, among other
things, require mortgage lenders to assess and document a borrower’s ability to repay their mortgage loan while
providing borrowers the ability to challenge foreclosures and sue for damages based on allegations that the lender
failed to meet the standard for determining the borrower’s ability to repay their loan. While the regulations include
presumptions in favor of the lender based on certain loan underwriting criteria, they have not yet been challenged
widely in courts and it is uncertain how these presumptions will be construed and applied by courts in the event of
litigation. The ultimate impact of these regulations on the lender’s enforcement of its loan documents in the event of
a loan default, and the cost and expense of doing so, is uncertain, but may be signiﬁ cant. In addition, the secondary
market demand for loans that do not fall within the presumptively safest category of a “qualiﬁ ed mortgage” as
deﬁ ned by the CFPB is uncertain. The 2014 regulations also require changes to certain loan servicing procedures
and practices, which has resulted in increased foreclosure costs and longer foreclosure timelines in the event of loan
default, and failure to comply with the new servicing rules may result in additional litigation and compliance risk.

The CFPB was also given authority over the Real Estate Settlement Procedures Act, or RESPA, under the
Dodd-Frank Act and has, in some cases, interpreted RESPA requirements diff erently than other agencies, regulators
and judicial opinions. As a result, certain practices that have been considered standard in the industry, including
relationships that have been established between mortgage lenders and others in the mortgage industry such as
developers, realtors and insurance providers, are now being subjected to additional scrutiny under RESPA. Our
regulators, including the FDIC, review our practices for compliance with RESPA as interpreted by the CFPB.
Changes in RESPA requirements and the interpretation of RESPA requirements by our regulators may result in
adverse examination ﬁ ndings by our regulators, which could negatively impact our ability to pursue our growth
plans, branch expansion and limit our acquisition activity.

In addition to RESPA compliance, the Bank is also subject to the CFPB’s Final Integrated Disclosure Rule,
commonly known as TRID, which became eff ective in October 2015. Among other things, TRID requires lenders
to combine the initial Good Faith Estimate and Initial Truth in Lending (“TIL”) disclosures into a single new Loan
Estimate disclosure and the HUD-1 and Final TIL disclosures into a single new Closing Disclosure. The deﬁ nition of
an application and timing requirements has changed, and a new Closing Disclosure waiting period has been added.
These changes, along with other changes required by TRID, require signiﬁ cant systems modiﬁ cations, process and
procedure changes. Failure to comply with these new requirements may result in regulatory penalties for disclosure
and other violations under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth In Lending Act

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(“TILA”), and private right of action under TILA, and may impact our ability to sell or the price we receive for
certain loans.

In addition, the CFPB has adopted and largely implemented additional rules under the Home Mortgage Disclosure
Act (“HMDA”) that are intended to improve information reported about the residential mortgage market and
increase disclosure about consumer access to mortgage credit. The updates to the HMDA increase the types of
dwelling-secured loans that are subject to the disclosure requirements of the rule and expand the categories of
information that ﬁ nancial institutions such as the Bank are required to report with respect to such loans and such
borrowers, including potentially sensitive customer information. Most of the rule’s provisions went into eff ect on
January 1, 2018. These changes increased our compliance costs due to the need for additional resources to meet the
enhanced disclosure requirements as well as informational systems to allow the Bank to properly capture and report
the additional mandated information. The volume of new data that is required to be reported under the updated rules
will also cause the Bank to face an increased risk of errors in the processing of such information. More importantly,
because of the sensitive nature of some of the additional customer information to be included in such reports, the
Bank may face a higher potential for security breaches resulting in the disclosure of sensitive customer information
in the event the HMDA reporting ﬁ les were obtained by an unauthorized party.

Interpretation of federal and state legislation, case law or regulatory action may negatively impact our business.

Regulatory and judicial interpretation of existing and future federal and state legislation, case law, judicial orders and
regulations could also require us to revise our operations and change certain business practices, impose additional
costs, reduce our revenue and earnings and otherwise adversely impact our business, ﬁ nancial condition and results
of operations. For instance, judges interpreting legislation and judicial decisions made during the recent ﬁ nancial
crisis could allow modiﬁ cation of the terms of residential mortgages in bankruptcy proceedings which could hinder
our ability to foreclose promptly on defaulted mortgage loans or expand assignee liability for certain violations in
the mortgage loan origination process, any or all of which could adversely aff ect our business or result in our being
held responsible for violations in the mortgage loan origination process. In addition, the exercise by regulators of
revised and at times expanded powers under existing or future regulations could materially and negatively impact the
proﬁ tability of our business, the value of assets we hold or the collateral available for our loans, require changes to
business practices, limit our ability to pursue growth strategies or force us to discontinue certain business practices
and expose us to additional costs, taxes, liabilities, penalties, enforcement actions and reputational risk.

Such judicial decisions or regulatory interpretations may aff ect the manner in which we do business and the products
and services that we provide, restrict our ability to grow through acquisition, restrict our ability to compete in our
current business or expand into any new business, and impose additional fees, assessments or taxes on us or increase
our regulatory oversight.

Federal, state and local consumer protection laws may restrict our ability to off er and/or increase our risk of
liability with respect to certain products and services and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain practices considered
“predatory” or “unfair and deceptive”. These laws prohibit practices such as steering borrowers away from more
aff ordable products, failing to disclose key features, limitations, or costs related to products and services, failing
to provide advertised beneﬁ ts, selling unnecessary insurance to borrowers, repeatedly reﬁ nancing loans, imposing
excessive fees for overdrafts, and making loans without a reasonable expectation that the borrowers will be able
to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans
or engage in deceptive practices, but these laws and regulations create the potential for liability with respect to our
lending, servicing, loan investment, deposit taking and other ﬁ nancial activities. As a company with a signiﬁ cant
mortgage banking operation, we also, inherently, have a signiﬁ cant amount of risk of noncompliance with fair
lending laws and regulations. These laws and regulations are complex and require vigilance to ensure that policies
and practices do not create disparate impact on our customers or that our employees do not engage in overt
discriminatory practices. Noncompliance can result in signiﬁ cant regulatory actions including, but not limited to,
sanctions, ﬁ nes or referrals to the Department of Justice and restrictions on our ability to execute our growth and
expansion plans. These risks are enhanced because of our growth activities as we integrate operations from our
acquisitions and expand our geographic markets. As we off er products and services to customers in additional states,
we may become subject to additional state and local laws designed to protect consumers. The additional laws and
regulations may increase our cost of doing business, and ultimately may prevent us from making certain loans,

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off ering certain products, and may cause us to reduce the average percentage rate or the points and fees on loans and
other products and services that we do provide.

Changes to regulatory requirements relating to customer information may increase our cost of doing business
and create additional compliance risk.

In May 2016, the Financial Crimes Enforcement Network of the U.S. Department of Treasury announced that
beginning in May 2018, ﬁ nancial institutions would be required to identify the ultimate beneﬁ cial owners of all
entity clients as part of their customer due diligence compliance. Meeting this new requirement will increase our
overall compliance burden and require us to expend additional resources in the review of customers who are entities.
In addition, there may be unforeseen challenges in obtaining beneﬁ cial ownership information about all of our entity
customers, which increases the risk that we will not be in compliance with this new requirement.

We are subject to more stringent capital requirements under Basel III.

As of January 1, 2015, we became subject to new rules relating to capital standards requirements, including
requirements contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted
by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. Many
of these rules apply to both the Company and the Bank, including increased common equity Tier 1 capital ratios,
Tier 1 leverage ratios, Tier 1 risk-based ratios and total risk-based ratios. In addition, beginning in 2016, all
institutions subject to Basel III, including the Company and the Bank are required to establish a “conservation
buff er” that is being phased in and will take full eff ect on January 1, 2019. This conservation buff er consists of
common equity Tier 1 capital and will ultimately be required to be 2.5% above existing minimum capital ratio
requirements. This means that once the conservation buff er is fully phased in, in order to prevent certain regulatory
restrictions, the common equity Tier 1 capital ratio requirement will be 7.0%, the Tier 1 risk-based ratio requirement
will be 8.5% and the total risk-based capital ratio requirement will be 10.5%. Any institution that does not meet
the conservation buff er will be subject to restrictions on certain activities including payment of dividends, stock
repurchases and discretionary bonuses to executive offi cers.

Additional prompt corrective action rules implemented in 2015 also apply to the Bank, including higher and
new ratio requirements for the Bank to be considered Well-Capitalized. The new rules also modify the manner
for determining when certain capital elements are included in the ratio calculations, including but not limited to,
requiring certain deductions related to mortgage servicing rights and deferred tax assets. While federal banking
regulators have proposed a rule change that would increase the amount of mortgage servicing rights that could
be included in ratio calculations, there can be no assurance that the proposed rule will be adopted in its current
form or at all. For more on these regulatory requirements and how they apply to the Company and the Bank, see
“Regulation and Supervision of HomeStreet Bank — Capital and Prompt Corrective Action Requirements — Capital
Requirements” in this Form 10-K. The application of more stringent capital requirements could, among other things,
result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with
such requirements. In addition, if we need to raise additional equity capital in order to meet these more stringent
requirements, our shareholders may be diluted.

Any restructuring or replacement of Fannie Mae and Freddie Mac and changes in existing government-
sponsored and federal mortgage programs could adversely aff ect our business.

We originate and purchase, sell and thereafter service single family and multifamily mortgages under the Fannie
Mae, and to a lesser extent, the Freddie Mac single family purchase programs and the Fannie Mae multifamily DUS®
program. In 2008, Fannie Mae and Freddie Mac were placed into conservatorship, and since then Congress, various
executive branch agencies and certain large private investors in Fannie Mae and Freddie Mac have off ered a wide
range of proposals aimed at restructuring these agencies.

We cannot be certain whether or how Fannie Mae and Freddie Mac ultimately will be restructured or replaced, if
or when additional reform of the housing ﬁ nance market will be implemented or what the future role of the U.S.
government will be in the mortgage market, and, accordingly, we will not be able to determine the impact that any
such reform may have on us until a deﬁ nitive reform plan is adopted. However, any restructuring or replacement
of Fannie Mae and Freddie Mac that restricts the current loan purchase programs of those entities may have a
material adverse eff ect on our business and results of operations. Moreover, we have recorded on our balance sheet

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an intangible asset (mortgage servicing rights, or MSRs) relating to our right to service single family loans sold
to Fannie Mae and Freddie Mac. We valued these single family MSRs at $258.6 million at December 31, 2017.
Changes in the policies and operations of Fannie Mae and Freddie Mac or any replacement for or successor to those
entities that adversely aff ect our single family residential loan and DUS® mortgage servicing assets may require us
to record impairment charges to the value of these assets, and signiﬁ cant impairment charges could be material and
adversely aff ect our business.

In addition, our ability to generate income through mortgage sales to institutional investors depends in part on
programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of mortgage-backed
securities in the secondary market. Any signiﬁ cant revision or reduction in the operation of those programs could
have a material adverse eff ect on our loan origination and mortgage sales as well as our results of operations. Also,
any signiﬁ cant adverse change in the level of activity in the secondary market or the underwriting criteria of these
entities could negatively impact our results of business, operations and cash ﬂ ows.

Changes in accounting standards may require us to increase our Allowance for Loan Losses and could materially
impact our ﬁ nancial statements.

From time to time, the Financial Accounting Standards Board (the “FASB”) and the SEC change the ﬁ nancial
accounting and reporting standards that govern the preparation of our ﬁ nancial statements. These changes can
materially impact how we record and report our ﬁ nancial condition and results of operations. For example, in June
2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) which changes, among
other things, the way companies must record expected credit losses on ﬁ nancial instruments that are not accounted
for at fair value through net income, including loans held for investment, available for sale and held-to-maturity debt
securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a
reporting entity at each reporting date, and require that ﬁ nancial assets measured at amortized cost be presented at
the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized
cost basis and eliminate the probable initial recognition in current GAAP and reﬂ ect the current estimate of all
expected credit losses based upon historical experience, current conditions, and reasonable and supportable forecasts
that aff ect the collectability of the ﬁ nancial assets.

For purchased ﬁ nancial assets with a more-than-insigniﬁ cant amount of credit deterioration since origination
(“PCD assets”) that are measured at amortized cost, an allowance for expected credit losses will be recorded as
an adjustment to the cost basis of the asset. Subsequent changes in estimated cash ﬂ ows would be recorded as an
adjustment to the allowance and through the statement of income. Credit losses relating to available-for-sale debt
securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security’s
cost basis. The amendments in this ASU will be eff ective for us beginning on January 1, 2020. For most debt
securities, the transition approach requires a cumulative-eff ect adjustment to the statement of ﬁ nancial position as
of the beginning of the ﬁ rst reporting period the guidance is eff ective. For other-than-temporarily impaired debt
securities and PCD assets, the guidance will be applied prospectively. We are currently evaluating the provisions
of this ASU to determine the impact and developing appropriate systems to prepare for compliance with this new
standard, however, we expect the new standard could have a material impact on the Company’s consolidated ﬁ nancial
statements.

HomeStreet, Inc. primarily relies on dividends from the Bank, which may be limited by applicable laws and
regulations.

HomeStreet, Inc. is a separate legal entity from the Bank, and although we may receive some dividends from
HomeStreet Capital Corporation, the primary source of our funds from which we service our debt, pay any
dividends that we may declare to our shareholders and otherwise satisfy our obligations is dividends from the Bank.
The availability of dividends from the Bank is limited by various statutes and regulations, capital rules regarding
requirements to maintain a “well capitalized” ratio at the bank, as well as by our policy of retaining a signiﬁ cant
portion of our earnings to support the Bank’s operations. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Capital Management” as well as “Regulation and Supervision of HomeStreet
Bank — Capital and Prompt Corrective Action Requirements” in this Form 10-K. If the Bank cannot pay dividends
to us, we may be limited in our ability to service our debts, fund the Company’s operations and acquisition plans
and pay dividends to the Company’s shareholders. While the Company has paid special dividends in some prior
quarters, we have not adopted a policy to pay dividends and in recent years our Board of Directors has elected to

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retain capital for growth rather than to declare a dividend. While management has recently discussed the possibility
of paying dividends in the near future, we have not declared dividends in any recent quarters, and the potential of
future dividends is subject to board approval, cash ﬂ ow limitations, capital requirements, capital and strategic needs
and other factors.

The ﬁ nancial services industry is highly competitive.

We face pricing competition for loans and deposits. We also face competition with respect to customer convenience,
product lines, accessibility of service and service capabilities. Our most direct competition comes from other
banks, credit unions, mortgage companies and savings institutions, but more recently has also come from
ﬁ nancial technology (or “ﬁ ntech”) companies that rely on technology to provide ﬁ nancial services. The signiﬁ cant
competition in attracting and retaining deposits and making loans as well as in providing other ﬁ nancial services
throughout our market area may impact future earnings and growth. Our success depends, in part, on the ability to
adapt products and services to evolving industry standards and provide consistent customer service while keeping
costs in line. There is increasing pressure to provide products and services at lower prices, which can reduce net
interest income and non-interest income from fee-based products and services. New technology-driven products
and services are often introduced and adopted, including innovative ways that customers can make payments, access
products and manage accounts. We could be required to make substantial capital expenditures to modify or adapt
existing products and services or develop new products and services. We may not be successful in introducing new
products and services or those new products may not achieve market acceptance. We could lose business, be forced
to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases if
we do not eff ectively develop and implement new technology. In addition, advances in technology such as telephone,
text, and on-line banking; e-commerce; and self-service automatic teller machines and other equipment, as well
as changing customer preferences to access our products and services through digital channels, could decrease the
value of our branch network and other assets. As a result of these competitive pressures, our business, ﬁ nancial
condition or results of operations may be adversely aff ected.

We will be subject to heightened regulatory requirements if we exceed $10 billion in assets.

We anticipate that our total assets could exceed $10 billion in the next several years, based on our historic
and projected growth rates. The Dodd-Frank Act and its implementing regulations impose various additional
requirements on bank holding companies with $10 billion or more in total assets, including compliance with
portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress testing requirements.
In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to
various federal consumer ﬁ nancial protection laws and regulations. Currently, our bank is subject to regulations
adopted by the CFPB, but the FDIC is primarily responsible for examining our bank’s compliance with consumer
protection laws and those CFPB regulations. As a relatively new agency with evolving regulations and practices,
there is uncertainty as to how the CFPB’s examination and regulatory authority might impact our business.

To ensure compliance with these heightened requirements when eff ective, our regulators may require us to fully
comply with these requirements or take actions to prepare for compliance even before our or the Bank’s total assets
equal or exceed $10 billion. In fact, we have already begun implementing measures to allow us to prepare for the
heightened compliance that we expect will be required if we exceed $10 billion in assets, including hiring additional
compliance personnel and designing and implementing additional compliance systems and internal controls. We
may incur signiﬁ cant expenses in connection with these activities, any of which could have a material adverse eff ect
on our business, ﬁ nancial condition or results of operations. We expect to incur these compliance-related costs
even if they are not yet fully required, and may incur them even if we do not ultimately reach $10 billion in asset
at the rate we expect or at all. We may also face heightened scrutiny by our regulators as we begin to implement
these new compliance measures and grow toward the $10 billion asset threshold, and our regulators may consider
our preparation for compliance with these regulatory requirements when examining our operations generally or
considering any request for regulatory approval we may make, even requests for approvals on unrelated matters. In
addition, compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also
be misinterpreted by the market generally or our customers and, as a result, may adversely aff ect our stock price or
our ability to retain our customers or eff ectively compete for new business opportunities.

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Risks Related to Information Systems and Security

A failure in or breach of our security systems or infrastructure, including breaches resulting from cyber-attacks,
could disrupt our businesses, result in the disclosure or misuse of conﬁ dential or proprietary information, damage
our reputation, increase our costs and cause losses.

Information security risks for ﬁ nancial institutions have increased in recent years in part because of the proliferation
of new technologies, the use of the Internet and telecommunications technologies to conduct ﬁ nancial transactions,
and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external
parties. Those parties also may attempt to fraudulently induce employees, customers, or other users of our systems
to disclose conﬁ dential information in order to gain access to our data or that of our customers. Our operations
rely on the secure processing, transmission and storage of conﬁ dential information in our computer systems and
networks, either managed directly by us or through our data processing vendors. In addition, to access our products
and services, our customers may use personal computers, smartphones, tablet PCs, and other mobile devices that are
beyond our control systems. Although we believe we have robust information security procedures and controls, we
rely heavily on our third party vendors, technologies, systems, networks and our customers’ devices all of which may
become the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information
security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, theft or
destruction of our conﬁ dential, proprietary and other information or that of our customers, or disrupt our operations
or those of our customers or third parties.

To date we are not aware of any material losses relating to cyber-attacks or other information security breaches,
but there can be no assurance that we will not suff er such attacks, breaches and losses in the future. Our risk and
exposure to these matters remains heightened because of, among other things, the evolving nature of these threats,
our plans to continue to implement our Internet banking and mobile banking channel, our expanding operations
and the outsourcing of a signiﬁ cant portion of our business operations. As a result, the continued development
and enhancement of our information security controls, processes and practices designed to protect customer
information, our systems, computers, software, data and networks from attack, damage or unauthorized access
remain a priority for our management. As cyber threats continue to evolve, we may be required to expend signiﬁ cant
additional resources to insure, modify or enhance our protective measures or to investigate and remediate important
information security vulnerabilities or exposures; however, our measures may be insuffi cient to prevent physical and
electronic break-ins, denial of service and other cyber-attacks or security breaches.

We maintain insurance coverage related to business interruptions and breaches of our security systems. However,
disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers,
or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our
products and services could result in customer attrition, uninsured ﬁ nancial losses, the inability of our customers to
transact business with us, violations of applicable privacy and other laws, regulatory ﬁ nes, penalties or intervention,
additional regulatory scrutiny, reputational damage, litigation, reimbursement or other compensation costs, and/or
additional compliance costs, any of which could materially and adversely aff ect our results of operations or ﬁ nancial
condition.

We rely on third party vendors and other service providers for certain critical business activities, which creates
additional operational and information security risks for us.

Third parties with which we do business or that facilitate our business activities, including exchanges, clearing
houses, ﬁ nancial intermediaries or vendors that provide services or security solutions for our operations, could
also be sources of operational and information security risk to us, including from breakdowns or failures of their
own systems, capacity constraints or failures of their own internal controls. Speciﬁ cally, we receive core systems
processing, essential web hosting and other Internet systems and deposit and other processing services from
third-party service providers. In late February 2018, one of our vendors provided notice to us that their independent
auditors had determined their internal controls to be inadequate. While we do not believe this particular failure
of internal controls would have an impact on us due to the strength of our own internal controls, future failures
of internal controls of a vendor could have a signiﬁ cant impact on our operations if we do not have controls to
cover those issues. To date none of our third party vendors or service providers has notiﬁ ed us of any security
breach in their systems that has resulted in an increased vulnerability to us or breached the integrity of our
conﬁ dential customer data. Such third parties may also be target of cyber-attacks, computer viruses, malicious code,

] 16 Page

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unauthorized access, hackers or information security breaches that could compromise the conﬁ dential or proprietary
information of HomeStreet and our customers.

In addition, if any third-party service providers experience diffi culties or terminate their services and we are unable
to replace them with other service providers, our operations could be interrupted and our operating expenses may
be materially increased. If an interruption were to continue for a signiﬁ cant period of time, our business ﬁ nancial
condition and results of operations could be materially adversely aff ected.

Some of our primary third party service providers are subject to examination by banking regulators and may be
subject to enhanced regulatory scrutiny due to regulatory ﬁ ndings during examinations of such service providers
conducted by federal regulators. While we subject such vendors to higher scrutiny and monitor any corrective
measures that the vendors are taking or would undertake, we cannot fully anticipate and mitigate all risks that could
result from a breach or other operational failure of a vendor’s system.

Others provide technology that we use in our own regulatory compliance, including our mortgage loan origination
technology. If those providers fail to update their systems or services in a timely manner to reﬂ ect new or changing
regulations, or if our personnel operate these systems in a non-compliant manner, our ability to meet regulatory
requirements may be impacted and may expose us to heightened regulatory scrutiny and the potential for payment of
monetary penalties.

In addition, in order to safeguard our online ﬁ nancial transactions, we must provide secure transmission of
conﬁ dential information over public networks. Our Internet banking system relies on third party encryption and
authentication technologies necessary to provide secure transmission of conﬁ dential information. Advances in
computer capabilities, new discoveries in the ﬁ eld of cryptology or other developments could result in a compromise
or breach of the algorithms our third-party service providers use to protect customer data. If any such compromise
of security were to occur, it could have a material adverse eff ect on our business, ﬁ nancial condition and results of
operations.

The failure to protect our customers’ conﬁ dential information and privacy could adversely aff ect our business.

We are subject to federal and state privacy regulations and conﬁ dentiality obligations that, among other things
restrict the use and dissemination of, and access to, certain information that we produce, store or maintain in
the course of our business. We also have contractual obligations to protect certain conﬁ dential information we
obtain from our existing vendors and customers. These obligations generally include protecting such conﬁ dential
information in the same manner and to the same extent as we protect our own conﬁ dential information, and in
some instances may impose indemnity obligations on us relating to unlawful or unauthorized disclosure of any such
information.

If we do not properly comply with privacy regulations and contractual obligations that require us to protect
conﬁ dential information, or if we experience a security breach or network compromise, we could experience adverse
consequences, including regulatory sanctions, penalties or ﬁ nes, increased compliance costs, remedial costs such as
providing credit monitoring or other services to aff ected customers, litigation and damage to our reputation, which in
turn could result in decreased revenues and loss of customers, all of which would have a material adverse eff ect on
our business, ﬁ nancial condition and results of operations.

The network and computer systems on which we depend could fail for reasons not related to security breaches.

Our computer systems could be vulnerable to unforeseen problems other than a cyber-attack or other security
breach. Because we conduct a part of our business over the Internet and outsource several critical functions to
third parties, operations will depend on our ability, as well as the ability of third-party service providers, to protect
computer systems and network infrastructure against damage from ﬁ re, power loss, telecommunications failure,
physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations may
compromise our ability to perform critical functions in a timely manner (or may give rise to perceptions of such
compromise) and could have a material adverse eff ect on our business, ﬁ nancial condition and results of operations
as well as our reputation and customer or vendor relationships.

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We continually encounter technological change, and we may have fewer resources than many of our competitors
to invest in technological improvements.

The ﬁ nancial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products and services. The eff ective use of technology increases effi ciency and enables ﬁ nancial
institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to
address the needs of our clients by using technology to provide products and services that will satisfy client demands
for convenience, as well as to create additional effi ciencies in our operations. Many national vendors provide
turn-key services to community banks, such as Internet banking and remote deposit capture that allow smaller banks
to compete with institutions that have substantially greater resources to invest in technological improvements. We
may not be able, however, to eff ectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers.

Anti-Takeover Risk

Some provisions of our articles of incorporation and bylaws and certain provisions of Washington law may deter
takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price.

Some provisions of our articles of incorporation and bylaws may have the eff ect of deterring or delaying attempts
by our shareholders to remove or replace management, to commence proxy contests, or to eff ect changes in control.
These provisions include:

•

A classiﬁ ed Board of Directors so that only approximately one third of our board of directors is elected
each year;

Elimination of cumulative voting in the election of directors;

Procedures for advance notiﬁ cation of shareholder nominations and proposals;

The ability of our Board of Directors to amend our bylaws without shareholder approval; and

The ability of our Board of Directors to issue shares of preferred stock without shareholder approval
upon the terms and conditions and with the rights, privileges and preferences as the board of directors
may determine.

In addition, as a Washington corporation, we are subject to Washington law which imposes restrictions on business
combinations and similar transactions between a corporation and certain signiﬁ cant shareholders. These provisions,
alone or together, could have the eff ect of deterring or delaying changes in incumbent management, proxy contests or
changes in control. These restrictions may limit a shareholder’s ability to beneﬁ t from a change-in-control transaction
that might otherwise result in a premium unless such a transaction is favored by our Board of Directors.

ITEM 1B UNRESOLVED STAFF COMMENTS

None.

ITEM 2 PROPERTIES

We lease principal offi ces, which are located in downtown Seattle at 601 Union Street, Suite 2000, Seattle, WA
98101. This lease provides suffi cient space to conduct the management of our business. The Company conducts
Mortgage Lending as well as Commercial and Consumer Banking activities in locations in Washington, California,
Oregon, Hawaii, Idaho, Arizona and Utah. As of December 31, 2017, we operated in 44 primary stand-alone home
loan centers, six primary commercial lending centers, 59 retail deposit branches, and one insurance offi ce. As of
such date, we also operated three facilities for the purpose of administrative and other functions in addition to the
principal offi ces: a loan fulﬁ llment center and a call center and operations support facility, both located in Federal
Way, Washington; and loan fulﬁ llment centers in Pleasanton, California and Vancouver, Washington. Of these
properties, we own ﬁ ve of the retail deposit branches, the loan fulﬁ llment center and the call center and operations
support facility in Federal Way and we own 50% of a retail branch through a joint venture. In addition, we own two
parcels of land in Washington State. All facilities are in a good state of repair and appropriately designed for use as
banking or administrative offi ce facilities.

ITEM 3 LEGAL PROCEEDINGS

Because the nature of our business involves the collection of numerous accounts, the validity of liens and
compliance with various state and federal lending 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 matters. We do not expect that these proceedings, taken as a whole, will have a material
adverse eff ect on our business, ﬁ nancial position or our results of operations. There are currently no matters that,
in the opinion of management, would have a material adverse eff ect on our consolidated ﬁ nancial position, 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 4 MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Select Market under the symbol “HMST.” The following table
sets forth, for the periods indicated, the high and low reported sales prices per share of the common stock as reported
on the NASDAQ Global Select Market, our principal trading market.

For the Year Ended December 31, 2017

First quarter ended March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second quarter ended June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter ended September 30 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter ended December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . .

For the Year Ended December 31, 2016

High

Low

Special Cash
Dividends
Declared

32.50 $
29.88
28.40
31.30

22.79 $
22.97
27.21
33.70

25.01 $
25.40
24.00
26.83

18.58 $
18.74
19.07
24.03

—
—
—
—

As of March 2, 2018, there were 2,476 shareholders of record of our common stock.

Dividend Policy

We have not adopted a formal dividend policy to pay dividends and did not pay any dividends in 2017 or 2016. The
amount and timing of any future dividends have not been determined. The payment of dividends will depend upon
a number of factors, including regulatory capital requirements, the Company’s and the Bank’s liquidity, ﬁ nancial
condition and results of operations, strategic growth plans, tax considerations, statutory and regulatory limitations
and general economic conditions. Our ability to pay dividends to shareholders is signiﬁ cantly dependent on the
Bank’s ability to pay dividends to the Company, which is limited to the extent necessary for the Bank to meet
the regulatory requirements of a “well-capitalized” bank or other formal or informal guidance communicated by
our principal regulators. Capital rules implemented beginning on January 1, 2015 have imposed more stringent
requirements on the ability of the Bank to maintain “well-capitalized” status and to pay dividends to the Company.
See “Regulation and Supervision of HomeStreet Bank — Capital and Prompt Corrective Action Requirements —
Capital Requirements.”

For the foregoing reasons, there can be no assurance that we will pay any further special dividends in any future
period.

Sales of Unregistered Securities

There were no sales of unregistered securities in the fourth quarter of 2017.

Stock Repurchases in the Fourth Quarter

Not applicable.

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Stock Performance Graph

This performance graph shall not be deemed “soliciting material” or to be “ﬁ led” with the SEC for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities
under that Section, and shall not be deemed to be incorporated by reference into any ﬁ ling of HomeStreet, Inc. under
the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows a comparison from February 10, 2012 (the date our common stock commenced trading
on the NASDAQ Global Select Market) through December 31, 2017 of the cumulative total return for our common
stock, the KBW Bank Index (BKX), the Russell 2000 Index (RUT) and the KBW Regional Banking Index (KRX).
The graph assumes that $100 was invested at the market close on February 10, 2012 in the common stock of
HomeStreet, Inc., the KBW Bank Index, the Russell 2000 Index, the KBW Regional Banking Index and data for
HomeStreet, Inc., the KBW Bank Index, the Russell 2000 Index and the KBW Regional Banking Index assumes
reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future
stock price performance. We are adding in the KBW Regional Bank Index this year, to eventually replace KBW
Bank Index, in our performance graph as the composition of the KBW Regional Bank index is more relevant to our
size and market cap.

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ITEM 6

SELECTED FINANCIAL DATA

The data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of
Consolidated Financial Condition and Results of Operations,” and the Consolidated Financial Statements and Notes
thereto appearing at Item 8 of this report.

The following table sets forth selected historical consolidated ﬁ nancial and other data for us at and for each of
the periods ended as described below. The selected historical consolidated ﬁ nancial data as of December 31, 2017
and 2016 and for each of the years ended December 31, 2017, 2016 and 2015 have been derived from, and should
be read together with, our audited consolidated ﬁ nancial statements and related notes included elsewhere in this
Form 10-K. The selected historical consolidated ﬁ nancial data as of December 31, 2015, 2014 and 2013 and for
each of the years ended December 31, 2015, 2014 and 2013 have been derived from our audited consolidated
ﬁ nancial statements for those years, which are not included in this Form10-K. You should read the summary selected
historical consolidated ﬁ nancial and other data presented below in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our ﬁ nancial statements and the notes thereto,
which are included elsewhere in this Form 10-K. We have prepared our unaudited information on the same basis as
our audited consolidated ﬁ nancial statements and have included, in our opinion, all adjustments that we consider
necessary for a fair presentation of the ﬁ nancial information set forth in that information.

(dollars in thousands, except share data)
Income statement data (for the period

2017

At or for the Years Ended December 31,
2015

2014

2016

2013

ended):
Net interest income . . . . . . . . . . . . . . $
Provision (reversal of provision) for
credit losses . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . .
Income before income taxes . . . . . . .
Income tax (beneﬁt) expense . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . $
Basic income per share . . . . . . . . . . . . . $
Diluted income per share . . . . . . . . . . . $
Common shares outstanding . . . . . . . . .
Weighted average number of shares

outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . $
Dividends per share . . . . . . . . . . . . . . . . $
Financial position (at year end):

194,438 $

180,049 $

148,338 $

98,669 $

74,444

750
312,154
439,653
66,189
(2,757)
68,946 $
2.57 $
2.54 $

4,100
359,150
444,322
90,777
32,626
58,151 $
2.36 $
2.34 $

6,100
281,237
366,568
56,907
15,588
41,319 $
1.98 $
1.96 $

(1,000)
185,657
252,011
33,315
11,056
22,259 $
1.50 $
1.49 $

900
190,745
229,495
34,794
10,985
23,809
1.65
1.61
14,799,991

26,888,288

26,864,657
27,092,019

26,800,183

22,076,534

14,856,611

24,615,990
24,843,683

20,818,045
21,059,201

14,800,689
14,961,081

26.20 $
— $

23.48 $
— $

21.08 $
— $

20.34 $
0.11 $

14,412,059
14,798,168
17.97
0.33

Cash and cash equivalents . . . . . . . . . $
Investment securities . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . .
Loans held for investment, net . . . . .
Mortgage servicing rights . . . . . . . . .
Other real estate owned . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank

72,718 $

53,932 $

904,304
610,902
4,506,466
284,653
664
6,742,041
4,760,952

1,043,851
714,559
3,819,027
245,860
5,243
6,243,700
4,429,701

32,684 $
572,164
650,163
3,192,720
171,255
7,531
4,894,495
3,231,953

30,502 $
455,332
621,235
2,099,129
123,324
9,448
3,535,090
2,445,430

33,908
498,816
279,941
1,871,813
162,463
12,911
3,066,054
2,210,821

advances . . . . . . . . . . . . . . . . . . . .

979,201

868,379

1,018,159

597,590

446,590

Federal funds purchased and

securities sold under agreements
to repurchase . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . $

—
704,380 $

—
629,284 $

—
465,275 $

50,000

302,238 $

—
265,926

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Summary Financial Data (continued)

(dollars in thousands, except share data)
Financial position (averages):

2017

At or for the Years Ended December 31,
2015

2014

2016

Investment securities . . . . . . . . . . . . . . . . . $ 1,023,702
4,178,326
Loans held for investment . . . . . . . . . . . . .
5,998,521
Total interest-earning assets . . . . . . . . . . .
3,588,515
Total interest-bearing deposits . . . . . . . . .
1,037,650
Federal Home Loan Bank advances . . . . .
4,755,221
Total interest-bearing liabilities . . . . . . . .
675,877
Shareholders’ equity . . . . . . . . . . . . . . . . .

$ 834,671
3,668,263
5,307,118
3,145,137
942,593
4,189,582
566,148

$ 523,756
2,834,511
4,150,089
2,499,538
795,368
3,368,160
442,105

$ 459,060
1,890,537
2,869,414
1,883,622
431,623
2,386,537
289,420

2013

$ 515,000
1,496,146
2,422,136
1,661,568
293,871
2,020,613
249,081

Financial performance:

Return on average shareholders’

equity(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average total assets . . . . . . . . . .
Net interest margin(2) . . . . . . . . . . . . . . . . .
Efficiency ratio(4) . . . . . . . . . . . . . . . . . . . .

Asset quality:

Allowance for credit losses . . . . . . . . . . . . $
Allowance for loan losses/total loans(5) . . .
Allowance for loan losses/nonaccrual

loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans(6)/(7) . . . . . . . . . . . . $
Nonaccrual loans/total loans . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . $
Total nonperforming assets . . . . . . . . . . . . $
Nonperforming assets/total assets . . . . . . .
Net (recoveries) charge-offs . . . . . . . . . . . $

10.20%
1.05%
3.31%
86.79%

10.27%
1.01%
3.45%
82.40%

9.35%
0.91%
3.63%
85.33%

7.69%
0.69%
3.51%
88.63%

9.56%
0.88%
3.17%(3)
86.54%

39,116

$ 35,264

$ 30,659

$ 22,524

$ 24,089

0.83%

0.88%

0.91%

1.04%

1.26%

251.63%
15,041

0.33%
664
15,705

0.23%
(3,102)

165.52%

170.54%

137.51%

93.00%

$ 20,542

$ 17,168

$ 16,014

$ 25,707

0.53%
$
5,243
$ 25,785

0.53%
$
7,531
$ 24,699

0.75%
$
9,448
$ 25,462

1.36%

$ 12,911
$ 38,618

0.41%
(505)

0.50%
(2,035)

0.72%
565

1.26%
4,562

Regulatory capital ratios for the Bank:
Basel III – Tier 1 leverage capital

(to average assets) . . . . . . . . . . . . . . . . .

9.67%

10.26%

9.46%

Basel III – Tier 1 common equity

risk-based capital
(to risk-weighted assets) . . . . . . . . . . . .

Basel III – Tier 1 risk-based capital (to

13.22%

13.92%

13.04%

risk-weighted assets) . . . . . . . . . . . . . . .

13.22%

13.92%

13.04%

Basel III – Total risk-based capital

(to risk-weighted assets) . . . . . . . . . . . .

14.02%

14.69%

13.92%

Basel I – Tier 1 leverage capital

(to average assets) . . . . . . . . . . . . . . . . .

Basel I – Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . . . . . . .

Basel I – Total risk-based capital

(to risk-weighted assets) . . . . . . . . . . . .

Regulatory capital ratios for the Company:

Basel III – Tier 1 leverage capital

9.38%

9.96%

13.10%

14.12%

14.03%

15.28%

(to average assets) . . . . . . . . . . . . . . . . .

9.12%

9.78%

9.95%

Basel III – Tier 1 common equity

risk-based capital (to risk-weighted
assets) . . . . . . . . . . . . . . . . . . . . . . . . . .

Basel III – Tier 1 risk-based capital

9.86%

10.54%

10.52%

(to risk-weighted assets) . . . . . . . . . . . .

10.92%

11.66%

11.94%

Basel III – Total risk-based capital

(to risk-weighted assets) . . . . . . . . . . . .

11.61%

12.34%

12.70%

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Summary Financial Data (continued)

(in thousands)
SUPPLEMENTAL DATA:
Loans serviced for others

2017

At or for the Years Ended December 31,
2014
2015
2016

2013

Single family . . . . . . . . . . . . . . . $ 22,631,147 $ 19,488,456 $ 15,347,811 $ 11,216,208 $ 11,795,621
720,429
Multifamily . . . . . . . . . . . . . . . .
95,673
Other . . . . . . . . . . . . . . . . . . . . .
Total loans serviced for others . . . $ 24,022,343 $ 20,665,819 $ 16,351,691 $ 12,051,202 $ 12,611,723
Loan origination activity

1,108,040
69,323

1,311,399
79,797

924,367
79,513

752,640
82,354

Single family . . . . . . . . . . . . . . . $ 8,091,400 $ 9,214,463 $ 7,440,612 $ 4,697,767 $ 4,852,879
603,271
Other . . . . . . . . . . . . . . . . . . . . .
Total loan origination activity . . . . $ 10,840,691 $ 11,775,012 $ 8,981,067 $ 5,665,267 $ 5,456,150

2,560,549

2,749,291

1,540,455

967,500

(1) Net earnings available to common shareholders divided by average shareholders’ equity.
(2) Net interest income divided by total average interest-earning assets on a tax equivalent basis.
(3) Net interest margin for the year ended December 31, 2013 included $1.4 million in interest expense related to the

correction of the cumulative eff ect of an error in prior years, resulting from the under accrual of interest due on the trust
preferred securities for which the Company had deferred the payment of interest. Excluding the impact of the prior period
interest expense correction, the net interest margin was 3.23% for the year ended December 31, 2013.

(4) Noninterest expense divided by total revenue (net interest income and noninterest income).
(5)

Includes loans acquired with bank acquisitions. Excluding acquired loans, allowance for loan losses/total loans was 0.90%,
1.00%, 1.10%, 1.10% and 1.40% at December 31, 2017, 2016, 2015, 2014 and 2013, respectively.

(6) Generally, loans are placed on nonaccrual status when they are 90 or more days past due, unless payment is insured by the

(7)

FHA or guaranteed by the VA.
Includes $1.9 million and $1.9 million of nonperforming loans at December 31, 2017 and 2016, respectively, which are
guaranteed by the Small Business Administration (“SBA”).

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

NOTICE REGARDING FORWARD LOOKING STATEMENTS

The following discussion contains certain forward-looking statements, which are statements of expectations and not
statements of historical fact. Many forward-looking statements can be identiﬁ ed 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 diffi cult to predict and are generally beyond the control of the Company and are subject to risks and
uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-K, particularly
in Item 1A “Risk Factors,” that could cause actual results to diff er signiﬁ cantly from those projected. Although we
believe that expectations reﬂ ected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We undertake no obligation to, and expressly disclaim any
such obligation to update, or clarify any of the forward-looking statements after the date of this Form 10-K to reﬂ ect
changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future
results over time of otherwise, except as required by law. Readers are cautioned not to place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in
conjunction with “Selected Consolidated Financial Data” and the Consolidated Financial Statements and Notes
included in Items 6 and 8 of this Form 10-K.

Executive Summary

HomeStreet is a diversiﬁ ed ﬁ nancial services company founded in 1921, headquartered in Seattle, Washington,
serving customers primarily in the western United States, including Hawaii. We are principally engaged in
commercial and consumer banking and real estate lending, including commercial real estate and single family
mortgage banking operations.

HomeStreet, Inc. is a bank holding company that has elected to be treated as a ﬁ nancial holding company. Our
primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. We also sell insurance products and
services for consumer clients under the name HomeStreet Insurance.

HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans,
mortgage loans, deposit products, other banking services, non-deposit investment products, private banking and cash
management services. Our loan products include commercial business loans and agriculture loans, consumer loans,
single family residential mortgages, loans secured by commercial real estate and construction loans for residential
and commercial real estate projects. We also have partial ownership in WMS Series LLC, an affi liated business
arrangement with various owners of Windermere Real Estate Company franchises which operates a home loan
business from select Windermere Real Estate Offi ces that is known as Penrith Home Loans (some of which were
formerly known as Windermere Mortgage Services).

HomeStreet Capital Corporation, a Washington corporation, originates, sells and services multifamily mortgage loans
under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS®”)2 in conjunction with HomeStreet Bank.

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

In 2017, we focused on measured growth and increased effi ciency in our operations overall. In our Commercial
and Consumer Banking Segment, we continued to execute our strategy of diversifying earnings by expanding the
business, growing and improving the quality of our deposits, and bolstering our processing, compliance and risk
management capabilities. We continued to expand our retail deposit branch network during the year, primarily
focusing on high-growth areas of Puget Sound and Southern California, in order to build convenience and market

DUS® is a registered trademark of Fannie Mae

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share. As of December 31, 2017 we had 27 retail branches in the Puget Sound region, including two de novo
branches added in 2017, and 16 retail branches in Southern California, including one de novo branch and one
acquired branch added in 2017. Meanwhile, in our Mortgage Banking Segment, faced with reduced expectations for
single family loan origination volume due to the current interest rate environment and, more importantly, a lack of
housing inventory in our primary markets, we implemented a restructuring plan that included a reduction in staffi ng,
production offi ce closures and the streamlining of our single family leadership team.

As part of our organic growth in commercial real estate lending, in 2015 we launched a new division of the Bank
called HomeStreet Commercial Capital, which originates permanent commercial real estate loans, primarily up to
$10 million in size, a portion of which we intend to sell into the secondary market.

Management’s Overview of 2017 Financial Performance

Results for 2017 reﬂ ect the continued expansion of our commercial and consumer business as well as the
restructuring of our mortgage banking business. During 2017, in our Commercial and Consumer Banking Segment
we added three de novo branches and acquired one branch in El Cajon, California. We also added a new stand-alone
commercial lending center in Northern California. In response to adverse market conditions, we reduced headcount
in the Mortgage Banking Segment by 13.1% during the year, closed three stand-alone home loan centers and
consolidated a further six offi ces down to three, and streamlined our leadership team by eliminating some positions
and reducing overall compensation. At December 31, 2017, we had total home loan centers of 44, total commercial
lending centers of six and total retail deposit branches of 59. We also have one stand-alone insurance offi ce.

Recent Developments

On December 22, 2017, President Trump signed into law major tax legislation commonly referred to as the Tax Cuts
and Jobs Act (“Tax Reform Act”). The Tax Reform Act reduces the U.S. federal corporate income tax rate from 35
percent to 21 percent and makes many other sweeping changes to the U.S. tax code. We were required to revalue
our deferred tax assets and liabilities at the new statutory tax rate upon enactment. As a result of this revaluation, in
2017, we recognized a one-time, non-cash, $23.3 million income tax beneﬁ t. Additionally, we expect our estimated
eff ective tax rate to fall to between 21% and 22% for 2018.

Known Trends

Trends Impacting Mortgage Origination Volume

Since the second half of 2016, the volume of loan origination for our single family mortgage business has been
signiﬁ cantly adversely impacted by a combination of rising interest rates, which lowers the demand for reﬁ nancing,
and a signiﬁ cant disparity between an increasing demand for housing and a decreasing supply of houses for sale in
our primary markets, especially the Puget Sound region and Northern California. The Federal Reserve is expected
to raise interest rates again in the near future, decreasing the likelihood that reﬁ nancing will regain popularity in
the near term. At the same time, populations in many of our major markets are predicted to continue to grow faster
than available housing inventory. While we have been focused on optimizing our mortgage banking operations in
response to these pressures, management continues to monitor these trends and may implement further measures in
an eff ort to keep the Company’s cost structure in line with the expectations of growth or contraction in our business.

Regulatory Compliance Costs

Federally insured ﬁ nancial institutions like the Bank become subject to heightened standards for regulatory
compliance as they reach an asset size of $10 billion. As we grow toward that size, we have begun to implement
additional compliance systems, procedures and processes to be able to meet these heightened standards. At the same
time, we are already subject to additional review by our regulators who have an interest in making sure the Bank’s
compliance systems are implemented and tested prior to crossing the $10 billion threshold for assets size, and the
work of designing systems to meet heightened requirements coupled with additional regulatory scrutiny meant to
test those systems may result in additional regulatory challenges for the Bank. As was disclosed in our most recent
Community Reinvestment Act rating, we have faced some regulatory challenges including a ﬁ nding of RESPA
violations that have require additional resources and attention from management to remediate. As a result of both of
the build out of our compliance management system and the growth in regulatory activity impacting the Bank, we

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expect our costs for compliance will grow in the near future, that we will continue to be subject to more regulatory
scrutiny, and that compliance matters will require more attention from management and the Board.

Consolidated Financial Performance

(in thousands, except per share data and ratios)
Selected statement of operations data

At or for the Years Ended December 31,
2016

2015

2017

Total net revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

506,592
439,653
750
(2,757)
68,946

Financial performance

Diluted income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Return on average common shareholders’ equity . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.54
10.20%
1.05%
3.31%

539,199
444,322
4,100
32,626
58,151

2.34
10.27%
1.01%
3.45%

429,575
366,568
6,100
15,588
41,319

1.96
9.35%
0.91%
3.63%

(1)

Total net revenue is net interest income and noninterest income.

Commercial and Consumer Banking Segment Results

Commercial and Consumer Banking Segment net income increased 36.6% to $42.1 million for the year ended
December 31, 2017 from $30.8 million in 2016, primarily due to higher net interest income from higher average
balances of interest-earning assets, partially off set by higher noninterest expense, primarily the result of organic
growth. Included in net income for the years ended December 31, 2017 and 2016 were acquisition related expenses,
net of tax of $391 thousand and $4.6 million, respectively. Net income in the year ended December 31, 2017, also
includes a one-time, non-cash, $4.2 million tax expense related to the Tax Reform Act, with no similar expenses in
2016.

Commercial and Consumer Banking Segment net interest income was $174.5 million for the year ended
December 31, 2017, an increase of $20.5 million, or 13.3%, from $154.0 million for the year ended December 31,
2016, reﬂ ecting higher average balances of loans held for investment primarily as a result of organic growth.

The Company recorded a $750 thousand provision for credit losses for the year ended December 31, 2017 compared
to a $4.1 million provision for credit losses for the year ended December 31, 2016. The reduction in credit loss
provision in the year was due primarily to continued improvements in credit quality reﬂ ected in the qualitative
reserves and historical loss rates, combined with an increase of $2.6 million in net recoveries over the comparable
period.

Net recoveries were $3.1 million in 2017 compared to net recoveries of $505 thousand in 2016. Overall, the
allowance for loan losses (which excludes the allowance for unfunded commitments) represented 0.83% of loans
held for investment at December 31, 2017 compared to 0.88% at December 31, 2016, which primarily reﬂ ected
the improved credit quality of the Company’s loan portfolio. Excluding acquired loans, the allowance for loan
losses was 0.90% of loans held for investment at December 31, 2017 compared to 1.00% at December 31,
2016. Nonperforming assets were $15.7 million, or 0.23% of total assets at December 31, 2017, compared to
$25.8 million, or 0.41% of total assets at December 31, 2016.

Commercial and Consumer Banking Segment noninterest expense of $149.0 million for the year ended
December 31, 2017 an increase of $10.6 million, or 7.7%, from $138.4 million for the year ended December 31,
2016, primarily due to increased costs related to organic growth of our commercial real estate and commercial
business lending units and the expansion of our branch banking network. During 2017, we added four retail deposit
branches, three de novo and one through the acquisition in El Cajon, California, and increased the segment’s
headcount by 7.0%.

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Mortgage Banking Segment Results

Mortgage Banking Segment net income was $26.9 million for the year ended December 31, 2017, compared to net
income of $27.4 million for the year ended December 31, 2016. The 1.7% decrease in net income is primarily due
to a $1.64 billion reduction in rate locks and restructuring related items, net of tax, of $2.4 million, substantially
off set by a one-time, non-cash, $27.5 million tax beneﬁ t related to the Tax Reform Act. In 2017, due to reduced
expectations in our single family loan origination volume, we implemented a restructuring plan to better align our
cost structure with market conditions, including a reduction in staffi ng, production offi ce closures and a streamlining
of the single family leadership team.

Mortgage Banking noninterest income of $269.8 million for the year ended December 31, 2017 decreased
$53.7 million, or 16.6%, from $323.5 million for the year ended December 31, 2016, primarily due to a 19.0%
decrease in single family mortgage interest rate lock commitments. Decreased interest rate lock commitments were
the result of both higher mortgage interest rates, which reduced the volume of reﬁ nance activity in the period and
to a lesser extent the limited supply of housing in our markets, which reduced the volume of purchase mortgage
activity in the period. We decreased our mortgage production personnel by 5.2% at December 31, 2017 compared to
December 31, 2016, primarily due to our 2017 restructuring in our Mortgage Banking Segment.

Mortgage Banking noninterest expense of $290.7 million for the year ended December 31, 2017 decreased
$15.3 million, or 5.0%, from $305.9 million for the year ended December 31, 2016, primarily due to decreased
commissions, salary, and related costs on lower closed loan volume, partially off set by a $3.7 million restructuring
charge related to our Mortgage Banking Segment. In 2017, we reduced home loan centers by a net of three and
decreased the segment’s headcount by 13.1% during 2017 primarily the result of our restructuring event.

Regulatory Matters

On January 1, 2015, the Company and the Bank became subject to new capital standards commonly referred
to as “Basel III” which raised our minimum capital requirements. The Company and the Bank remain above
current “well-capitalized” regulatory minimums since the Company’s initial public off ering in 2012, even with the
implementation of more stringent capital requirements implemented beginning in 2015 under the capital standards
commonly referred to as “Basel III”.

Under the Basel III standards, the Bank’s Tier 1 leverage and total risk-based capital ratios at December 31, 2017
were 9.67% and 14.02% and at December 31, 2016 were 10.26% and 14.69%, respectively. The Company’s Tier 1
leverage and total risk-based capital ratios were 9.12% and 11.61% at December 31, 2017, and 9.78% and 12.34% at
December 31, 2016, respectively.

In September 2017, federal banking regulators issued a proposed rule intended to simplify and limit the impact
of the Basel III regulatory capital requirements for certain banks. We believe that these proposed changes, if
implemented, would signiﬁ cantly beneﬁ t our Mortgage Banking business model by reducing the amount of
regulatory capital that we would be required to maintain in relation to our mortgage servicing assets. Other proposed
changes to the Basel III capital requirements would require a small increase in capital related to commercial and
residential acquisition, development, and construction lending activity which would partially off set some portion
of the beneﬁ t we would expect to receive with respect to our mortgage servicing assets. The ﬁ nal rules have yet to
be published following the comment period, but if they are adopted without any material changes to the current
proposal, we would expect to beneﬁ t from a signiﬁ cant reduction in the regulatory capital requirements related to
our mortgage servicing rights beginning in 2018. Although it is too early to predict the form, if any, in which the
ﬁ nal regulations are adopted, certain alternatives we believe to be under consideration would potentially allow us
to allocate that capital to other aspects of our operations, including as capital to support our commercial lending
operations.

For more on the Basel III requirements as they apply to us, please see “Capital Management” within the Liquidity
and Capital Resources section and “Business — Regulation and Supervision” of this Form 10-K.

Critical Accounting Policies and Estimates

The preparation of ﬁ nancial statements in accordance with the accounting principles generally accepted in the
United States (“U.S. GAAP”) requires management to make a number of judgments, estimates and assumptions that
aff ect the reported amount of assets, liabilities, income and expense in the ﬁ nancial statements. Various elements

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of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and
assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent
uncertainties. It is possible that, in some instances, diff erent estimates and assumptions could reasonably have been
made and used by management, instead of those we applied, which might have produced diff erent results that could
have had a material eff ect on the ﬁ nancial statements.

We have identiﬁ ed the following accounting policies and estimates that, due to the inherent judgments and
assumptions and the potential sensitivity of the ﬁ nancial statements to those judgments and assumptions, are critical
to an understanding of our ﬁ nancial statements. We believe that the judgments, estimates and assumptions used in
the preparation of the Company’s ﬁ nancial statements are appropriate. For a further description of our accounting
policies, see Note 1 — Summary of Signiﬁ cant Accounting Policies in the ﬁ nancial statements included in this
Form 10-K.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of incurred credit losses inherent within our loan
portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about
the eff ect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors
then prevailing, may result in signiﬁ cant changes in the allowance for loan losses in those future periods.

We employ a disciplined process and methodology to establish our allowance for loan losses that has two basic
components: ﬁ rst, an asset-speciﬁ c component involving the identiﬁ cation of impaired loans and the measurement
of impairment for each individual loan identiﬁ ed; and second, a formula-based component for estimating probable
principal losses for all other loans.

Based upon this methodology, management establishes an asset-speciﬁ c allowance for impaired loans based on the
amount of impairment calculated on those loans and charging off amounts determined to be uncollectible. A loan is
considered impaired when it is probable that all contractual principal and interest payments due will not be collected
substantially in accordance with the terms of the loan agreement. Factors we consider in determining whether a
loan is impaired include payment status, collateral value, borrower ﬁ nancial condition, guarantor support and the
probability of collecting scheduled principal and interest payments when due.

When a loan is identiﬁ ed as impaired, we measure impairment as the diff erence between the recorded investment
in the loan and the present value of expected future cash ﬂ ows discounted at the loan’s eff ective interest rate or
based on the loan’s observable market price. For impaired collateral-dependent loans, impairment is measured as
the diff erence between the recorded investment in the loan and the fair value of the underlying collateral. The fair
value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent
on the sale (rather than only on the operation) of the collateral. In accordance with our appraisal policy, the fair
value of impaired collateral-dependent loans is based upon independent third-party appraisals or on collateral
valuations prepared by in-house appraisers, which generally are updated every twelve months. We require an
independent third-party appraisal at least annually for substandard loans and other real estate owned (“OREO”).
Once a third-party appraisal is six months old, or if our chief appraiser determines that market conditions, changes
to the property, changes in intended use of the property or other factors indicate that an appraisal is no longer
reliable, we perform an internal collateral valuation to assess whether a change in collateral value requires an
additional adjustment to carrying value. A collateral valuation is a restricted-use report prepared by our internal
appraisal staff in accordance with our appraisal policy. When we receive an updated appraisal or collateral valuation,
management reassesses the need for adjustments to loan impairment measurements and, where appropriate, records
an adjustment. If the calculated impairment is determined to be permanent, ﬁ xed or nonrecoverable, the impairment
will be charged off . See “Credit Risk Management — Asset Quality and Nonperforming Assets” discussions within
Management’s Discussion and Analysis of this Form 10-K.

In estimating the formula-based component of the allowance for loan losses, loans are segregated into loan classes.
Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or
areas of risk concentration. Credit loss assumptions are estimated using a model that categorizes loan pools based on
loan type and asset quality rating (“AQR”) or delinquency bucket. This model calculates an expected loss percentage
for each loan category by considering the probability of default, based on the migration of loans from performing to

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loss by AQR or delinquency buckets using two-year analysis periods for commercial segments and one-year analysis
periods for consumer segments, and the potential severity of loss, based on the aggregate net lifetime losses incurred
per loan class.

The formula-based component of the allowance for loan losses also considers qualitative factors for each loan class,
including changes in:

•

lending policies and procedures;

international, national, regional and local economic business conditions and developments that aff ect the
collectability of the portfolio, including the condition of various markets;

the nature of the loan portfolio, including the terms of the loans;

the experience, ability and depth of the lending management and other relevant staff ;

the volume and severity of past due and adversely classiﬁ ed or graded loans and the volume of
nonaccrual loans;

the quality of our loan review and process;

the value of underlying collateral for collateral-dependent loans;

the existence and eff ect of any concentrations of credit and changes in the level of such concentrations;
and

the eff ect of external factors such as competition and legal and regulatory requirements on the level of
estimated credit losses in the existing portfolio.

Qualitative factors are expressed in basis points and are adjusted downward or upward based on statistical analysis of
economic drivers and management’s judgment as to the potential loss impact of each qualitative factor to a particular
loan pool at the date of the analysis.

The provision for loan losses recorded through earnings is based on management’s assessment of the amount
necessary to maintain the allowance for loan losses at a level appropriate to cover probable incurred losses inherent
within the loans held for investment portfolio. The amount of provision and the corresponding level of allowance for
loan losses are based on our evaluation of the collectability of the loan portfolio based on historical loss experience
and other signiﬁ cant qualitative factors.

The allowance for loan losses, as reported in our consolidated statements of ﬁ nancial condition, is adjusted by a
provision for loan losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of
recoveries. For further information on the allowance for loan losses, see Note 5–Loans and Credit Quality in the
notes to the ﬁ nancial statements of this Form 10-K.

Fair Value of Financial Instruments, Single Family MSRs and OREO

A portion of our assets are carried at fair value, including single family mortgage servicing rights (“MSRs”), single
family loans held for sale, interest rate lock commitments, investment securities available for sale and derivatives
used in our hedging programs. Fair value is deﬁ ned 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.

Fair value is based on quoted market prices, when available. If a quoted price for an asset or liability is not available,
the Company uses valuation models to estimate its 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. We believe our 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 reﬂ ecting the amount realized in an actual sale or
transfer of the asset or liability in a current market exchange.

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A three-level valuation hierarchy has been established under the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codiﬁ cation (“ASC”) Topic 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 ﬁ nancial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is
signiﬁ cant to the fair value measurement. The levels are deﬁ ned 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 suffi cient 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
ﬁ nancial instrument.

Level 3 — Unobservable inputs for the asset or liability. These inputs reﬂ ect the Company’s assumptions
of what market participants would use in pricing the asset or liability.

Signiﬁ cant judgment is required to determine whether certain assets and liabilities measured at fair value are
included in Level 2 or Level 3. When making this judgment, we consider all available information, including
observable market data, indications of market liquidity and orderliness, and our understanding of the valuation
techniques and signiﬁ cant inputs used. The classiﬁ cation of Level 2 or Level 3 is based upon the speciﬁ c facts and
circumstances of each instrument or instrument category and judgments are made regarding the signiﬁ cance of the
Level 3 inputs to an instrument’s fair value measurement in its entirety. If Level 3 inputs are considered signiﬁ cant,
the instrument is classiﬁ ed as Level 3.

As of December 31, 2017, our Level 3 recurring fair value measurements consisted of single family MSRs, single
family loans held for investment where fair value option was elected, certain single family loans held for sale and
interest rate lock and purchase loan commitments.

On a quarterly basis, our Asset/Liability Management Committee (“ALCO”) and the Finance Committee of the
Board review signiﬁ cant modeling variables used to measure the fair value of the Company’s ﬁ nancial instruments,
including the signiﬁ cant inputs used in the valuation of single family MSRs. Additionally, ALCO periodically
obtains an independent review of the MSR valuation process and procedures, including a review of the model
architecture and the valuation assumptions. We obtain an MSR valuation from an independent valuation ﬁ rm
monthly to assist with the validation of our fair value estimate and the reasonableness of the assumptions used in
measuring fair value.

In addition to the recurring fair value measurements, from time to time the Company may have certain nonrecurring
fair value measurements. These fair value measurements usually result from the application of lower of cost or fair
value accounting or impairment of individual assets. As of December 31, 2017 and 2016, the Company’s Level 3
nonrecurring fair value measurements were based on the appraised value of collateral used as the basis for the
valuation of collateral dependent loans held for investment and OREO.

Real estate valuations are overseen by our appraisal department, which is independent of our lending and credit
administration functions. The appraisal department maintains the appraisal policy and recommends changes to
the policy subject to approval by the Credit Committee of the Company’s Board of Directors and Company’s Loan
Committee (the “Loan Committee”), established by the Credit Committee of the Company’s Board of Directors and
comprised of certain of the Company’s management. Appraisals are prepared by independent third-party appraisers
and our internal appraisers. Appraisals are reviewed either by our in-house appraisal staff or by independent and
qualiﬁ ed third-party appraisers.

For further information on the fair value of ﬁ nancial instruments, single family MSRs and OREO, see
Note 1 — Summary of Signiﬁ cant Accounting Policies, Note 12 — Mortgage Banking Operations and Note 17 —
Fair Value Measurements in the notes to the ﬁ nancial statements of this Form 10-K.

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Income Taxes

In establishing an income tax provision, we must make judgments and interpretations about the application of
inherently complex tax laws. We must also make estimates about when in the future certain items will aff ect taxable
income. Our interpretations may be subject to review during examination by taxing authorities and disputes may
arise over the respective tax positions. We monitor tax authorities and revise our estimates of accrued income taxes
due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly
basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and
strategies and from the resolution of income tax controversies. Such revisions in our estimates may be material to
our operating results for any given reporting period.

Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the ﬁ nancial
statements. Under this method, a deferred tax asset or liability is determined based on the diff erences between the
tax basis of assets and liabilities and their reported amounts in the ﬁ nancial statements. The eff ect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent it is believed that these assets will more likely than not
be realized. In making such determination, management considers all available positive and negative evidence,
including future reversals of existing taxable temporary diff erences, projected future taxable income, tax planning
strategies and recent ﬁ nancial operations. After reviewing and weighing all of the positive and negative evidence, if
the positive evidence outweighs the negative evidence, then management does not record a valuation allowance for
deferred tax assets. If the negative evidence outweighs the positive evidence, then a valuation allowance for all or a
portion of the deferred tax assets is recorded.

The Company recognizes potential interest and penalties related to unrecognized tax beneﬁ ts as income tax expense
in the consolidated statements of operations. Accrued interest and penalties are included within the related tax
liability line in the consolidated statements of ﬁ nancial condition. For further information regarding income taxes,
see Note 14 — Income Taxes to the ﬁ nancial statements of this Form 10-K.

Business Combinations

The Simplicity and Orange County Business Bank acquisitions, as well as the branch acquisitions were accounted
for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. The assets and
liabilities, both tangible and intangible, were recorded at their estimated fair values as of acquisition date.
Management made signiﬁ cant estimates and exercised signiﬁ cant judgment in estimating the fair values and
accounting for such acquired assets and assumed liabilities, and in certain instances received “bargain purchase
gains” or “goodwill” in these transactions.

The valuation of acquired loans, mortgage servicing rights, premises and equipment, core deposit intangibles,
deferred taxes, deposits, Federal Home Loan Bank advances and any contingent liabilities that arise as a result of
the transaction may be preliminary for a period of time following completion of the acquisition. As such, fair value
estimates are subject to adjustment when additional information relative to the closing date fair values becomes
available and such information is considered ﬁ nal or up to one year after the acquisition date, or, whichever is earlier.

Management used valuation models to estimate the fair value for certain assets and liabilities. These models
incorporate inputs such as forward yield curves, loan prepayment expectations, expected credit loss assumptions,
market volatilities, and pricing spreads utilizing market-based inputs where available. We believe our 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
reﬂ ecting the amount that could be realized in an actual sale or transfer of the asset or liability in a current market
exchange.

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Results of Operations

Average Balances and Rates

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

2017

Years Ended December 31,
2016

2015

Average
Balance

Interest

Average
Yield/
Cost

Average
Balance

Interest

Average
Yield/
Cost

Average
Balance

Interest

Average
Yield/
Cost

(in thousands)

Assets:
Interest-earning assets:(1)

Cash and cash

equivalents. . . . . . . . . . . $

Investment securities . . . . .
Loans held for sale . . . . . . .
Loans held for

investment . . . . . . . . . . .
Total interest-earning

85,430
1,023,702
711,063

567
25,810
28,732

0.67% $
2.54
4.05

39,962
834,671
764,222

254
21,611
28,581

0.63% $
2.57
3.76

36,134
523,756
755,688

67
14,270
29,165

0.18%
2.72
3.86

4,178,326

187,281

4.46

3,668,263

162,219

4.40

2,834,511

123,680

4.36

assets . . . . . . . . . . . .

5,998,521

242,390

4.03

5,307,118

212,665

4.00

4,150,089

167,182

4.03

Noninterest-earning

assets(2) . . . . . . . . . . . . . . . .

591,561
Total assets . . . . . . . . $ 6,590,082

Liabilities and shareholders’

equity:
Deposits:

Interest-bearing demand

accounts . . . . . . . . . . . . . $ 477,635
306,151
1,579,115
1,225,614

Savings accounts . . . . . . . .
Money market accounts . . .
Certiﬁcate accounts . . . . . .
Total interest-bearing

470,021
$ 5,777,139

410,404
$ 4,560,493

1,964
1,013
8,533
13,028

0.41% $ 450,838
0.33
299,502
1,370,256
0.54
1,024,541
1.06

$ 1,950
1,029
7,344
9,086

0.43% $ 317,510
284,309
0.34
1,122,321
0.53
775,398
0.88

$ 1,492
1,053
4,930
4,501

0.46%
0.38
0.44
0.58

deposits . . . . . . . . . .

3,588,515

24,538

0.68

3,145,137

19,409

0.61

2,499,538

11,976

0.48

Federal Home Loan Bank

advances . . . . . . . . . . . . . . .

1,037,650

12,589

1.19

942,593

6,030

0.64

795,368

3,669

0.46

Federal funds purchased

and securities sold under
agreements to repurchase . .
Long-term debt . . . . . . . . . . . .
Other borrowings . . . . . . . . . .

Total interest-bearing

3,732
125,228
96

48
6,067
3

1.20
4.83
0.89

803
101,049
—

6
4,043
—

0.40
3.73
—

11,397
61,857
—

29
1,104
—

0.31
1.78
—

liabilities . . . . . . . . . .

4,755,221

43,245

0.91

4,189,582

29,488

0.70

3,368,160

16,778

0.50

Noninterest-bearing

liabilities . . . . . . . . . . . . . . .
Total liabilities . . . . .
Shareholders’ equity . . . . . . . .

1,158,984
5,914,205
675,877

Total liabilities and
shareholders’
equity . . . . . . . . . . $ 6,590,082

Net interest income(3). . . . . . . .
Net interest spread . . . . . . . . . .
Impact of noninterest-bearing
sources . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . .

1,021,409
5,210,991
566,148

750,228
4,118,388
442,105

$ 199,145

$ 183,177

$ 150,404

$ 5,777,139

$ 4,560,493

3.12%

0.19%
3.31%

3.30%

0.15%
3.45%

3.53%

0.10%
3.63%

(1)
(2)
(3)

The average balances of nonaccrual assets and related income, if any, are included in their respective categories.
Includes former loan balances that have been foreclosed and are now reclassiﬁ ed to OREO.
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of
$4.7 million, $3.1 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. The
estimated federal statutory tax rate was 35% for the periods presented.

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Interest on Nonaccrual Loans

We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual
status, we reverse the accrued but unpaid interest, reducing interest income, and we stop amortizing any net deferred
fees. Additionally, if interest is received on nonaccrual loans, the interest collected on the loan is recognized as an
adjustment to the cost basis of the loan. The net decrease to interest income due to adjustments made for nonaccrual
loans, including the eff ect of additional interest income that would have been recorded during the period if the loans
had been accruing, was $1.5 million, $2.2 million and $2.5 million for the years ended December 31, 2017, 2016
and 2015, respectively.

Rate and Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of our
interest-earning assets and interest-bearing liabilities have aff ected our interest income and interest expense,
excluding interest income from nonaccrual loans. Information is provided in each category with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) changes attributable
to changes in rate (changes in rate multiplied by prior volume), (3) changes attributable to changes in rate and
volume (change in rate multiplied by change in volume), which were allocated in proportion to the percentage
change in average volume and average rate and included in the relevant column and (4) the net change.

Years Ended December 31,

2017 vs. 2016

Increase (Decrease)
Due to

Rate

Volume

Total
Change

2016 vs. 2015

Increase (Decrease)
Due to

Rate

Volume

Total
Change

(in thousands)
Assets:
Interest-earning assets

Cash and cash equivalents . . . . . . . . . . . $
Investment securities . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . .
Loans held for investment . . . . . . . . . . .
Total interest-earning assets . . . . .

Liabilities:
Deposits

Interest-bearing demand accounts . . . . .
Savings accounts . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . .
Certiﬁcate accounts . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . .
Federal Home Loan Bank advances . . . . .
Securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . .
Total changes in net interest

27 $

287 $

314 $

180 $

7 $

(656)
2,149
2,597
4,117

(103)
(39)
81
2,179
2,118
5,952

30
1,124
3
9,227

4,855
(1,998)
22,464
25,608

4,199
151
25,061
29,725

(1,128)
(914)
2,191
329

8,469
329
36,348
45,153

116
23
1,108
1,763
3,010
608

11
901
—
4,530

13
(16)
1,189
3,942
5,128
6,560

41
2,025
3
13,757

(161)
(81)
1,325
3,130
4,213
1,682

10
2,242
—
8,147

619
57
1,089
1,454
3,219
679

(32)
697
—
4,563

187
7,341
(585)
38,539
45,482

458
(24)
2,414
4,584
7,432
2,361

(22)
2,939
—
12,710

income . . . . . . . . . . . . . . . . . . $ (5,110) $ 21,078 $ 15,968 $ (7,818) $ 40,590 $ 32,772

Net Income

Comparison of 2017 to 2016

For the year ended December 31, 2017, net income was $68.9 million, an increase of $10.8 million, or 18.6%, from
$58.2 million for the year ended December 31, 2016. Included in net income for the year ended December 31, 2017
was a one-time, non-cash, tax reform beneﬁ t of $23.3 million and restructuring as well as merger-related costs
(net of tax) of $2.4 million and $391 thousand, respectively. Such merger-related costs (net of tax) relating to prior
acquisitions totaled $4.6 million in 2016. There were no similar tax reform beneﬁ ts or restructuring costs in 2016.

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Comparison of 2016 to 2015

For the year ended December 31, 2016, net income was $58.2 million, an increase of $16.8 million, or 40.7%,
compared to net income of $41.3 million in 2015. Included in net income for the year ended December 31, 2016
were acquisition-related costs (net of tax) of $4.6 million. Such acquisition-related costs (net of tax) relating to prior
acquisitions totaled $10.7 million which were off set by bargain purchase gains of $7.7 million during 2015.

Net Interest Income

Our proﬁ tability depends signiﬁ cantly on net interest income, which is the diff erence between income earned on our
interest-earning assets, primarily loans and investment securities, and interest paid on interest-bearing liabilities. Our
interest-bearing liabilities consist primarily of deposits and borrowed funds, including our outstanding trust preferred
securities, senior unsecured notes and advances from the Federal Home Loan Bank (“FHLB”).

Comparison of 2017 to 2016

Net interest income on a tax equivalent basis for the year ended December 31, 2017 increased $16.0 million, or
8.7%, from December 31, 2016 as a result of growth in average interest earning assets, partially off set by a lower net
interest margin. The net interest margin decreased to 3.31% for the year ended December 31, 2017 from 3.45% for
the year ended December 31, 2016. The decrease in the net interest margin from the year ended December 31, 2016
was due primarily to higher costs of funds related to our long term debt issuance in the second quarter of 2016 and
higher FHLB borrowing costs due to higher short-term rates.

Total average interest-earning assets increased by $691.4 million, or 13%, in 2017 compared to 2016 primarily as
a result of growth in average loans held for investment from organic growth. Additionally, our average balance of
investment securities grew from prior periods as part of the strategic growth of the Company.

Total interest income on a tax equivalent basis in 2017 increased $29.7 million, or 14.0%, from 2016 resulting from
higher average balances of loans held for investment, which increased $510.1 million, or 13.9%, from 2016.

Total interest expense in 2017 increased $13.8 million, or 46.7%, from 2016 primarily resulting from higher average
balances of interest-bearing deposits and FHLB advances and interest paid on our $65.0 million in senior debt issued
in May 2016.

Comparison of 2016 to 2015

Net interest income on a tax equivalent basis for the year ended December 31, 2016 increased $32.8 million, or
21.8%, from December 31, 2015 as a result of growth in average interest earning assets, partially off set by a lower
net interest margin. The net interest margin decreased to 3.45% for the year ended December 31, 2016 from 3.63%
for the year ended December 31, 2015. The decrease in the net interest margin from the year ended December 31,
2015 was due primarily to shifts in asset mix from growth in lower yielding investment securities and loans held for
sale and to higher costs of funds primarily related to our long-term debt issuance in 2016, money market products
and FHLB borrowings.

Total average interest-earning assets increased by $1.16 billion, or 28% in 2016 compared to 2015 primarily as a
result of growth in average loans held for investment, both organically and through acquisition activity. Additionally,
our average balance of investment securities grew from prior periods as part of the strategic growth of the Company.

Total interest income on a tax equivalent basis in 2016 increased $45.5 million, or 27.2%, from 2015 resulting from
higher average balances of loans held for investment, which increased $833.8 million, or 29.4%, from 2015.

Total interest expense in 2016 increased $12.7 million, or 75.8%, from 2015 primarily resulting from higher average
balances of interest-bearing deposits and FHLB advances, and interest paid on our $65.0 million in senior debt
issued in May 2016.

Provision for Credit Losses

Management believes that our allowance for loan losses is at a level appropriate to cover estimated incurred losses
inherent within the loans held for investment portfolio. Our credit risk proﬁ le has continued to improve since our initial
public off ering in 2012, including year over year improvements from December 31, 2016 and December 31, 2015.

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Comparison of 2017 to 2016

The Company recorded a $750 thousand provision for credit losses for the year ended December 31, 2017 compared
to a $4.1 million provision for credit losses for the year ended December 31, 2016. The reduction in credit loss
provision in the year was due in part to continued improvements in credit quality reﬂ ected in the qualitative reserves
and historical loss rates, combined with an increase of $2.6 million in net recoveries over the comparable period.

Nonaccrual loans were $15.0 million at December 31, 2017, a decrease of $5.5 million, or 26.8%, from
$20.5 million at December 31, 2016. Nonaccrual loans as a percentage of total loans decreased to 0.33% at
December 31, 2017 compared to 0.53% at December 31, 2016. Net loan loss recoveries were $3.1 million in 2017
compared to net loan loss recoveries of $505 thousand in 2016. Overall, the allowance for credit losses, which
includes the reserve for unfunded commitments, was $39.1 million, or 0.86% of loans held for investment at
December 31, 2017, compared to $35.3 million, or 0.92% of loans held for investment at December 31, 2016.

Comparison of 2016 to 2015

The Company recorded a $4.1 million provision for credit losses for the year ended December 31, 2016 compared
to a $6.1 million provision for credit losses for the year ended December 31, 2015. The reduction in credit loss
provision in the year was due in part to a continuing decline in historical loss rates as a result of net recoveries for
the past two years and continued improvements in portfolio performance which was reﬂ ected in the qualitative
reserves. In 2015, one-time model adjustments contributed to an increase in provision expense.

Nonaccrual loans were $20.5 million at December 31, 2016, an increase of $3.4 million, or 19.7%, from
$17.2 million at December 31, 2015. Nonaccrual loans as a percentage of total loans remained steady at 0.53% at
both December 31, 2016 and December 31, 2015. Net loan loss recoveries were $505 thousand in 2016 compared
to net loan loss recoveries of $2.0 million in 2015. Overall, the allowance for credit losses, which includes the
reserve for unfunded commitments, was $35.3 million, or 0.92% of loans held for investment at December 31, 2016,
compared to $30.7 million, or 0.95% of loans held for investment at December 31, 2015.

For a more detailed discussion on our allowance for loan losses and related provision for loan losses, see “Credit
Risk Management — Asset Quality and Nonperforming Assets” in this Form 10-K.

Noninterest Income

Noninterest income consisted of the following.

(in thousands)
Noninterest income

Gain on loan origination and sale

Years Ended December 31,

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

activities(1) . . . . . . . . . . . . . . . . . . $ 255,876 $ (51,437)
2,325
(1,735)

Loan servicing income . . . . . . . . . .
Income from WMS Series LLC . . .
Depositor and other retail banking

35,384
598

(17)% $ 307,313 $ 70,925
8,809
33,059
709
2,333

7
(74)

30% $ 236,388
24,250
36
1,624
44

7,221
1,904

431
285

6
18

6,790
1,619

909
(63)

15
(4)

5,881
1,682

fees . . . . . . . . . . . . . . . . . . . . . . .
Insurance agency commissions . . . .
Gain on sale of investment securities
available for sale . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .

5,185
Total noninterest income . . . . . . . . . . . $ 312,154 $ (46,996)

489
—
10,682

(2,050)

2,539

(81)
133
— NM
— (7,726)
4,217
5,497
94
(13)% $ 359,150 $ 77,913

6
2,406
NM
7,726
1,280
329
28% $ 281,237

NM = not meaningful
(1)

Single family and multifamily mortgage banking activities.

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Comparison of 2017 to 2016

Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are
comprised of mortgage origination and sale as well as mortgage servicing activities. The level of our mortgage
banking activity ﬂ uctuates and is highly sensitive to changes in mortgage interest rates, as well as to general
economic conditions such as employment trends and housing supply and aff ordability. The decrease in noninterest
income in 2017 compared to 2016 was primarily due to a decrease in gain on loan origination and sale activities
resulting from a 19% decrease in single family rate lock volume.

Comparison of 2016 to 2015

The increase in noninterest income in 2016 compared to 2015 was primarily the result of higher gain on loan
origination and sale activities mostly due to increased single family mortgage interest rate lock commitments
and higher mortgage servicing income. Included in noninterest income for 2015 was a bargain purchase gain of
$7.7 million from the Simplicity merger and our acquisition of a branch in Dayton, Washington. No similar bargain
purchase gains occurred in 2016.

The signiﬁ cant components of our noninterest income are described in greater detail, as follows.

Gain on loan origination and sale activities consisted of the following.

(in thousands)
Single family held for sale:

Servicing value and secondary

Years Ended December 31,

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

market gains(1) . . . . . . . . . . . $ 209,027 $ (51,450)

(20)% $ 260,477 $ 54,964

27% $ 205,513

Loan origination and

administrative fees . . . . . . .

26,822

(3,144)

(10)

29,966

7,745

22,221

Total single family held for

sale . . . . . . . . . . . . . . . . . . . . .
Multifamily DUS® . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS® . . . . . . . . . . . . .
Gain on loan origination and

235,849
13,210
2,439
4,378

(54,594)
1,813
1,025
319

(19)
16
72
8

290,443
11,397
1,414
4,059

62,709
4,272
344
3,600

28
60
32
784

227,734
7,125
1,070
459

sale activities . . . . . . . . . . . . $ 255,876 $ (51,437)

(17)% $ 307,313 $ 70,925

30% $ 236,388

(1) Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family

loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the
Company’s repurchase liability for loans that have been sold.

Single family production volumes related to loans designated for sale consisted of the following.

(in thousands)
Single family

2017

Dollar
Change

For The Years Ended December 31,
Dollar
Percent
Change
Change

2016

Percent
Change

2015

mortgage closed
loan volume(1) . . . . $ 7,554,185 $ (1,443,162)

Single family
mortgage
interest rate lock
commitments(1) . . . $ 6,980,477 $ (1,640,499)

(16)% $ 8,997,347 $ 1,784,912

25% $ 7,212,435

(19)% $ 8,620,976 $ 1,689,868

24% $ 6,931,108

(1)

Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank.

Comparison of 2017 to 2016

The decrease in gain on loan origination and sale activities in 2017 compared to 2016 predominantly reﬂ ected lower
single family mortgage interest rate lock commitments as a result of higher market interest rates in the period and

] 24 Page

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a limited supply of available housing in our primary markets. In 2017, we reduced the number of employees in the
mortgage segment by 13.1% at December 31, 2017 compared to December 31, 2016, primarily due to our Mortgage
Banking Segment restructuring. Mortgage production personnel was reduced by 5.2% at December 31, 2017
compared to December 31, 2016.

Comparison of 2016 to 2015

The increase in gain on loan origination and sale activities in 2016 compared to 2015 predominantly reﬂ ected higher
single family mortgage interest rate lock commitments as a result of the expansion of our mortgage lending network,
higher loan production per loan producer and higher reﬁ nance volumes. Mortgage production personnel grew by
12.7% during 2016 compared to 2015.

Management records a liability for estimated mortgage repurchase losses, which has the eff ect of reducing gain on
mortgage loan origination and sale activities. The following table presents the eff ect of changes in our mortgage
repurchase liability within the respective line of gain on mortgage loan origination and sale activities. For further
information on the Company’s mortgage repurchase liability, see Note 13, Commitments, Guarantees and
Contingencies to the ﬁ nancial statements in this Form 10-K.

(in thousands)
Effect of changes to the mortgage repurchase liability

recorded in gain on loan origination and sale activities:
New loan sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other changes in estimated repurchase losses(2) . . . . . . . . . .

Years Ended December 31,
2016

2015

2017

(2,528) $
2,354
(174) $

(3,574) $
2,032
(1,542) $

(2,764)
—
(2,764)

(1) Represents the estimated fair value of the repurchase or indemnity obligation recognized as a reduction of proceeds on new

loan sales.

(2) Represents changes in estimated probable future repurchase losses on previously sold loans.

Loan servicing income consisted of the following.

(in thousands)
Servicing income, net:

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

Servicing fees and other . . . . $ 66,192 $ 12,538
Changes in fair value of

23% $ 53,654 $ 11,638

28% $ 42,016

single family MSRs due to
amortization(1) . . . . . . . . . .
Amortization of multifamily
and SBA MSRs . . . . . . . . .

Risk management:

Changes in fair value of
MSRs due to changes
in model inputs and/or
assumptions . . . . . . . . . . . .

Net gain (loss) from

(35,451)

(2,146)

(3,932)
26,809

(1,297)
9,095

49
51

(33,305)

733

(2)

(34,038)

(2,635)
17,714

(643)
11,728

32
196

(1,992)
5,986

(1,157)

(21,182)

(106)

20,025

13,470

205

6,555

derivatives economically
hedging MSRs . . . . . . . . . .

14,412
(6,770)
Loan servicing income . . . . . . . $ 35,384 $ 2,325

9,732
8,575

(308)
(44)

(4,680)
15,345

(16,389)
(2,919)
7% $ 33,059 $ 8,809

11,709
(140)
(16)
18,264
36% $ 24,250

(1) Represents changes due to collection/realization of expected cash ﬂ ows and curtailments.
(2)

Principally reﬂ ects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which aff ect future prepayment speed and cash ﬂ ow projections.

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Comparison of 2017 to 2016

The increase in mortgage servicing income in 2017 compared to 2016 was primarily due to higher servicing
income, net, off set by lower risk management results. The higher servicing income was primarily attributed to higher
servicing fees on higher average balances of loans serviced for others. The lower risk management results were due
in part to gains from prepayment model reﬁ nements in 2016 to align borrower prepayment behavior with observed
borrower prepayment behavior. Mortgage servicing fees collected in 2017 increased compared to 2016 primarily as a
result of higher average balances of loans serviced for others during the year. Our loans serviced for others portfolio
was $24.02 billion at December 31, 2017 compared to $20.67 billion at December 31, 2016.

life of the net servicing cash ﬂ ows of the MSR asset. Certain other changes in MSR fair value relate to factors other
than interest rate changes and are generally not within the scope of the Company’s MSR economic hedging strategy.
These factors may include but are not limited to the impact of changes to the housing price index, prepayment model
assumptions, the level of home sales activity, changes to mortgage spreads, valuation discount rates, costs to service
and policy changes by U.S. government agencies.

Comparison of 2016 to 2015

The increase in mortgage servicing income in 2016 compared to 2015 was primarily due to higher servicing
income, net, off set by lower risk management results. The higher servicing income was primarily attributed to higher
servicing fees on higher average balances of loans serviced for others and lower modeled amortization. Mortgage
servicing fees collected in 2016 increased compared to 2015 primarily as a result of higher average balances of loans
serviced for others during the year. Our loans serviced for others portfolio was $20.67 billion at December 31, 2016
compared to $16.35 billion at December 31, 2015.

The lower risk management results in 2016 compared to 2015 were mainly due to adverse results during the fourth
quarter driven by the unexpected and signiﬁ cant increases in long-term Treasury rates beginning in November
2016 following the U.S. presidential election, coinciding with an increase in short-term interest rates by the Federal
Reserve in December 2016. The unexpected and sustained increase in interest rates during the quarter resulted in
asymmetrical changes in valuation between hedging derivatives and servicing valuations. This market dislocation
in the fourth quarter reduced the value of our hedging derivatives to a greater extent than value of our mortgage
servicing rights increased, resulting in lower risk management results.

Income from WMS Series LLC

Comparison of 2017 to 2016

Income from WMS Series LLC decreased by $1.7 million in 2017 to $598 thousand compared to $2.3 million in
2016, primarily due to a 15.6% decrease in interest rate lock commitments and a 7.7% decrease in closed loan
volume, which were $546.5 million and $631.4 million, respectively, in 2017 compared to $647.3 million and
$684.1 million, respectively, for the same period in 2016.

Comparison of 2016 to 2015

Income from WMS Series LLC increased by $709 thousand in 2016 to $2.3 million compared to $1.6 million in
2015 primarily due to a 15.1% increase in interest rate lock commitments and a 10.9% increase in closed loan
volume, which were $647.3 million and $684.1 million, respectively, in 2016 compared to $562.2 million and
$616.9 million, respectively, for the same period in 2015.

Depositor and other retail banking fees for 2017 increased from 2016 primarily due to an increase in the number
of transaction accounts in both existing branches and new retail deposit branches. The following table presents the
composition of depositor and other retail banking fees for the periods indicated.

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(in thousands)
Fees:

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

Monthly maintenance and

deposit-related fees . . . . . . $ 3,085 $

Debit Card/ATM fees . . . . . .
Other fees . . . . . . . . . . . . . . .
Total depositor and other retail

3,912
224

133
291
7

5% $ 2,952 $
8
3

3,621
217

295
476
138

11% $ 2,657
3,145
15
79
175

banking fees . . . . . . . . . . . . . $ 7,221 $

431

6% $ 6,790 $

909

15% $ 5,881

Noninterest Expense

Noninterest expense consisted of the following.

(in thousands)
Noninterest expense

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

Salaries and related costs . . . . $ 293,870 $ (9,484)
General and administrative . . .
1,830
Amortization of core deposit

65,036

(3)% $ 303,354 $ 62,767
6,385
3

63,206

26% $ 240,587
56,821
11

intangibles . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . .
Consulting . . . . . . . . . . . . . . . .
Federal Deposit Insurance

Corporation assessments . . .
Occupancy . . . . . . . . . . . . . . . .
Information services . . . . . . . .
Net (beneﬁt) cost of operation
and sale of other real estate
owned . . . . . . . . . . . . . . . . .

1,710
1,410
3,467

3,279
38,268
33,143

(456)
(457)
(1,491)

(135)
7,738
80

(21)
(24)
(30)

(4)
25
—

2,166
1,867
4,958

3,414
30,530
33,063

242
(940)
(2,257)

841
5,603
4,009

13
(33)
(31)

33
22
14

1,924
2,807
7,215

2,573
24,927
29,054

(2,294)
Total noninterest expense . . . . . . $ 439,653 $ (4,669)

(530)

(130)

1,104
1,764
(1)% $ 444,322 $ 77,754

167

660
21% $ 366,568

The following table shows the acquisition-related expenses impacting the components of noninterest expense.

(in thousands)
Noninterest expense

Years Ended December 31,
2016

2015

2017

Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

— $
79
64
366
72
21
602 $

4,128 $
633
132
1,500
180
563
7,136 $

7,672
1,463
830
5,703
382
514
16,564

The following table shows the restructuring-related expenses impacting the components of noninterest expense.

(in thousands)
Noninterest expense

Years Ended December 31,
2016

2015

2017

Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

648 $

3,072
3,720 $

— $
—
— $

—
—
—

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Comparison of 2017 to 2016

The decrease in noninterest expense in 2017 compared to 2016 was primarily due to decreased commissions on
lower closed loan volume, partially off set by other costs related to the growth in offi ces and personnel in connection
with our organic expansion of our commercial and consumer banking businesses and restructuring-related costs in
our Mortgage Banking Segment.

Included in noninterest expense in 2017 was $602 thousand and $3.7 million of acquisition-related and
restructuring-related costs, respectively, compared to $7.1 million in acquisition-related costs in 2016. There were no
similar restructuring-related costs in 2016.

Salaries and related costs decreased primarily due to lower commission and incentive expense, as single family
mortgage closed loan volumes decreased 16.0%, from 2016 and a 5.2% decrease in full-time equivalent employees
at December 31, 2017 compared to December 31, 2016, primarily due to our 2017 restructuring in our Mortgage
Banking Segment.

General and administrative and Information services costs increased primarily due to our expansion of our
commercial and consumer business.

Comparison of 2016 to 2015

The increase in noninterest expense in 2016 compared to 2015 was primarily due to increased commissions on
higher closed loan volume, as well as other costs related to the growth in offi ces and personnel in connection with
our expansion of our commercial and consumer and mortgage banking businesses, both organically and through
acquisition-related activities.

Included in noninterest expense in 2016 was $7.1 million of acquisition-related costs compared to $16.6 million in
2015 primarily related to Simplicity merger.

Salaries and related costs increased primarily due to a 19.3% increase in full-time equivalent employees at
December 31, 2016 compared to December 31, 2015 and higher commission and incentive expense, as single family
mortgage closed loan volumes increased 24.7%, from 2015.

General and administrative and Information services costs increased primarily due to increased headcount and
continued growth of our mortgage banking business and expansion of our commercial and consumer business.

Income Tax Expense

Comparison of 2017 to 2016

The Tax Reform Act was signed into law in December 2017. We expect that our 2018 eff ective tax rate will be
between 21% and 22%, before discrete items, as a result of this legislation. We also recognized a one-time, non-cash,
beneﬁ t of $23.3 million from this legislation in 2017 as we revalued our December 31, 2017 net deferred tax liability
position at the new federal corporate income tax rate.

For the year ended December 31, 2017, income tax beneﬁ t was $2.8 million with an eff ective tax rate of (4.2)%
(inclusive of discrete items) compared to income tax expense of $32.6 million and an eff ective tax rate of 35.9%
(inclusive of discrete items) for the year ended December 31, 2016.

The Company’s eff ective income tax rate for the year ended December 31, 2017 diff ers from the Federal statutory tax
rate of 35% primarily due to the impact of the newly enacted tax law, state income taxes, tax-exempt income and low
income housing tax credit investments.

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Comparison of 2016 to 2015

The Company’s income tax expense for 2016 was $32.6 million, representing an eff ective tax rate of 35.9%
(inclusive of discrete items). In 2015, the Company’s tax expense was $15.6 million, representing an eff ective tax
rate of 27.4% (inclusive of discrete items). The Company’s eff ective income tax rate for the year ended December 31,
2015 was signiﬁ cantly less than the Federal statutory tax rate of 35% primarily due to the impact of state income
taxes, tax-exempt interest income and low income housing tax credit investments.

Capital Expenditures

Comparison of 2017 to 2016

During 2017, our net expenditures for property and equipment were $42.3 million, compared to net expenditures of
$24.5 million during 2016, primarily due to the continued expansion of our commercial and consumer businesses.

Comparison of 2016 to 2015

During 2016, our net expenditures for property and equipment were $24.5 million, compared to net expenditures of
$20.6 million during 2015, as we continued the expansion of our commercial and consumer and mortgage banking
businesses.

Review of Financial Condition — Comparison of December 31, 2017 to December 31, 2016

Total assets were $6.74 billion at December 31, 2017 and $6.24 billion at December 31, 2016, an increase of
$498.3 million.

Cash and cash equivalents were $72.7 million at December 31, 2017 compared to $53.9 million at December 31,
2016, an increase of $18.8 million, or 34.8%.

Investment securities were $904.3 million at December 31, 2017 compared to $1.04 billion at December 31, 2016, a
decrease of $139.5 million, or 13.4%, primarily due to sales and principal repayments of securities purchased with
temporary excess capital from the 2016 debt and equity issuances.

We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of
interest income. We designated the vast majority of these securities as available for sale. We held securities having a
carrying value of $58.0 million at December 31, 2017, which were designated as held to maturity.

The following table sets forth certain information regarding the amortized cost and fair values of our investment
securities available for sale.

(in thousands)
Investment securities available for sale:

Mortgage-backed securities:

Residential . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations:

Residential . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . . . .

Total investment securities

At December 31,

2017

2016

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

133,654 $
24,024
389,117

130,090 $
23,694
388,452

164,502
100,001
25,146
10,899
9,861

160,424
98,569
24,737
10,652
9,650

181,158 $

25,896
473,153

194,982
71,870
52,045
10,882
—

177,074
25,536
467,673

191,201
70,764
51,122
10,620
—

available for sale . . . . . . . . . . . . . . . . . . . $

857,204 $

846,268 $

1,009,986 $

993,990

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Mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) represent securities issued
by government sponsored enterprises (“GSEs”). Each of the MBS and CMO securities in our investment portfolio
are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation
bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues
from the speciﬁ c project being ﬁ nanced) issued by various municipal corporations. As of December 31, 2017 and
2016, substantially all securities held were either agency quality or rated investment grade by at least one Nationally
Recognized Statistical Rating Organization (“NRSRO”).

For information regarding the fair value of investment securities available for sale by contractual maturity along with
the associated contractual yield for the periods, see Note 4, Investment Securities to the ﬁ nancial statements of this
Form 10-K.

Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or
Freddie Mac. Investments in these instruments involve a risk that actual prepayments will vary from the estimated
prepayments over the life of the security. This may require adjustments to the amortization of premium or accretion
of discount relating to such instruments, thereby changing the net yield on such securities. At December 31,
2017, the aggregate net premium associated with our MBS portfolio was $8.0 million, or 4.4%, of the aggregate
unpaid principal balance, compared with $10.1 million or 4.5% at December 31, 2016. The aggregate net premium
associated with our CMO portfolio as of December 31, 2017 and 2016 was $4.8 million, or 1.8%, of the aggregate
unpaid principal balance. There is also reinvestment risk associated with the cash ﬂ ows from such securities and the
market value of such securities may be adversely aff ected by changes in interest rates.

Management monitors the portfolio of securities classiﬁ ed as available for sale for impairment, which may result
from credit deterioration of the issuer, changes in market interest rates relative to the rate of the instrument or
changes in prepayment speeds. We evaluate each investment security on a quarterly basis to assess if impairment is
considered other than temporary. In conducting this evaluation, management considers many factors, including but
not limited to whether we expect to recover the entire amortized cost basis of the security in light of adverse changes
in expected future cash ﬂ ows, the length of time the security has been impaired and the severity of the unrealized
loss. We also consider whether we intend to sell the security (or whether we will be required to sell the security)
prior to recovery of its amortized cost basis, which may be at maturity.

Based on this evaluation, management concluded that unrealized losses as of December 31, 2017 were the result of
changes in interest rates. Management does not intend to sell such securities nor is it likely it will be required to sell
such securities prior to recovery of the securities’ amortized cost basis. Accordingly, none of the unrealized losses as
of December 31, 2017 were considered other than temporary.

Loans held for sale were $610.9 million at December 31, 2017 compared to $714.6 million at December 31, 2016,
a decrease of $103.7 million, or 14.5%. Loans held for sale include single family and multifamily residential loans,
typically sold within 30 days of closing the loan.

Loans held for investment, net increased $687.4 million, or 18.0%, from December 31, 2016. Our single family loan
portfolio increased $297.5 million from 2016. Our commercial and industrial loan portfolio increased $149.8 million
from 2016, primarily as a result of the organic growth of our Commercial and Consumer Banking Segment. Our
construction loans, including commercial construction and residential construction, increased $51.3 million from
2016, primarily from new originations in our commercial real estate and residential construction lending business.

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The following table details the composition of our loans held for investment portfolio by dollar amount and as a
percentage of our total loan portfolio.

(in thousands)

Consumer loans:

2017

2016

At December 31,

2015

2014

2013

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Amount

Percent

Single family . . . . . . . . . $

1,381,366(1)

30.5% $ 1,083,822(1)

28.2% $ 1,203,180

37.3% $ 896,665

42.2% $ 904,913

47.7%

Home equity and

other . . . . . . . . . . . . .

Commercial real estate loans:

Non-owner occupied

commercial real estate . .

Multifamily . . . . . . . . . .

Construction/land

development . . . . . . . . . .

Commercial and industrial

loans:

Owner occupied commercial
real estate . . . . . . . . . . . .

Commercial business . . . . .

Total loans before allowance,
net deferred loan fees and
costs . . . . . . . . . . . . . . . . . . .

Net deferred loan fees and

costs . . . . . . . . . . . . . . . . . . .

453,489

1,834,855

10.0

40.5

359,874

1,443,696

9.3

37.5

256,373

1,459,553

8.0

45.3

135,598

1,032,263

6.4

48.6

135,650

1,040,563

7.1

54.8

622,782

728,037

687,631

2,038,450

391,613

264,709

656,322

13.8

16.1

15.2

45.1

8.6

5.8

14.4

588,672

674,219

636,320

1,899,211

282,891

223,653

506,544

15.4

17.5

16.5

49.4

7.3

5.8

13.1

445,903

426,557

583,160

1,455,620

154,800

154,262

309,062

13.8

13.2

18.1

45.1

4.8

9.6

379,664

55,088

367,934

802,686

143,800

147,449

291,249

17.8

2.6

17.3

37.7

6.8

6.9

13.7

320,942

79,216

130,465

530,623

156,700

171,054

327,754

16.8

4.2

6.9

27.9

8.3

9.0

17.3

4,529,627

100.0%

3,849,451

100.0%

3,224,235

100.0%

2,126,198

100.0%

1,898,940

100.0%

Allowance for loan losses . . . . .

(37,847)

4,506,466

14,686

4,544,313

3,577

3,853,028

(34,001)

$ 3,819,027

(2,237)

3,221,998

(29,278)

$ 3,192,720

(5,048)

2,121,150

(22,021)

$ 2,099,129

(3,219)

1,895,721

(23,908)

$ 1,871,813

(1)

Includes $5.5 million and $18.0 million of loans at December 31, 2017 and 2016 respectively, where a fair value option
election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the
consolidated statements of operations.

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The following table shows the composition of the loan portfolio by ﬁ xed-rate and adjustable-rate loans.

(in thousands)
Adjustable-rate loans:

Single family . . . . . . . . . . . . . . . . . . . . . . $
Non-owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development, net(1) . . .
Owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . .
Home equity and other . . . . . . . . . . . . . .
Total adjustable-rate loans. . . . . . . . . .

Fixed-rate loans:

Single family . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development, net(1) . . .
Owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . .
Home equity and other . . . . . . . . . . . . . .
Total ﬁxed-rate loans . . . . . . . . . . . . . .
Total loans held for investment . . . .

Less:

At December 31,

2017

2016

Amount

Percent

Amount

Percent

998,237

545,076
696,267
596,913

259,207
189,163
415,441
3,700,304

383,129

77,706
31,770
90,718

132,406
75,546
38,048
829,323
4,529,627

22.0% $

657,837

17.1%

12.0
15.4
13.2

5.7
4.2
9.2
81.7

8.5

1.7
0.7
2.0

2.9
1.7
0.8
18.3
100.0%

512,005
655,271
497,175

189,689
143,960
303,565
2,959,502

425,985

76,667
18,949
139,145

93,201
79,693
56,309
889,949
3,849,451

13.3
17.0
12.9

4.9
3.7
7.9
76.8

11.1

2.0
0.5
3.6

2.4
2.1
1.5
23.2
100.0%

Net deferred loan fees and costs . . . . . . .
Allowance for loan losses . . . . . . . . . . . .
Loans held for investment, net . . . . . . . . . . $

14,686
(37,847)
4,506,466

3,577
(34,001)
3,819,027

(1) Construction/land development is presented net of the undisbursed portion of the loan commitment.

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The following tables show the contractual maturity of our loan portfolio by loan type.

December 31, 2017
After
one year
through
ﬁve years

After
ﬁve
years

Within
one
year

Loans due after one year
by rate characteristic

Total

Fixed-rate

Adjustable-
rate

(in thousands)
Consumer:

Single family . . . . . . . . . . . . . . . $
Home equity and other . . . . . . .
Total consumer . . . . . . . . . . .

1,854 $
1
1,855

4,532 $ 1,374,980 $ 1,381,366 $ 381,275 $ 998,237
415,441
453,489
1,413,678
1,834,855

453,408
1,828,388

38,047
419,322

80
4,612

Commercial real estate loans:

Non-owner occupied

commercial real estate . . . . . .
Multifamily . . . . . . . . . . . . . . . .
Construction/land

development . . . . . . . . . . . . .
Total commercial real

28,363
11,197

65,470
74,237

528,949
642,603

622,782
728,037

66,565
30,046

527,854
686,794

528,813

144,824

13,994

687,631

62,810

96,008

estate . . . . . . . . . . . . . . . . .

568,373

284,531

1,185,546

2,038,450

159,421

1,310,656

Commercial and industrial loans:
Owner occupied commercial

real estate . . . . . . . . . . . . . . .
Commercial business . . . . . . . .

Total commercial and

industrial . . . . . . . . . . . . . .
Total loans held for

9,137
60,274

41,416
90,704

341,060
113,731

391,613
264,709

126,316
67,061

256,160
137,374

69,411

132,120

454,791

656,322

193,377

393,534

investment . . . . . . . . . . . $ 639,639 $ 421,263 $ 3,468,725 $ 4,529,627 $ 772,120 $ 3,117,868

December 31, 2016
After
one year
through ﬁve
years

After
ﬁve
years

Within
one
year

Loans due after one year by
rate characteristic

Total

Fixed-rate

Adjustable-
rate

(in thousands)
Consumer:

Single family . . . . . . . . . . . . $
Home equity and other . . . .
Total consumer . . . . . . . .

7,327 $
7,156
14,483

4,878 $ 1,071,618 $ 1,083,823 $ 418,923 $
27,879
32,757

359,873
1,443,696

324,838
1,396,456

52,922
471,845

657,573
299,795
957,368

Commercial real estate:
Non-owner occupied

commercial real estate . . .
Multifamily . . . . . . . . . . . . .
Construction/land

development . . . . . . . . . .
Total commercial real

estate . . . . . . . . . . . . . .

Commercial and industrial:

Owner occupied commercial
real estate . . . . . . . . . . . .

Commercial

business . . . . . . . . . . . . . .
Total commercial and

industrial . . . . . . . . . . .
Total loans held for

22,887
1,658

75,403
51,766

490,382
620,796

588,672
674,220

69,668
17,664

496,117
654,898

483,211

151,785

1,324

636,320

74,003

79,106

507,756

278,954

1,112,502

1,899,212

161,335

1,230,121

25,232

32,164

225,495

282,891

78,300

179,359

55,820

72,985

94,847

223,652

76,060

91,772

81,052

105,149

320,342

506,543

154,360

271,131

investment . . . . . . . . $ 603,291 $ 416,860 $ 2,829,300 $ 3,849,451 $ 787,540 $ 2,458,620

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The following table presents loan origination and loan sale volumes.

(in thousands)
Loans originated
Real estate

Single family

Years Ended December 31,
2016

2015

2017

Originated by HomeStreet . . . . . . . . . . . . . . . . . . . . . . $
Originated by WMS Series LLC . . . . . . . . . . . . . . . . . .
Total single family . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied commercial real estate . . . . . . . . . .
Owner occupied commercial real estate . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . .
Total real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans sold

Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily DUS®(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS®(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

7,525,248 $
566,152
8,091,400
746,748
208,130
121,398
1,084,092
10,251,768
227,880
361,043
10,840,691 $

8,637,631 $
576,832
9,214,463
640,142
271,701
173,017
1,079,243
11,378,566
116,595
279,851
11,775,012 $

7,508,949 $
347,084
26,841
321,699
8,204,573 $

8,785,412 $
301,442
17,308
150,903(3)
9,255,065 $

6,834,296
606,316
7,440,612
322,637
134,068
35,236
767,063
8,699,616
105,021
176,430
8,981,067

7,038,635
204,744
14,275
15,038
7,272,692

(1)

(2)
(3)

Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS”®) is a registered trademark of Fannie
Mae.
Loans originated as Held for Investment.
Includes $63.2 million of single family portfolio loan sales in 2016.

Mortgage servicing rights were $284.7 million at December 31, 2017 compared to $245.9 million at December 31,
2016, an increase of $38.8 million, or 15.8%, as a result of growth in the loans serviced for others portfolio and
changes in market inputs, including current market interest rates and prepayment model updates.

Federal Home Loan Bank stock was $46.6 million at December 31, 2017 compared to $40.3 million at December 31,
2016, an increase of $6.3 million, or 15.6%. FHLB stock is carried at par value and can only be purchased or
redeemed at par value in transactions between the FHLB and its member institutions. Both cash and stock dividends
received on FHLB stock are reported in earnings.

Other assets were $188.5 million at December 31, 2017, compared to $221.1 million at December 31, 2016, a
decrease of $32.6 million, or 14.7%.

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Deposits

Deposit balances were as follows for the periods indicated:

(in thousands)
Noninterest-bearing accounts – checking and savings . . . . . . . $
Interest-bearing transaction and savings deposits:

NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement savings accounts due on demand . . . . . . . . . . . . .
Money market accounts due on demand . . . . . . . . . . . . . . . .
Total interest-bearing transaction and savings deposits . .
Total transaction and savings deposits . . . . . . . . . . . . .
Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest-bearing accounts – other . . . . . . . . . . . . . . . . . . . .

Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2017

At December 31,
2016

2015

579,504 $

537,651 $

370,523

461,349
293,858
1,834,154
2,589,361
3,168,865
1,190,689
401,398
4,760,952 $

468,812
301,361
1,603,141
2,373,314
2,910,965
1,091,558
427,178
4,429,701 $

408,477
292,092
1,155,464
1,856,033
2,226,556
732,892
272,505
3,231,953

Deposits at December 31, 2017 increased $331.3 million, or 7.5%, from December 31, 2016. During 2017, the
Company increased the balances of transaction and savings deposits by $257.9 million, or 8.9%. The $99.1 million,
or 9.1%, increase in certiﬁ cates of deposit since December 31, 2016 was due in part to increases in business and
personal CDs, institutional CDs and brokered deposits.

At December 31, 2016, deposits increased $1.20 billion, or 37.1%, from December 31, 2015 primarily due to the
acquisition related activities and growth of our deposit branch network. During 2016, the Company increased the
balances of transaction and savings deposits by $684.4 million, or 30.7%, reﬂ ecting the growth and expansion of our
branch banking network. The $358.7 million, or 48.9%, increase in certiﬁ cates of deposit since December 31, 2015
was primarily due in part to increases in business and personal CDs, institutional CDs and brokered deposits.

Borrowings

FHLB advances were $979.2 million at December 31, 2017 compared to $868.4 million at December 31, 2016.
FHLB advances may be collateralized by stock in the FHLB, cash, pledged mortgage-backed securities, real
estate-secured commercial loans and unencumbered qualifying mortgage loans. As of December 31, 2017, 2016 and
2015, FHLB borrowings had weighted average interest rates of 1.58%, 0.91% and 0.64%, respectively. Of the total
FHLB borrowings outstanding as of December 31, 2017, $963.6 million mature prior to December 31, 2018. We
had $579.2 million and $282.8 million of additional borrowing capacity with the FHLB as of December 31, 2017
and 2016, respectively. We use short term funding to lower the cost of funds and manage the sensitivity of our net
portfolio value and net interest income which mitigated the impact of changes in interest rates.

We may also borrow, on a collateralized basis, from the Federal Reserve Bank of San Francisco (“FRBSF” or
“Federal Reserve Bank”). At December 31, 2017 and 2016, we did not have any outstanding borrowings from
the FRBSF. Based on the amount of qualifying collateral available, borrowing capacity from the FRBSF was
$331.5 million and $292.1 million at December 31, 2017 and 2016, respectively. The FRBSF is not contractually
bound to off er credit to us, and our access to this source for future borrowings may be discontinued at any time.

Long-term debt was $125.3 million and $125.1 million at December 31, 2017 and 2016, respectively. The balance
at December 31, 2017 represents $63.4 million of senior notes issued during 2016 and $61.9 million of junior
subordinated debentures issued in prior years. Such debentures were issued in connection with the sale of trust
preferred securities by HomeStreet Statutory Trusts, subsidiaries of HomeStreet, Inc. Trust preferred securities allow
investors to buy subordinated debt through a variable interest entity trust that issues preferred securities to third-party
investors and uses the cash received to purchase subordinated debt from the issuer. That debt is the sole asset of the trust
and the coupon rate on the debt mirrors the dividend rate on the preferred securities. These securities are nonvoting and
are not convertible into capital stock, and the variable interest entity trust is not consolidated in our ﬁ nancial statements.

Shareholders’ Equity

Shareholders’ equity was $704.4 million at December 31, 2017 compared to $629.3 million at December 31, 2016.
This increase was primarily due to net income of $68.9 million and by other comprehensive income of $3.3 million

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recognized during the year ended December 31, 2017. Other comprehensive income (loss) represents unrealized
gains and losses in the valuation of our available for sale investment securities portfolio at December 31, 2017.

Shareholders’ equity, on a per share basis, was $26.20 per share at December 31, 2017, compared to $23.48 per
share at December 31, 2016.

Return on Equity and Assets

The following table presents certain information regarding our returns on average equity and average total assets.

Years Ended December 31,
2016

2015

2017

Return on assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on equity(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity to assets ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.05%
10.20%
10.26%

1.01%
10.27%
9.80%

0.91%
9.35%
9.69%

(1) Net income divided by average total assets.
(2) Net earnings available to common shareholders divided by average common shareholders’ equity.
(3) Average equity divided by average total assets.

Business Segments

Our business segments are determined based on the products and services provided, as well as the nature of the
related business activities, and they reﬂ ect the manner in which ﬁ nancial information is evaluated by management.

This process is dynamic and is based on management’s view of the Company’s operations and is not necessarily
comparable with similar information for other ﬁ nancial institutions. We deﬁ ne our business segments by product
type and customer segment. If the management structure or the allocation process changes, allocations, transfers and
assignments may change.

We use various management accounting methodologies to assign certain income statement items to the responsible
operating segment, including:

•

a funds transfer pricing system, which allocates interest income credits and funding charges between the
segments, assigning to each segment a funding credit for its liabilities, such as deposits, and a charge to
fund its assets;

an allocation of charges for services rendered to the segments by centralized functions, such as corporate
overhead, which are generally based on each segment’s consumption patterns; and

an allocation of the Company’s consolidated income taxes which are based on the eff ective tax rate
applied to the segment’s pretax income or loss.

Commercial and Consumer Banking Segment

Commercial and Consumer Banking provides diversiﬁ ed ﬁ nancial products and services to our commercial and
consumer customers through bank branches and through ATMs, online, mobile and telephone banking. These products
and services include deposit products; residential, consumer, business and agricultural portfolio loans; non-deposit
investment products; insurance products and cash management services. We originate construction loans, bridge
loans and permanent loans for our portfolio primarily on single family residences, and on offi ce, retail, industrial
and multifamily property types. We originate multifamily real estate loans through our Fannie Mae DUS® business,
whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. In
addition, through HomeStreet Commercial Capital, a division of HomeStreet Bank based in Orange County, California,
we originate permanent commercial real estate loans primarily up to $10 million in size, a portion of which we pool and
sell into the secondary market. We have a team specializing in U.S. Small Business Administration (“SBA”) lending. As
of December 31, 2017, our retail deposit branch network consists of 59 branches in the Paciﬁ c Northwest, California
and Hawaii. At December 31, 2017 and December 31, 2016, our transaction and savings deposits totaled $3.17 billion
and $2.91 billion, respectively, and our loan portfolio totaled $4.51 billion and $3.82 billion, respectively. This segment
also reﬂ ects the results for the management of the Company’s portfolio of investment securities.

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Commercial and Consumer Banking segment results are detailed below.

2017

(in thousands)
Net interest income . . . . . . . . . . $ 174,542
750
Provision for credit losses . . . . .
42,360
Noninterest income . . . . . . . . . .
148,977
Noninterest expense . . . . . . . . .
Income before income tax

67,175
expense . . . . . . . . . . . . . . . . .
25,114
Income tax expense . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . $ 42,061

Total assets . . . . . . . . . . . . . . . . $ 5,875,329
Efficiency ratio(1) . . . . . . . . . . . .
Full-time equivalent employees
(ending) . . . . . . . . . . . . . . . . .
Production volumes for sale to

1,068

68.68%

Years Ended December 31,

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

20,527
(3,350)
6,678
10,592

19,963
8,702
$ 11,261

13% $ 154,015
4,100
(82)
35,682
19
138,385
8

33,995
(2,000)
6,315
15,787

28% $ 120,020
(33)
6,100
29,367
22
122,598
13

47,212
42
16,412
53
37% $ 30,800

26,523
13,740
$ 12,783

20,689
128
2,672
514
71% $ 18,017

$ 605,877

11% $ 5,269,452

$ 1,223,402

30% $ 4,046,050

72.95%

82.07%

998

170

21%

828

the secondary market:
Loan originations

Multifamily DUS®(2) . . . . . $ 341,308
39,009
SBA . . . . . . . . . . . . . . . . .

Loans sold

Multifamily DUS®(2) . . . . . $ 347,084
26,841
SBA . . . . . . . . . . . . . . . . .
CRE Non-DUS(3) . . . . . . .
321,699

Net gain on mortgage loan
origination and sale
activities:

Multifamily DUS®(2) . . . . . $
SBA . . . . . . . . . . . . . . . . .
CRE Non-DUS(3) . . . . . . .

13,210
2,439
4,378
$ 20,027

15,457
25,279

5% $ 325,851
13,730

184%

$ 121,013
13,730

59% $ 204,838
—

NM $

45,642
9,533
170,796

15% $ 301,442
55%
17,308
150,903(4)
113%

96,698
3,033
135,865

47% $ 204,744
14,275
21%
15,038
903%

1,813
1,025
319
3,157

16% $
72%
8%
19% $ 16,870

11,397
1,414
4,059(5)

4,272
344
3,600
8,216

60% $
32%
784%
95% $

7,125
1,070

459(5)

8,654

(1)
(2)
(3)
(4)
(5)

Noninterest expense divided by total net revenue (net interest income and noninterest income).
Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS”®) is a registered trademark of Fannie Mae.
Loans originated as Held for Investment.
Includes $63.2 million of single family portfolio loan sales in 2016.
Includes $2.8 million net gain on sale of single family portfolio loan during fourth quarter of 2016 and $27 thousand
during fourth quarter of 2015.

Comparison of 2017 to 2016

Commercial and Consumer Banking net income increased in 2017 primarily due to increased net interest income
resulting from higher average balances of interest-earning assets, partially off set by increased noninterest expense.
These increases were primarily due to organic growth. Included in net income for the year ended December 31, 2017
and 2016 were $391 thousand and $4.6 million, respectively, in acquisition related expenses, net of tax. Additionally,
the year ended December 31, 2017 included a $4.2 million, one-time, non-cash, income tax expense related to the
Tax Reform Act.

The segment recorded a provision for credit losses of $750 thousand for the year ended December 31, 2017
compared to a $4.1 million provision for credit losses for the year ended December 31, 2016. The reduction in credit
loss provision in the year was due in part to continued improvements in credit quality reﬂ ected in the qualitative
reserves and historical loss rates combined with an increase of $2.6 million in net recoveries over the comparable
period.

Resulting from the growth of this segment, noninterest income increased for the year ended December 31, 2017 due
primarily to an increase in gain on sale income driven by higher commercial real estate loan sales volume.

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Noninterest expense increased primarily due to the growth of our commercial real estate and commercial business
lending units and the expansion of our retail deposit banking network. In 2017, we added four retail deposit
branches, three de novo and one acquired retail branch. Full-time equivalent employees increased by 70, or 7.0%,
from 2016. Included in noninterest expense for 2017 and 2016 was $602 thousand and $7.1 million, respectively, of
acquisition-related costs.

Comparison of 2016 to 2015

Commercial and Consumer Banking net income was $30.8 million for the year ended December 31, 2016, an
increase of $12.8 million from $18.0 million for the year ended December 31, 2015. The increase in 2016 was
primarily due to increased net interest income resulting from higher average balances of interest-earning assets and
higher commercial net gain on loan origination and sale activities, partially off set by increased noninterest expense
primarily resulting from the expansion of this segment.

The segment recorded a provision for credit losses of $4.1 million for the year ended December 31, 2016 compared
to a $6.1 million provision for credit losses for the year ended December 31, 2015. The reduction in credit loss
provision in the year was due in part to a continuing decline in historical loss rates as a result of net recoveries for
the past two years and continued improvements in portfolio performance which was reﬂ ected in the qualitative
reserves. In 2015, one-time model adjustments contributed to an increase in provision expense.

Resulting from the growth of this segment, noninterest income increased for the year ended December 31, 2016 due
primarily to increases in net gain on loan origination and sale activities, mortgage servicing income and depositor
and other retail banking fees. Included in noninterest income for the year ended December 31, 2015 was a bargain
purchase gain of $7.7 million from the merger with Simplicity and the Dayton, Washington branch acquisition.
There were no similar bargain purchase gains in 2016.

Noninterest expense increased primarily due to the growth of our commercial real estate and commercial business
lending units and the expansion of our retail deposit banking network. In 2016, we added 11 retail deposit
branches, six de novo and ﬁ ve from acquisitions. Full-time equivalent employees increased by 170, or 20.5%,
from 2015. Included in noninterest expense for 2016 was $7.1 million of acquisition-related costs. In 2015, such
acquisition-related expenses related to prior acquisitions were $16.6 million.

Commercial and Consumer Banking segment loans serviced for others consisted of the following.

(in thousands)
Commercial

At December 31,

2017

2016

Multifamily DUS® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

1,311,399 $
79,797
1,391,196 $

1,108,040
69,323
1,177,363

Commercial and Consumer Banking segment servicing income consisted of the following.

(in thousands)
Servicing income, net:

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

Servicing fees and other . . . . $ 7,263 $ 1,649
Amortization of multifamily
and SBA MSRs . . . . . . . . .
Commercial mortgage servicing

(3,932)

(1,297)

29% $ 5,614 $ 1,335

31% $ 4,279

(2,635)

(643)

(1,992)

income . . . . . . . . . . . . . . . . . . $ 3,331 $

352

12% $ 2,979 $

692

30% $ 2,287

Mortgage Banking Segment

Mortgage Banking originates single family residential mortgage loans primarily for sale in the secondary markets
and performs mortgage servicing on a substantial portion of such loans. The majority of our mortgage loans are
sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans.
We have become a rated originator and servicer of jumbo loans, allowing us to sell these loans to other securitizers.

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Additionally, we purchase loans from WMS Series LLC through a correspondent arrangement with that company.
We also sell loans on a servicing-released and servicing-retained basis to securitizers and correspondent lenders.
A small percentage of our loans are brokered to other lenders. On occasion, we may sell a portion of our MSR
portfolio. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and
the retained single family mortgage servicing rights within this business segment.

Mortgage Banking segment results are detailed below.

(in thousands)
Net interest income . . . $
Noninterest income . . .
Noninterest expense . .
Income (loss) before

income tax (beneﬁt)
expense . . . . . . . . . .

Income tax (beneﬁt)

Years Ended December 31,

2017

19,896 $

269,794
290,676

Dollar
Change

Percent
Change

(6,138)
(53,674)
(15,261)

(24)% $
(17)
(5)

2016
26,034
323,468
305,937

Dollar
Change

Percent
Change

(2,284)
71,598
61,967

(8)% $
28
25

2015
28,318
251,870
243,970

(986)

(44,551)

(102)

43,565

7,347

36,218

expense . . . . . . . . . .
Net income . . . . . . . . . $

(27,871)
26,885 $

(44,085)
(466)

(272)

(2)% $

16,214
27,351

3,298
4,049

26
17% $

12,916
23,302

Total assets . . . . . . . . . $ 866,712 $ (107,536)
Efficiency ratio(1) . . . . .
Full-time equivalent

100.34%

(11)% $ 974,248

$ 125,803

15% $ 848,445

87.54%

87.07%

employees
(ending) . . . . . . . . . .

Production volumes
for sale to the
secondary market:

Single family

1,351

(203)

(13)%

1,554

243

19%

1,311

mortgage closed
loan volume(2)(3) . . . . $ 7,554,185 $ (1,443,162)

(16)% $ 8,997,347

$ 1,784,912

25% $ 7,212,435

Single family
mortgage
interest rate lock
commitments(2) . . . .

Single family

6,980,477

(1,640,499)

(19)

8,620,976

1,689,868

6,931,108

mortgage loans
sold(2) . . . . . . . . . . . . $ 7,508,949 $ (1,276,463)

(15)% $ 8,785,412

$ 1,778,075

25% $ 7,007,337

(1)
(2)

Noninterest expense divided by total net revenue (net interest income and noninterest income).
Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank and brokered loans where HomeStreet
receives fee income but does not fund the loan on its balance sheet or sell it into the secondary market.

(3) Represents single family mortgage production volume designated for sale to the secondary market during each respective period.

Comparison of 2017 to 2016

The decrease in Mortgage Banking net income for 2017 compared to 2016 was primarily due to $1.64 billion
of lower rate lock and purchase loan commitments and related lower noninterest expense resulting from lower
commission expense from the decreased closed loan volume, partially off set by the recognition of a one-time,
non-cash, tax beneﬁ t of $27.9 million from the revaluation of our net deferred tax liability position at December 31,
2017 related to the Tax-Reform Act. In 2017, we implemented a restructuring plan to better align our costs structure
with market conditions, including a reduction in staffi ng, production offi ce closures and a streamlining of the single
family leadership team. Included in net income for the year ended December 31, 2017, was restructuring-related
items, net of tax, of $2.4 million. There were no similar charges in 2016.

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Comparison of 2016 to 2015

The increase in Mortgage Banking net income for 2016 compared to 2015 was primarily due to the higher gain on
single family mortgage loan origination and sale activities resulting from higher interest rate lock commitments
and higher servicing fee income, partially off set by higher noninterest expense resulting from higher commission
expense from increased closed loan volume, as well as continued growth and expansion of our mortgage banking
segment, increased costs resulting from new regulatory disclosure requirements for the mortgage industry and lower
risk management results.

Mortgage Banking gain on sale to the secondary market is detailed in the following table.

(in thousands)
Single family:(1)

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

Servicing value and
secondary market
gains(2) . . . . . . . . . . $ 209,027 $ (51,450)

Loan origination and
funding fees . . . . . .
Total mortgage banking
gain on mortgage loan
origination and sale
activities(1) . . . . . . . . . $ 235,849 $ (54,594)

(3,144)

26,822

(20)% $ 260,477 $ 54,964

27% $ 205,513

(10)

29,966

7,745

22,221

(19)% $ 290,443 $ 62,709

28% $ 227,734

Excludes inter-segment activities.

(1)
(2) Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family
loans held for sale, forward sale commitments used to economically hedge secondary market activities, and the estimated
fair value of the repurchase or indemnity obligation recognized on new loan sales.

Comparison of 2017 to 2016

The decrease in gain on mortgage loan origination and sale activities in 2017 compared to 2016 is primarily the
result of a 19.0% decrease in interest rate lock commitments primarily due to the impact of higher interest rates,
which reduced the volume of reﬁ nance activity in 2017. During 2017, as a result of our restructuring, we have
decreased our lending footprint by a net of three home loan centers to bring our total primary home loan centers to
44 as of December 31, 2017.

Comparison of 2016 to 2015

The increase in gain on mortgage loan origination and sale activities in 2016 compared to 2015 is primarily the
result of a 24.4% increase in interest rate lock commitments, which was mainly driven by the expansion of our
mortgage production offi ces and personnel. During 2016, we increased our lending footprint to bring our total
primary home loan centers to 48 as of December 31, 2016.

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Mortgage Banking servicing income consisted of the following.

2017

Dollar
Change

Percent
Change

2016

Dollar
Change

Percent
Change

2015

Years Ended December 31,

(in thousands)
Servicing income, net:
Servicing fees and

other . . . . . . . . . . . $ 58,929 $ 10,889

23% $ 48,040 $ 10,303

27% $ 37,737

Changes in fair value
of MSRs due to
amortization(1) . . . .

Risk management:

Changes in fair value
of MSRs due to
changes in market
inputs and/or model
updates(2) . . . . . . . .

Net gain (loss)

from derivatives
economically
hedging MSRs . . . .

Mortgage Banking

(35,451)
23,478

(2,146)
8,743

6
59

(33,305)
14,735

733
11,036

(2)
298

(34,038)
3,699

(1,157)

(21,182)

(106)

20,025

13,470

205

6,555

9,732
8,575

14,412
(6,770)

(308)
(44)

(4,680)
15,345

(16,389)
(2,919)

(140)
(16)

11,709
18,264

servicing income . . . . $ 32,053 $

1,973

7% $ 30,080 $

8,117

37% $ 21,963

(1) Represents changes due to collection/realization of expected cash ﬂ ows and curtailments.
(2)

Principally reﬂ ects changes in model assumptions, including prepayment speed assumptions, which are primarily aff ected
by changes in mortgage interest rates.

Comparison of 2017 to 2016

The increase in Mortgage Banking servicing income in 2017 compared to 2016 was primarily attributable to higher
servicing income, net, off set by lower risk management results. The higher servicing income was primarily attributed
to higher servicing fees on higher average balances of loans serviced for others. The lower risk management results
were due in part to gains from prepayment model reﬁ nements in 2016 to align borrower prepayment behavior with
observed borrower prepayment behavior. Mortgage servicing fees collected in the year ended December 31, 2017
increased compared to the year ended December 31, 2016 primarily as a result of higher average balances of loans
serviced for others during the year. Our single family loans serviced for others portfolio was $22.63 billion at
December 31, 2017 compared to $19.49 billion at December 31, 2016.

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

Comparison of 2016 to 2015

The increase in Mortgage Banking servicing income in 2016 compared to 2015 was primarily due to higher servicing
income, partially off set by lower risk management results. The higher servicing income was primarily attributed to
higher servicing fees on higher average balances of loans serviced for others and lower modeled amortization. Mortgage
servicing fees collected in the year ended December 31, 2016 increased compared to the year ended December 31, 2015
primarily as a result of higher average balances of loans serviced for others during the year. Our loans serviced for others
portfolio was $20.67 billion at December 31, 2016 compared to $16.35 billion at December 31, 2015.

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The lower risk management results in 2016 were mainly due to adverse results during the fourth quarter driven
by the unexpected and signiﬁ cant increases in long-term Treasury rates beginning in November 2016 following
the U.S. presidential election, coinciding with an increase in short-term interest rates by the Federal Reserve in
December 2016. The unexpected and sustained increase in interest rates during the quarter resulted in asymmetrical
changes in valuation between hedging derivatives and servicing valuations. This market dislocation in the fourth
quarter reduced the value of our hedging derivatives to a greater extent than value of our mortgage servicing rights
increased, resulting in lower risk management results.

Model assumptions are regularly updated to better align observed borrower prepayment behavior with modeled
borrower prepayment behavior.

Single family loans serviced for others consisted of the following.

(in thousands)
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At December 31,

2017

2016

U.S. government and agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total single family loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

22,123,710 $
507,437
22,631,147 $

18,931,835
556,621
19,488,456

Comparison of 2017 to 2016

Mortgage Banking noninterest expense in 2017 decreased from 2016 primarily due to decreased commissions, salary
and related costs on lower closed loan volumes, partially off set by a $3.7 million charge related to the restructuring
of our mortgage segment and other costs related to the implementation of a new loan origination system. In 2017, as
a result of our mortgage banking restructuring, we have decreased our lending footprint by a net of three home loan
centers to bring our total primary home loan centers to 44 as of December 31, 2017.

Comparison of 2016 to 2015

Mortgage Banking noninterest expense in 2016 increased from 2015 primarily due to the continued expansion
of offi ces in new markets and increases of our mortgage production and support staff along with related salary,
insurance, and beneﬁ t costs as well as increased costs resulting from new regulatory disclosure requirements for
the mortgage industry. In 2016, we increased our lending footprint by adding home loan centers to bring our total
primary home loan centers to 48.

Off -Balance Sheet Arrangements

In the normal course of business, we are a party to ﬁ nancial instruments with off -balance sheet risk. These ﬁ nancial
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 ﬁ nancial statements. These
transactions are designed to (1) meet the ﬁ nancial needs of our customers, (2) manage our credit, market or liquidity
risks, (3) diversify our funding sources and/or (4) optimize capital.

For more information on off -balance sheet arrangements, see Note 13, Commitments, Guarantees and Contingencies
to the ﬁ nancial statements of this Form 10-K.

Commitments, Guarantees and Contingencies

We may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. Our
known contingent liabilities include:

•

Unfunded loan commitments. We make certain unfunded loan commitments as part of our lending
activities that have not been recognized in the Company’s ﬁ nancial statements. These include
commitments to extend credit made as part of our lending activities on loans we intend to hold in
our loans held for investment portfolio. The aggregate amount of these unrecognized unfunded loan
commitments existing at December 31, 2017 and 2016 was $56.9 million and $42.6 million, respectively.

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•

Credit agreements. We extend secured and unsecured open-end loans to meet the ﬁ nancing
needs of our customers. These commitments, which primarily related to unused home equity and
commercial real estate lines of credit and business banking funding lines, totaled $456.1 million and
$289.3 million at December 31, 2017 and 2016, respectively. Undistributed construction loan proceeds,
where the Company has an obligation to advance funds for construction progress payments, was
$706.7 million and $603.8 million at December 31, 2017 and 2016, respectively. The total amounts of
unused commitments do not necessarily represent future credit exposure or cash requirements in that
commitments may expire without being drawn upon.

Interest rate lock commitments. The Company writes options in the form of interest rate lock
commitments on single family mortgage loans that are exercisable at the option of the borrower.
We are exposed to market risk on interest rate lock commitments. The fair value of interest rate
lock commitments existing at December 31, 2017 and 2016, was $12.9 million and $19.2 million,
respectively. We mitigate the risk of future changes in the fair value of interest rate lock commitments
primarily through the use of forward sale commitments.

Credit loss sharing. We originate, sell and service multifamily loans through the Fannie Mae DUS
program. Multifamily loans are sold to Fannie Mae subject to a loss sharing arrangement. HomeStreet
Capital 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, in general the DUS lender is contractually responsible
for all losses on the ﬁ rst 5% of the unpaid principal balance of the loan (determined as of the day prior to
valuation of the asset for loss purposes) and then shares in the remainder of losses with Fannie Mae with
the lender being responsible for 25% of any losses that exceed 5% of the unpaid principal balance up
to 20% of the unpaid principal balance and 10% of any losses that exceed 20% of the unpaid principal
balance. The maximum lender loss on most DUS program loans is 20% of the original principal balance.
The total principal balance of loans outstanding under the DUS program as of December 31, 2017
and 2016 was $1.31 billion and $1.11 billion, respectively, and our loss reserve was $2.0 million and
$1.8 million as of December 31, 2017 and 2016, respectively.

Mortgage repurchase liability.
In our single family lending business, we sell residential mortgage
loans to government sponsored and other entities. In addition, the Company pools Federal Housing
Administration (“FHA”)-insured and Department of Veterans’ Aff airs (“VA”)-guaranteed mortgage loans
into Ginnie Mae, Fannie Mae and Freddie Mac guaranteed mortgage-backed securities. We have made
representations and warranties that the loans sold meet certain requirements. We may be required to
repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the
loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud.

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

We do not typically receive repurchase requests from the FHA or VA. As an originator of FHA-insured
or VA-guaranteed loans, we are responsible for obtaining the insurance with FHA or the guarantee with
the VA. If we are not able to meet the requirements of FHA to get the loan insured by FHA or guaranteed
by VA, we may be unable to sell the loan or be required to repurchase the loan. Loans that are found not
to meet the requirements of FHA or VA, through required internal quality control reviews or through
agency audits, we may be required to indemnify FHA or VA against loss. The loans remain in Ginnie
Mae pools unless and until they qualify for voluntary repurchase by the Company. In general, once an
FHA or VA loan becomes 90 days past due, we repurchase the FHA or VA loan to minimize the cost of
interest advances on the loan. If the loan is cured through borrower eff orts or through loss mitigation
activities, the loan may be resold into a Ginnie Mae pool. The Company’s liability for mortgage loan
repurchase losses incorporates probable losses associated with such indemniﬁ cation.

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As of December 31, 2017 and 2016, the total principal balance of loans sold on a servicing-retained
basis that were subject to the terms and conditions of these representations and warranties totaled
$22.71 billion and $19.56 billion, respectively. The recorded mortgage repurchase liability for loans sold
on a servicing-retained and a servicing-released basis was $3.0 million and $3.4 million at December 31,
2017 and 2016, respectively. The Company’s mortgage repurchase liability reﬂ ects management’s estimate
of losses for loans sold on a servicing-retained and servicing-released basis for which we could have a
repurchase obligation. Actual repurchase losses of $541 thousand, $1.1 million and $1.8 million were
incurred for the years ended December 31, 2017, 2016 and 2015, respectively.

•

Leases. The Company is obligated under non-cancelable leases for offi ce space and leased equipment.
The offi ce leases also contain renewal and space options. Rental expense under non-cancelable operating
leases totaled $26.1 million, $22.7 million and $20.1 million for the years ended December 31, 2017,
2016 and 2015, respectively.

Small business investment company (“SBIC”) investment funds.
agreements to invest $8.3 million and $5.0 million, respectively, over time in qualifying small businesses
and small enterprises. At December 31, 2017 and 2016 we had unfunded commitments of $11.0 million
and $4.0 million, respectively, related to these agreements.

In 2017 and 2016, we entered into

Derivative Counterparty Credit Risk

Derivative ﬁ nancial instruments expose us to credit risk in the event of nonperformance by counterparties to
such agreements. This risk consists primarily of the termination value of agreements where we are in a favorable
position. Credit risk related to derivative ﬁ nancial instruments is considered within the fair value measurement of the
instrument. We manage the credit risk associated with our various derivative agreements through counterparty credit
review, counterparty exposure limits and monitoring procedures. From time to time, we may provide collateral to
certain counterparties for amounts in excess of exposure limits as outlined by the counterparty credit policies of the
parties. We have entered into agreements with derivative counterparties that include netting arrangements whereby
the counterparties are entitled to settle certain positions on a net basis. At December 31, 2017 and 2016, our net
exposure to the credit risk of derivative counterparties was $19.8 million and $69.4 million, respectively.

Contractual Obligations

The following table summarizes our signiﬁ cant ﬁ xed and determinable contractual obligations, within the categories
described below, by payment date or contractual maturity as of December 31, 2017. The payment amounts for
ﬁ nancial instruments shown below represent principal amounts contractually due to the recipient and do not include
any unamortized premiums or discounts, or other similar carrying value adjustments.

Within
one year

After one but
within three
years

After three
but within ﬁve

More than
ﬁve years

Total

(in thousands)
Deposits(1) . . . . . . . . . . . . . . . . . . $ 4,460,052 $
FHLB advances . . . . . . . . . . . . . .
Long term debt . . . . . . . . . . . . . .
Trust preferred securities(2) . . . . .
Interest(3) . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . .
Purchase obligations(4) . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $ 5,479,723 $

963,611
—
—
14,815
26,477
14,768

269,919 $

10,000
—
—
15,990
44,589
8,278
348,776 $

30,827 $
—
—
—
13,457
32,752
782
77,818 $

154 $ 4,760,952
979,201
65,000
61,857
85,788
152,570
23,828
222,879 $ 6,129,196

5,590
65,000
61,857
41,526
48,752
—

(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reﬂ ected as obligations

due less than one year.
Trust preferred securities are included in long-term debt on the consolidated statements of ﬁ nancial condition.

(2)
(3) Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course

of business. These interest obligations assume no early debt redemption. We estimated variable interest rate payments using
December 31, 2017 rates, which we held constant until maturity.

(4) Represents agreements to purchase goods or services.

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Enterprise Risk Management

All ﬁ nancial institutions manage and control a variety of business and ﬁ nancial risks that can signiﬁ cantly aff ect
their ﬁ nancial performance. Among these risks are credit risk; market risk, which includes interest rate risk and price
risk; liquidity risk; and operational risk. We are also subject to risks associated with compliance/legal, strategic and
reputational matters.

Our Board of Directors (the “Board”) and executive management have overall and ultimate responsibility for
management of these risks. The Board, its committees and senior managers oversee the management of various
risks. The Company utilizes a risk management framework which includes three lines of defense. The business
units, which are the ﬁ rst line of defense, have responsibility to identify, monitor, control and escalate risks in their
respective areas. The second line of defense, comprised of independent risk management functions, operating under
the Chief Risk Offi cer, establishes the risk governance framework and assesses, tests and reports on risks by business
unit and on an enterprise-wide basis. Our internal audit department provides independent assurance that the risk
framework, policies, procedures and controls are appropriate and operating as intended and is considered the third
line of defense. The Chief Risk Offi cer reports directly to the Enterprise Risk Management Committee of the Board
and is responsible for oversight of enterprise risk management, compliance, Bank Secrecy Act, quality control and
regulatory aff airs functions. The Chief Audit Offi cer reports directly to the Audit Committee of the Board.

The Board and its committees work closely with senior management in overseeing risk. Management recommends
the appropriate level of risk in our strategic and business plans and in our board-approved credit and operating
policies and has responsibility for measuring, managing, controlling and reporting on risks. The Board and its
committees oversee the monitoring and controlling of signiﬁ cant risk exposures, including the policies governing
risk management. The Board authorizes its committees to take any action on its behalf as described in their
respective charter or as otherwise delegated by the Board, except as otherwise speciﬁ cally reserved by law,
regulation, other committees’ charters or the Company’s charter documents for action solely by the full board or
another board committee. These committees include:

•

Audit Committee. The Audit Committee oversees the policies and management activities relating to our
ﬁ nancial reporting and internal and external audit.

Finance Committee. The Finance Committee oversees the consolidated companies’ activities related
to balance sheet management, major ﬁ nancial risks including market, interest rate, liquidity and funding
risks and counterparty risk management, including trading limits.

Credit Committee. The Credit Committee oversees the annual Loan Review Plan, lending policies,
credit performance and trends, the allowance for credit loss policy and loan loss reserves, large borrower
exposure and concentrations, and approval of broker/dealer relationships.

Human Resources and Corporate Governance Committee. The Human Resources and Corporate
Governance Committee (the “HRCG”) of HomeStreet, Inc. reviews all matters concerning our human
resources, compensation, beneﬁ ts, and corporate governance. HRCG’s policy objectives are to ensure
that HomeStreet and its operating subsidiaries meet their corporate objectives of attracting and retaining
a well-qualiﬁ ed workforce, to oversee our human resource strategies and policies and to ensure processes
are in place to assure compliance with employment laws and regulations.

Enterprise Risk Management Committee. The Enterprise Risk Management Committee (the “ERMC”)
oversees the Company’s enterprise-wide risk management framework, including evaluating management’s
identiﬁ cation and assessment of the signiﬁ cant risks and the related infrastructure to address such risks
and monitors the Company’s compliance with its risk appetite and risk limit structures and eff ective
remediation of non-compliance on an ongoing, enterprise-wide, and individual entity basis. The ERMC
also oversees policies and management activities relating to operational, regulatory, legal and compliance
risks. The ERMC does not duplicate the risk oversight of the Board’s other committees, but rather helps
ensure end-to-end understanding and oversight of all risk issues in one Board committee and enhances the
Board’s and management’s understanding of the Company’s aggregate enterprise-wide risk proﬁ le.

The following is a discussion of our risk management practices. The risks related to credit, liquidity, interest rate and
price warrant in-depth discussion due to the signiﬁ cance of these risks and the impact they may have on our business.

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Credit Risk Management

Credit risk is deﬁ ned as the risk to current or anticipated earnings or capital arising from an obligor’s failure to meet
the terms of any contract with the Company, including those in the lending, securities and derivative portfolios, or
otherwise perform as agreed. Factors relating to the degree of credit risk include the size of the asset or transaction,
the contractual terms of the related documents, the credit characteristics of the borrower, the channel through which
assets are acquired, the features of loan products or derivatives, the existence and strength of guarantor support, the
availability, quality and adequacy of any underlying collateral and the economic environment after the loan is originated
or the asset is acquired. Our overall portfolio credit risk is also impacted by asset concentrations within the portfolio.

Our credit risk management process is primarily centrally governed. Our overall credit process includes
comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement
and modeling and loan review, quality control and audit processes. In addition, we have an independent loan review
function that reports directly to the Credit Committee of the Board, and internal auditors and regulatory examiners
review and perform detailed tests of our credit underwriting, loan administration and allowance processes.

The Chief Credit Offi cer’s primary responsibilities include directing the activities of the credit risk management
function as it relates to the loan portfolio, overseeing loan portfolio performance, ensuring compliance with
regulatory requirements and the Company’s established credit policies, standards and limits, determining the
reasonableness of our allowance for loan losses, reviewing and approving large credit exposures and delegating
credit approval authorities. Senior credit administrators who oversee the lines of business have both transaction
approval authority and governance authority for the approval of procedures within established policies, standards and
limits. The Chief Credit Offi cer’s role also includes direct oversight of appraisal and environmental functions. The
Chief Credit Offi cer reports directly to the Chief Executive Offi cer.

The Loan Committee provides direction and oversight within our risk management framework. The committee seeks
to ensure eff ective portfolio risk analysis and policy review and to support sound implementation of deﬁ ned business
and risk strategies. Additionally, the Loan Committee periodically approves credits larger than the Chief Credit
Offi cer’s or Chief Executive Offi cer’s individual approval authorities allow. The members of the Loan Committee are
the Chief Executive Offi cer, Chief Credit Offi cer and the Commercial Banking Director.

The loan review department’s primary responsibility includes the review of our loan portfolios to provide an
independent assessment of credit quality, portfolio oversight and credit management, including accuracy of loan
grading. Loan review also conducts targeted credit-related reviews and credit process reviews at the request of the
Board and management and reviews a sample of newly originated loans for compliance with closing conditions and
accuracy of loan grades. Loan review reports directly to the Credit Committee and administratively to the Chief
Credit Offi cer.

Credit limits for capital markets counterparties, including derivative counterparties, are deﬁ ned in the Company’s
Counterparty Risk policy, which is reviewed annually by the Bank Loan Committee, with ﬁ nal approval by the
Board Credit Committee. The treasury function is responsible for directing the activities related to securities
and derivative portfolios, including overseeing derivative portfolio performance and ensuring compliance with
established credit policies, standards and limits. The Chief Investment Offi cer and Treasurer reports directly to both
the Chief Executive Offi cer and Chief Financial Offi cer.

Appraisal Policy

An integral part of our credit risk management process is the valuation of the collateral supporting the loan portfolio,
which is primarily comprised of loans secured by real estate. We maintain a Board-approved appraisal policy for real
estate appraisals that conforms to the Uniform Standards of Professional Appraisal Practice and FDIC regulatory
requirements. Our Chief Appraiser, who is independent of the business units, is responsible for maintaining the
appraisal policy and recommending changes to the policy subject to Loan Committee and Credit Committee approval.

Real Estate

Our appraisal policy requires that market value appraisals or evaluations be prepared prior to new loan origination,
subsequent loan transactions and for loan monitoring purposes. Our appraisals are prepared by independent
third-party appraisers and our staff appraisers. Evaluations are prepared by independent and qualiﬁ ed third-party

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providers. We use state certiﬁ ed and licensed appraisers with appropriate expertise as it relates to the subject
property type and location. All appraisals contain an “as is” market value estimate based upon the deﬁ nition of
market value as set forth in the FDIC appraisal regulations. For applicable property types, we may also obtain “upon
completion” and “upon stabilization” values. The appraisal standard for non-tract development properties (four units
or less) is the retail market value of individual units. For tract development properties with ﬁ ve or more units, the
appraisal standard is the bulk market value of the tract as a whole.

We review all appraisals and evaluations prior to the closing of a loan transaction. Commercial and single family real
estate appraisals and evaluations are reviewed by either our in-house appraisal staff or by independent and qualiﬁ ed
third-party appraisers.

For loan monitoring and problem loan management purposes our appraisal practices are as follows:

• We generally do not perform valuation monitoring for pass-graded credits because we believe they carry

minimal credit risk.

•

For commercial loans secured by real estate that are graded special mention, an appraisal is performed at
the time of loan downgrade, and an appraisal or evaluation is performed at least every two years thereafter,
depending upon property complexity, market area, market conditions, intended use and other considerations.

For commercial loans secured by real estate that are graded substandard or doubtful and for all OREO
properties, we require an independent third-party appraisal at the time of downgrade or transfer to OREO
and at least every twelve months thereafter until disposition or loan upgrade. For loans where foreclosure is
probable, an appraisal or evaluation is prepared at the intervening six-month period prior to foreclosure.

For performing consumer segment loans secured by real estate that are graded special mention or
substandard, property values are determined semi-annually from automated valuation model services
employed by the Bank.

In addition, if we determine that market conditions, changes to the property, changes in the intended use
of the property or other factors indicate an appraisal is no longer reliable, we will also obtain an updated
appraisal or evaluation and assess whether a change in collateral value requires an additional adjustment
to carrying value.

Other

Our appraisal requirements for loans not secured by real estate, such as business loans secured by equipment,
include valuation methods ranging from evidence of sales price or veriﬁ cation with a recognized guide for new
equipment to a valuation opinion by a professional appraiser for multiple pieces of used equipment.

Loan Modiﬁ cations

We have modiﬁ ed loans for various reasons for borrowers not experiencing ﬁ nancial diffi culties. Those modiﬁ cations
generally are short-term extensions granted to allow time for receipt of appraisals and other ﬁ nancial reporting
information to facilitate underwriting of loan extensions and renewals.

Our policy allows modiﬁ cations for borrowers with ﬁ nancial diffi culty when there is a well-conceived and prudent
workout plan that supports the ultimate collection of principal and interest. We may enter into a loan modiﬁ cation
to help maximize the likelihood of success for a given workout strategy. In each case we also assess whether it is in
the best interests of the Company to foreclose or modify the terms. We have made concessions such as interest-only
payment terms, interest rate reductions, principal and interest forgiveness and payment restructures. For single
family mortgage borrowers, we have generally provided for granting interest rate reductions for periods of three
years or less to reduce payments and provide the borrower time to resolve their ﬁ nancial diffi culties. In each case, we
carefully analyze the borrower’s current ﬁ nancial condition to assure that they can make the modiﬁ ed payment.

Asset Quality and Nonperforming Assets

Nonperforming assets (“NPAs”) were $15.7 million, or 0.23% of total assets at December 31, 2017, compared
to $25.8 million, or 0.41% of total assets at December 31, 2016. Nonaccrual loans of $15.0 million, or 0.33% of

] 28 Page

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total loans at December 31, 2017, decreased $5.5 million, or 26.8%, from $20.5 million, or 0.53% of total loans at
December 31, 2016. Net recoveries in 2017 were $3.1 million compared with net recoveries of $505 thousand in
2016 and net recoveries of $2.0 million in 2015.

At December 31, 2017, our loans held for investment portfolio, net of the allowance for loan losses, was
$4.51 billion, an increase of $687.4 million from December 31, 2016. The allowance for loan losses was
$37.8 million, or 0.83% of loans held for investment, compared to $34.0 million, or 0.88% of loans held for
investment at December 31, 2016.

The Company recorded a provision for credit losses of $750 thousand for the year ended December 31, 2017
compared to a $4.1 million of provision for credit losses for the year ended December 31, 2016 and a $6.1 million
provision for credit losses for the year ended December 31, 2015. Management considers the current level of the
allowance for loan losses to be appropriate to cover estimated incurred losses inherent within our loans held for
investment portfolio.

For information regarding the activity on our allowance for credit losses, which includes the reserves for unfunded
commitments, and the amounts that were collectively and individually evaluated for impairment, see Note 5, Loans
and Credit Quality to the ﬁ nancial statements of this Form 10-K.

The allowance for credit losses represents management’s estimate of the incurred credit losses inherent within our
loan portfolio. For further discussion related to credit policies and estimates see “Critical Accounting Policies and
Estimates — Allowance for Loan Losses” within Management’s Discussion and Analysis of this Form 10-K.

The following tables present the recorded investment, unpaid principal balance and related allowance for impaired
loans, broken down by those with and those without a speciﬁ c reserve.

(in thousands)
Impaired loans:

At December 31, 2017
Unpaid
Principal
Balance(2)

Related
Allowance

Recorded
Investment

Loans with no related allowance recorded . . . . . . . . . . . . . . $
Loans with an allowance recorded . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

78,696(3) $
5,150
83,846(1) $

80,904 $
5,288
86,192 $

—
289
289

(in thousands)
Impaired loans:

At December 31, 2016
Unpaid
Principal
Balance(2)

Related
Allowance

Recorded
Investment

Loans with no related allowance recorded . . . . . . . . . . . . . . $
Loans with an allowance recorded . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

86,723
3,785
90,508(1) $

92,431 $
3,875
96,306 $

—
379
379

(in thousands)
Impaired loans:

At December 31, 2015

Recorded
Investment

Unpaid
Principal
Balance(2)

Related
Allowance

Loans with no related allowance recorded . . . . . . . . . . . . . . $
Loans with an allowance recorded . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

90,547
3,126
93,673(1) $

94,058 $
3,293
97,351 $

—
567
567

(1)

Includes $69.6 million, $73.1 million and $74.7 million in single family performing troubled debt restructurings (“TDRs”)
at December 31, 2017, 2016 and 2015, respectively.

(2) Unpaid principal balance does not include partial charge-off s, purchase discounts and premiums or nonaccrual interest

paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $231 thousand of fair value option loans.

(3)

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The Company had 335 impaired loan relationships totaling $83.8 million at December 31, 2017 and 282 impaired
loan relationships totaling $90.5 million at December 31, 2016. Included in the total impaired loan relationship
amounts were 297 single family TDR loan relationships totaling $72.0 million at December 31, 2017 and 239
single family TDR relationships totaling $76.0 million at December 31, 2016. The increase in the number of
impaired loan relationships at December 31, 2017 from 2016 was primarily due to an increase in the number of
single family impaired loans. At December 31, 2017, there were 286 single family impaired relationships totaling
$69.6 million that were performing per their current contractual terms. Additionally, the impaired loan balance
included $46.7 million of loans insured by the FHA or guaranteed by the VA. The average recorded investment in
these loans for the year ended December 31, 2017 was $89.8 million, compared to $94.4 million for the year ended
December 31, 2016. Impaired loans of $5.2 million and $3.8 million had a valuation allowance of $289 thousand
and $379 thousand at December 31, 2017 and 2016, respectively.

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

2017

Percent of
Allowance
to Total
Allowance

Loan
Category
as a %
of Total
Loans(1)

At December 31,
2016

Percent of
Allowance
to Total
Allowance

Loan
Category
as a %
of Total
Loans(1)

Amount

2015

Percent of
Allowance
to Total
Allowance

Loan
Category
as a %
of Total
Loans(1)

Amount

24.1%

30.4% $ 8,196

23.2%

27.8% $ 8,942

29.2%

36.9%

(in thousands)

Consumer loans

Amount

Single family . . . . . . . . $ 9,412
Home equity and

other . . . . . . . . . . . .

7,081
16,493

18.1
42.2

10.0
40.4

6,153
14,349

17.4
40.6

9.4
37.2

4,620
13,562

15.1
44.3

8.0
44.9

Commercial real estate

loans
Non-owner occupied
commercial real
estate . . . . . . . . . . . .
Multifamily . . . . . . . . .
Construction/land

development . . . . . .

Commercial and industrial

loans
Owner occupied

commercial real
estate . . . . . . . . . . . .
Commercial business . .

Total allowance for credit

4,755
3,895

8,677
17,327

2,960
2,336
5,296

12.1
10.0

22.2
44.3

7.5
6.0
13.5

13.8
16.1

15.2
45.1

8.7
5.9
14.5

4,481
3,086

8,553
16,120

2,199
2,596
4,795

12.7
8.8

24.3
45.8

6.2
7.4
13.6

15.4
17.6

16.6
49.6

7.4
5.8
13.2

3,594
1,194

9,271
14,059

1,253
1,785
3,038

11.7
3.9

30.2
45.8

4.1
5.8
9.9

13.9
13.3

18.2
45.4

4.9
4.8
9.7

losses . . . . . . . . . . . . . . $ 39,116

100.0%

100.0% $ 35,264

100.0%

100.0% $ 30,659

100.0%

(1)

Excludes loans held for investment balances that are carried at fair value.

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The following tables present the composition of TDRs by accrual and nonaccrual status.

At December 31, 2017

Number
of accrual

Accrual

relationships Nonaccrual

Number of
nonaccrual
relationships

Total
number of
relationships

Total

69,555

1,254
70,809

507

454
961

280 $

2,451

11 $

72,006

16
296

36
2,487

1
2

—

—
—

2
13

—

—
—

1,290
73,296

507

454
961

(in thousands)
Consumer

Single family(1) . . . . . . . $
Home equity and

other . . . . . . . . . . . . .

Commercial real estate

loans
Multifamily . . . . . . . . . .
Construction/land

development . . . . . . .

Commercial and industrial

loans
Owner occupied
commercial
real estate . . . . . . . . .
Commercial business . .

(in thousands)
Consumer

Single family(1) . . . . . . . $
Home equity and

other . . . . . . . . . . . . .

Commercial real estate

loans
Multifamily . . . . . . . . . .
Construction/land

development . . . . . . .

Commercial and industrial

loans
Owner occupied

commercial real
estate . . . . . . . . . . . . .
Commercial business . .

876
377
1,253
73,023

1
3
4
302 $

—
62
62
2,549

—
1
1
14 $

876
439
1,315
75,572

(1)

Includes loan balances insured by the FHA or guaranteed by the VA of $46.7 million at December 31, 2017.

At December 31, 2016

Number
of accrual

Accrual

relationships Nonaccrual

Number of
nonaccrual
relationships

Total

Total
number of
relationships

73,147

1,247
74,394

508

1,186
1,694

229 $

2,885

10 $

76,032

18
247

216
3,101

1
2

—

707
707

3
13

—

1
1

1,463
77,495

508

1,893
2,401

—
493
493
76,581

—
4
4
253 $

933
133
1,066
4,874

1
1
2
16 $

933
626
1,559
81,455

(1)

Includes loan balances insured by the FHA or guaranteed by the VA of $35.1 million at December 31, 2016.

291

18
309

1
2

1
4
5
316

239

21
260

2
3

1
5
6
269

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At December 31, 2015

Number
of accrual
relationships

Accrual

Number of
nonaccrual
relationships

Total

Total
number of
relationships

Nonaccrual

74,685

1,340
76,025

3,014

3,714
6,728

(in thousands)
Consumer

Single family(1) . . . . . . $
Home equity and

other . . . . . . . . . . . .

Commercial real estate

loans
Multifamily . . . . . . . . .
Construction/land

development . . . . . .

Commercial and
industrial loans
Owner occupied

commercial real
estate . . . . . . . . . . . .

Commercial

business . . . . . . . . . .

213 $

2,452

11 $

77,137

20
233

271
2,723

3
5

—

—
—

1,023

185
1,208
3,931

4
15

—

—
—

1,611
78,748

3,014

3,714
6,728

1,023

1
2
17 $

1,843
2,866
88,342

224

24
248

3
5

5
6
259

—

1,658
1,658
84,411

4
4
242 $

(1)

Includes loan balances insured by the FHA or guaranteed by the VA of $29.6 million at December 31, 2015.

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The increase in the number of TDR loan relationships at December 31, 2017 from 2016 and 2015 was primarily due
to an increase in the number of single family loan TDRs. TDR loans within the loans held for investment portfolio
and the related reserves are included in the impaired loan tables above. At December 31, 2017 and 2016 and 2015,
the Company had no unfunded commitments related to TDR loans.

(in thousands)
Loans accounted for on a nonaccrual

basis:(1)
Consumer

Single family . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . .

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . .

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .

Total loans on nonaccrual . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . .

Total nonperforming assets . . . . . . . . . $

Loans 90 days or more past due and

accruing(2) . . . . . . . . . . . . . . . . . . . . . . $
Accruing TDR loans . . . . . . . . . . . . . . . . $
Nonaccrual TDR loans . . . . . . . . . . . . . .

Total TDR loans . . . . . . . . . . . . . . . . . $

Allowance for loan losses as a percent of
nonaccrual loans . . . . . . . . . . . . . . . . .
Nonaccrual loans as a percentage of total
loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonperforming assets as a percentage of
total assets . . . . . . . . . . . . . . . . . . . . . .

2017

2016

At December 31,
2015

2014

2013

11,091
1,404
12,495

12,717
1,571
14,288

12,119
1,576
13,695

8,368
1,526
9,894

8,861
1,846
10,707

—
302
78
380

640
1,526
2,166
15,041
664
15,705

37,171
73,023
2,549
75,572

$
$

871
337
1,376
2,584

1,256
2,414
3,670
20,542
5,243
25,785

40,846
76,581
4,874
81,455

$
$

—
119
339
458

2,341
674
3,015
17,168
7,531
24,699

36,612
84,411
3,931
88,342

193
—
—
193

4,650
1,277
5,927
16,014
9,448
25,462

3,200
—
—
3,200

9,057
2,743
11,800
25,707
12,911
38,618

$
34,987
$ 107,815
4,110
$ 111,925

$
46,811
$ 101,905
4,731
$ 106,636

251.63%

165.52%

170.54%

137.51%

93.00%

0.33%

0.53%

0.75%

1.36%

0.23%

0.41%

0.50%

0.72%

1.26%

(1)

(2)

If interest on nonaccrual loans under the original terms had been recognized, such income is estimated to have been
$1.5 million, $2.2 million and $2.5 million for the years ended December 31, 2017, 2016 and 2015.
FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on an accrual status
if they have been determined to have little or no risk of loss.

] 28 Page

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Delinquent loans and other real estate owned by loan type consisted of the following.

(in thousands)
Consumer loans

At December 31, 2017

30-59
Days Past
Due

60-89
Days

Past Due Nonaccrual

90 Days or
More Past
Due and
Accruing

Total
Past Due
Loans

Other
Real
Estate
Owned

Single family . . . . . . . . . . . . . . . . . . . . . $ 10,493 $ 4,437 $
Home equity and other . . . . . . . . . . . . .

750
11,243

20
4,457

Commercial real estate loans

Multifamily . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . .

Commercial and industrial loans
Owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . .

—
641
641

—
377
377

—
—
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,261 $ 4,457 $

11,091 $
1,404
12,495

37,171(1) $ 63,192 $

—
37,171

2,174
65,366

302
78
380

—
—
—

302
719
1,021

640
1,526
2,166
15,041 $

—
—
—
37,171

640
1,903
2,543
$ 68,930 $

664
—
664

—
—
—

—
—
—
664

(1)

FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if
they are determined to have little to no risk of loss. At December 31, 2017, these past due loans totaled $37.2 million.

(in thousands)
Consumer loans

At December 31, 2016

30-59
Days Past
Due

60-89
Days

Past Due Nonaccrual

90 Days or
More Past
Due and
Accruing

Total
Past Due
Loans

Other
Real
Estate
Owned

Single family . . . . . . . . . . . . . . . . . . . . . $ 4,310 $ 5,459 $
Home equity and other . . . . . . . . . . . . .

251
4,561

442
5,901

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . .

Commercial and industrial loans
Owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . .

23
—
—
23

48
202
250

—
—
—
—

205
—
205

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,834 $ 6,106 $

12,717 $
1,571
14,288

40,846(1) $ 63,332 $

—
40,846

2,264
65,596

871
337
1,376
2,584

—
—
—
—

894
337
1,376
2,607

2,133
—
2,133

—
—
2,712
2,712

1,256
2,414
3,670
20,542 $

—
—
—
40,846

1,509
2,616
4,125
$ 72,328 $

398
—
398
5,243

(1)

FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status as
they have little to no risk of loss. At December 31, 2016, these past due loans totaled $40.8 million.

] 28 Page

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(in thousands)
Consumer loans

At December 31, 2015

30-59
Days Past
Due

60-89
Days

Past Due Nonaccrual

90 Days or
More Past
Due and
Accruing

Total
Past Due
Loans

Other
Real
Estate
Owned

Single family . . . . . . . . . . . . . . . . . . . . . $ 7,098 $ 3,537 $
Home equity and other . . . . . . . . . . . . .

1,095
8,193

398
3,935

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . .

Commercial and industrial loans
Owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . .

—
—
77
77

233
—
233

—
—
—
—

—
—
—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,503 $ 3,935 $

12,119 $
1,576
13,695

36,595(1) $ 59,349 $

—
36,595

3,069
62,418

301
—
301

—
119
339
458

—
—
—
—

—
119
416
535

4,071
—
3,159
7,230

2,341
675
3,016
17,169 $

—
17
17
36,612

2,574
692
3,266
$ 66,219 $

—
—
—
7,531

(1)

FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status as
they have little to no risk of loss. At December 31, 2015, these past due loans totaled $36.6 million.

The following tables present the single family loan held for investment portfolio by original FICO score.

Greater Than
N/A(2)
<
500
550
600
650
700
750

At December 31, 2017
Less Than or Equal To
N/A(2)
500
549
599
649
699
749
>
TOTAL

(1)
(2)

Percentages based on aggregate loan amounts.
Information is not available.

Greater Than
N/A(2)
<
500
550
600
650
700
750

At December 31, 2016
Less Than or Equal To
N/A(2)
500
549
599
649
699
749
>
TOTAL

(1)
(2)

Percentages based on aggregate loan amounts.
Information is not available.

Percentage(1)
1.9%
0.1%
0.1%
0.5%
4.1%
13.1%
30.8%
49.4%
100.0%

Percentage(1)
2.5%
—%
0.1%
0.7%
4.8%
16.0%
28.6%
47.2%
100.0%

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Loan Underwriting Standards

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

For commercial, multifamily and construction loans, we consider the same factors with regard to the borrower
and the guarantors. In addition, we evaluate liquidity, net worth, leverage, other outstanding indebtedness of the
borrower, an analysis of cash expected to ﬂ ow through the borrower (including the outﬂ ow to other lenders) and
prior experience with the borrower. We use this information to assess ﬁ nancial capacity, proﬁ tability and experience.
Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and
availability of long-term ﬁ nancing.

Additional considerations for commercial permanent loans secured by real estate:

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

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

Additional considerations for commercial construction loans secured by real estate:

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

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

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

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

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

Liquidity and Capital Resources

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

HomeStreet, Inc., HomeStreet Capital and the Bank have diff erent funding needs and sources of liquidity and
separate regulatory capital requirements.

HomeStreet, Inc.

The main source of liquidity for HomeStreet, Inc. is proceeds from dividends from the Bank and HomeStreet
Capital. HomeStreet, Inc. has raised capital through the issuance of common stock, senior debt and trust preferred
securities. Additionally, we also have an available line of credit from which we can borrow up to $30.0 million. At
December 31, 2017, no advances were outstanding against this line.

Historically, the main cash outﬂ ows have been distributions to shareholders, interest and principal payments to
creditors and payments of operating expenses. HomeStreet, Inc.’s ability to pay dividends to shareholders depends
substantially on dividends received from the Bank. We do not currently pay a dividend and our most recent special
dividend to shareholders was declared during the ﬁ rst quarter of 2014. We are generally deploying our capital toward
strategic growth, and at this time our Board of Directors has not authorized the payment of a dividend.

HomeStreet Capital

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

HomeStreet Bank

The Bank’s primary sources of funds include deposits, advances from the FHLB, repayments and prepayments of
loans, proceeds from the sale of loans and investment securities, interest from our loans and investment securities
and capital contributions from HomeStreet, Inc. We have also raised short-term funds through the sale of securities
under agreements to repurchase and federal funds purchased. While scheduled principal repayments on loans are
a relatively predictable source of funds, deposit inﬂ ows and outﬂ ows and loan prepayments are greatly inﬂ uenced
by interest rates, economic conditions and competition. The Bank uses the primary liquidity ratio as a measure of
liquidity. The primary liquidity ratio is deﬁ ned as net cash, short-term investments and other marketable assets as
a percent of net deposits and short-term borrowings. At December 31, 2017, our primary liquidity ratio was 18.1%
compared with 31.2% at December 31, 2016 and 25.4% at December 31, 2015.

At December 31, 2017, 2016 and 2015, the Bank had available borrowing capacity of $579.2 million, $282.8 million
and $320.4 million, respectively, from the FHLB, and $331.5 million, $292.1 million and $382.1 million,
respectively, from the Federal Reserve Bank of San Francisco.

Cash Flows

For the years ended December 31, 2017, 2016 and 2015, cash and cash equivalents increased $18.8 million,
increased $21.2 million and increased $2.2 million, respectively. The following discussion highlights the major
activities and transactions that aff ected our cash ﬂ ows during these periods.

Cash ﬂ ows 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 year ended December 31, 2017, net cash of $160.6 million was provided by
operating activities, as our cash proceeds from the sale of loans exceeded cash used to fund loans held for sale
production. We believe that cash ﬂ ows from operations, available cash balances and our ability to generate cash
through short-term debt are suffi cient to fund our operating liquidity needs. For the year ended December 31,
2016, net cash of $44.8 million was used in operating activities, as our net income was less than the net fair value
adjustment and gain on sale of loans held for sale. For the year ended December 31, 2015, net cash of $8.3 million
was provided by operating activities, as our net income exceeded the net amount of cash used to fund loans held for
sale production and proceeds from the sale of loans.

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Cash ﬂ ows from investing activities

The Company’s investing activities primarily include available-for-sale securities and loans originated as held for
investment. For the year ended December 31, 2017, net cash of $556.2 million was used in investing activities,
primarily due to $998.6 million cash used for the origination of portfolio loans net of principal repayments and
$368.1 million of cash used for the purchase of investment securities, and $42.3 million used for the purchase
of property and equipment, partially off set by $397.5 million from proceeds from sale of investment securities,
$324.7 million proceeds from sale of loans held for investment and $105.8 million from principal repayments. For
the year ended December 31, 2016, net cash of $819.3 million was used in investing activities, primarily due to cash
used for the origination of portfolio loans and principal repayments and purchases of investment securities, partially
off set by $153.5 million from proceeds from sale of loans originated as held for investment and $112.2 million from
principal repayments and maturities of investment securities. For the year ended December 31, 2015, net cash of
$418.3 million was used in investing activities, primarily due to cash used for the origination of portfolio loans and
principal repayments and purchases of investment securities, partially off set by $132.4 million of net cash received
from acquisitions, primarily from the Simplicity merger.

Cash ﬂ ows from ﬁ nancing activities

The Company’s ﬁ nancing activities are primarily related to customer deposits and net proceeds from the FHLB.
For the year ended December 31, 2017, net cash of $414.4 million was provided by ﬁ nancing activities, primarily
resulting from a $309.8 million growth in deposits and $111.0 million net proceeds from FHLB advances. For the
year ended December 31, 2016, net cash of $885.3 million was provided by ﬁ nancing activities, primarily resulting
from a $919.5 million growth in deposits, $58.7 million net proceeds from our equity off ering and $63.2 million
in net proceeds from our senior note off ering, partially off set by $164.0 million from net repayments of FHLB
advances. For the year ended December 31, 2015, net cash of $412.2 million was provided by ﬁ nancing activities,
primarily resulting from net proceeds of $355.0 million of FHLB advances and a $111.9 million growth in deposits.

Capital Management

In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital rules (as used in this
section, the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies
(such as the Company). The Rules reﬂ ect, in part, certain standards initially adopted by the Basel Committee on Banking
Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements
contemplated by the Dodd-Frank Act. Since 2015, the Rules have applied to both the Company and the Bank.

The Rules recognize three components, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital
and Tier 2 capital. Common equity Tier 1 capital generally consists of retained earnings and common stock
instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”)
except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain
components of AOCI. Both the Company and the Bank elected this one-time option in 2015 to exclude certain
components of AOCI. Additional Tier 1 capital generally includes non-cumulative preferred stock and related
surplus subject to certain adjustments and limitations. Tier 2 capital generally includes certain capital instruments
(such as subordinated debt) and portions of the amounts of the allowance for loan and lease losses, subject to certain
requirements and deductions. The term “Tier 1 capital” means common equity Tier 1 capital plus additional Tier 1
capital, and the term “total capital” means Tier 1 capital plus Tier 2 capital.

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addition, certain off -balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount
is then assigned to one of the risk categories. An institution’s federal regulator may require the institution to hold
more capital than would otherwise be required under the Rules if the regulator determines that the institution’s capital
requirements under the Rules are not commensurate with the institution’s credit, market, operational or other risks.

To be classiﬁ ed as “well capitalized,” both the Company and the Bank are required to have a common equity Tier 1
capital ratio of at least 6.5%, a Tier 1 risk-based ratio of at least 8.0%, a total risk-based ratio of at least 10.0%
and a Tier 1 leverage ratio of at least 5.0%. In addition to the preceding requirements, all ﬁ nancial institutions
subject to the Rules, including both the Company and the Bank, are required to establish a “conservation buff er”
of common equity Tier 1 capital that was subject to a three year phase-in period that began on January 1, 2016 and
would have been fully phased-in on January 1, 2019 at 2.5% above the required common equity Tier 1 capital ratio,
the Tier 1 risk-based ratio and the total risk-based ratio. However in 2017, the FDIC issued a ﬁ nal rule to extend
the 2017 transition provision on a go-forward basis, so the full phase in has been halted. The required phase-in
capital conservation buff er during 2017 was 0.625%. A ﬁ nancial institution with a conservation buff er of less
than the required amount is subject to limitations on capital distributions, including dividend payments and stock
repurchases, and certain discretionary bonus payments to executive offi cers. At December 31, 2017, our capital
conservation buff ers for the Company and the Bank were 3.61% and 6.02%, respectively.

The Rules set forth the manner in which certain capital elements are determined, including but not limited to,
requiring certain deductions related to mortgage servicing rights and deferred tax assets. Holding companies with
less than $15 billion in total assets as of December 31, 2009 (which includes the Company) are permitted under the
rules to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to
25% of other Tier 1 capital. Because our trust preferred securities were issued prior to May 19, 2010, we include
those in our Tier 1 capital calculations.

The Rules made changes in the methods of calculating certain risk-based assets, which in turn aff ects the calculation
of risk-based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, including
commercial real estate, credit facilities that ﬁ nance the acquisition, development or construction of real property,
certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures,
securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets.

Certain calculations under the rules related to deductions from capital had phase-in periods through 2017. Speciﬁ cally,
the capital treatment of mortgage servicing rights was to be phased in through the transition periods. Under the prior
rules, the Bank deducted 10% of the value of MSRs (net of deferred tax) from Tier 1 capital ratios. However, under
Basel III, the Bank and Company must deduct a much larger portion of the value of MSRs from Tier 1 capital.

•

MSRs in excess of 10% of Tier 1 capital before threshold based deductions must be deducted from
common equity. The disallowable portion of MSRs was phased in incrementally (40% in 2015; 60% in
2016; 80% in 2017 and beyond).

In addition, the combined balance of MSRs and deferred tax assets is limited to approximately 15% of
the Bank’s and the Company’s common equity Tier 1 capital. These combined assets must be deducted
from common equity to the extent that they exceed the 15% threshold.

Any portion of the Bank’s and the Company’s MSRs that are not deducted from the calculation of
common equity Tier 1 are subject to a 100% risk weight.

Both the Company and the Bank began compliance with the Rules on January 1, 2015. The phase-in of the
conservation buff er began in 2016 and will take full eff ect on January 1, 2019. Certain calculations under the Rules
will also have phase-in periods. We believe that the current capital levels of the Company and the Bank are in
compliance with the standards under the Rules including the conservation buff er.

At December 31, 2017, the Bank’s capital ratios continued to meet the regulatory capital category of “well
capitalized” as deﬁ ned by the FDIC’s prompt corrective action rules.

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The following tables present regulatory capital information for HomeStreet, Inc. and HomeStreet Bank for the
December 31, 2017, 2016 and 2015 respectively, under Basel III.

At December 31, 2017

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio
Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions

Amount

Ratio

HomeStreet Bank
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . . . $ 649,864

9.67% $

268,708

4.0% $ 335,885

5.0%

Common equity risk-based capital

(to risk-weighted assets) . . . . . . . . $ 649,864

13.22% $

221,201

4.5% $ 319,512

6.5%

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . . . $ 649,864

13.22% $

294,935

6.0% $ 393,246

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . . . $ 688,981

14.02% $

393,246

8.0% $ 491,558

10.0%

HomeStreet, Inc.
(in thousands)
Tier 1 leverage capital

At December 31, 2017

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio
Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions

Amount

Ratio

(to average assets) . . . . . . . . . . . . . . . $ 614,624

9.12% $ 269,534

4.0% $ 336,918

Common equity risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 555,120

9.86% $ 253,293

4.5% $ 365,868

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 614,624

10.92% $ 337,724

6.0% $ 450,299

5.0%

6.5%

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 653,741

11.61% $ 450,299

8.0% $ 562,873

10.0%

HomeStreet Bank
(in thousands)
Tier 1 leverage capital

At December 31, 2016

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio
Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions

Amount

Ratio

(to average assets) . . . . . . . . . . . . . . . $ 635,988

10.26% $ 248,055

4.0% $ 310,069

Common equity risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 635,988

13.92% $ 205,615

4.5% $ 297,000

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 635,988

13.92% $ 274,154

6.0% $ 365,538

5.0%

6.5%

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . . . . . $ 671,252

14.69% $ 365,538

8.0% $ 456,923

10.0%

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At December 31, 2016

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio
Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective Action
Provisions

Amount

Ratio

HomeStreet, Inc.
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 608,988

9.78% $ 249,121

4.0% $ 311,402

Common equity risk-based capital

(to risk-weighted assets) . . . . . . $ 550,510

10.54% $ 234,965

4.5% $ 339,395

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . $ 608,988

11.66% $ 313,287

6.0% $ 417,716

5.0%

6.5%

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . $ 644,252

12.34% $ 417,716

8.0% $ 522,146

10.0%

At December 31, 2015

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective Action
Provisions

Amount

Ratio

HomeStreet Bank
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 455,101

9.46% $ 192,428

4.0% $ 240,536

Common equity risk-based capital

(to risk-weighted assets) . . . . . . $ 455,101

13.04% $ 157,074

4.5% $ 226,885

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . $ 455,101

13.04% $ 209,432

6.0% $ 279,243

5.0%

6.5%

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . $ 485,761

13.92% $ 279,243

8.0% $ 349,054

10.0%

At December 31, 2015

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective Action
Provisions

Amount

Ratio

HomeStreet, Inc.
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 480,038

9.95% $ 193,025

4.0% $ 241,281

Common equity risk-based capital

(to risk-weighted assets) . . . . . . $ 423,005

10.52% $ 180,912

4.5% $ 261,317

Tier 1 risk-based capital

(to risk-weighted assets) . . . . . . $ 480,038

11.94% $ 241,216

6.0% $ 321,621

5.0%

6.5%

8.0%

Total risk-based capital

(to risk-weighted assets) . . . . . . $ 510,697

12.70% $ 321,621

8.0% $ 402,026

10.0%

Impact of Inﬂ ation

The consolidated ﬁ nancial statements presented in this Form 10-K have been prepared in accordance with U.S.
GAAP, which requires the measurement of ﬁ nancial position and operating results in terms of historical dollar
amounts or market value without considering the changes in the relative purchasing power of money over time due
to inﬂ ation. The impact of inﬂ ation is reﬂ ected in the cost of our operations as incurred. Unlike industrial companies,
nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our
performance than do the eff ects of general levels of inﬂ ation.

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Operational Risk Management

Operational risk is deﬁ ned as the risk to current or anticipated earnings or capital arising from inadequate or
failed internal processes or systems, misconduct or errors, and adverse external events. Each line of business
and the departments supporting the lines of business (collectively referred to as “business lines”) have primary
responsibility for identifying, monitoring, controlling and escalating their operational risks. In addition, independent
risk management functions, such as our enterprise risk management, risk and regulatory aff airs, Bank Secrecy
Act, quality control, and legal departments provide support to the business lines as they develop and implement
operational risk management practices speciﬁ c to their needs and escalate enterprise-wide operational risks to
senior management and the Board. Our internal audit department provides independent assurance on the strength of
operational risk controls and compliance with Company policies and procedures. Additionally, we maintain adequate
change management, business resumption and data and customer information security processes. We also maintain
a code of conduct with periodic training, setting a “tone from the top” that articulates a strong focus on compliance
and ethical standards and a zero tolerance approach to unethical or fraudulent behavior.

Compliance/Regulatory Risk Management

Compliance risk is the risk to current or anticipated earnings or capital arising from violations of, or
nonconformance with, laws, rules, regulations, prescribed practices, internal policy and procedures or ethical
standards. As a regulated ﬁ nancial institution with a signiﬁ cant mortgage banking operation, we have signiﬁ cant
compliance and regulatory risk.

To mitigate our compliance risk, and as part of a comprehensive Risk Management System, the Bank is in the
process of developing and implementing a Compliance Management System (CMS) which is designed to meet
the heightened standards for risk governance framework adopted by the federal banking regulators. The Bank has
implemented a “three lines of defense” model: business lines have primary responsibility for identifying, monitoring
and controlling compliance risks, then reporting on those compliance risks to the corporate compliance department,
which is our second line of defense. The second line is responsible for providing advice to the business lines, as
well as assessing, testing and reporting on the status of the Bank’s compliance and identiﬁ ed compliance risks to our
senior management and the Board of Directors. Our Internal Audit Department serves as the third line of defense,
providing independent assurance on the strength of compliance risk controls and compliance with applicable laws
and regulations, as well as compliance with Company policies and procedures. The Chief Audit Offi cer reports to the
audit committees of the Board of Directors of HomeStreet and the Bank.

We are still in the process of implementing the heightened standards required for banks with assets over
$10 billion as we are not yet at that level but anticipate that we will grow to that size in the next several years.
As the Bank continues to grow, our regulators may require us, or we may determine in response to perceived
regulatory expectations, to comply with these heightened standards more completely, or to take actions to prepare
for compliance, even before the Bank’s total assets equal or exceed $10 billion. In preparation for meeting those
heightened standards, we have hired an experienced Chief Compliance Offi cer and additional compliance personnel,
and we are designing and implementing additional compliance systems and internal controls.

In addition to the CMS, the Bank’s Risk Management System includes a Bank Secrecy Act (BSA) department
responsible for designing and implementing processes to support business line eff orts meet the requirements of BSA
and anti-money laundering (AML) regulations of the Department of Treasury, the Internal Revenue Service and the
Offi ce of Foreign Assets Control (OFAC) relating to combatting money laundering, terrorist ﬁ nancing, tax evasion
and other ﬁ nancial crimes. As with the CMS requirements, the BSA, AML and OFAC systems being designed
and implemented are intended to meet the heightened standards applicable to banks with more than $10 billion in
assets. To date, the BSA department has implemented processes to identify, measure, monitor, control, and manage
compliance risk as outlined within applicable BSA, AML, and OFAC requirements, and has recently separated the
oversight of BSA compliance from the compliance department itself, adding a BSA Offi cer who reports to the Chief
Risk Offi cer and reorganizing distributed BSA responsibilities under the BSA Offi cer. We are continuing to assess
the adequacy of BSA resources and we are designing and implementing additional BSA compliance systems and
internal controls required by the heightened standards for banks with over $10 billion in assets.

Additionally, Corporate Compliance, BSA, and the Company’s senior management have established tracking
processes for monitoring the status of pending regulations and implementing regulatory requirements as they are
published and become eff ective.

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Strategic Risk Management

Strategic risk is the risk to current or anticipated earnings, capital or enterprise value arising from adverse business
decisions, improper implementation of decisions or lack of responsiveness to industry changes.

Strategic risk is managed by the Board and senior management through development of strategic plans, successful
implementation of business initiatives and reporting to the Board and its committees.

Reputation Risk Management

Reputation risk is deﬁ ned as the risk to current or anticipated earnings, capital or enterprise value arising from
negative public opinion.

We believe that we have an excellent reputation in the community primarily due to our longevity and signiﬁ cant
outreach to the communities we serve.

Accounting Developments

See Financial Statements and Supplementary Data — Note 1, Summary of Signiﬁ cant Accounting Policies, for a
discussion of accounting developments.

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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

Market risk is deﬁ ned 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 deﬁ ned 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 deﬁ ned 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 ﬁ nancial instruments and positions we hold. This
includes loans, mortgage servicing rights, investment securities, deposits, borrowings, long-term debt and derivative
ﬁ nancial 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 and, in particular, the regional economy of the western United States, including Hawaii.

Our price and interest rate risks are managed by the Bank’s Asset/Liability Management Committee (“ALCO”), a
management committee that identiﬁ es and manages the sensitivity of earnings or capital to changing interest rates to
achieve our overall ﬁ nancial objectives. ALCO is a management-level committee whose members include the Chief
Investment Offi cer, acting as the chair, the Chief Executive Offi cer, Chief Financial Offi cer and other members of
management. The committee meets monthly and is responsible for:

•

understanding the nature and level of the Company’s interest rate risk and interest rate sensitivity;

assessing how that risk ﬁ ts within our overall business strategies;

ensuring an appropriate level of rigor and sophistication in the risk management process for the overall
level of risk;

complying with and reviewing the asset/liability management policy; and

formulating and implementing strategies to improve balance sheet mix and earnings.

The Finance Committee of the Bank’s Board provides oversight of the asset/liability management process, reviews
the results of interest rate risk analysis and approves submission of the relevant policies to the board.

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 aff ecting net interest income. Changes in net
interest rates (interest rate risk) are inﬂ uenced to a signiﬁ cant 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 effi ciently 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. Eff ective 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 diff erence 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.

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The following table presents sensitivity gaps for these diff erent intervals.

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
Yrs.

Non-Rate-
Sensitive

Total

December 31, 2017

72,718
—

— $
—

— $

46,639

— $
—

72,718
46,639

37,240

35,978

46,017

210,030

135,838

439,201

607,445

136

598

689

1,967

—

904,304

610,902

1,398,210

323,288

514,689

970,991

585,363

713,925

— 4,506,466

2,115,613

359,333

560,842

1,181,619

721,890

1,201,732

— 6,141,029

(dollars in thousands)

Interest-earning assets:

Cash & cash

equivalents. . . . . . . . $

FHLB Stock . . . . . . . . .

Investment

securities(1) . . . . .
Mortgage loans held for
sale . . . . . . . . . . . . .
Loans held for

investment(1) . . . .
Total interest-
earning
assets . . . . . . .

Non-interest-earning

—
assets . . . . . . . . . . . .
Total assets . . . . . . . $ 2,115,613

—
359,333

—
560,842

—
$ 1,181,619

—
$ 721,890

—
$ 1,201,732

601,012
$ 601,012

601,012
$ 6,742,041

Interest-bearing liabilities:

NOW accounts(2) . . . . . . $
Statement savings

461,349

— $

— $ 461,349

accounts(2) . . . . . . . .

293,858

Money market

accounts(2) . . . . . . . .

1,834,154

—

395,769
933,611
60,274

271,297
—
—

237,928
30,000
—

255,139
10,000
—

30,555
—
—

3,979,015

271,297

267,928

265,139

30,555

70,591

— 4,884,525

—

1
5,590
65,000

—

293,858

— 1,834,154

— 1,190,689
979,201
—
125,274
—

Certiﬁcates of

deposit . . . . . . . . . . .
FHLB advances . . . . . .
Long-term debt(3) . . . . .
Total interest-bearing
liabilities . . . . . . .

Non-interest bearing

liabilities . . . . . . . . . . . .
Equity . . . . . . . . . . . . . .
Total liabilities and
shareholders’
equity . . . . . . . . . . . . $ 3,979,015

—
—

Interest sensitivity

—
—

— 1,153,136
704,380
—

1,153,136
704,380

271,297

267,928

$ 265,139

$ 30,555

70,591

$ 1,857,516

$ 6,742,041

gap . . . . . . . . . . . . . . $ (1,863,402) $

88,036

292,914

$ 916,480

$ 691,335

$ 1,131,141

Cumulative interest

sensitivity gap . . . . . $ (1,863,402) $ (1,775,366) $ (1,482,452) $ (565,972) $ 125,363

$ 1,256,504

Cumulative interest

sensitivity gap as a
percentage of total
assets . . . . . . . . . . . .

Cumulative interest-
earning assets as
a percentage of
cumulative interest-
bearing liabilities . . .

(28)%

(26)%

(22)%

(8)%

19%

53%

58%

67%

88%

103%

126%

(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 December 31, 2017, the Bank’s cumulative interest sensitivity gap was positive, resulting in an asset-sensitive
position. Therefore, net interest income would be expected to rise in the long term if interest rates were to rise
without changing the slope of the yield curve. The Bank is liability-sensitive in the “three months or less” period
which generally indicates that net interest income would be expected to fall in the short term if interest rates were to
rise, though deposit interest rate increases generally lag market rate increases.

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Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net
interest margin, without aff ecting interest rate sensitivity. In addition, the interest rate spread between an earning
asset and its funding liability can vary signiﬁ cantly, 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
reﬂ ected in the interest rate sensitivity analysis. These prepayments may have a signiﬁ cant 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 December 31, 2017 and 2016 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.

Change in Interest Rates
(basis points)(1)
+200
+100
-100
-200

December 31, 2017

December 31, 2016

Percentage Change
Net Interest Income(2) Net Portfolio Value(3) Net Interest Income(2) Net Portfolio Value(3)

(0.5)%
(0.2)
1.9
2.3%

(8.2)%
(4.2)
(0.9)
(4.8)%

2.8%
1.4
1.1
(2.8)%

(6.2)%
(3.1)
(3.5)
(5.6)%

(1)

(2)

(3)

For purposes of our model, we assume interest rates will not go below zero. This “ﬂ oor” limits the eff ect of a potential
negative interest rate shock in a low rate environment like the one we are currently experiencing.
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.
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 December 31, 2017, 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. Since December 31, 2016, the interest rate sensitivity of
the Company’s assets and liabilities both decreased, with a greater decrease in the interest rate sensitivity of the
Company’s liabilities. The changes in sensitivity reﬂ ect the impact of both higher market interest rates 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. Modeling results in extreme interest rate decline scenarios
may encounter negative rate assumptions which may cause the 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
inﬂ uences on our deposits.

Risk Management Instruments

We originate ﬁ xed-rate residential home mortgages primarily for sale into the secondary market. These loans are
hedged against interest rate ﬂ uctuations from the time of the loan commitment until the loans are sold.

We have been able to manage interest rate risk by matching both on- and off -balance sheet assets and liabilities,
within reasonable limits, through a range of potential rate and repricing characteristics. Where appropriate, we also
use hedging techniques including the use of forward sale commitments, option contracts and interest rate swaps.

In order to protect the economic value of our mortgage servicing rights, we employ hedging strategies utilizing
derivative ﬁ nancial instruments including interest rate swaps, forward interest rate swaps, options on interest rate
swap contracts and commitments to purchase mortgage backed securities. We utilize these instruments as economic
hedges and changes in the fair value of these instruments are recognized in current income as a component of
mortgage servicing income. Our mortgage servicing rights hedging policy requires management to hedge the impact
on the value of our mortgage servicing rights for a low-probability, extreme and sudden increase in interest rates.

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The following table presents the ﬁ nancial instruments classiﬁ ed as derivatives.

(in thousands)
Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest rate swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurodollar Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At December 31, 2017

Fair value

Notional
amount

Asset
derivatives

Liability
derivatives

1,687,658 $
120,000
472,733
1,869,000
3,287,000
7,436,391 $

1,311 $
—
12,950
12,172
—
26,433 $

(1,445)
—
(25)
(23,654)
(101)
(25,225)

We may implement other hedge transactions using forward loan sales, futures, option contracts and interest rate
swaps, interest rate ﬂ oors, ﬁ nancial futures, forward rate agreements and U.S. Treasury options on futures or bonds.
Prior to considering any hedging activities, we analyze the costs and beneﬁ ts of the hedge in comparison to other
viable alternative strategies.

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of HomeStreet, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of ﬁ nancial condition of HomeStreet, Inc. and
subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of
operations, comprehensive income, shareholders’ equity, and cash ﬂ ows for each of the three years in the period
ended December 31, 2017, and the related notes (collectively referred to as the “ﬁ nancial statements”). In our
opinion, the ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash ﬂ ows for each of the three years in the
period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States
of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over ﬁ nancial reporting as of December 31, 2017, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 6, 2018, expressed an unqualiﬁ ed opinion
on the Company’s internal control over ﬁ nancial reporting.

Basis for Opinion

These ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s ﬁ nancial statements based on our audits. We are a public accounting ﬁ rm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the ﬁ nancial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the ﬁ nancial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the ﬁ nancial statements. Our audits also included evaluating the accounting principles used and
signiﬁ cant estimates made by management, as well as evaluating the overall presentation of the ﬁ nancial statements.
We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP

Seattle, Washington
March 6, 2018

We have served as the Company’s auditor since 2013.

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)

ASSETS

At December 31,

2017

2016

Cash and cash equivalents (including interest-earning instruments of $30,268 and

$34,615) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Investment securities (includes $846,268 and $993,990 carried at fair value) . . . . . . . . .
Loans held for sale (includes $577,313 and $656,334 carried at fair value) . . . . . . . . . .
Loans held for investment (net of allowance for loan losses of $37,847 and $34,001;

72,718 $
904,304
610,902

53,932
1,043,851
714,559

includes $5,477 and $17,988 carried at fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights (includes $258,560 and $226,113 carried at fair value) . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,819,027
245,860
5,243
40,347
77,636
22,175
221,070
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,742,041 $ 6,243,700

4,506,466
284,653
664
46,639
104,654
22,564
188,477

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,760,952 $ 4,429,701
868,379
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191,189
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,147
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,614,416
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

979,201
172,234
125,274
6,037,661

Commitments and contingencies (Note 13)
Shareholders’ equity:

Preferred stock, no par value, authorized 10,000 shares, issued and outstanding,

0 shares and 0 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

Common stock, no par value, authorized 160,000,000 shares, issued and

outstanding, 26,888,288 shares and 26,800,183 shares . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

511
336,149
303,036
(10,412)
629,284
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,742,041 $ 6,243,700

511
339,009
371,982
(7,122)
704,380

See accompanying notes to consolidated ﬁ nancial statements.

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,
2016

2015

2017

215,363 $

190,667 $

(in thousands, except share data)
Interest income:

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest expense:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities sold under agreements to

repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for credit losses . . . . . . . . . .

Noninterest income:

Net gain on loan origination and sale activities . . . . . . . . . . . . . . .
Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from WMS Series LLC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depositor and other retail banking fees . . . . . . . . . . . . . . . . . . . . .
Insurance agency commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment securities available for sale . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Noninterest expense:

Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of core deposit intangibles . . . . . . . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance Corporation assessments . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (beneﬁt) cost from operation and sale of other real estate

owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

152,621
11,590
903
165,114

11,801
3,668

8
1,104
195
16,776
148,338
6,100
142,238

236,388
24,250
1,624
5,881
1,682
2,406
7,726
1,280
281,237

240,587
56,821
1,924
2,807
7,215
2,573
24,927
29,054

18,394
476
209,537

19,009
6,030

4
4,043
402
29,488
180,049
4,100
175,949

307,313
33,059
2,333
6,790
1,619
2,539
—
5,497
359,150

303,354
63,206
2,166
1,867
4,958
3,414
30,530
33,063

21,753
567
237,683

23,912
12,589

5
6,067
672
43,245
194,438
750
193,688

255,876
35,384
598
7,221
1,904
489
—
10,682
312,154

293,870
65,036
1,710
1,410
3,467
3,279
38,268
33,143

(530)
439,653
66,189
(2,757)
68,946 $
2.57 $
2.54 $

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic weighted average number of shares outstanding . . . . . . . . . . . . . .
Diluted weighted average number of shares outstanding . . . . . . . . . . . .

1,764
444,322
90,777
32,626
58,151 $
2.36 $
2.34 $

660
366,568
56,907
15,588
41,319
1.98
1.96
20,818,045
21,059,201

26,864,657
27,092,019

24,615,990
24,843,683

See accompanying notes to consolidated ﬁ nancial statements.

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on investment securities available for sale:

Unrealized holding gain (loss) arising during the year, net of tax

expense (beneﬁt) of $1,942, $(3,400) and $(713) . . . . . . . . . . . .
Reclassiﬁcation adjustment for net gains included in net income,
net of tax expense (beneﬁt) of $172, $889 and $(264) . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

68,946 $

58,151 $

41,319

3,607

(6,313)

(1,325)

(317)
3,290
72,236 $

(1,650)
(7,963)
50,188 $

(2,670)
(3,995)
37,324

See accompanying notes to consolidated ﬁ nancial statements.

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Number of
shares

Common
stock

Additional
paid-in
capital

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Total

1,546 $ 302,238
41,319

—

—
1,267
— 124,446
(3,995)
465,275
58,151

(3,995)
(2,449)
—

—
1,788
— 112,033
(7,963)
629,284
68,946

(7,963)
(10,412)

2,502
358
3,290
3,290
(7,122) $ 704,380

(in thousands, except share data)
Balance, December 31, 2014 . . . . . 14,856,611 $
Net income . . . . . . . . . . . . . . . . . . .
Share-based compensation

—

511 $ 96,615 $ 203,566 $
—

41,319

—

—
expense . . . . . . . . . . . . . . . . . . . .
7,219,923
Common stock issued . . . . . . . . . . .
Other comprehensive loss . . . . . . . .
—
Balance, December 31, 2015 . . . . . 22,076,534
Net income . . . . . . . . . . . . . . . . . . .
—
Share-based compensation

—
expense . . . . . . . . . . . . . . . . . . . .
4,723,649
Common stock issued . . . . . . . . . . .
Other comprehensive loss . . . . . . . .
—
Balance, December 31, 2016 . . . . . 26,800,183
Net income . . . . . . . . . . . . . . . . . . .
Share-based compensation

expense . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . .
Other comprehensive income . . . . .
Balance, December 31, 2017 . . . . . 26,888,288 $

88,105

—
1,267
— 124,446
—
—
222,328
511
—
—

—
1,788
— 112,033
—
—
336,149
511
—

—
—
—
244,885
58,151

—
—
—
303,036
68,946

2,502
358

—
—
—
511 $ 339,009 $ 371,982 $

—
—
—

See accompanying notes to consolidated ﬁ nancial statements.

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:

Years Ended December 31,
2016

2015

2017

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by (used

68,946 $

58,151 $

41,319

in) operating activities:
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . .
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net fair value adjustment and gain on sale of loans held for sale . .
Fair value adjustment of loans held for investment . . . . . . . . . . . . .
Origination of mortgage servicing rights . . . . . . . . . . . . . . . . . . . .
Change in fair value of mortgage servicing rights . . . . . . . . . . . . .
Net gain on sale of investment securities . . . . . . . . . . . . . . . . . . . .
Net gain on sale of loans originated as held for investment . . . . . .
Net fair value adjustment, gain on sale and provision for

losses on other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of ﬁxed assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on lease abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans originated as held for sale . . . . . . . . . . .
Changes in operating assets and liabilities:

22,645
750
(218,331)
(1,030)
(78,412)
36,615
(489)
(4,600)

15,667
4,100
(268,104)
(354)
(90,520)
13,280
(2,539)
(2,607)

14,877
6,100
9,632
2,000
(76,417)
27,483
(2,406)
(456)

(383)
215
5,054
(2,094)
2,856
—
(7,763,844)
8,084,916

1,767
253
—
31,490
2,062
—
(9,169,488)
9,379,720

176
61
—
16,389
1,060
(7,726)
(7,265,622)
7,243,990

Decrease (increase) in accounts receivable and other assets. . . . . .
(Decrease) increase in accounts payable and other liabilities . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . .

27,711
(19,957)
160,568

(60,946)
43,255
(44,813)

(12,151)
10,002
8,311

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of investment securities . . . . . . . . . . . . . . . . . . . .
Principal repayments and maturities of investment securities . . . . . .
Proceeds from sale of other real estate owned . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans originated as held for investment . . . . . .
Proceeds from sale of mortgage servicing rights . . . . . . . . . . . . . . . .
Mortgage servicing rights purchased from others . . . . . . . . . . . . . . .
Capital expenditures related to other real estate owned . . . . . . . . . . .
Origination of loans held for investment and principal repayments,

net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . .
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash acquired from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . .

CASH FLOWS FROM FINANCING ACTIVITIES:

(743,861)
164,429
112,245
5,672
153,518
—
—
(720)

(609,981)
1,148
(24,482)
122,760
(819,272)

(247,713)
112,259
36,798
6,110
34,111
4,325
(9)
—

(476,062)
—
(20,560)
132,407
(418,334)

(368,071)
397,492
105,801
6,105
324,745
—
(565)
(57)

(998,638)
—
(42,286)
19,285
(556,189)

309,798 $

Increase in deposits, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Proceeds from Federal Home Loan Bank advances . . . . . . . . . . . . . .
Repayment of Federal Home Loan Bank advances . . . . . . . . . . . . . .
Proceeds from federal funds purchased and securities sold under

10,972,200
(10,861,200)

14,734,636
(14,898,636)

919,497 $

111,906
10,618,900
(10,263,900)

agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

875,166

64,804

82,204

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HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)

(in thousands)

Repayment of federal funds purchased and securities sold under

agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank stock repurchase . . . . . . . .
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . .
Proceeds from debt issuance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Payments) proceeds from equity raise, net . . . . . . . . . . . . . . . . . . . .
Proceeds from stock issuance, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax beneﬁt related to the exercise of stock options . . . . . . . . .
Net cash provided by ﬁnancing activities . . . . . . . . . . . . . . . . . . . .
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . .
CASH AND CASH EQUIVALENTS:

Years Ended December 31,
2016

2015

2017

(875,166)
187,766
(194,058)
(65)
(45)
11
—
414,407
18,786

(64,804)
284,662
(279,436)
63,184
58,713
2,713
—
885,333
21,248

(132,204)
153,657
(158,565)
—
—
178
29
412,205
2,182

Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

53,932
72,718 $

32,684
53,932 $

30,502
32,684

SUPPLEMENTAL DISCLOSURES OF CASH FLOW

INFORMATION:
Cash paid during the period for:

Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal and state income taxes (refunded) paid, net . . . . . . . . . . . .

42,889 $
(21,885)

28,672 $
14,441

16,647
11,328

Non-cash activities:

Loans held for investment foreclosed and transferred to other real
estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred from held for investment to held for sale . . . . . .
Loans transferred from held for sale to held for investment . . . . . .
Ginnie Mae loans recognized with the right to repurchase, net . . .
Simplicity acquisition:

Assets acquired, excluding cash acquired . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Orange County Business Bank acquisition:

1,125
419,494
100,049
3,534

2,056
169,745
12,311
6,775

—
—
—
—

Assets acquired, excluding cash acquired . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

—
—
—
— $

165,786
141,267
8,360
50,373 $

4,396
76,178
25,668
7,857

738,279
718,916
7,345
124,214

—
—
—
—

See accompanying notes to consolidated ﬁ nancial statements.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

The Company’s accounting and ﬁ nancial reporting policies conform to accounting principles generally accepted
in the United States of America (U.S. GAAP). Inter-company balances and transactions have been eliminated in
consolidation. In preparing the consolidated ﬁ nancial statements, the Company is required to make estimates and
assumptions that aff ect the reported amounts of assets and liabilities as of the date of the ﬁ nancial statements and
revenues and expenses during the reporting periods and related disclosures. These estimates that require application
of management’s most diffi cult, subjective or complex judgments often result in the need to make estimates
about the eff ect of matters that are inherently uncertain and may change in future periods. Management has made
signiﬁ cant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business
combinations (Note 2, Business Combinations), allowance for credit losses (Note 5, Loans and Credit Quality),
valuation of residential mortgage servicing rights and loans held for sale (Note 12, Mortgage Banking Operations),
valuation of certain loans held for investment (Note 5, Loans and Credit Quality), valuation of investment securities
(Note 4, Investment Securities), valuation of derivatives (Note 11, Derivatives and Hedging Activities), other
real estate owned (Note 6, Other Real Estate Owned), and taxes (Note 14, Income Taxes). Actual results could
diff er materially from those estimates. Certain amounts in the ﬁ nancial statements from prior periods have been
reclassiﬁ ed to conform to the current ﬁ nancial statement presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash, interest-earning overnight deposits at other ﬁ nancial institutions, and other
investments with original maturities equal to three months or less. For the consolidated statements of cash ﬂ ows,
the Company considered cash equivalents to be investments that are readily convertible to known amounts, so near
to their maturity that they present an insigniﬁ cant risk of a change in fair value due to change in interest rates,
and purchased in conjunction with cash management activities. Restricted cash of $4.4 million and $4.0 million
at December 31, 2017 and 2016, respectively, is included in cash and cash equivalents for FNMA DUS pledged
securities and related reserves. In addition, restricted cash of $1.2 million and $2.4 million at December 31, 2017
and 2016, respectively, is included in accounts receivable and other assets for reinsurance-related reserves.

Investment Securities

We classify investment securities as trading, held to maturity (“HTM”), or available for sale (“AFS”) at the date of
acquisition. Purchases and sales of securities are generally recorded on a trade-date basis. We include and record
certain certiﬁ cates of deposit that meet the deﬁ nition of a security as HTM investments.

Investment securities that we might not hold until maturity are classiﬁ ed as AFS and are reported at fair value in
the statement of ﬁ nancial condition. Fair value measurement is based upon quoted market prices in active markets,
if available. If quoted prices in active markets are not available, fair value is measured using pricing models or
other model-based valuation techniques such as the present value of future cash ﬂ ows, which consider prepayment
assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded
from earnings and reported, net of tax, in other comprehensive income (“OCI”). Purchase premiums and discounts
are recognized in interest income using the eff ective interest method over the life of the securities. Purchase
premiums or discounts related to mortgage-backed securities are amortized or accreted using projected prepayment
speeds. Gains and losses on the sale of securities are recorded on the trade date and are determined using the speciﬁ c
identiﬁ cation method.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

AFS investment securities in unrealized loss positions are evaluated for other-than-temporary impairment (“OTTI”)
at least quarterly. For AFS debt securities, a decline in fair value is considered to be other-than-temporary if the
Company does not expect to recover the entire amortized cost basis of the security. For AFS equity securities, the
Company considers a decline in fair value to be other-than-temporary if it is probable that the Company will not
recover its cost basis.

Debt securities are classiﬁ ed as HTM if the Company has both the intent and ability to hold those securities to
maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of purchase premiums and accretion of purchase
discounts.

Transfers of securities from available for sale to held to maturity are accounted for at fair value as of the date of the
transfer. The diff erence between the fair value and the par value at the date of transfer is considered a premium or
discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI,
and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the
amortization of any premium or discount, and will off set or mitigate the eff ect on interest income of the amortization
of the premium or discount for that held to maturity security.

Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an
assessment of recoverability, all relevant information is considered, including the length of time and extent to which
fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer
and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

For debt securities, the Company measures and recognizes OTTI losses through earnings if (1) the Company
has the intent to sell the security or (2) it is more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis. In these circumstances, the impairment loss is equal to the
full diff erence between the amortized cost basis and the fair value of the security. For securities that are considered
other-than-temporarily-impaired that the Company has the intent and ability to hold in an unrealized loss position,
the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and
the amount related to other factors, which is recognized as a component of OCI.

For equity securities, the Company recognizes OTTI losses through earnings if the Company intends to sell the
security. The Company also considers other relevant factors, including its intent and ability to retain the security
for a period of time suffi cient to allow for any anticipated recovery in market value, and whether evidence exists to
support a realizable value equal to or greater than the carrying value. Any impairment loss on an equity security is
equal to the full diff erence between the amortized cost basis and the fair value of the security.

Federal Home Loan Bank Stock

As a borrower from the Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of San Francisco
(“FHLB”), the Company is required to purchase an amount of FHLB stock based on our outstanding borrowings
with the FHLB. This stock is used as collateral to secure the borrowings from the FHLB and is accounted for as a
cost-method investment. FHLB stock is reviewed at least quarterly for possible OTTI, which includes an analysis of
the FHLB’s cash ﬂ ows, capital needs and long-term viability.

Loans Held for Sale

Loans originated for sale in the secondary market, which is our principal market, or as whole loan sales are
classiﬁ ed as loans held for sale. Management has elected the fair value option for all single family loans held for
sale (originated with the intent to be held for sale) and records these loans at fair value. The fair value of loans held
for sale is generally based on observable market prices from other loans in the secondary market that have similar
collateral, credit, and interest rate characteristics. If quoted market prices are not readily available, the Company
may consider other observable market data such as dealer quotes for similar loans or forward sale commitments.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

In certain cases, the fair value may be based on a discounted cash ﬂ ow model. Gains and losses from changes in
fair value on loans held for sale are recognized in net gain on mortgage loan origination and sale activities within
noninterest income. Direct loan origination costs and fees for single family loans originated as held for sale are
recognized in earnings. The change in fair value of loans held for sale is primarily driven by changes in interest
rates subsequent to loan funding and changes in the fair value of related servicing asset, resulting in revaluation
adjustments to the recorded fair value. The use of the fair value option allows the change in the fair value of loans
to more eff ectively off set the change in the fair value of derivative instruments that are used as economic hedges to
loans held for sale.

Multifamily and SBA loans held for sale are accounted for at the lower of amortized cost or fair value. Related
gains and losses are recognized in net gain on mortgage loan origination and sale activities. Direct loan origination
costs and fees for multifamily and SBA loans classiﬁ ed as held for sale are deferred at origination and recognized in
earnings at the time of sale.

Loans Held for Investment

Loans held for investment are reported at the principal amount outstanding, net of cumulative charge-off s, interest
applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan
origination fees and costs and unamortized premiums or discounts on purchased loans. Deferred fees and costs and
premiums and discounts are amortized over the contractual terms of the underlying loans using the constant eff ective
yield (the interest method) or straight-line method. Interest on loans is accrued and recognized as interest income at
the contractual rate of interest. A determination is made as of the loan commitment date as to whether a loan will be
held for sale or held for investment. This determination is based primarily on the type of loan or loan program and its
related proﬁ tability characteristics.

When a loan is designated as held for investment, the intent is to hold these loans for the foreseeable future or until
maturity or pay-off . If subsequent changes occur, the Company may change its intent to hold these loans. Once a
determination has been made to sell such loans, they are immediately transferred to loans held for sale and carried at
the lower of cost or fair value.

From time to time, the Company will originate loans to facilitate the sale of other real estate owned without a
suffi cient down payment from the borrower. Such loans are accounted for using the installment method and any gain
on sale is deferred.

Nonaccrual Loans

All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost
recovery method, all cash collected is applied to ﬁ rst reduce the principal balance. A loan may be returned to
accrual status if all delinquent principal and interest payments are brought current and the collectability of the
remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans that
are well-secured and in the process of collection are maintained on accrual status, even if they are 90 days or more
past due. Loans whose repayments are insured by the Federal Housing Administration (“FHA”) or guaranteed by the
Department of Veterans’ Aff airs (“VA”) are maintained on accrual status even if 90 days or more past due.

Impaired Loans

A loan is considered impaired when it is probable that all contractual principal and interest payments due will not
be collected in accordance with the terms of the loan agreement. Factors considered by management in determining
whether a loan is impaired include payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

Troubled Debt Restructurings

A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons,
we grant a concession to a borrower experiencing ﬁ nancial diffi culty that we would not otherwise consider. A
restructuring that results in only an insigniﬁ cant delay in payment is not considered a concession. A delay may
be considered insigniﬁ cant if the payments subject to the delay are insigniﬁ cant relative to the unpaid principal
or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is
insigniﬁ cant relative to the frequency of payments, the debt’s original contractual maturity or original expected
duration.

TDRs are designated as impaired because interest and principal payments will not be received in accordance with
original contract terms. TDRs that are performing and on accrual status as of the date of the modiﬁ cation remain
on accrual status. TDRs that are nonperforming as of the date of modiﬁ cation generally remain as nonaccrual until
the prospect of future payments in accordance with the modiﬁ ed loan agreement is reasonably assured, generally
demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period,
normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR and
impaired regardless of the accrual or performance status until the loan is paid off . However, if the TDR loan has
been modiﬁ ed in a subsequent restructure with market terms and the borrower is not currently experiencing ﬁ nancial
diffi culty, then the loan may be de-designated as a TDR.

Allowance for Credit Losses

Credit quality within the loans held for investment portfolio is continuously monitored by management and is
reﬂ ected within the allowance for credit losses. The allowance for credit losses is maintained at a level that, in
management’s judgment, is appropriate to cover losses inherent within the Company’s loans held for investment
portfolio, including unfunded credit commitments, as of the balance sheet date. The allowance for loan losses, as
reported in our consolidated statements of ﬁ nancial condition, is adjusted by a provision for loan losses, which is
recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The loss estimation process involves procedures to appropriately consider the unique characteristics of its two loan
portfolio segments, the consumer loan portfolio segment and the commercial loan portfolio segment. These two
segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing
allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss
history, delinquency status and other credit trends and risk characteristics. Determining the appropriateness of the
allowance is complex and requires judgment by management about the eff ect of matters that are inherently uncertain.
Subsequent evaluations of the overall loan portfolio, in light of the factors then prevailing, may result in signiﬁ cant
changes in the allowance for credit losses in those future periods.

Credit quality is assessed and monitored by evaluating various attributes and utilizes such information in our
evaluation of the adequacy of the allowance for credit losses. The following provides the credit quality indicators and
risk elements that are most relevant and most carefully considered and monitored for each loan portfolio segment.

Consumer Loan Portfolio Segment

The consumer loan portfolio segment is comprised of the single family and home equity loan classes, which are
underwritten after evaluating a borrower’s capacity, credit, and collateral. Capacity refers to a borrower’s ability
to make payments on the loan. Several factors are considered when assessing a borrower’s capacity, including the
borrower’s employment, income, current debt, assets, and level of equity in the property. Credit refers to how well a
borrower manages their current and prior debts as documented by a credit report that provides credit scores and the
borrower’s current and past information about their credit history. Collateral refers to the type and use of property,
occupancy, and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property
value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that
negatively aff ect housing prices and demand and levels of unemployment.

Commercial Loan Portfolio Segment

The commercial loan portfolio segment is comprised of the commercial real estate, non-owner occupied,
multifamily residential, construction/land development, owner occupied and commercial business loan classes,
whose underwriting standards consider the factors described for single family and home equity loan classes as
well as others when assessing the borrower’s and associated guarantors or other related party’s ﬁ nancial position.
These other factors include assessing liquidity, the level and composition of net worth, leverage, considering all
other lender amounts and position, an analysis of cash expected to ﬂ ow through the obligors including the outﬂ ow
to other lenders, and prior experience with the borrower. This information is used to assess adequate ﬁ nancial
capacity, proﬁ tability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general
economic conditions, liquidity, and availability of long-term ﬁ nancing.

Loan Loss Measurement

Allowance levels are inﬂ uenced by loan volumes, loan asset quality ratings (“AQR”) migration or delinquency
status, historic loss experience and other conditions inﬂ uencing loss expectations, such as economic conditions.
The methodology for evaluating the adequacy of the allowance for loan losses has two basic components: ﬁ rst, an
asset-speciﬁ c component involving the identiﬁ cation of impaired loans and the measurement of impairment for each
individual loan identiﬁ ed; and second, a formula-based component for estimating probable loan principal losses for
all other loans.

Impaired Loans

When a loan is identiﬁ ed as impaired, impairment is measured based on net realizable value, or the diff erence
between the discounted value of the expected future cash ﬂ ows, based on the original eff ective interest rate, and the
recorded investment balance of the loan. For impaired loans, we recognize impairment if we determine that the net
realizable value of the impaired loan is less than the recorded investment of the loan (net of previous charge-off s and
deferred loan fees and costs), except when the sole remaining source of collection is the underlying collateral. In
these cases impairment is measured as the diff erence between the recorded investment balance of the loan and the
fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or
satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally,
collateral values for impaired loans are updated every twelve months, either from external third parties or in-house
certiﬁ ed appraisers. A third party appraisal is required at least annually. Third party appraisals are obtained from
a pre-approved list of independent, third party, local appraisal ﬁ rms. Approval and addition to the list is based
on experience, reputation, character, consistency and knowledge of the respective real estate market. Generally,
appraisals are internally reviewed by the appraisal services group to ensure the quality of the appraisal and the
expertise and independence of the appraiser. For performing consumer segment loans secured by real estate that
are classiﬁ ed as collateral dependent, the Bank determines the fair value estimates semi-annually using automated
valuation services. Once the impairment amount is determined an asset-speciﬁ c allowance is provided for equal to
the calculated impairment and included in the allowance for loan losses. If the calculated impairment is determined
to be permanent or not recoverable, the impairment will be charged off . Factors considered by management in
determining if impairment is permanent or not recoverable include whether management judges the loan to be
uncollectible, repayment is deemed to be protracted beyond reasonable time frames or the loss becomes evident
owing to the borrower’s lack of assets or, for single family loans, the loan is 180 days or more past due unless both
well-secured and in the process of collection.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

Estimate of Probable Loan Losses

In determining the allowance for loan losses we derive an estimated credit loss assumption from a model that
categorizes loan pools based on loan type and AQR or delinquency bucket. This model calculates an expected loss
percentage for each loan category by considering the probability of default, based on the migration of loans from
performing to loss by AQR or delinquency buckets using two-year analysis periods for commercial segments and
one-year analysis periods for consumer segments, and the potential severity of loss, based on the aggregate net
lifetime losses incurred per loan class.

The formula-based component of the allowance for loan losses also considers qualitative factors for each loan class,
including changes in the following: (1) lending policies and procedures; (2) international, national, regional and
local economic business conditions and developments that aff ect the collectability of the portfolio, including the
condition of various markets; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the
experience, ability, and depth of the lending management and other relevant staff ; (5) the volume and severity of past
due and adversely classiﬁ ed or graded loans and the volume of nonaccrual loans; (6) the quality of our loan review
system; (7) the value of underlying collateral for collateral-dependent loans. Additional factors include (8) the
existence and eff ect of any concentrations of credit, and changes in the level of such concentrations and (9) the eff ect
of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses
in the existing portfolio. Qualitative factors are expressed in basis points and are adjusted downward or upward
based on management’s judgment as to the potential loss impact of each qualitative factor to a particular loan pool at
the date of the analysis.

Unfunded Loan Commitments

The Company maintains a separate allowance for losses on unfunded loan commitments, which is included in
accounts payable and other liabilities on the consolidated statements of ﬁ nancial condition. Management estimates
the amount of probable losses by calculating a one-year commitment usage factor and applying the loss factors used
in the allowance for loan loss methodology to the results of the usage calculation to estimate the liability for credit
losses related to unfunded commitments for each loan type.

Other Real Estate Owned

Other real estate owned (“OREO”) represents real estate acquired for debts previously contracted with the Company,
generally through the foreclosure of loans. In certain cases, such as foreclosures on loans involving both the
Company and other participating lenders, other real estate owned may be held in the form of an investment in an
unconsolidated legal entity that is in-substance real estate. These properties are initially recorded at the net realizable
value (fair value of collateral less estimated costs to sell). Upon transfer of a loan to other real estate owned, an
appraisal is obtained and any excess of the loan balance over the net realizable value is charged against the allowance
for loan losses. The Company allows up to 90 days after foreclosure to ﬁ nalize determination of net realizable value.
Subsequent declines in net realizable value identiﬁ ed from the ongoing analysis of such properties are recognized
in current period earnings within noninterest expense as a provision for losses on other real estate owned. The net
realizable value of these assets is reviewed and updated at least every six months depending on the type of property,
or more frequently as circumstances warrant.

As part of our subsequent events analysis process, we review updated independent third-party appraisals received
and internal collateral valuations received subsequent to the reporting period-end to determine whether the fair value
of loan collateral or OREO has changed. Additionally, we review agreements to sell OREO properties executed
prior to and subsequent to the reporting period-end to identify changes in the fair value of OREO properties. If we

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

determine that current valuations have changed materially from the prior valuations, we record any additional loan
impairments or adjustments to OREO carrying values as of the end of the prior reporting period.

From time to time the Company may elect to accelerate the disposition of certain OREO properties in a time frame
faster than the expected marketing period assumed in the appraisal supporting our valuation of such properties. At
the time a property is identiﬁ ed and the decision to accelerate its disposition is made, that property’s underlying fair
value is re-measured. Generally, to achieve an accelerated time frame in which to sell a property, the price that the
Company is willing to accept for the disposition of the property decreases. Accordingly, the net realizable value of
these properties is adjusted to reﬂ ect this change in valuation.

Mortgage Servicing Rights

We initially record all mortgage servicing rights (“MSRs”) at fair value. For subsequent measurement of
MSRs, accounting standards permit the election of either fair value or the lower of amortized cost or fair value.
Management has elected to account for single family MSRs at fair value during the life of the MSR, with changes
in fair value recorded through current period earnings. Fair value adjustments encompass market-driven valuation
changes as well as modeled amortization involving the run-off of value that occurs due to the passage of time as
individual loans are paid by borrowers. We account for multifamily and SBA MSRs at the lower of amortized cost or
fair value.

MSRs are recorded as separate assets on our consolidated statements of ﬁ nancial condition upon purchase of the
rights or when we retain the right to service loans that we have sold. Net gains on mortgage loan origination and sale
activities depend, in part, on the initial fair value of MSRs, which is based on a discounted cash ﬂ ow model.

Mortgage servicing income includes the changes in fair value over the reporting period of both our single family
MSRs and the derivatives used to economically hedge our single family MSRs. Subsequent fair value measurements
of single family MSRs, which are not traded in an active market with readily observable market prices, are
determined by considering the present value of estimated future net servicing cash ﬂ ows. Changes in the fair value
of single family MSRs result from changes in (1) model inputs and assumptions and (2) modeled amortization,
representing the collection and realization of expected cash ﬂ ows and curtailments over time. The signiﬁ cant model
inputs used to measure the fair value of single family MSRs include assumptions regarding market interest rates,
projected prepayment speeds, discount rates, estimated costs of servicing and other income and additional expenses
associated with the collection of delinquent loans.

Market expectations about loan duration, and correspondingly the expected term of future servicing cash ﬂ ows, may
vary from time to time due to changes in expected prepayment activity, especially when interest rates rise or fall.
Market expectations of increased loan prepayment speeds may negatively impact the fair value of the single family
MSRs. Fair value is also dependent on the discount rate used in calculating present value, which is imputed from
observable market activity and market participants. Management reviews and adjusts the discount rate on an ongoing
basis. An increase in the discount rate would reduce the estimated fair value of the single family MSRs asset.

For further 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 12, Mortgage
Banking Operations.

Investment in WMS Series LLC

HomeStreet/WMS, Inc. (Windermere Mortgage Services, Inc.), a wholly owned and consolidated subsidiary of the
Bank, has an affi liated business arrangement with Windermere Real Estate, WMS Series Limited Liability Company
(“WMS LLC”). The Company and Windermere Real Estate each have 50% joint control over the governance of
WMS LLC. The operations of WMS LLC, which is subdivided into 28 individual operating series, are recorded
using the equity method of accounting. The Company recognizes its proportionate share of the results of operations
of WMS LLC as income from WMS Series LLC in noninterest income within the Company’s consolidated
statements of operations.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

Equity method investment income from WMS LLC was $598 thousand, $2.7 million, and $2.5 million for the years
ended December 31, 2017, 2016 and 2015, respectively. The Company’s investment in WMS LLC was $2.0 million
and $2.7 million, which is included in accounts receivable and other assets at December 31, 2017 and 2016,
respectively.

The Company provides contracted services to WMS LLC related to accounting, loan shipping, loan underwriting,
quality control, secondary marketing, and information systems support performed by Company employees on behalf
of WMS LLC. The Company recorded contracted services income/(loss) of $844 thousand, $370 thousand, and
$(960) thousand for the years ended December 31, 2017, 2016 and 2015, respectively. Income related to WMS LLC,
including equity method investment income, is classiﬁ ed as income from WMS Series LLC in noninterest income
within the consolidated statements of operations.

The Company purchased $574.3 million, $589.2 million and $616.9 million of single family mortgage loans
from WMS LLC for the years ended December 31, 2017, 2016 and 2015, respectively. The Company provides
a $25.0 million secured line of credit that allows WMS LLC to fund and close single family mortgage loans in
the name of WMS LLC. The outstanding balance of the secured line of credit was $6.1 million and $6.9 million
at December 31, 2017, and 2016, respectively. The highest outstanding balance of the secured line of credit was
$13.0 million and $17.0 million during 2017 and 2016, respectively. The line of credit matures July 1, 2018.

Premises and Equipment

Furniture and equipment and leasehold improvements are stated at cost less accumulated depreciation or
amortization and depreciated or amortized over the shorter of the useful life of the related asset or the term of the
lease, generally 3 to 39 years, using the straight-line method. Management periodically evaluates furniture and
equipment and leasehold improvements for impairment.

Goodwill

Goodwill is recorded upon completion of a business combination as the diff erence between the purchase price and
the fair value of net identiﬁ able assets acquired. Subsequent to initial recognition, the Company tests goodwill for
impairment during the third quarter of each ﬁ scal year, or more often if events or circumstances, such as adverse
changes in the business climate, indicate there may be impairment. Goodwill was not impaired at December 31,
2017 or 2016, nor was any goodwill written off due to impairment during 2017, 2016 or 2015.

Changes in the carrying amount of goodwill are detailed in the following table:

Goodwill balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(in thousands)
11,521
10,654
22,175
389
22,564

Trust Preferred Securities

Trust preferred securities allow investors the ability to invest in junior subordinated debentures of the Company,
which provide the Company with long-term ﬁ nancing. The transaction begins with the formation of a Variable
Interest Entity (“VIE”) established as a trust by the Company. This trust issues two classes of securities: common
securities, all of which are purchased and held by the Company and recorded in other assets on the consolidated
statements of ﬁ nancial position, and trust preferred securities, which are sold to third-party investors. The trust
holds subordinated debentures (debt) issued by the Company, which the Company records in long-term debt on the
consolidated statement of ﬁ nancial position. The trust ﬁ nances the purchase of the subordinated debentures with the
proceeds from the sale of its common and preferred securities.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

The junior subordinated debentures are the sole assets of the trust, and the coupon rate on the debt mirrors the
dividend payment on the preferred security. The Company also has the right to defer interest payments for up to
ﬁ ve years and has the right to call the preferred securities. These preferred securities are non-voting and do not
have the right to convert to shares of the issuer. The trust’s common equity securities issued to the Company are not
considered to be equity at risk because the equity securities were ﬁ nanced by the trust through the purchase of the
debentures from the Company. As a consequence, the Company holds no variable interest in the trust, and therefore,
is not the trust’s primary beneﬁ ciary.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

From time to time, the Company may enter into federal funds transactions involving purchasing reserve balances
on a short-term basis, or sales of securities under agreements to repurchase the same securities (“repurchase
agreements”). Repurchase agreements are accounted for as secured ﬁ nancing arrangements with the obligation to
repurchase securities sold reﬂ ected as a liability in the consolidated statements of ﬁ nancial condition. The dollar
amount of securities underlying the repurchase agreements remains in investment securities available for sale. For
short-term instruments, including securities sold under agreements to repurchase and federal funds purchased, the
carrying amount is a reasonable estimate of the fair value.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax beneﬁ ts reﬂ ect
management’s best assessment of estimated current and future taxes to be paid. We are subject to federal income
tax and also state income taxes in a number of diff erent states. Signiﬁ cant judgments and estimates are required in
determining the consolidated income tax expense.

Deferred income taxes arise from temporary diff erences between the tax basis of assets and liabilities and their
reported amounts in the ﬁ nancial statements, which will result in taxable or deductible amounts in the future.
Changes in tax laws and rates may aff ect recorded deferred tax assets and liabilities and our eff ective tax rate in
the future. Such changes are accounted for in the period of enactment, and are reﬂ ected as discrete tax items in the
Company’s tax provision.

The Company records net deferred tax assets to the extent it is believed that these assets will more likely than not
be realized. In making this determination, the Company considers all available positive and negative evidence,
including future reversals of existing taxable temporary diff erences, projected future taxable income, tax planning
strategies, and recent ﬁ nancial operations. After reviewing and weighing all of the positive and negative evidence, if
the positive evidence outweighs the negative evidence, then the Company does not record a valuation allowance for
deferred tax assets. If the negative evidence outweighs the positive evidence, then a valuation allowance for all or a
portion of the deferred tax assets is recorded.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and
regulations in diff erent jurisdictions. Accounting Standards Codiﬁ cation (“ASC”) 740 states that a tax beneﬁ t from
an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.

We record unrecognized tax beneﬁ ts as liabilities in accordance with ASC 740 (including any potential interest and
penalties) and we adjust these liabilities when our judgment changes as a result of the evaluation of new information
not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result
in a payment that is materially diff erent from our current estimate of the unrecognized tax beneﬁ t liabilities. These
diff erences will be reﬂ ected as increases or decreases to income tax expense in the period in which new information
is available.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

Derivatives and Hedging Activities

In order to reduce the risk of signiﬁ cant interest rate ﬂ uctuations on the value of certain assets and liabilities, such as
certain mortgage loans held for sale or mortgage servicing rights, the Company utilizes derivatives, such as forward
sale commitments, interest rate futures, option contracts, interest rate swaps and swaptions as risk management
instruments in its hedging strategy.

All free-standing derivatives are required to be recorded on the consolidated statements of ﬁ nancial condition at fair
value. As permitted under U.S. GAAP, the Company nets derivative assets and liabilities, and related collateral, when
a legally enforceable master netting agreement exists between the Company and the derivative counterparty. The
accounting for changes in fair value of a derivative depends on whether or not the transaction has been designated
and qualiﬁ es for hedge accounting. Derivatives that are not designated as hedges are reported and measured at fair
value through earnings. The Company does not use derivatives for trading purposes.

Before initiating a position where hedge accounting treatment is desired, the Company formally documents the
relationship between the hedging instrument(s) and the hedged item(s), as well as its risk management objective and
strategy.

For derivative instruments qualifying for hedge accounting treatment, the instrument is designed as either: (1) a
hedge of changes in fair value of a recognized asset or liability or of an unrecognized ﬁ rm commitment (a fair value
hedge), or (2) a hedge of the variability in expected future cash ﬂ ows associated with an existing recognized asset or
liability or a probable forecasted transaction (a cash ﬂ ow hedge).

Derivatives where the Company has not attempted to achieve or attempted but did not achieve hedge accounting
treatment are referred to as economic hedges. The changes in fair value of these instruments are recorded in our
consolidated statements of operations in the period in which the change occurs.

In a fair value hedge, changes in the fair value of the derivative and, to the extent that it is eff ective, changes in the
fair value of the hedged asset or liability attributable to the hedged risk are recorded through current period earnings
in the same ﬁ nancial statement category as the hedged item.

In a cash ﬂ ow hedge, the eff ective portion of the change in the fair value of the hedging derivative is recorded in
accumulated other comprehensive income and is subsequently reclassiﬁ ed into earnings during the same period
in which the hedged item aff ects earnings. The ineff ective portion is recognized immediately in noninterest
income — other.

The Company discontinues hedge accounting when (1) it determines that the derivative is no longer expected to be
highly eff ective in off setting changes in fair value or cash ﬂ ows of the designated item; (2) the derivative expires or
is sold, terminated, or exercised; (3) the derivative is de-designated from the hedge relationship; or (4) it is no longer
probable that a hedged forecasted transaction will occur by the end of the originally speciﬁ ed time period.

If the Company determines that the derivative no longer qualiﬁ es as a fair value or cash ﬂ ow hedge and therefore
hedge accounting is discontinued, the derivative (if retained) will continue to be recorded on the balance sheet at its
fair value with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously
hedged item is no longer adjusted for changes in fair value.

When the Company discontinues hedge accounting because it is not probable that a forecasted transaction will occur,
the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included
in current earnings, and the gains and losses in accumulated other comprehensive income will be recognized
immediately in earnings. When the Company discontinues hedge accounting because the hedging instrument is sold,
terminated, or de-designated as a hedge, the amount reported in accumulated other comprehensive income through
the date of sale, termination, or de-designation will continue to be reported in accumulated other comprehensive
income until the forecasted transaction aff ects earnings. For fair value hedges that are de-designated, the net gain
or loss on the underlying transactions being hedged is amortized to other noninterest income over the remaining

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

contractual life of the loans at the time of de-designation. Changes in the fair value of these derivative instruments
after de-designation of fair value hedge accounting are recorded in noninterest income in the consolidated statements
of operations. As of December 31, 2017, the Company had no derivatives that were designated as fair value hedges
or cash ﬂ ow hedges.

Interest rate lock commitments (“IRLCs”) for single family mortgage loans that we intend to sell are considered
free-standing derivatives. For determining the fair value measurement of IRLCs we consider 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 ﬂ ows related to the associated servicing of the loan and the probability
that the loan will not fund according to the terms of the commitment (referred to as a fall-out factor). The value of
the underlying loan is aff ected primarily by changes in interest rates. Management uses forward sales commitments
to hedge the interest rate exposure from IRLCs. A forward loan sale commitment protects the Company from losses
on sales of loans arising from the exercise of the loan commitments by securing the ultimate sales price and delivery
date of the loan. The Company takes into account various factors and strategies in determining the portion of the
mortgage pipeline it wants to hedge economically. Unrealized and realized gains and losses on derivative contracts
utilized for economically hedging the mortgage pipeline are recognized as part of the net gain on mortgage loan
origination and sale activities within noninterest income.

The Company is exposed to credit risk if derivative counterparties to derivative contracts do not perform as
expected. This risk consists primarily of the termination value of agreements where the Company is in a favorable
position. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures,
and obtaining collateral, as appropriate.

Share-Based Employee Compensation

The Company has share-based employee compensation plans as more fully discussed in Note 16, Share-Based
Compensation Plans. Under the accounting guidance for stock compensation, compensation expense recognized
includes the cost for share-based awards, such as nonqualiﬁ ed stock options and restricted stock grants, which are
recognized as compensation expense over the requisite service period (generally the vesting period) on a straight
line basis. For stock awards that vest upon the satisfaction of a market condition, the Company estimates the service
period over which the award is expected to vest. If all conditions to the vesting of an award are satisﬁ ed prior to the
end of the estimated vesting period, any unrecognized compensation costs associated with the portion of the award
that vested earlier than expected are immediately recognized in earnings.

Fair Value Measurement

The term “fair value” is deﬁ ned 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. The degree of management judgment involved in estimating the fair value of a ﬁ nancial
instrument or other asset is dependent upon the availability of quoted market prices or observable market value
inputs for internal valuation models, used for estimating fair value. For ﬁ nancial instruments that are actively traded
in the marketplace or whose values are based on readily available market data, little judgment is necessary when
estimating the instrument’s fair value. When observable market prices and data are not readily available, signiﬁ cant
management judgment often is necessary to estimate fair value. In those cases, diff erent assumptions could result in
signiﬁ cant changes in valuation. See Note 17, Fair Value Measurement.

Commitments, Guarantees, and Contingencies

U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to
the fair value of the obligation undertaken in issuing the guarantee. A guarantee is a contract that contingently

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or
equity security of the guaranteed party; or (b) a third party’s failure to perform under a speciﬁ ed agreement. The
Company initially records guarantees at the inception date fair value of the obligation assumed and records the
amount in other liabilities. For indemniﬁ cations provided in sales agreements, a portion of the sale proceeds is
allocated to the guarantee, which adjusts the gain or loss that would otherwise result from the transaction. For these
indemniﬁ cations, the initial liability is amortized to income as the Company’s risk is reduced (i.e., over time as the
Company’s exposure is reduced or when the indemniﬁ cation expires).

Contingent liabilities, including those that exists as a result of a guarantee or indemniﬁ cation, are recognized when
it becomes probable that a loss has been incurred and the amount of the loss is reasonably estimable. The contingent
portion of a guarantee is not recognized if the estimated amount of loss is less than the carrying amount of the
liability recognized at inception of the guarantee (as adjusted for any amortization).

The Company typically sells loans servicing retained in either a pooled loan securitization transaction with a
government-sponsored enterprise (“GSE”), a whole loan sale to a GSE, or a whole loan sale to market participants
such as other ﬁ nancial institutions, who purchase the loans for investment purposes or include them in a private
label securitization transaction, or the loans are pooled and sold into a conforming loan securitization with a GSE,
provided loan origination parameters conform to GSE guidelines. Substantially all of the Company’s loan sales are
pooled loan securitization transactions with GSEs. These conforming loan securitizations are guaranteed by GSEs,
such as Fannie Mae, Ginnie Mae and Freddie Mac.

The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the
origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment
defaults and fraud. These obligations expose the Company to any credit loss on the repurchased mortgage loans
after accounting for any mortgage insurance that it may receive. Generally, the maximum amount of future payments
the Company would be required to make for breaches of these representations and warranties would be equal to
the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in
certain circumstances, accrued and unpaid interest on such loans and certain expenses. See Note 13, Commitments,
Guarantees, and Contingencies.

The Company sells multifamily loans through the Fannie Mae Delegated Underwriting and Servicing Program
(“DUS”®) (DUS® is a registered trademark of Fannie Mae). that are subject to a credit loss sharing arrangement. The
Company may also from time to time sell loans with recourse. When loans are sold with recourse or subject to a loss
sharing arrangement, a liability is recorded based on the estimated fair value of the obligation under the accounting
guidance for guarantees. These liabilities are included within other liabilities. See Note 13, Commitments,
Guarantees, and Contingencies.

Earnings per Share

Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by the
weighted average common shares outstanding during the period. Diluted EPS is computed by dividing net income
available to common shareholders by the weighted average common shares outstanding, plus the eff ect of common
stock equivalents (for example, stock options and unvested restricted stock). Stock options issued under stock-based
compensation plans that have an antidilutive eff ect and shares of restricted stock whose vesting is contingent upon
conditions that have not been satisﬁ ed at the end of the period are excluded from the computation of diluted EPS.
Weighted average common shares outstanding include shares held by the HomeStreet, Inc. 401(k) Savings Plan.

Business Segments

The Company’s business segments are determined based on the products and services provided, as well as the
nature of the related business activities, and they reﬂ ect the manner in which ﬁ nancial information is regularly
reviewed by the Company’s chief operating decision maker for the purpose of allocating resources and evaluating
the performance of the Company’s businesses. The results for these business segments are based on management’s

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

accounting process, which assigns income statement items and assets to each responsible operating segment.
This process is dynamic and is based on management’s view of the Company’s operations. See Note 19, Business
Segments.

Advertising Expense

Advertising costs, which we consider to be media and marketing materials, are expensed as incurred. We incurred
$6.8 million, $7.4 million and $8.5 million in advertising expense during the years ended December 31, 2017, 2016
and 2015, respectively.

Recent Accounting Developments

In February 2018 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220): Reclassiﬁ cation of
Certain Tax Eff ects from Accumulated Other Comprehensive Income, or ASU 2018-02. The amendments in this
Update allow a reclassiﬁ cation from accumulated other comprehensive income to retained earnings for stranded tax
eff ects resulting from the Tax Cuts and Jobs Act. The Update does not have any impact on the underlying ASC 740
guidance that requires the eff ect of a change in tax law be included in income from continuing operations. The
amendments in this Update are eff ective for all entities for ﬁ scal years beginning after December 15, 2018, and
interim periods within those ﬁ scal years. Early adoption is permitted and should be applied either in the period of
adoption or retrospectively to each period (or periods) in which the eff ect of the change in the U.S. federal corporate
income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the provisions of
this guidance to determine the potential impact the new standard will have on the Company’s consolidated ﬁ nancial
statements.

In August 2017 the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities, or ASU 2017-12. This standard better aligns an entity’s risk management
activities and ﬁ nancial reporting for hedging relationships through changes to both the designation and measurement
guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the
amendments expand and reﬁ ne hedge accounting for both nonﬁ nancial and ﬁ nancial risk components and align the
recognition and presentation of the eff ects of the hedge instruments and the hedged item in the ﬁ nancial statements.
Adoption for this ASU is required for ﬁ scal years and interim periods beginning after December 15, 2018 and early
adoption is permitted. The Company is currently evaluating the provisions of this guidance to determine the potential
impact the new standard will have on the Company’s consolidated ﬁ nancial statements.

In March 2017 the FASB issued ASU No. 2017-08, Receivables — Nonrefundable Fees and other Costs
(Subtopic 320-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This standard
shortens the amortization period for the premium to the earliest call date to more closely align interest income
recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Adoption of
ASU 2017-08 is required for ﬁ scal years and interim periods within those ﬁ scal years, beginning after December, 15,
2018, early adoption is permitted. The Company is currently evaluating the provisions of this guidance to determine
the potential impact the new standard will have on the Company’s consolidated ﬁ nancial statements.

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

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Deﬁ nition
of a Business, for determining whether transactions should be accounted for as acquisitions (or disposals) of assets
or businesses. The new standard is eff ective for annual periods, and interim periods within those annual periods,
beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance
date or eff ective date of the standard if the transactions were not reported in ﬁ nancial statements that have been
issued or made available for issuance. The standard must be applied prospectively. Upon adoption, the standard will
impact how we assess acquisitions (or disposals) of assets or businesses. Management does not expect the adoption
of ASU 2017-01 to have a material impact on its consolidated ﬁ nancial statements.

On November 17, 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash:
a Consensus of the FASB Emerging Issues Task Force. This ASU requires a company’s cash ﬂ ow statement to explain
the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash
equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and
cash equivalents if the cash ﬂ ow statement includes a reconciliation of the total cash balances for a reporting period.
This ASU is eff ective for public business entities for annual periods, including interim periods within those annual
periods, beginning after December 15, 2017, with early application permitted. Management does not anticipate that
this guidance will have a material impact on the Company’s consolidated ﬁ nancial statements.

On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):, Classiﬁ cation of
Certain Cash Receipts and Cash Payments. The amendments in this ASU were issued to reduce diversity in how
certain cash receipts and payments are presented and classiﬁ ed in the statement of cash ﬂ ows in eight speciﬁ c areas.
The amendments in this ASU are eff ective for ﬁ scal years beginning after December 15, 2017, including interim
periods within those ﬁ scal years and should be applied using a retrospective transition method to each period
presented. Early application was permitted upon issuance of the ASU. Management is currently evaluating the
impact of this ASU but does not expect this ASU to have a material impact on the Company’s consolidated ﬁ nancial
statements.

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current
GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is
probable a loss has been incurred. The main objective of this ASU is to provide ﬁ nancial statement users with more
decision-useful information about the expected credit losses on ﬁ nancial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. The amendment aff ects loans, debt securities, trade
receivables, net investments in leases, off -balance-sheet credit exposures, reinsurance receivables, and any other
ﬁ nancial asset not excluded from the scope that have the contractual right to receive cash. The amendments in this
ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reﬂ ects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform
credit loss estimates. The amendments in this ASU require a ﬁ nancial asset (or group of ﬁ nancial assets) measured
at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is
a valuation account that is deducted from the amortized cost basis of the ﬁ nancial asset(s) to present the net carrying
value at the amount expected to be collected on the ﬁ nancial asset. The measurement of expected credit losses
will be based on relevant information about past events, including historical experience, current conditions, and
reasonable and supportable forecasts that aff ect the collectability of the reported amount. The amendments in this
ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets
measured either collectively or individually. The use of forecasted information incorporates more timely information
in the estimate of expected credit loss, which will be more decision useful to users of the ﬁ nancial statements. The
amendments in this ASU will be eff ective for ﬁ scal years beginning after December 15, 2019, including interim
periods within those ﬁ scal years. The Company is still evaluating the eff ects this ASU will have on the Company’s
consolidated ﬁ nancial statements. The Company has formed an internal committee to oversee the project. Upon
adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses,
including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus
the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in
the allowance for loan losses; however, management is still assessing the magnitude of the increase and its impact

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

on the Company’s consolidated ﬁ nancial statements. In addition, the current accounting policy and procedures for
other-than-temporary impairment on investment securities available for sale will be replaced with an allowance
approach. The Company has begun developing and implementing processes to address the amendments of this ASU.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this ASU require
lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a speciﬁ ed
asset for the lease term. This ASU simpliﬁ es the accounting for sale and leaseback transactions. The amendments
in this ASU are eff ective for ﬁ scal years beginning after December 15, 2018, including interim periods within those
ﬁ scal years. Early application was permitted upon issuance of the ASU. Lessees (for capital and operating leases)
and lessors (for sales-type, direct ﬁ nancing, and operating leases) must apply a modiﬁ ed retrospective transition
approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the ﬁ nancial statements. The modiﬁ ed retrospective approach would not require any transition accounting for leases
that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective
transition approach. During 2018, a proposed ASU was issued by the FASB that provides a practical expedient that
would allow companies to use an optional transition method, which would allow for a cumulative adjustment to
retained earnings during the period of adoption and prior periods would not require restatement. Management is
currently evaluating the provisions of this guidance to determine the potential impact the new standard will have
on the Company’s consolidated ﬁ nancial statements. While we have not quantiﬁ ed the impact to our balance sheet,
upon the adoption of this ASU we expect to report increased assets and liabilities on our Consolidated Statement
of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and
certain equipment under non-cancelable operating lease agreements, which currently are not on our Consolidated
Statement of Financial Condition.

In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities. The amendments in this ASU require equity securities to be measured at fair value with changes in
the fair value recognized through net income. The amendments allow equity investments that do not have readily
determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures
about those investments. This ASU simpliﬁ es the impairment assessment of equity investments without readily
determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and signiﬁ cant
assumptions used to estimate the fair value that is required to be disclosed for ﬁ nancial instruments measured at
amortized cost on the consolidated statement of ﬁ nancial position. The amendments in this ASU require separate
presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting
from a change in the instrument-speciﬁ c credit risk when the entity has elected to measure the liability at fair
value in accordance with the fair value option for ﬁ nancial instruments. This ASU excludes from net income gains
or losses that the entity may not realize because those ﬁ nancial liabilities are not usually transferred or settled at
their fair values before maturity. The amendments in this ASU require separate presentation of ﬁ nancial assets and
ﬁ nancial liabilities by measurement category and form of ﬁ nancial asset (that is, securities or loans and receivables)
on the consolidated statement of ﬁ nancial position or in the accompanying notes to the ﬁ nancial statements. The
amendments in this ASU are eff ective for ﬁ scal years beginning after December 15, 2017, including interim periods
within those ﬁ scal years. The implementation of this guidance will not have a material impact on our consolidated
ﬁ nancial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU
clariﬁ es the principles for recognizing revenue from contracts with customers. On August 12, 2015, the FASB
issued ASU 2015-14 to defer the eff ective date of ASU 2014-09. Public business entities, certain not-for-proﬁ t
entities, and certain employee beneﬁ t plans should apply the guidance in ASU 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. On March 17, 2016, the FASB issued Accounting Standards Update
2016-08 to clarify the implementation guidance on principal versus agent considerations. We intend to adopt this
new guidance on January 1, 2018. We completed an analysis that includes (1) identiﬁ cation of all revenue streams

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)

included in the ﬁ nancial statements; (2) of the revenue streams identiﬁ ed, determine which are within the scope
of the pronouncement; (3) determination of size, timing and amount of revenue recognition for streams of income
within the scope of this pronouncement; (4) determination of the sample size of contracts for further analysis; and
(5) completion of analysis on sample of contracts to evaluate the impact of the new guidance. Based on this analysis,
we developed processes and procedures in 2017 to address the amendments of this ASU, including new disclosures.
The implementation of this guidance will not have a material impact on our consolidated ﬁ nancial statements.

NOTE 2 — BUSINESS COMBINATIONS:

Recent Acquisition Activity

On September 15, 2017, the Company completed its acquisition of one branch and its related deposits in Southern
California, from Opus Bank. The application of the acquisition method of accounting resulted in goodwill of $389
thousand.

On November 10, 2016, the Company completed its acquisition of two branches and their related deposits in
Southern California, from Boston Private Bank and Trust. The provisional application of the acquisition method of
accounting resulted in goodwill of $2.3 million.

On August 12, 2016, the Company completed its acquisition of certain assets and liabilities, including two branches
in Lake Oswego, Oregon from The Bank of Oswego. The application of the acquisition method of accounting
resulted in goodwill of $19 thousand.

On February 1, 2016, the Company completed its acquisition of Orange County Business Bank (“OCBB”) located
in Irvine, California through the merger of OCBB with and into HomeStreet Bank with HomeStreet Bank as the
surviving subsidiary. The purchase price of this acquisition was $55.9 million. OCBB shareholders as of the eff ective
time received merger consideration equal to 0.5206 shares of HomeStreet common stock, and $1.1641 in cash upon
the surrender of their OCBB shares, which resulted in the issuance of 2,459,461 shares of HomeStreet common
stock. The application of the acquisition method of accounting resulted in goodwill of $8.4 million.

Simplicity Acquisition

On March 1, 2015, the Company completed its acquisition of Simplicity Bancorp, Inc., a Maryland corporation
(“Simplicity”) and Simplicity’s wholly owned subsidiary, Simplicity Bank. Simplicity’s principal business activities
prior to the merger were attracting retail deposits from the general public, originating or purchasing loans, primarily
loans secured by ﬁ rst mortgages on owner-occupied, one-to-four family residences and multi-family residences
located in Southern California and, to a lesser extent, commercial real estate, automobile and other consumer
loans; and the origination and sale of ﬁ xed-rate, conforming, one-to-four family residential real estate loans in
the secondary market, usually with servicing retained. The primary objective for this acquisition is to grow our
Commercial and Consumer Banking segment by expanding the business of the former Simplicity branches by
off ering additional banking and lending products to former Simplicity customers as well as new customers. The
acquisition was accomplished by the merger of Simplicity with and into HomeStreet, Inc. with HomeStreet,
Inc. as the surviving corporation, followed by the merger of Simplicity Bank with and into HomeStreet Bank
with HomeStreet Bank as the surviving subsidiary. The results of operations of Simplicity are included in the
consolidated results of operations from the date of acquisition.

At the closing, there were 7,180,005 shares of Simplicity common stock, par value $0.01, outstanding, all of
which were cancelled and exchanged for an equal number of shares of HomeStreet common stock, no par value,
issued to Simplicity’s stockholders. In connection with the merger, all outstanding options to purchase Simplicity
common stock were cancelled in exchange for a cash payment equal to the diff erence between a calculated price
of HomeStreet common stock and the exercise price of the option, provided, however, that any options that were
out-of-the-money at the time of closing were cancelled for no consideration. The calculated price of $17.53 was
determined by averaging the closing price of HomeStreet common stock for the 10 trading days prior to but not

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — BUSINESS COMBINATIONS: (cont.)

including the 5th business day before the closing date. The aggregate consideration paid by us in the Simplicity
acquisition was approximately $471 thousand in cash and 7,180,005 shares of HomeStreet common stock with a fair
value of approximately $124.2 million as of the acquisition date. We used current liquidity sources to fund the cash
consideration.

The acquisition was accounted for under the acquisition method of accounting pursuant to ASC 805, Business
Combinations. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as
of acquisition date. The Company made signiﬁ cant estimates and exercised signiﬁ cant judgment in estimating the
fair values and accounting for such acquired assets and assumed liabilities.

A summary of the consideration paid, the assets acquired and liabilities assumed in the merger are presented below:

(in thousands)
Fair value consideration paid to Simplicity shareholders:
Cash paid (79,399 stock options, consideration based on intrinsic value at a calculated
price of $17.53) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of common shares issued (7,180,005 shares at $17.30 per share) . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair value of assets acquired:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair value of liabilities assumed:

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 1, 2015

471
124,214
124,685

112,667
26,845
664,148
980
5,520
2,966
14,501
7,450
15,869
850,946

651,202
65,855
1,859
718,916

132,030
(7,345)

The application of the acquisition method of accounting resulted in a bargain purchase gain of $7.3 million which
was reported as a component of noninterest income on our consolidated statements of operations. A substantial
portion of the assets acquired from Simplicity were mortgage-related assets, which generally decrease in value
as interest rates rise and increase in value as interest rates fall. The bargain purchase gain was driven largely by a
substantial decline in long-term interest rates between the period shortly after our announcement of the Simplicity
acquisition and its closing, which resulted in an increase in the fair value of the acquired mortgage assets and
the overall net fair value of assets acquired. In addition, the Company believes it was able to acquire Simplicity
for less than the fair value of its net assets due to Simplicity’s stock trading below its book value for an extended
period of time prior to the announcement of the acquisition. The Company negotiated a purchase price per share for
Simplicity that was above the prevailing stock price thereby representing a premium to the shareholders. The stock
consideration transferred was based on a 1:1 stock conversion ratio. The price of the Company’s shares declined
between the time the deal was announced and when it closed which also attributed to the bargain purchase gain. The

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 — BUSINESS COMBINATIONS: (cont.)

acquisition of Simplicity by the Company was approved by Simplicity’s shareholders. For tax purposes, the bargain
purchase gain is a non-taxable event.

The operations of Simplicity are included in the Company’s operating results as of the acquisition date of March 1,
2015 through the period ended December 31, 2017. Acquisition-related costs were expensed as incurred in
noninterest expense as merger and integration costs.

The following table provides a breakout of Simplicity merger-related expense for the year ended December 31, 2015:

(in thousands)
Noninterest expense

Year Ended
December 31,
2015

Salaries and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

7,669
1,256
530
5,539
335
481
15,810

The $664.1 million estimated fair value of loans acquired from Simplicity was determined by utilizing a discounted
cash ﬂ ow methodology considering credit and interest rate risk. Cash ﬂ ows were determined by estimating future
credit losses and the rate of prepayments. Projected monthly cash ﬂ ows were then discounted to present value
based on the Company’s weighted average cost of capital. The discount for acquired loans from Simplicity was
$16.6 million as of the acquisition date.

A core deposit intangible (“CDI”) of $7.5 million was recognized related to the core deposits acquired from
Simplicity. A discounted cash ﬂ ow method was used to estimate the fair value of the certiﬁ cates of deposit. The
CDI is amortized over its estimated useful life of approximately ten years using an accelerated method and will be
reviewed for impairment quarterly.

The fair value of savings and transaction deposit accounts was assumed to approximate the carrying value as these
accounts have no stated maturity and are payable on demand. A discounted cash ﬂ ow method was used to estimate
the fair value of the certiﬁ cates of deposit. A premium, which will be amortized over the contractual life of the
deposits, of $4.0 million was recorded for certiﬁ cates of deposit.

The fair value of Federal Home Loan Bank advances was estimated using a discounted cash ﬂ ow method. A
premium, which will be amortized over the contractual life of the advances, of $855 thousand was recorded for the
Federal Home Loan Bank advances.

The Company determined that the disclosure requirements related to the amounts of revenues and earnings of
the acquiree included in the consolidated statements of operations since the acquisition date is impracticable. The
ﬁ nancial activity and operating results of the acquiree were commingled with the Company’s ﬁ nancial activity and
operating results as of the acquisition date.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — REGULATORY CAPITAL REQUIREMENTS:

In July 2013, federal banking regulators (including the Federal Deposit Insurance Corporation “FDIC” and the
Federal Reserve Bank “FRB”) adopted new capital rules (the “Rules”). The Rules apply to both depository
institutions (such as the Bank) and their holding companies (such as the Company). The Rules reﬂ ect, in part, certain
standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards
are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act. The Rules
applied to both the Company and the Bank beginning in 2015.

Failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary
actions by the regulators that, if undertaken, could have a direct material eff ect on the Company’s ﬁ nancial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank
and the Company must meet speciﬁ c capital guidelines that involve quantitative measures of assets, liabilities,
and certain off -balance sheet items as calculated under regulatory accounting practices. Capital amounts and
classiﬁ cation are also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to
maintain minimum amounts and ratios of Tier 1 leverage capital, common equity Tier 1 capital, Tier 1 risk-based
capital and total risk-based capital (as deﬁ ned in the regulations). The regulators also have the ability to impose
elevated capital requirements in certain circumstances. At December 31, 2017 and 2016 the Bank’s capital ratios
meet the regulatory capital category of “well capitalized” as deﬁ ned by the Rules.

The Bank’s and the Company’s capital amounts and ratios under Basel III are included in the following tables:

At December 31, 2017

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Ratio

Amount

HomeStreet Bank
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 649,864

9.67% $ 268,708

4.0% $ 335,885

5.0%

Common equity risk-based capital
(to risk-weighted assets) . . . . . .

Tier 1 risk-based capital

649,864

13.22

221,201

(to risk-weighted assets) . . . . . .

649,864

13.22

294,935

Total risk-based capital

(to risk-weighted assets) . . . . . .

688,981

14.02

393,246

4.5

6.0

8.0

319,512

393,246

6.5

8.0

491,558

10.0

At December 31, 2017

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Ratio

Amount

HomeStreet, Inc.
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 614,624

9.12% $ 269,534

4.0% $ 336,918

5.0%

Common equity risk-based capital
(to risk-weighted assets) . . . . . .

Tier 1 risk-based capital

555,120

9.86

253,293

(to risk-weighted assets) . . . . . .

614,624

10.92

337,724

Total risk-based capital

(to risk-weighted assets) . . . . . .

653,741

11.61

450,299

4.5

6.0

8.0

365,868

450,299

6.5

8.0

562,873

10.0

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 — REGULATORY CAPITAL REQUIREMENTS: (cont.)

At December 31, 2016

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Ratio

Amount

HomeStreet Bank
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 635,988

10.26% $ 248,055

4.0% $ 310,069

5.0%

Common equity risk-based capital
(to risk-weighted assets) . . . . . .

Tier 1 risk-based capital

635,988

13.92

205,615

(to risk-weighted assets) . . . . . .

635,988

13.92

274,154

Total risk-based capital

(to risk-weighted assets) . . . . . .

671,252

14.69

365,538

4.5

6.0

8.0

297,000

365,538

6.5

8.0

456,923

10.0

At December 31, 2016

Actual

Amount

Ratio

For Minimum Capital
Adequacy Purposes
Ratio

Amount

To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Ratio

Amount

HomeStreet, Inc.
(in thousands)
Tier 1 leverage capital

(to average assets) . . . . . . . . . . . $ 608,988

9.78% $ 249,121

4.0% $ 311,402

5.0%

Common equity risk-based capital
(to risk-weighted assets) . . . . . .

Tier 1 risk-based capital

550,510

10.54

234,965

(to risk-weighted assets) . . . . . .

608,988

11.66

313,287

Total risk-based capital

(to risk-weighted assets) . . . . . .

644,252

12.34

417,716

4.5

6.0

8.0

339,395

417,716

6.5

8.0

522,146

10.0

At periodic intervals, the FDIC and the Washington State Department of Financial Institutions (“WDFI”) routinely
examine the Bank’s ﬁ nancial statements as part of their legally prescribed oversight of the banking industry. Based
on their examinations, these regulators can direct that the Bank’s ﬁ nancial statements be adjusted in accordance with
their ﬁ ndings.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES:

The following tables sets forth certain information regarding the amortized cost and fair values of our investment
securities available for sale and held to maturity.

(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:

At December 31, 2017
Gross
Gross
unrealized
unrealized
losses
gains

Fair
value

Amortized
cost

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations:

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HELD TO MATURITY
Mortgage-backed securities:

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .

133,654 $
24,024
389,117

164,502
100,001
25,146
10,899
9,861
857,204 $

12,062 $
21,015
3,439
21,423
97
58,036 $

4 $
8
2,978

3
9
67
—
—
3,069 $

(3,568) $
(338)
(3,643)

130,090
23,694
388,452

(4,081)
(1,441)
(476)
(247)
(211)
(14,005) $

160,424
98,569
24,737
10,652
9,650
846,268

35 $
75
—
339
—
449 $

(99) $
(161)
—
(97)
—
(357) $

11,998
20,929
3,439
21,665
97
58,128

(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:

At December 31, 2016
Gross
Gross
unrealized
unrealized
losses
gains

Fair
value

Amortized
cost

181,158 $
25,896
473,153

194,982
71,870
52,045
10,882
$ 1,009,986 $

31 $
13
1,333

32
29
110
—
1,548 $

(4,115) $
(373)
(6,813)

177,074
25,536
467,673

(3,813)
(1,135)
(1,033)
(262)
(17,544) $

191,201
70,764
51,122
10,620
993,990

HELD TO MATURITY
Mortgage-backed securities:

Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . .

127

13,844 $
16,303
19,612
102
49,861 $

71 $
70
99
—
240 $

(90) $
(64)
(459)
—
(613) $

13,825
16,309
19,252
102
49,488

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES: (cont.)

Mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) represent securities issued
by government sponsored enterprises (“GSEs”). Each of the MBS and CMO securities in our investment portfolio
are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation
bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues
from the speciﬁ c project being ﬁ nanced) issued by various municipal corporations. As of December 31, 2017 and
2016, 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 deﬁ ned by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As
of December 31, 2017 and 2016, substantially all securities held had ratings available by external ratings agencies.

Investment securities available for sale and held to maturity that were in an unrealized loss position are presented in
the following tables based on the length of time the individual securities have been in an unrealized loss position.

Less than 12 months
Gross
unrealized
losses

Fair
value

At December 31, 2017
12 months or more
Gross
unrealized
losses

Fair
value

Total

Gross
unrealized
losses

Fair
value

(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:

HELD TO MATURITY
Mortgage-backed securities:

(182) $ 18,020 $
(113)
(760)

15,265
105,415

(3,386) $ 110,878 $

(225)
(2,883)

6,748
134,103

(3,568) $ 128,898
22,013
239,518

(338)
(3,643)

(612)
(538)
(15)
(3)
(211)

158,276
92,461
18,637
10,652
9,650
(2,434) $ 265,576 $ (11,571) $ 414,529 $ (14,005) $ 680,105

104,555
35,225
13,365
9,655
—

(4,081)
(1,441)
(476)
(247)
(211)

(3,469)
(903)
(461)
(244)
—

53,721
57,236
5,272
997
9,650

Residential . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . .

(13) $
(161)
—
(3)

2,662 $
15,900
3,439
2,185

(177) $ 24,186 $

(86) $
—
—
(94)
(180) $ 13,917 $

4,452 $
—
—
9,465

(99) $

7,114
15,900
(161)
3,439
—
(97)
11,650
(357) $ 38,103

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES: (cont.)

Less than 12 months
Gross
unrealized
losses

Fair
value

At December 31, 2016
12 months or more
Gross
unrealized
losses

Fair
value

Total

Gross
unrealized
losses

Fair
value

(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:

(3,842) $ 144,240 $

(373)
(6,813)

23,798
283,531

(273) $
—
—

9,907 $
—
—

(4,115) $ 154,147
23,798
283,531

(373)
(6,813)

Residential . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . .

(3,052)
(1,005)
(472)
(262)

175,490
60,926
24,447
10,620

$ (15,819) $ 723,052 $

(761)
(130)
(561)
—

186,912
66,275
36,124
10,620
(1,725) $ 38,355 $ (17,544) $ 761,407

(3,813)
(1,135)
(1,033)
(262)

11,422
5,349
11,677
—

HELD TO MATURITY
Mortgage-backed securities:

Residential . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . .

(90) $
(64)
(459)
(613) $ 30,354 $

5,481 $
13,156
11,717

— $
—
—
— $

5,481
(90) $
13,156
(64)
11,717
(459)
(613) $ 30,354

The Company has evaluated securities available for sale that are in an unrealized loss position and has determined
that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline
in value is not related to any issuer- or industry-speciﬁ c credit event. The Company has not identiﬁ ed any expected
credit losses on its debt securities as of December 31, 2017 and 2016. In addition, as of December 31, 2017 and
2016, 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.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES: (cont.)

The following tables present the fair value of investment securities available for sale and held to maturity by
contractual maturity along with the associated contractual yield for the periods indicated below. Contractual
maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the eff ect
of expected prepayments. Expected maturities will diff er from contractual maturities because borrowers may have
the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed
using the contractual coupon of each security weighted based on the fair value of each security and does not include
adjustments to a tax equivalent basis.

At December 31, 2017

Within one year

After one year
through ﬁve years

After ﬁve years
through ten years

After ten years

Total

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

(in thousands)
AVAILABLE FOR

SALE

Mortgage-backed
securities:
Residential . . . . . . . . $ —
—
Commercial . . . . . . .
641
Municipal bonds . . . . . .
Collateralized mortgage

—% $ —
15,356
—
24,456
2.64

—% $ 8,914
4,558
39,883

2.07
3.10

1.63% $ 121,176
3,780
2.03
323,472
3.25

1.97% $ 130,090
23,694
2.98
388,452
3.81

1.94%
2.21
3.71

obligations:
Residential . . . . . . . .
Commercial . . . . . . .
Agency debentures . . . .
Corporate debt

—
—
—

—
12,550
—

—
2.09
—

—
21,837
9,650

— 160,424
64,182
—

2.38
2.26

2.10
2.13
—

160,424
98,569
9,650

securities . . . . . . . . .

1,048

2.11

6,527

2.80

11,033

3.49

6,129

3.57

24,737

U.S. Treasury

securities . . . . . . . . .

997

1.22

—

9,655

1.76

—

10,652

2.10
2.18
2.26

3.27

1.71

Total available for

sale . . . . . . . . . . . . . . $ 2,686

1.90% $ 58,889

2.58% $ 105,530

2.67% $ 679,163

2.90% $ 846,268

2.85%

HELD TO MATURITY
Mortgage-backed
securities:
Residential . . . . . . . . $ —
Commercial . . . . . . .
—
Collateralized mortgage
obligations . . . . . . . .
Municipal bonds . . . . . .
Corporate debt

—
—

securities . . . . . . . . .

—
Total held to maturity . . $ —

—% $ —
6,577
—

—
—

—
1,846

—% $

2.15

—
3.35

—
14,352

—
4,630

—% $ 11,998
—

2.71

2.93% $ 11,998
20,929

—

—
2.57

3,439
15,189

1.90
3.50

3,439
21,665

—
—
—% $ 8,423

—

—
2.41% $ 18,982

—

97
2.68% $ 30,723

6.00
97
3.10% $ 58,128

2.93%
2.53

1.90
3.28

6.00
2.86%

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(in thousands)

AVAILABLE FOR

SALE

Mortgage-backed
securities:
Residential . . . . . . . . $
Commercial . . . . . . .
Municipal bonds . . . . . .
Collateralized mortgage

obligations:
Residential . . . . . . . .
Commercial . . . . . . .

Corporate debt

securities . . . . . . . . .

U.S. Treasury

HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 — INVESTMENT SECURITIES: (cont.)

Within one year

After one year
through ﬁve years

At December 31, 2016
After ﬁve years
through ten years

After ten years

Total

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

1
—
3,479

0.29% $ —
20,951
20,939

—
3.30

—% $ 2,122
4,585
52,043

2.13
2.94

1.59% $ 174,951
2.06
—
391,212
2.55

2.03% $ 177,074
25,536
467,673

—
3.08

2.02%
2.11
3.02

—
—

—

—
—

—

—
10,860

—
1.84

1,639
19,273

1.32
2.74

189,562
40,631

2.06
1.91

191,201
70,764

10,516

2.67

21,493

3.74

19,113

3.54

51,122

2.06
2.12

3.45

1.66

securities . . . . . . . . .

999

0.64

—

9,621

1.76

—

10,620

Total available for

sale . . . . . . . . . . . . . . $ 4,479

2.70% $ 63,266

2.43% $ 110,776

2.69% $ 815,469

2.57% $ 993,990

2.57%

HELD TO MATURITY
Mortgage-backed
securities:
Residential . . . . . . . . $ —
—
Commercial . . . . . . .
Municipal bonds . . . . . .
—
Corporate debt

securities . . . . . . . . .

—
Total held to maturity . . $ —

—% $ —
4,581
—
—
—

—% $

2.06
—

—
11,728
6,450

—% $ 13,825
—
12,802

2.71
2.73

3.11% $ 13,825
16,309
19,252

—
3.31

—
—
—% $ 4,581

—

—
2.06% $ 18,178

—

102
2.72% $ 26,729

102
6.00
3.22% $ 49,488

3.11%
2.53
3.11

6.00
2.93%

Sales of investment securities available for sale were as follows.

(in thousands)
Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years Ended December 31,
2016
164,430 $
2,782
(243)

2017
397,492 $
1,214
(725)

2015
112,259
2,571
(165)

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)
Federal Home Loan Bank to secure borrowings . . . . . . . . . . . . . . . . . . . . . . . . . $
Washington and California State to secure public deposits . . . . . . . . . . . . . . . .
Securities pledged to secure derivatives in a liability position . . . . . . . . . . . . . .
Other securities pledged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total securities pledged as collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At December 31,
2017

At December 31,
2016

425,866 $
118,828
7,308
6,089
558,091 $

103,171
30,364
9,359
8,123
151,017

The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has
determined that these arrangements have little risk. There were no securities pledged under repurchase agreements at
December 31, 2017 and 2016.

Tax-exempt interest income on securities available for sale totaling $8.8 million, $6.3 million and $3.6 million for
the years ended December 31, 2017, 2016 and 2015, respectively, was recorded in the Company’s consolidated
statements of operations.

131

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to
estimate the allowance for credit losses, see Note 1, Summary of Signiﬁ cant Accounting Policies.

The Company’s portfolio of loans held for investment is divided into two portfolio segments, consumer loans and
commercial loans, which are the same segments used to determine the allowance for loan losses. Within each
portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the
following loan classes: single family and home equity and other loans within the consumer loan portfolio segment
and non-owner occupied commercial real estate, multifamily, construction/land development, owner occupied
commercial real estate and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following:

(in thousands)
Consumer loans

At December 31,

2017

2016

Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,381,366 $
453,489
1,834,855

1,083,822
359,874
1,443,696

Commercial real estate loans

Non-owner occupied commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

622,782
728,037
687,631
2,038,450

Commercial and industrial loans

Owner occupied commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for investment before deferred fees, costs and allowance . . .
Net deferred loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

391,613
264,709
656,322
4,529,627
14,686
4,544,313
(37,847)
4,506,466 $

588,672
674,219
636,320
1,899,211

282,891
223,653
506,544
3,849,451
3,577
3,853,028
(34,001)
3,819,027

(1)

Includes $5.5 million and $18.0 million at December 31, 2017 and December 31, 2016, respectively, of loans where a fair
value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized
in the consolidated statements of operations.

Loans in the amount of $1.81 billion and $1.59 billion at December 31, 2017 and 2016, respectively, were pledged to
secure borrowings from the FHLB as part of our liquidity management strategy. Additionally, loans totaling $663.8 million
and $554.7 million at December 31, 2017 and 2016, respectively, were pledged to secure borrowings from the Federal
Reserve Bank. The FHLB and Federal Reserve Bank do not have the right to sell or re-pledge these loans.

It is the Company’s policy to make loans to offi cers, directors, and their associates in the ordinary course of business
on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
The following is a summary of activity during the years ended December 31, 2017 and 2016 with respect to such
aggregate loans to these related parties and their associates:

(in thousands)
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Principal repayments and advances, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2017

2016

4,379 $
(2,411)
1,968 $

4,511
(132)
4,379

Years Ended December 31,

132

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

Credit Risk Concentrations

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

Loans held for investment are primarily secured by real estate located in the Paciﬁ c Northwest, California and
Hawaii. At December 31, 2017, we had concentrations representing 10% or more of the total portfolio by state and
property type for the loan class of single family within the state of Washington and California, which represented
15.0% and 10.9% of the total portfolio, respectively. At December 31, 2016 we had concentrations representing 10%
or more of the total portfolio by state and property type for the loan classes of single family and non-owner occupied
real estate within the state of Washington, which represented 13.8% and 10.1% of the total portfolio, respectively.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within
the loans held for investment portfolio as of December 31, 2017. In addition to the allowance for loan losses, the
Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is
included in accounts payable and other liabilities on the consolidated statements of ﬁ nancial condition. Collectively,
these allowances are referred to as the allowance for credit losses.

For further information on the policies that govern the determination of the allowance for loan losses levels, see
Note 1, Summary of Signiﬁ cant Accounting Policies.

Activity in the allowance for credit losses was as follows.

(in thousands)
Allowance for credit losses (roll-forward):

Years Ended December 31,
2016

2015

2017

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries, net of charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

35,264 $
750
3,102
39,116 $

30,659 $
4,100
505
35,264 $

Components:

Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allowance for unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

37,847 $
1,269
39,116 $

34,001 $
1,263
35,264 $

22,524
6,100
2,035
30,659

29,278
1,381
30,659

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] 32 Page

HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

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

(in thousands)
Consumer loans

Year Ended December 31, 2017

Beginning
balance

Charge-offs

Recoveries

(Reversal of)
Provision

Ending
balance

Single family . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . .

8,196 $
6,153
14,349

(2) $

(707)
(709)

1,495 $
818
2,313

(277) $
817
540

9,412
7,081
16,493

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . .
Total commercial real estate loans .

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .
Total commercial and industrial

loans . . . . . . . . . . . . . . . . . . . . . .

Total allowance for credit losses . . . . . . . $

4,481
3,086
8,553
16,120

2,199
2,596

—
—
—
—

—
(411)

—
—
1,017
1,017

—
892

274
809
(893)
190

761
(741)

4,755
3,895
8,677
17,327

2,960
2,336

4,795
35,264 $

(411)
(1,120) $

892
4,222 $

20
750 $

5,296
39,116

(in thousands)
Consumer loans

Year Ended December 31, 2016

Beginning
balance

Charge-offs

Recoveries

(Reversal of)
Provision

Ending
balance

Single family . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . .

8,942 $
4,620
13,562

(790) $
(839)
(1,629)

90 $
920
1,010

(46) $

1,452
1,406

8,196
6,153
14,349

Commercial real estate loans

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .
Total commercial and industrial

loans . . . . . . . . . . . . . . . . . . . . . .

Total allowance for credit losses . . . . . . . $

3,594
1,194
9,271
14,059

1,253
1,785

—
—
(42)
(42)

—
(27)

—
—
1,143
1,143

—
50

887
1,892
(1,819)
960

946
788

4,481
3,086
8,553
16,120

2,199
2,596

3,038
30,659 $

(27)
(1,698) $

50
2,203 $

1,734
4,100 $

4,795
35,264

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

The following tables disaggregate our allowance for credit losses and recorded investment in loans by impairment
methodology.

(in thousands)
Consumer loans

Allowance:
collectively
evaluated for
impairment

Allowance:
individually
evaluated for
impairment

At December 31, 2017
Loans:
collectively
evaluated for
impairment

Total

Loans:
individually
evaluated for
impairment

Total

Single family . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . .

9,188
7,036
16,224

224
45
269

9,412
7,081
16,493

$ 1,300,939
452,182
1,753,121

74,967
1,290
76,257

$ 1,375,906
453,472
1,829,378

Commercial real estate loans

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .
Total commercial and industrial

loans . . . . . . . . . . . . . . . . . . . . . .
Total loans evaluated for impairment . . .
Loans held for investment carried at fair
value . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loans held for

4,755
3,895
8,677
17,327

2,960
2,316

5,276
38,827

—
—
—
—

—
20

4,755
3,895
8,677
17,327

622,782
727,228
687,177
2,037,187

2,960
2,336

388,624
261,603

—
809
454
1,263

2,989
3,106

622,782
728,037
687,631
2,038,450

391,613
264,709

20
289

5,296
39,116

650,227
4,440,535

6,095
83,615

656,322
4,524,150

5,246

231

5,477(1)

investment . . . . . . . . . . . . . . . . . . . . . . $

38,827

289

$ 39,116

$ 4,445,781

83,846

$ 4,529,627

(in thousands)
Consumer loans

Allowance:
collectively
evaluated for
impairment

Allowance:
individually
evaluated for
impairment

At December 31, 2016
Loans:
collectively
evaluated for
impairment

Total

Loans:
individually
evaluated for
impairment

Total

Single family . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . .
Total consumer loans . . . . . . . . . .

7,871
6,104
13,975

325
49
374

8,196
6,153
14,349

985,219
358,350
1,343,569

80,676
1,463
82,139

$ 1,065,895
359,813
1,425,708

Commercial real estate loans

Non-owner occupied commercial

real estate . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . .
Total commercial real estate loans. .

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . .
Total commercial and industrial

loans . . . . . . . . . . . . . . . . . . . . .
Total loans evaluated for impairment . .
Loans held for investment carried at

fair value . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . $

4,481
3,086
8,553
16,120

2,199
2,591

4,790
34,885

—
—
—
—

—
5

4,481
3,086
8,553
16,120

587,801
673,374
634,427
1,895,602

2,199
2,596

281,424
220,360

871
845
1,893
3,609

1,467
3,293

588,672
674,219
636,320
1,899,211

282,891
223,653

5
379

4,795
35,264

501,784
3,740,955

4,760
90,508

506,544
3,831,463

34,885

379

$ 35,264

$ 3,740,955

90,508

$ 3,849,451

17,988(1)

(1) Comprised of single family loans where a fair value option election was made at the time of origination and, therefore, are

carried at fair value with changes recognized in the consolidated statements of operations.

135

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.

(in thousands)
With no related allowance recorded:

Consumer loans

At December 31, 2017
Unpaid
principal
balance(2)

Related
allowance

Recorded
investment(1)

Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71,264(4) $
782
72,046

72,424 $
807
73,231

Commercial real estate loans

Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . .

809
454
1,263

837
454
1,291

Commercial and industrial loans

Owner occupied commercial real estate . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . . . . . . . . .

2,989
2,398
5,387
78,696 $

3,288
3,094
6,382
80,904 $

With an allowance recorded:

Consumer loans

Commercial and industrial loans

Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . . . . . . . . .

3,934 $
508
4,442

708
708
5,150 $

4,025 $
508
4,533

755
755
5,288 $

Total:

Consumer loans

Single family(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75,198 $
1,290
76,488

76,449 $
1,315
77,764

Commercial real estate loans

809
454
1,263

837
454
1,291

Commercial and industrial loans

Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2,989
3,106
6,095
83,846 $

3,288
3,849
7,137
86,192 $

—
—
—

—
—
—
—

224
45
269

20
20
289

224
45
269

—
—
—

—
20
20
289

Includes partial charge-off s and nonaccrual interest paid and purchase discounts and premiums.

(1)
(2) Unpaid principal balance does not include partial charge-off s, purchase discounts and premiums or nonaccrual interest

paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $69.6 million in single family performing TDRs.
Includes $231 thousand of fair value option loans.

(3)
(4)

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

(in thousands)
With no related allowance recorded:

Consumer loans

At December 31, 2016
Unpaid
principal
balance(2)

Related
allowance

Recorded
investment(1)

77,756 $
946
78,702

80,573 $
977
81,550

Commercial real estate loans

Non-owner occupied commercial real estate . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . .

871
845
1,893
3,609

898
851
2,819
4,568

Commercial and industrial loans

1,467
2,945
4,412
86,723 $

1,948
4,365
6,313
92,431 $

With an allowance recorded:

Consumer loans

Commercial and industrial loans

Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . . . . . . . . .

2,920 $
517
3,437

348
348
3,785 $

3,011 $
517
3,528

347
347
3,875 $

Total:

Consumer loans

80,676 $
1,463
82,139

83,584 $
1,494
85,078

Commercial real estate loans

871
845
1,893
3,609

898
851
2,819
4,568

Commercial and industrial loans

Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

1,467
3,293
4,760
90,508 $

1,948
4,712
6,660
96,306 $

—
—
—

—
—
—
—

325
49
374

5
5
379

325
49
374

—
—
—
—

—
5
5
379

Includes partial charge-off s and nonaccrual interest paid and purchase discounts and premiums.

(1)
(2) Unpaid principal balance does not include partial charge-off s, purchase discounts and premiums or nonaccrual interest

paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $73.1 million in single family performing TDRs.

(3)

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

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

Year Ended
December 31, 2017

Year Ended
December 31, 2016

Year Ended
December 31, 2015

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

(in thousands)
Consumer loans

Single family . . . . . . . . . . . . . . . . $ 80,519 $
Home equity and other . . . . . . . .
Total consumer loans . . . . . . .

1,432
81,951

2,963 $ 82,745 $

2,873 $ 78,824 $

80
3,043

1,408
84,153

68
2,941

1,922
80,746

2,670
83
2,753

Commercial real estate loans
Non-owner occupied

commercial real estate . . . . . . .
Multifamily . . . . . . . . . . . . . . . . .
Construction/land

development . . . . . . . . . . . . . .
Total commercial real estate

loans . . . . . . . . . . . . . . . . . .

Commercial and industrial loans

Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . .

Total commercial and

industrial loans . . . . . . . . . .

Credit Quality Indicators

686
824

917

2,427

2,922
2,533

5,455
$ 89,833 $

—
25

170
144

314

435
1,299

2,286

4,020

2,648
3,591

6,239

—
47

10,862
4,035

4,535

134

19,432

22
83

3,554
4,431

105

7,985

3,455 $ 94,412 $

3,180 $ 108,163 $

375
111

207

693

69
163

232
3,678

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

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

Pass. We have ﬁ ve pass risk ratings which represent a level of credit quality that ranges from no well-deﬁ ned
deﬁ ciency or weakness to some noted weakness, however the risk of default on any loan classiﬁ ed as pass is
expected to be remote. The ﬁ ve pass risk ratings are described below:

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

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

Modest Risk. A modest risk loan, risk rated 3-Excellent, is a desirable loan with excellent sources of
repayment and no currently identiﬁ able risk associated with collection. The borrower exhibits a very strong

138

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

capacity to repay the loan in accordance with the repayment agreement. The borrower may be susceptible to
economic cycles, but will have cash reserves to weather these cycles.

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

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

Watch. A watch loan, risk rated 6-Watch, is still pass-rated, but represents the lowest level of acceptable risk due
to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues
resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have
a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time. Borrowers
rated watch are characterized by elements of uncertainty, such as:

•

The borrower may be experiencing declining operating trends, strained cash ﬂ ows or less-than
anticipated performance. Cash ﬂ ow should still be adequate to cover debt service, and the negative
trends should be identiﬁ ed as being of a short-term or temporary nature.

The borrower may have experienced a minor, unexpected covenant violation.

Companies who may be experiencing tight working capital or have a cash cushion deﬁ ciency.

A loan may also be a watch if ﬁ nancial information is late, there is a documentation deﬁ ciency, the
borrower has experienced unexpected management turnover, or if they face industry issues that, when
combined with performance factors create uncertainty in their future ability to perform.

Delinquent payments, increasing and material overdraft activity, request for bulge and/or out-of-formula
advances may be an indicator of inadequate working capital and may suggest a lower rating.

Failure of the intended repayment source to materialize as expected, or renewal of a loan (other than
cash/marketable security secured or lines of credit) without reduction are possible indicators of a watch
or worse risk rating.

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

•

Performance is poor or signiﬁ cantly less than expected. There may be a temporary debt-servicing
deﬁ ciency or inadequate working capital as evidenced by a cash cushion deﬁ ciency, but not to the extent
that repayment is compromised. Material violation of ﬁ nancial covenants is common.

Loans with unresolved material issues that signiﬁ cantly cloud the debt service outlook, even though a
debt servicing deﬁ ciency does not currently exist.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

•

Modest underperformance or deviation from plan for real estate loans where absorption of rental/sales
units is necessary to properly service the debt as structured. Depth of support for interest carry provided
by owner/guarantors may mitigate and provide for improved rating.

This rating may be assigned when a loan offi cer is unable to supervise the credit properly, an inadequate
loan agreement, an inability to control collateral, failure to obtain proper documentation, or any other
deviation from prudent lending practices.

Unlike a substandard credit, there should be a reasonable expectation that these temporary issues will
be corrected within the normal course of business, rather than liquidation of assets, and in a reasonable
period of time.

Substandard. A substandard loan, risk rated 8-Substandard, is inadequately protected by the current sound worth
and paying capacity of the borrower or of the collateral pledged, if any. Loans so classiﬁ ed must have a well-deﬁ ned
weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility
that the Company will sustain some loss if the deﬁ ciencies are not corrected. Loss potential, while existing in the
aggregate amount of substandard loans, does not have to exist in individual loans classiﬁ ed substandard. Loans
are classiﬁ ed as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A
substandard loan normally has one or more well-deﬁ ned weaknesses that could jeopardize repayment of the loan.
The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the
key distinction between special mention and substandard. The following are examples of well-deﬁ ned weaknesses:

•

Cash ﬂ ow deﬁ ciencies or trends are of a magnitude to jeopardize current and future payments with
no immediate relief. A loss is not presently expected, however the outlook is suffi ciently uncertain to
preclude ruling out the possibility.

The borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.

Material underperformance or deviation from plan for real estate loans where absorption of rental/sales
units is necessary to properly service the debt and risk is not mitigated by willingness and capacity of
owner/guarantor to support interest payments.

Management character or honesty has become suspect. This includes instances where the borrower has
become uncooperative.

Due to unproﬁ table or unsuccessful business operations, some form of restructuring of the business,
including liquidation of assets, has become the primary source of loan repayment. Cash ﬂ ow has
deteriorated, or been diverted, to the point that sale of collateral is now the Company’s primary source
of repayment (unless this was the original source of repayment). If the collateral is under the Company’s
control and is cash or other liquid, highly marketable securities and properly margined, then a more
appropriate rating might be special mention or watch.

The borrower is involved in bankruptcy proceedings where collateral liquidation values are expected to
fully protect the Company against loss.

There is material, uncorrectable faulty documentation or materially suspect ﬁ nancial information.

Doubtful. Loans classiﬁ ed as doubtful, risk rated 9-Doubtful, have all the weaknesses inherent in one classiﬁ ed
substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis
of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is
extremely high, but because of certain important and reasonably speciﬁ c pending factors, which may work towards
strengthening of the loan, classiﬁ cation as a loss (and immediate charge-off ) is deferred until more exact status may
be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and
perfection of liens on additional collateral and reﬁ nancing plans. In certain circumstances, a doubtful rating will
be temporary, while the Company is awaiting an updated collateral valuation. In these cases, once the collateral is

140

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off . The remaining
balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual.

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

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

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

Watch. A homogeneous watch loan, risk rated 6, is 30-59 days past due from the required payment date at
month-end.

Special Mention. A homogeneous special mention loan, risk rated 7, is 60-89 days past due from the required
payment date at month-end.

Substandard. A homogeneous substandard loan, risk rated 8, is 90-179 days past due from the required payment
date at month-end.

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

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

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

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

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

Residential and home equity loans modiﬁ ed in a troubled debt restructure are not considered homogeneous. The risk
rating classiﬁ cation for such loans are based on the non-homogeneous deﬁ nitions noted above.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

The following tables summarize designated loan grades by loan portfolio segment and loan class.

(in thousands)
Consumer loans

Pass

Watch

At December 31, 2017
Special
mention

Substandard

Total

Single family . . . . . . . . . . . . . . . . . . . . $ 1,355,965(1) $
Home equity and other . . . . . . . . . . . .

451,194
1,807,159

2,982 $
143
3,125

11,328 $
751
12,079

11,091 $ 1,381,366
453,489
1,401
1,834,855
12,492

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . .

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .

(in thousands)
Consumer loans

613,181
693,190
664,025
1,970,396

8,801
34,038
22,062
64,901

—
507
1,466
1,973

800
302
78
1,180

622,782
728,037
687,631
2,038,450

361,429
220,461
581,890
$ 4,359,445 $

20,949
39,588
60,537
128,563 $

6,399
1,959
8,358
22,410 $

391,613
2,836
264,709
2,701
5,537
656,322
19,209 $ 4,529,627

Pass

Watch

At December 31, 2016
Special
mention

Substandard

Total

Single family . . . . . . . . . . . . . . . . . . . . $ 1,051,463(1) $
Home equity and other . . . . . . . . . . . .

357,191
1,408,654

4,348 $
597
4,945

15,172 $
514
15,686

12,839 $ 1,083,822
359,874
1,572
1,443,696
14,411

Commercial real estate loans

Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . .

Commercial and industrial loans

Owner occupied commercial real

estate . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . .

562,950
660,234
615,675
1,838,859

23,741
13,140
16,074
52,955

1,110
508
3,083
4,701

871
337
1,488
2,696

588,672
674,219
636,320
1,899,211

247,046
171,883
418,929
$ 3,666,442 $

28,778
42,767
71,545
129,445 $

6,055
3,385
9,440
29,827 $

282,891
1,012
223,653
5,618
6,630
506,544
23,737 $ 3,849,451

(1)

Includes $5.5 million and $18.0 million of loans at December 31, 2017 and 2016, respectively, where a fair value option
election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the
consolidated statements of operations.

As of December 31, 2017 and 2016, none of the Company’s loans were rated Doubtful or Loss.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

Nonaccrual and Past Due Loans

Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful,
generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal
balance has been charged off . Loans whose repayments are insured by the FHA or guaranteed by the VA are
generally maintained on accrual status even if 90 days or more past due.

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

At December 31, 2017

30-59 days
past due

60-89 days
past due

90 days or
more past
due

Total past
due

Current

Total
loans

90 days or
more past
due and
accruing

(in thousands)
Consumer loans

Single family . . . . . . . . . . . $
Home equity and other . . . .

10,493
750
11,243

4,437
20
4,457

48,262
1,404
49,666

63,192
2,174
65,366

$ 1,318,174(1) $ 1,381,366
453,489
1,834,855

451,315
1,769,489

37,171(2)

—
37,171

Commercial real estate loans
Non-owner occupied

commercial real estate . .
Multifamily . . . . . . . . . . . . .
Construction/land

development . . . . . . . . . .

Commercial and industrial

loans
Owner occupied

commercial real estate . .
Commercial business . . . . .

(in thousands)
Consumer loans

—
—

641
641

—
—

—
302

78
380

—
302

622,782
727,735

622,782
728,037

719
1,021

686,912
2,037,429

687,631
2,038,450

—
377
377
12,261 $

—
—
—
4,457 $

640
1,526
2,166
52,212 $

640
1,903
2,543
68,930 $ 4,460,697 $ 4,529,627 $

391,613
264,709
656,322

390,973
262,806
653,779

—
—

—
—
—
37,171

At December 31, 2016

30-59 days
past due

60-89 days
past due

90 days or
more past
due

Total past
due

Current

Total
loans

90 days or
more past
due and
accruing

Single family . . . . . . . . . . . $
Home equity and other . . . .

4,310
251
4,561

5,459
442
5,901

53,563
1,571
55,134

63,332
2,264
65,596

$ 1,020,490(1) $ 1,083,822
359,874
1,443,696

357,610
1,378,100

40,846(2)

—
40,846

Commercial real estate loans
Non-owner occupied

commercial real estate . .
Multifamily . . . . . . . . . . . . .
Construction/land

development . . . . . . . . . .

Commercial and industrial

loans
Owner occupied

commercial real estate . .
Commercial business . . . . .

23
—

—
23

48
202
250

—
—

205
—
205

4,834 $

6,106 $

871
337

1,376
2,584

894
337

587,778
673,882

588,672
674,219

1,376
2,607

634,944
1,896,604

636,320
1,899,211

1,256
2,414
3,670
61,388

1,509
2,616
4,125
72,328 $ 3,777,123 $ 3,849,451 $

282,891
223,653
506,544

281,382
221,037
502,419

—
—

—
—
—
40,846

(1)

143

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

(2)

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

The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.

(in thousands)
Consumer loans

At December 31, 2017
Nonaccrual

Total

Accrual

Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,370,275(1) $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

452,085
1,822,360

Commercial real estate loans

Non-owner occupied commercial real estate . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial and industrial loans

Owner occupied commercial real estate . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

622,782
727,735
687,553
2,038,070

11,091 $ 1,381,366
453,489
1,404
1,834,855
12,495

—
302
78
380

622,782
728,037
687,631
2,038,450

390,973
263,183
654,156
$ 4,514,586

391,613
640
264,709
1,526
2,166
656,322
15,041 $ 4,529,627

(in thousands)
Consumer loans

Accrual

At December 31, 2016
Nonaccrual

Total

Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,071,105(1) $

358,303
1,429,408

12,717 $
1,571
14,288

1,083,822
359,874
1,443,696

Commercial real estate loans

Non-owner occupied commercial real estate . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . .

Commercial and industrial loans

Owner occupied commercial real estate . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

587,801
673,882
634,944
1,896,627

281,635
221,239
502,874
3,828,909

871
337
1,376
2,584

1,256
2,414
3,670
20,542 $

588,672
674,219
636,320
1,899,211

282,891
223,653
506,544
3,849,451

(1)

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

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

(dollars in thousands)
Consumer loans
Single family

Home equity and other

Total consumer

Commercial and industrial loans

Commercial business

Total commercial and industrial

Total loans

(dollars in thousands)
Consumer loans
Single family

Home equity and other

Total consumer

Commercial and industrial loans

Commercial business

Total commercial and industrial

Total loans

Concession type

Year Ended December 31, 2017

Number of loan
modiﬁcations

Recorded
investment

Related
charge-offs

Interest rate reduction
Payment restructure

56 $

102

10,040 $
21,356

Payment restructure

Interest rate reduction
Payment restructure

Payment restructure

Interest rate reduction
Payment restructure

56
104
160

1
1

351

10,040
21,707
31,747

18
18

56
105
161 $

10,040
21,725
31,765 $

—
—

—

—
—
—

—

—
—

—
—
—

Concession type

Year Ended December 31, 2016

Number of loan
modiﬁcations

Recorded
investment

Related
charge-offs

36 $
51

7,453 $
10,578

2
1

38
52
90

1
1

113
192

7,566
10,770
18,336

51
51

38
53
91 $

7,566
10,821
18,387 $

—
—

—
—
—

—

—
—

—
—
—

Interest rate reduction
Payment restructure

Payment restructure

Interest rate reduction
Payment restructure

145

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 — LOANS AND CREDIT QUALITY: (cont.)

(dollars in thousands)
Consumer loans
Single family

Home equity and other

Total consumer

Commercial and industrial loans

Commercial business

Total commercial and industrial

Total loans

Concession type

Year Ended December 31, 2015

Number of loan
modiﬁcations

Recorded
investment

Related
charge-offs

Interest rate reduction

47 $

10,167 $

Interest rate reduction

49
49

2
2

130

10,297
10,297

482

482
482

Interest rate reduction

51
51 $

10,779
10,779 $

—

—
—

—

—
—

The following table presents loans that were modiﬁ ed as TDRs within the previous 12 months and subsequently
re-defaulted during the years ended December 31, 2017 and 2016, respectively. A TDR loan is considered
re-defaulted when it becomes doubtful that the objectives of the modiﬁ cations 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.

(dollars in thousands)
Consumer loans

Single family . . . . . . . . . . . . . . . . . . . . .
Home equity and other . . . . . . . . . . . . .

Years Ended December 31,

2017

2016

Number of loan
relationships that
re-defaulted

Recorded
investment

Number of loan
relationships that
re-defaulted

Recorded
investment

21 $
—
21 $

4,286
—
4,286

19 $
1
20 $

4,464
93
4,557

NOTE 6 — OTHER REAL ESTATE OWNED:

Other real estate owned consisted of the following.

(in thousands)
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At December 31,

2017

2016

664 $

—
—
664
—
664 $

2,133
552
5,381
8,066
(2,823)
5,243

146

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 — OTHER REAL ESTATE OWNED: (cont.)

Activity in other real estate owned was as follows.

(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions related to sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Activity in the valuation allowance for other real estate owned was as follows.

Years Ended December 31,

2017

2016

5,243 $
1,113
(33)
(5,659)

664 $

7,531
5,417
(1,553)
(6,152)
5,243

(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Charge-offs), net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

3,095 $
33
(3,128)

— $

1,764 $
1,553
(222)
3,095 $

1,303
695
(234)
1,764

The components of the net cost of operation and sale of other real estate owned are as follows.

(in thousands)
Maintenance (reimbursements) costs . . . . . . . . . . . . . . . . . . . . $
Loss provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (income) cost from operation and sale of other real estate

owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

(114) $
—
(416)
—

469 $

1,332
(37)
—

(530) $

1,764 $

453
695
(447)
(41)

660

At December 31, 2017, we had concentrations within the state of Washington, primarily in Spokane County,
representing 76.8% of the total balance of other real estate owned. At December 31, 2016, we had concentrations
within the state of Washington, primarily in Thurston County, representing 78.2% of the total balance of other real
estate owned.

NOTE 7 — PREMISES AND EQUIPMENT, NET:

Premises and equipment consisted of the following.

(in thousands)
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2017

2016

70,657 $
57,402
28,898
156,957
(52,303)
104,654 $

65,089
45,075
10,437
120,601
(42,965)
77,636

Depreciation expense for the years ended December 31, 2017, 2016, and 2015, was $13.5 million, $11.4 million, and
$10.9 million, respectively.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — DEPOSITS:

Deposit balances, including stated rates, were as follows.

(in thousands)
Noninterest-bearing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOW accounts, 0.00% to 1.98% at December 31, 2017 and 0.00% to 1.00% at
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Statement savings accounts, due on demand, 0.05% to 1.13% at

At December 31,

2017

2016

980,902 $

964,829

461,349

468,812

December 31, 2017 and December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .

293,858

301,361

Money market accounts, due on demand, 0.00% to 1.80% and at

December 31, 2017 and 0.00% to 1.70% at December 31, 2016 . . . . . . . . . . .

1,834,154

1,603,141

Certiﬁcates of deposit, 0.05% to 3.80% at December 31, 2017 and

December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,190,689
4,760,952 $

1,091,558
4,429,701

There were $178.4 million and $21.8 million in public funds included in deposits at December 31, 2017 and 2016,
respectively.

Interest expense on deposits was as follows.

(in thousands)
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Statement savings accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years Ended December 31,
2016

2015

2017

1,964 $
1,007
8,604
12,337
23,912 $

1,950 $
1,029
7,398
8,632
19,009 $

1,773
1,032
4,945
4,051
11,801

The weighted-average interest rates on certiﬁ cates of deposit at December 31, 2017, 2016 and 2015 were 1.12%,
0.96% and 0.96% respectively.

Certiﬁ cates of deposit outstanding mature as follows.

(in thousands)
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
One to two years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Two to three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three to four years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Four to ﬁve years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2017

889,790
236,414
33,505
13,412
17,415
153
1,190,689

The aggregate amount of time deposits in denominations of more than $250 thousand at December 31, 2017 and
2016 was $88.8 million and $87.4 million, respectively. There were $345.5 million and $234.4 million of brokered
deposits at December 31, 2017 and 2016, respectively.

NOTE 9 — FEDERAL HOME LOAN BANK AND OTHER BORROWINGS:

Federal Home Loan Bank

The Company borrows funds through advances from the FHLB. FHLB advances totaled $979.2 million and
$868.4 million as of December 31, 2017, and 2016, respectively.

148

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 — FEDERAL HOME LOAN BANK AND OTHER BORROWINGS: (cont.)

Weighted-average interest rates on the advances were 1.58%, 0.91%, and 0.64% at December 31, 2017, 2016 and
2015, respectively. The advances may be collateralized by stock in the FHLB, pledged securities, and unencumbered
qualifying loans. The Company has an available line of credit with the FHLB equal to 35.0% of assets, subject to
collateralization requirements. Based on the amount of qualifying collateral available, borrowing capacity from the
FHLB was $579.2 million as of December 31, 2017. The FHLB is not contractually bound to continue to off er credit
to the Company, and the Company’s access to credit from this agency for future borrowings may be discontinued at
any time.

FHLB advances outstanding by contractual maturities were as follows.

(in thousands)
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At December 31, 2017

Advances
outstanding

Weighted-average
interest rate

963,611
10,000
—
—
5,590
979,201

1.53%
4.27
—
—
5.31
1.58%

The Company, as a member of the FHLB, is required to own shares of FHLB stock. This requirement is based upon
the amount of either the eligible collateral or advances outstanding from the FHLB. As of December 31, 2017 and
2016, the Company held $46.6 million and $40.3 million, respectively, of FHLB stock. FHLB stock is carried at
par value and is restricted to transactions between the FHLB and its member institutions. FHLB stock can only be
purchased or redeemed at par value. Both cash and dividends received on FHLB stock are reported in earnings.

Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s
determination of whether these investments are impaired is based on its assessment of ultimate recoverability of
par value rather than recognizing temporary declines in value. The determination of whether the decline aff ects
the ultimate recoverability is inﬂ uenced by criteria such as: (1) the signiﬁ cance of the decline in net assets of the
FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted;
(2) commitments by the FHLB to make payments required by law or regulation and the level of such payments
in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on
institutions and, accordingly, on the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based
on this evaluation, the Company determined there is no other-than-temporary impairment of the FHLB stock
investment as of December 31, 2017, or 2016.

Federal Reserve Bank of San Francisco

The Company may also borrow on a collateralized basis from the Federal Reserve Bank of San Francisco
(“FRBSF”). At December 31, 2017 and 2016, there were no outstanding borrowings from the FRBSF. Based on the
amount of qualifying collateral available, borrowing capacity from the FRBSF was $331.5 million at December 31,
2017. The FRBSF is not contractually bound to off er credit to the Company, and the Company’s access to credit from
this agency for future borrowings may be discontinued at any time.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase

Federal funds transactions involve lending reserve balances on a short-term basis. Securities borrowed or purchased
under agreements to resell are collateralized lending transactions utilized to accommodate customer transactions,
earn interest rate spreads, and obtain securities for settlement and for collateral. At December 31, 2017 and 2016, we
had no balance of federal funds purchased and securities sold under agreements to repurchase.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 — LONG-TERM DEBT:

At December 31, 2017 and 2016, the Company had long-term debt balance of $125.3 million and $125.1 million,
respectively, consisting of senior notes issued during 2016 and junior subordinated debentures issued in prior years.

In 2016, the Company closed on $65.0 million in aggregate principal amount of its 6.50% Senior Notes due
2026 (the “Senior Notes”) at an off ering price of 100% plus accrued interest, which represented $63.4 million of
long-term debt balance at December 31, 2017.

The Company raised capital by issuing trust preferred securities during the period from 2005 through 2007, resulting
in a debt balance of $61.9 million that remains outstanding at December 31, 2017. In connection with the issuance
of trust preferred securities, HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable
Interest Debentures. The sole assets of the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III,
and IV.

The Subordinated Debt Securities are as follows:

(in thousands)
Date issued
Amount
Interest rate

Maturity date
Call option(1)

HomeStreet Statutory

I
June 2005
$5,155
3 MO LIBOR +
1.70%
June 2035
5 years

II
September 2005
$20,619
3 MO LIBOR +
1.50%
December 2035
5 years

III
February 2006
$20,619
3 MO LIBOR +
1.37%
March 2036
5 years

IV
March 2007
$15,464
3 MO LIBOR +
1.68%
June 2037
5 years

(1) Call options are exercisable at par.

NOTE 11 — DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of signiﬁ cant interest rate ﬂ uctuations on the value of certain assets and liabilities, such as
certain mortgage loans held for sale or MSRs, the Company utilizes derivatives, such as forward sale commitments,
futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy.
Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated
statements of ﬁ nancial condition. The notional amount is generally not exchanged and is used as the basis for interest
and other contractual payments.

The use of derivatives as interest rate risk management instruments helps minimize signiﬁ cant, unplanned
ﬂ uctuations in earnings, fair value of assets and liabilities, and cash ﬂ ows caused by interest rate volatility. This
approach involves mitigating the repricing characteristics of certain assets or liabilities so that changes in interest
rates do not have a signiﬁ cant adverse eff ect on net interest margin and cash ﬂ ows. As a result of interest rate
ﬂ uctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the eff ect of
this gain or loss will generally be off set by the gain or loss on the derivatives linked to hedged assets or liabilities. In
a cash ﬂ ow hedging strategy, management manages the variability of cash payments due to interest rate ﬂ uctuations
by the eff ective use of derivatives linked to hedged assets and liabilities. We held no derivatives designated as a fair
value, cash ﬂ ow or foreign currency hedge instrument at December 31, 2017 or 2016. Derivatives are reported at
their respective fair values in the other assets or accounts payable and other liabilities line items on the consolidated
statements of ﬁ nancial condition, with changes in fair value reﬂ ected in current period earnings.

As permitted under U.S. GAAP, the Company nets derivative assets and liabilities when a legally enforceable
master netting agreement exists between the Company and the derivative counterparty, which are documented
under industry standard master agreements and credit support annexes. The Company’s master netting agreements
provide that following an uncured payment default or other event of default the non-defaulting party may promptly
terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting

150

HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)

party. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery
(which remains uncured following applicable notice and grace periods). The Company’s right of off set requires that
master netting agreements are legally enforceable and that the exercise of rights by the non-defaulting party under
these agreements will not be stayed, or avoided under applicable law upon an event of default including bankruptcy,
insolvency or similar proceeding.

The collateral used under the Company’s master netting agreements is typically cash, but securities may be
used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to
counterparties is included in other assets on the Company’s consolidated statements of ﬁ nancial condition. Any
securities pledged to counterparties as collateral remain on the consolidated statement of ﬁ nancial condition. Refer
to Note 4, Investment Securities for further information on securities collateral pledged. At December 31, 2017 and
2016, the Company did not hold any collateral received from counterparties under derivative transactions.

The Company’s derivative activities are monitored by the asset/liability management committee. The treasury
function, which includes asset/liability management, is responsible for hedging strategies developed through
analysis of data from ﬁ nancial models and other internal and industry sources. The resulting hedging strategies are
incorporated into the overall risk management strategies.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of
Signiﬁ cant Accounting Policies.

The notional amounts and fair values for derivatives consist of the following.

At December 31, 2017

Notional amount

Fair value derivatives

(in thousands)
Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest rate swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate lock and purchase loan commitments . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurodollar futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total derivatives before netting . . . . . . . . . . . . . . . . . . . . $

Netting adjustment/Cash collateral(1) . . . . . . . . . . . . . . . . .

Carrying value on consolidated statements of

ﬁnancial condition . . . . . . . . . . . . . . . . . . . . . . . . . .

1,687,658 $
120,000
472,733
1,869,000
3,287,000
7,436,391

Asset

Liability

1,311 $
—
12,950
12,171
—
26,432
(6,646)

(1,445)
—
(25)
(23,654)
(101)
(25,225)
23,505

19,786 $

(1,720)

At December 31, 2016

Notional amount

Fair value derivatives

Total derivatives before netting . . . . . . . . . . . . . . . . . . . . $

Netting adjustment/Cash collateral(1) . . . . . . . . . . . . . . . . .

Carrying value on consolidated statements of

ﬁnancial condition . . . . . . . . . . . . . . . . . . . . . . . . . .

3,596,677 $
20,000
746,102
1,689,850
6,052,629

Asset

Liability

24,623 $
1
19,586
15,016
59,226
10,174

(15,203)
—
(367)
(26,829)
(42,399)
37,836

69,400 $

(4,563)

(1)

Includes cash collateral of $16.9 million and $48.0 million at December 31, 2017 and 2016, respectively, as part of netting
adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions
and held by the counterparty as security.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)

The following tables present gross and net information about derivative instruments.

At December 31, 2017

Netting
adjustments/
Cash
collateral(1)

Carrying value

Securities
not offset in
consolidated
balance sheet
(disclosure-only
netting)

Net amount

(in thousands)
Derivative assets . . . . . . . $

Gross fair value

26,432 $

(6,646) $

19,786 $

— $

19,786

Derivative liabilities . . . . $

(25,225) $

23,505 $

(1,720) $

1,213 $

(507)

At December 31, 2016

Netting
adjustments/
Cash
collateral(1)

Carrying value

Securities
not offset in
consolidated
balance sheet
(disclosure-only
netting)

Net amount

(in thousands)
Derivative assets . . . . . . . $

Gross fair value

59,226 $

10,174 $

69,400 $

— $

69,400

Derivative liabilities . . . . $

(42,399) $

37,836 $

(4,563) $

1,820 $

(2,743)

(1)

Free-standing derivatives are used for fair value interest rate risk management purposes and do not qualify for hedge
accounting treatment, referred to as economic hedges. Economic hedges are used to hedge against adverse changes in
fair value of single family mortgage servicing rights (“single family MSRs”), interest rate lock commitments (“IRLCs”)
for single family mortgage loans that the Company intends to sell, and single family mortgage loans held for sale.

Free-standing derivatives used as economic hedges for single family MSRs typically include positions in interest
rate futures, options on 10-year treasury contracts, forward sales commitments on mortgage-backed securities, and
interest rate swap and swaption contracts. The single family MSRs and the free-standing derivatives are carried at
fair value with changes in fair value included in mortgage servicing income.

The free-standing derivatives used as economic hedges for IRLCs and single family mortgage loans held for sale
are forward sales commitments on mortgage-backed securities and option contracts. IRLCs, single family mortgage
loans held for sale, and the free-standing derivatives (“economic hedges”) are carried at fair value with changes in
fair value included in net gain on mortgage loan origination and sale activities.

The following table presents the net gain (loss) recognized on derivatives, including economic hedge derivatives,
within the respective line items in the statement of operations for the periods indicated.

(in thousands)
Recognized in noninterest income:

Years Ended December 31,
2016

2015

2017

Net (loss) gain on loan origination and sale activities(1) . . . . $
Loan servicing income (loss)(2) . . . . . . . . . . . . . . . . . . . . . . .
Other(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(28,549) $
9,732
—
(18,817) $

12,443 $
(4,680)
735
8,498 $

2,080
11,709
—
13,789

(1) Comprised of interest rate lock commitments (“IRLCs”) and forward contracts used as an economic hedge of IRLCs and

single family mortgage loans held for sale.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)

(2) Comprised of interest rate swaps, interest rate swaptions and forward contracts used as an economic hedge of single family

MSRs.

(3) Comprised of interest rate swaps, interest rate swaptions and forward contracts used as an economic hedge of fair value

option loans held for investment.

NOTE 12 — MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.

(in thousands)
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily DUS®(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS®(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At December 31,

2017

2016

577,313 $

29,651
3,938
—
610,902 $

656,334
35,506
5,207
17,512
714,559

(1)

(2)

Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS”®) is a registered trademark of Fannie
Mae.
Loans originated as Held for Investment.

Loans sold consisted of the following.

(in thousands)
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily DUS®(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS®(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016
8,785,412
301,442
17,308
150,903(3)

2017
7,508,949 $
347,084
26,841
321,699
8,204,573 $

9,255,065

2015
7,038,635
204,744
14,275
15,038
7,272,692

(1)
(2)
(3)

Fannie Mae Multifamily DUS® is a registered trademark of Fannie Mae.
Loans originated as Held for Investment.
Included $63.2 million in single family loans sold transferred to held for investment during 2016.

Gain on loan origination and sale activities, including the eff ects of derivative risk management instruments,
consisted of the following.

(in thousands)
Single family:

Years Ended December 31,
2016

2015

2017

Servicing value and secondary market gains(1) . . . . . . . . . . . $
Loan origination and funding fees . . . . . . . . . . . . . . . . . . . .
Total single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily DUS® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS®(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total gain on loan origination and sale activities . . . . . . . $

209,027 $
26,822
235,849
13,210
2,439
4,378
255,876 $

260,477 $
29,966
290,443
11,397
1,414
4,059
307,313 $

205,513
22,221
227,734
7,125
1,070
459
236,388

(1) Comprised of gains and losses on interest rate lock and purchase loan commitments (which considers the value of

servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market
activities, and changes in the Company’s repurchase liability for loans that have been sold.
Loan originated as held for investment.

(2)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 — MORTGAGE BANKING OPERATIONS: (cont.)

The Company’s portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and
agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the
consolidated statements of ﬁ nancial condition as they are not assets of the Company.

The composition of loans serviced for others that contribute to loan servicing income is presented below at the
unpaid principal balance.

(in thousands)
Single family

U.S. government and agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercial

Multifamily DUS® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At December 31,

2017

2016

22,123,710 $
507,437
22,631,147

18,931,835
556,621
19,488,456

1,311,399
79,797
1,391,196
24,022,343 $

1,108,040
69,323
1,177,363
20,665,819

The Company has made representations and warranties that the loans sold meet certain requirements. The Company
may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination
process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early
payment defaults and fraud. For further information on the Company’s mortgage repurchase liability, see Note 13,
Commitments, Guarantees and Contingencies.

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

(in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions, net of adjustments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,

2017

2016

3,382 $
174
(541)
3,015 $

2,922
1,542
(1,082)
3,382

(1)
(2)

Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants
and certain related expense.

The Company has agreements with 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 $5.3 million and $7.5 million were recorded in
other assets as of December 31, 2017 and 2016, 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 then records the loan on its consolidated statement
of ﬁ nancial condition. At December 31, 2017 and 2016, delinquent or defaulted mortgage loans currently in
Ginnie Mae pools that the Company has recognized on its consolidated statements of ﬁ nancial condition totaled
$39.3 million and $35.8 million, respectively, with a corresponding amount recorded within accounts payable and
other liabilities on the consolidated statements of ﬁ nancial condition. The recognition of previously sold loans does
not impact the accounting for the previously recognized MSRs.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 — MORTGAGE BANKING OPERATIONS: (cont.)

Revenue from mortgage servicing, including the eff ects of derivative risk management instruments, consisted of the
following.

(in thousands)
Servicing income, net: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Servicing fees and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Changes in fair value of single family MSRs due to

modeled amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of multifamily and SBA MSRs . . . . . . . . . . . .

Risk management, single family MSRs:

Changes in fair value of MSRs due to changes in market

inputs and/or model updates(2) . . . . . . . . . . . . . . . . . . . . . .

Net gain (loss) from derivatives economically

hedging MSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loan servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

66,192 $

53,654 $

42,016

(35,451)
(3,932)
26,809

(33,305)
(2,635)
17,714

(1,157)

20,025

9,732
8,575
35,384 $

(4,680)
15,345
33,059 $

(34,038)
(1,992)
5,986

6,555

11,709
18,264
24,250

(1) Represents changes due to collection/realization of expected cash ﬂ ows and curtailments.
(2)

Principally reﬂ ects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which aff ect future prepayment speed and cash ﬂ ow projections.

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

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

The initial fair value measurement of MSRs is adjusted up or down depending on whether the underlying loan pool
interest rate is at a premium, discount or par. Key economic assumptions used in measuring the initial fair value of
capitalized single family MSRs were as follows.

(rates per annum)(1)
Constant prepayment rate (“CPR”)(2) . . . . . . . . . . . . . . . . . . . .
Discount rate(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Years Ended December 31,
2016

2015

2017

13.36%
10.27%

13.93%
10.28%

14.95%
10.29%

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

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 — MORTGAGE BANKING OPERATIONS: (cont.)

Key economic assumptions and the sensitivity of the current fair value for single family MSRs to immediate adverse
changes in those assumptions were as follows.

(dollars in thousands)
Fair value of single family MSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Expected weighted-average life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Constant prepayment rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact on 25 basis points adverse change in interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impact on 50 basis points adverse change in interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact on fair value of 100 basis points increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impact on fair value of 200 basis points increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(1) Represents the expected lifetime average.

At
December 31,
2017

258,560
6.12
12.40%

(21,004)
(42,036)
10.40%
(8,958)
(17,567)

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

The changes in single family MSRs measured at fair value are as follows.

(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions and amortization: . . . . . . . . . . . . . . . . . . . . . . . . .
Originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes due to modeled amortization(1) . . . . . . . . . . . . . .
Net additions and amortization . . . . . . . . . . . . . . . . . . .
Changes in fair value of MSRs due to changes in market
inputs and/or model updates (2) . . . . . . . . . . . . . . . . . . .

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

226,113 $

156,604 $

112,439

68,499
565
(35,451)
33,613

82,789
—
(33,305)
49,484

70,659
989
(34,038)
37,610

(1,166)
258,560 $

20,025
226,113 $

6,555
156,604

(1) Represents changes due to collection/realization of expected cash ﬂ ows and curtailments.
(2)

Principally reﬂ ects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which aff ect future prepayment speed and cash ﬂ ow projections.

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

156

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12 — MORTGAGE BANKING OPERATIONS: (cont.)

The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.

(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

19,747 $

9,915
(3,569)
26,093 $

14,651 $

7,731
(2,635)
19,747 $

10,885
5,758
(1,992)
14,651

At December 31, 2017, the expected weighted-average life of the Company’s multifamily MSRs was 10.33 years.
Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.

(in thousands)
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of multifamily MSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At
December 31,
2017

3,527
3,429
3,355
3,146
2,825
9,811
26,093

The projected amortization expense of multifamily MSRs is an estimate and subject to key assumptions of the
underlying valuation model. The amortization expense for future periods was calculated by applying the same
quantitative factors, such as actual MSR prepayment experience and discount rates, which were used to determine
amortization expense. These factors are inherently subject to signiﬁ cant ﬂ uctuations, primarily due to the eff ect that
changes in interest rates may have on expected loan prepayment experience. Accordingly, any projection of MSR
amortization in future periods is limited by the conditions that existed at the time the calculations were performed
and may not be indicative of actual amortization expense that will be recorded in future periods.

NOTE 13 — COMMITMENTS, GUARANTEES AND CONTINGENCIES:

Commitments

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

The Company makes certain unfunded loan commitments as part of its lending activities that have not been
recognized in the Company’s ﬁ nancial statements. These include commitments to extend credit made as part of the
Company’s lending activities on loans the Company intends to hold in its loans held for investment portfolio. The
aggregate amount of these unrecognized unfunded loan commitments existing at December 31, 2017 and 2016 was
$56.9 million and $42.6 million, respectively.

In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the ﬁ nancing
needs of its customers. Undistributed construction loan commitments, where the Company has an obligation to
advance funds for construction progress payments, were $706.7 million and $603.8 million at December 31, 2017
and 2016, respectively. Unused home equity and commercial banking funding lines totaled $456.1 million and
$289.3 million at December 31, 2017 and 2016, respectively. The Company has recorded an allowance for credit
losses on loan commitments, included in accounts payable and other liabilities on the consolidated statements of
ﬁ nancial condition, of $1.3 million and $1.3 million at December 31, 2017 and 2016, respectively.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 — COMMITMENTS, GUARANTEES AND CONTINGENCIES: (cont.)

The Company is in certain agreements to invest in qualifying small businesses and small enterprises that have not
been recognized in the Company’s ﬁ nancial statements. At December 31, 2017 and 2016 we had a $11.0 million and
$4.0 million, respectively, future commitment to invest in these enterprises.

The Company is obligated under non-cancelable leases for offi ce space and leased equipment. Generally, the offi ce
leases also contain ﬁ ve-year renewal and space options. Rental expense under non-cancelable operating leases
totaled $26.1 million, $22.7 million, and $20.1 million for the years ended December 31, 2017, 2016, and 2015,
respectively.

Minimum rental payments for all non-cancelable leases were as follows.

Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At
December 31,
2017

26,477
23,685
20,904
17,757
14,995
48,752
152,570

Guarantees

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 program, the DUS lender is contractually responsible for the ﬁ rst 5% of losses and then shares
in the remainder of losses with Fannie Mae with a maximum lender loss of 20% of the original principal balance
of each DUS loan. 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 December 31, 2017 and 2016, the total unpaid
principal balance of loans sold under this program was $1.31 billion and $1.11 billion, respectively. The Company’s
reserve liability related to this arrangement totaled $2.0 million and $1.8 million at December 31, 2017 and 2016,
respectively. There were no actual losses incurred under this arrangement during the years ended December 31,
2017, 2016 and 2015.

Mortgage repurchase liability

In the ordinary course of business, the Company sells residential mortgage loans to GSEs and other entities. In
addition, the Company pools FHA-insured and VA-guaranteed mortgage loans into Ginnie Mae, Fannie Mae and
Freddie Mac guaranteed mortgage-backed securities. The Company has made representations and warranties that
the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify
loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting
errors and judgments, early payment defaults and fraud.

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

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 — COMMITMENTS, GUARANTEES AND CONTINGENCIES: (cont.)

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

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 $22.71 billion and $19.56 billion as of December 31, 2017
and 2016, respectively. At December 31, 2017 and 2016, the Company had recorded a mortgage repurchase liability
for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities
on the consolidated statements of ﬁ nancial condition, of $3.0 million and $3.4 million, respectively.

Contingencies

In the normal course of business, the Company may have various legal claims and other similar contingent matters
outstanding for which a loss may be realized. For these claims, the Company establishes a liability for contingent
losses when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. For
claims determined to be reasonably possible but not probable of resulting in a loss, there may be a range of possible
losses in excess of the established liability. At December 31, 2017, we reviewed our legal claims and determined that
there were no material claims that were considered to be probable or reasonably possible of resulting in a material
loss. As a result, the Company did not have any material amounts reserved for legal claims as of December 31, 2017.

NOTE 14 — INCOME TAXES:

On December 22, 2017, President Trump signed into law a major tax legislation commonly referred to as the Tax
Cuts and Jobs Act (“Tax Reform Act”). The Tax Reform Act reduces the U.S. federal corporate income tax rate from
35 percent to 21 percent and makes many other changes to the U.S. tax code. Upon enactment, we were required to
revalue our deferred tax assets and liabilities at the new statutory tax rate. As a result of this revaluation, we have
recognized a one-time, non-cash, $23.3 million deferred income tax beneﬁ t in our 2017 year-end provision.

Income tax (beneﬁ t) expense consisted of following:

(in thousands)
Current (beneﬁt) expense

Years Ended December 31,
2016

2015

2017

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(649) $
62

(1,154) $
1,595

(1,469)
668

Deferred expense (beneﬁt)

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of deferred items . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit investment amortization . . . . . . . . . . . . . . . . . . . . . .

Total income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . $

17,637
(23,325)
528
2,990
(2,757) $

27,538
—
3,058
1,589
32,626 $

15,301
—
602
486
15,588

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 — INCOME TAXES: (cont.)

Income tax (beneﬁ t) expense diff ered from amounts computed at the federal income tax statutory rate as follows:

(in thousands)
Income taxes at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . $
State income tax expense net of federal tax beneﬁt . . . . . . . . .
Tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of and pass-through losses from low income

housing investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in state rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bargain purchase gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of deferred tax consequences on historical AFS . . . .
Impact from Federal Rate Change . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

23,166 $

31,772 $

1,207
(2,855)
(2,041)

1,716
(714)
—
(2)
(23,325)
76
15
(2,757) $

2,073
(2,177)
(1,389)

1,018
811
—
—
—
—
518
32,626 $

19,917
715
(1,307)
(903)

658
722
(2,704)
(1,107)
—
—
(403)
15,588

Deferred income taxes reﬂ ect the net tax eff ect of temporary diff erences between the carrying amounts of assets
and liabilities for ﬁ nancial reporting purposes and those amounts used for tax return purposes. The following is a
summary of the Company’s signiﬁ cant portions of deferred tax assets and liabilities:

(in thousands)
Deferred tax assets:

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal and state net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on investment available for sale securities . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deferred tax liabilities:

Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

At December 31,

2017

2016

11,844 $

3,914
—
4,747
145
2,336
2,286
1,695
993
1,857
1,158
30,975

(58,195)
(316)
(3,828)
(5,267)
(1,371)
(141)
(69,118)
(38,143) $

18,123
7,073
1,196
4,453
283
3,121
5,714
1,369
1,164
4,547
2,163
49,206

(76,680)
(522)
(3,653)
(6,960)
(2,813)
(107)
(90,735)
(41,529)

The Company currently has a net deferred tax liability. This net deferred tax liability is included in accounts payable
and other liabilities on the consolidated statements of ﬁ nancial condition. The Company’s net deferred tax liability is
now signiﬁ cantly lower compared to the prior year, due primarily to the new lower federal income tax rate eff ective
January 1, 2018.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 — INCOME TAXES: (cont.)

Management assesses the available positive and negative evidence to estimate if suffi cient future taxable income
will be generated to utilize the existing deferred tax assets. As of December 31, 2017 management determined that
suffi cient evidence exists to support the future utilization of all of the Company’s deferred tax assets.

Utilization of the federal and state net operating loss and tax credit carryforwards may be subject to an annual
limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended.
Speciﬁ cally, the Company is subject to annual limitations on the amounts of net operating loss and credit carryover
that the Company can use from its pre-IPO period, or from the pre-acquisition periods of the companies that it has
acquired in prior years. At December 31, 2017 and 2016, the Company has federal net operating loss carryforwards
totaling $10.8 million and $16.1 million, respectively, which expire between 2029 and 2036. In addition, as of
December 31, 2017, the Company has minimum tax credits of $1.6 million which never expire. The Tax Reform Act
repeals the corporate alternative minimum tax rules and makes any unused minimum tax credit partially refundable
in the tax years 2018 – 2020, and fully refundable in the tax year 2021. Accordingly, we expect to utilize all of the
remaining minimum tax credit before 2022. We also have state net operating loss carryforwards as of December 31,
2017 and 2016 of $17.4 million and $14.0 million, respectively, that expire between 2018 and 2036.

Retained earnings at December 31, 2017 and 2016 include approximately $12.7 million in tax basis bad debt reserves
for which no income tax liability has been recorded. This represents the balance of bad debt reserves created for tax
purposes as of December 31, 1987. These amounts are subject to recapture (i.e., included in taxable income) in certain
events, such as in the event HomeStreet Bank ceases to be a bank. In the event of recapture, the Company will incur
both federal and state tax liabilities on this pre-1988 bad debt reserve balance at the then prevailing corporate tax rates.

The Company has recorded unrecognized tax positions of $514 thousand and $438 thousand as of December 31,
2017 and 2016, respectively, both periods including potential interest of $19 thousand. Any resolution of our
unrecognized tax positions would impact our eff ective tax rate. We periodically evaluate our exposures associated
with our ﬁ ling positions. During 2017, we updated the amount of recorded potential liability based on actual
proposed adjustments received from the relevant tax authority. We expect our uncertain tax positions will be settled
within the next 12 months.

A reconciliation of our unrecognized tax positions, excluding accrued interest and penalties, for the years ended
December 31, 2017, 2016 and 2015 is as follows:

(in thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increases related to prior year tax positions . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,
2016

2015

2017

419 $
76
495 $

419 $
—
419 $

—
419
419

The Company ﬁ les federal income tax returns with the Internal Revenue Service and state income tax returns with
various state tax authorities. The Company is no longer subject to federal income tax examinations for tax years
prior to 2014 or state income tax examination for tax years prior to 2012.

NOTE 15 — 401(k) SAVINGS PLAN:

The Company maintains a 401(k) Savings Plan for the beneﬁ t of its employees. Substantially all of the Company’s
employees are eligible to participate in the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”). The Plan provides
for payment of retirement beneﬁ ts to employees pursuant to the provisions of the plan and in conformity with
Section 401(k) of the Internal Revenue Code. Employees may elect to have a portion of their salary contributed to
the Plan. New employees are automatically enrolled in the Plan at a 3.0% deferral rate unless they elect otherwise.
Participants receive a vested employer matching contribution equal to 100% of the ﬁ rst 3.0% of eligible compensation
deferred by the participant and 50% of the next 2.0% of eligible compensation deferred by the participant.

Salaries and related costs for the years ended December 31, 2017, 2016, and 2015, included employer contributions
of $8.5 million, $7.7 million and $6.1 million, respectively.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 — SHARE-BASED COMPENSATION PLANS:

For the years ended December 31, 2017, 2016, and 2015, the Company recognized $2.5 million, $1.8 million, and
$1.1 million of compensation cost, respectively, for share-based compensation awards.

2014 Equity Incentive Plan

In May 2014, the shareholders approved the Company’s 2014 Equity Incentive Plan (the “2014 EIP”). Under the
2014 EIP, all of the Company’s offi cers, employees, directors and/or consultants are eligible to receive awards.
Awards which may be granted under the 2014 EIP include incentive stock options, non-qualiﬁ ed stock options, stock
appreciation rights, restricted stock awards, restricted stock units, unrestricted stock, performance share awards and
performance compensation awards. The maximum amount of HomeStreet, Inc. common stock available for grant
under the 2014 EIP is 900,000 shares, which includes shares of common stock that were still available for issuance
under the 2010 Plan and the 2011 Plan.

Nonqualiﬁ ed Stock Options

The Company grants nonqualiﬁ ed options to key senior management personnel. A summary of changes in
nonqualiﬁ ed stock options granted for the year ended December 31, 2017 is as follows:

Options outstanding at

December 31, 2016 . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at December 31, 2017 . . . .
Options that are exercisable and expected to be
exercisable(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercisable . . . . . . . . . . . . . . . . . . . . . . .

Weighted
Average
Exercise Price

Number

Weighted
Average
Remaining
Contractual
Term

Aggregate
Intrinsic Value(2)
(in thousands)

268,547 $
(1,000)
267,547

267,547
267,547 $

12.00
11.00
12.01

12.01
12.01

5.2 years $
0.0 years
4.2 years

4.2 years
4.2 years $

5,263
15
4,533

4,533
4,533

(1) Adjusted for estimated forfeitures.
(2)

Intrinsic value is the amount by which fair value of the underlying stock exceeds the exercise price.

Under this plan, 1,000 options have been exercised during the year ended December 31, 2017, resulting in
cash received and related income tax beneﬁ ts totaling $16 thousand. As of December 31, 2017, there were no
unrecognized compensation costs related to stock options. Compensation costs are recognized over the requisite
service period, which typically is the vesting period.

As observable market prices are generally not available for estimating the fair value of stock options, an
option-pricing model is utilized to estimate fair value. There were no options granted during the years ended
December 31, 2017, 2016 and 2015.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 16 — SHARE-BASED COMPENSATION PLANS: (cont.)

Restricted Shares

The Company grants restricted shares to key senior management personnel and directors. A summary of the status of
restricted shares follows.

Restricted shares outstanding at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . .

Number

Weighted
Average Grant
Date Fair Value
19.34
27.06
22.36
18.76
23.21

256,454 $
163,070
(38,146)
(74,703)
306,675

At December 31, 2017, there was $3.8 million of total unrecognized compensation cost related to nonvested restricted
shares. Unrecognized compensation cost is generally expected to be recognized over a weighted average period of
1.9 years. Restricted share awards granted to senior management vest based upon the achievement of certain market
conditions. One-third vested when the 30-day rolling average share price exceeded 25% of the grant date fair value;
one-third vested when the 30-day rolling average share price exceeded 40% of the grant date fair value; and one-third
vested when the 30-day rolling average share price exceeded 50% of the grant date fair value. The Company accrues
compensation expense based upon an estimate of the awards’ expected vesting period. If a market condition is
satisﬁ ed prior to the end of the estimated vesting period any unrecognized compensation costs associated with the
portion of restricted shares that vested earlier than expected are immediately recognized in earnings.

Certain restricted stock awards granted to senior management during 2017 and 2016 contain both service conditions
and performance conditions. Restricted stock units (“RSUs”) are stock awards with a pro-rata three year vesting,
and the fair market value of the awards are determined at the grant date. Performance share units (“PSUs”)
are stock awards where the number of shares ultimately received by the employee depends on the company’s
performance against speciﬁ ed targets and vest over a three-year period. The fair value of each PSU is determined
on the grant date, based on the company’s stock price, and assumes that performance targets will be achieved. Over
the performance period, the number of shares of stock that will be issued is adjusted upward or downward based
upon the probability of achievement of performance targets. The ultimate number of shares issued and the related
compensation cost recognized as expense will be based on a comparison of the ﬁ nal performance metrics to the
speciﬁ ed targets. Compensation cost is recognized over the requisite three-year service period on a straight-line basis
and adjusted for changes in the probability that the performance targets will be achieved.

NOTE 17 — FAIR VALUE MEASUREMENT:

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 ﬁ nancial instrument’s categorization within the valuation hierarchy is based on the lowest level
of input that is signiﬁ cant to the fair value measurement. The levels are deﬁ ned as follows:

•

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

•

Level 3 — Unobservable inputs for the asset or liability. These inputs reﬂ ect 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.

Valuation Processes

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

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

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

Estimation of Fair Value

Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability
is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such
as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing
spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are
appropriate and consistent with those that would be used by other market participants. However, imprecision in
estimating unobservable inputs and other factors may result in these fair value measurements not reﬂ ecting the
amount realized in an actual sale or transfer of the asset or liability in a current market exchange.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

The following table summarizes the fair value measurement methodologies, including signiﬁ cant inputs and
assumptions, and classiﬁ cation of the Company’s assets and liabilities.

Asset/Liability class
Cash and cash equivalents Carrying value is a reasonable estimate of fair value based on

Valuation methodology, inputs and assumptions

the short-term nature of the instruments.

Classiﬁcation

Estimated fair value
classiﬁed as Level 1.

Investment securities

Investment securities
available for sale

Observable market prices of identical or similar securities are
used where available.

Level 2 recurring fair
value measurement.

If market prices are not readily available, value is based on
discounted cash ﬂows using the following signiﬁcant inputs:

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

Investment securities
held to maturity

Observable market prices of identical or similar securities are
used where available.

If market prices are not readily available, value is based on
discounted cash ﬂows using the following signiﬁcant inputs:

Carried at amortized
cost. Estimated fair value
classiﬁed as Level 2.

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

Loans held for sale

Single family loans,
excluding loans
transferred from held
for investment

Fair value is based on observable market data, including:

• Quoted market prices, where available

• Dealer quotes for similar loans

• Forward sale commitments

Level 2 recurring fair
value measurement.

When not derived from observable market inputs, fair value
is based on discounted cash ﬂows, which considers the
following inputs:

Estimated fair value
classiﬁed as Level 3.

• Current lending rates for new loans

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

Loans originated as
held for investment
and transferred to held
for sale

Fair value is based on discounted cash ﬂows, which considers
the following inputs:

• Current lending rates for new loans

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

Carried at lower of
amortized cost or fair
value.

Estimated fair value
classiﬁed as Level 3.

Multifamily loans
(DUS®) and other

The sale price is set at the time the loan commitment is
made, and as such subsequent changes in market conditions
have a very limited effect, if any, on the value of these loans
carried on the consolidated statements of ﬁnancial condition,
which are typically sold within 30 days of origination.

Carried at lower of
amortized cost or fair
value.

Estimated fair value
classiﬁed as Level 2.

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Loans held for
investment transferred
from loans held for
sale

Mortgage servicing rights
Single family MSRs

• Current lending rates for new loans

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

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 12, Mortgage Banking
Operations.

HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

Asset/Liability class
Loans held for investment

Loans held for
investment, excluding
collateral dependent
loans and loans
transferred from held
for sale

Valuation methodology, inputs and assumptions

Classiﬁcation

Fair value is based on discounted cash ﬂows, which considers
the following inputs:

• Current lending rates for new loans

• Expected prepayment speeds

• Estimated credit losses

• Market liquidity adjustments

For the carrying value
of loans see Note 1 —
Summary of Signiﬁcant
Accounting Policies.

Estimated fair value
classiﬁed as Level 3.

Loans held for
investment, collateral
dependent

Fair value is based on appraised value of collateral,
which considers sales comparison and income approach
methodologies. Adjustments are made for various factors,
which may include:

Carried at lower of
amortized cost or fair
value of collateral, less
the estimated cost to sell.

• Adjustments for variations in speciﬁ c property

qualities such as location, physical dissimilarities,
market conditions at the time of sale, income
producing characteristics and other factors

• Adjustments to obtain “upon completion” and “upon
stabilization” values (e.g., property hold discounts
where the highest and best use would require
development of a property over time)

• Bulk discounts applied for sales costs, holding costs
and proﬁ t for tract development and certain other
properties

Classiﬁed as a Level 3
nonrecurring fair value
measurement in periods
where carrying value is
adjusted to reﬂect the
fair value of collateral.

Fair value is based on discounted cash ﬂows, which considers
the following inputs:

Level 3 recurring fair
value measurement.

Carried at lower of
amortized cost or fair
value. Estimated fair
value classiﬁed as
Level 3.

Level 1 recurring fair
value measurement.

Multifamily MSRs and
SBA

Fair value is based on discounted estimated future servicing
fees and other revenue, less estimated costs to service the
loans.

Derivatives

Eurodollar futures

Fair value is based on closing exchange prices.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

Asset/Liability class

Interest rate swaps
Interest rate swaptions
Forward sale
commitments

Valuation methodology, inputs and assumptions
Fair value is based on quoted prices for identical or similar
instruments, when available.

Classiﬁcation

Level 2 recurring fair
value measurement.

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

Interest rate lock
and purchase loan
commitments

The fair value considers several factors including:

• Fair value of the underlying loan based on quoted
prices in the secondary market, when available.

Level 3 recurring fair
value measurement.

• Value of servicing

• Fall-out factor

Other real estate owned
(“OREO”)

Fair value is based on appraised value of collateral, less
the estimated cost to sell. See discussion of “loans held
for investment, collateral dependent” above for further
information on appraisals.

Federal Home Loan Bank
stock

Carrying value approximates fair value as FHLB stock can
only be purchased or redeemed at par value.

Deposits

Demand deposits

Fair value is estimated as the amount payable on demand at
the reporting date.

Fixed-maturity
certiﬁcates of deposit

Fair value is estimated using discounted cash ﬂows based
on market rates currently offered for deposits of similar
remaining time to maturity.

Federal Home Loan Bank
advances

Fair value is estimated using discounted cash ﬂows based on
rates currently available for advances with similar terms and
remaining time to maturity.

Long-term debt

Fair value is estimated using discounted cash ﬂows based on
current lending rates for similar long-term debt instruments
with similar terms and remaining time to maturity.

Carried at lower of
amortized cost or fair
value of collateral
(Level 3), less the
estimated cost to sell.
Carried at par value.

Estimated fair value
classiﬁed as Level 2.

Carried at historical cost.

Estimated fair value
classiﬁed as Level 2.

Carried at historical cost.

Estimated fair value
classiﬁed as Level 2.

Carried at historical cost.

Estimated fair value
classiﬁed as Level 2.

Carried at historical cost.

Estimated fair value
classiﬁed as Level 2.

167

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

The following tables present the levels of the fair value hierarchy for the Company’s assets and liabilities measured
at fair value on a recurring basis.

(in thousands)
Assets:

Fair Value at
December 31,
2017

Level 1

Level 2

Level 3

Investment securities available for sale

Mortgage backed securities:

Residential . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations:

Residential . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . .

Single family mortgage servicing

rights . . . . . . . . . . . . . . . . . . . . . . . . . .
Single family loans held for sale . . . . . . .
Single family loans held for investment .
Derivatives

Forward sale commitments . . . . . . . . .
Interest rate lock and purchase loan

commitments . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . .

Total assets . . . . . . . . . . . . . . . . . $

Liabilities:

Derivatives

130,090 $
23,694
388,452

— $
—
—

160,424
98,569
24,737
10,652
9,650

258,560
577,313
5,477

1,311

—
—
—
—
—

—
—
—

—

130,090 $

23,694
388,452

160,424
98,569
24,737
10,652
9,650

—
575,977
—

—
—
—

—
—
—
—
—

258,560
1,336
5,477

1,311

—

12,950
12,172
1,714,051 $

—
—
— $

—
12,172
1,435,728 $

12,950
—
278,323

Eurodollar futures . . . . . . . . . . . . . . . . $
Forward sale commitments . . . . . . . . .
Interest rate lock and purchase loan

commitments . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . .

Total liabilities. . . . . . . . . . . . . . . $

101 $

1,445

25
23,654
25,225 $

101 $
—

—
—
101 $

— $

1,445

—
23,654
25,099 $

—
—

25
—
25

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

(in thousands)
Assets:

Fair Value at
December 31,
2016

Level 1

Level 2

Level 3

Investment securities available for sale

Mortgage backed securities:

Residential . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations:

Residential . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . .

Single family mortgage servicing

rights . . . . . . . . . . . . . . . . . . . . . . . . . .
Single family loans held for sale . . . . . . .
Single family loans held for

investment . . . . . . . . . . . . . . . . . . . . . .

Derivatives

Forward sale commitments . . . . . . . . .
Interest rate swaptions . . . . . . . . . . . . .
Interest rate lock and purchase loan

commitments . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . .

Total assets . . . . . . . . . . . . . . . . . $

Liabilities:

Derivatives

177,074 $
25,536
467,673

— $
—
—

191,201
70,764
51,122
10,620

226,113
656,334

17,988

24,623
1

—
—
—
—

—
—

—

—
—

177,074 $

25,536
467,673

191,201
70,764
51,122
10,620

—
614,524

—
—
—

—
—
—
—

226,113
41,810

—

17,988

24,623
1

—
—

19,586
15,016
1,953,651 $

—
—
— $

—
15,016
1,648,154 $

19,586
—
305,497

Forward sale commitments . . . . . . . . . $
Interest rate lock and purchase loan

commitments . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . .

Total liabilities. . . . . . . . . . . . . . . $

15,203 $

— $

15,203 $

367
26,829
42,399 $

—
—
— $

—
26,829
42,032 $

—

367
—
367

There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2017
and 2016.

Level 3 Recurring Fair Value Measurements

The Company’s level 3 recurring fair value measurements consist of single family mortgage servicing rights, single
family loans held for investment where fair value option was elected, certain single family loans held for sale, and
interest rate lock and purchase loan commitments, which are accounted for as derivatives. For information regarding
fair value changes and activity for single family MSRs during the years ended December 31, 2017 and 2016, see
Note 12, Mortgage Banking Operations.

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 ﬂ ows related to the associated
servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be
converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on loans held for sale, while

169

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The
signiﬁ cance 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 speciﬁ ed
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 signiﬁ cant 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 ﬂ ow model to estimate the fair value of certain loans that have been
transferred from held for sale to held for investment and single family loans held for sale when the fair value of
the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied
spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived
from third party pricing which is based on market information from comparable loan pools. The fair value estimate
of these certain single family loans that have been transferred from held for sale to held for investment and these
certain single family loans held for sale is sensitive to changes in the benchmark interest rate which might result in a
signiﬁ cantly 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 signiﬁ cant unobservable input. The total amount of held for
investment loans where fair value option election was made was $5.5 million and $18.0 million at December 31,
2017 and December 31, 2016, respectively.

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

(dollars in thousands)
Loans held for investment, fair

value option

Fair
Value
$ 5,477

Valuation
Technique
Income
approach

(dollars in thousands)
Loans held for investment, fair

value option

Fair
Value
$ 17,988

Valuation
Technique
Income
approach

At December 31, 2017

Signiﬁcant
Unobservable Input
Implied spread to
benchmark interest rate
curve

At December 31, 2016

Signiﬁcant
Unobservable Input
Implied spread to
benchmark interest rate
curve

Low
High
3.61% 4.96%

Weighted
Average
4.10%

Low
High
3.62% 4.97%

Weighted
Average
4.49%

170

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

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

(dollars in thousands)
Loans held for sale, fair value

option

Fair
Value
$ 1,336

Valuation
Technique
Income
approach

(dollars in thousands)
Loans held for sale, fair value

option

Fair
Value
$ 41,810

Valuation
Technique
Income
approach

At December 31, 2017

Signiﬁcant
Unobservable Input
Implied spread to
benchmark interest rate
curve
Market price movement
from comparable bond

At December 31, 2016

Signiﬁcant
Unobservable Input
Implied spread to
benchmark interest rate
curve
Market price movement
from comparable bond

Low
High
3.93% 3.93%

Weighted
Average
3.93%

(0.38)% (0.10)% (0.24)%

Low
High
3.46% 6.14%

Weighted
Average
4.23%

(0.49)% (0.11)% (0.27)%

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan
commitments.

(in thousands)
Beginning balance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total realized/unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Years Ended December 31,

2017

2016

19,219 $
126,082
(132,376)

12,925 $

17,711
146,462
(144,954)
19,219

The following table presents fair value changes and activity for Level 3 loans held for sale and loans held for
investment.

Year Ended December 31, 2017

Additions

Transfers

Payoffs/Sales

Change in
mark to
market

Ending
balance

Beginning
balance

41,810 $

4,327 $

12,797 $

(58,396) $

798 $

1,336

(in thousands)
Loans held for sale . . . . . $
Loans held for

investment . . . . . . . . . .

17,988

127

(12,272)

(480)

114

5,477

Year Ended December 31, 2016

Additions

Transfers

Payoffs/Sales

Change in
mark to
market

Ending
balance

Beginning
balance

49,322 $

14,454 $

(4,913) $

(14,524) $

(2,529) $

41,810

(in thousands)
Loans held for sale . . . . . $
Loans held for

investment . . . . . . . . . .

21,544

357

4,913

(7,608)

(1,218)

17,988

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

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

At December 31, 2017

Fair
Value
$ 12,925

Valuation
Technique
Income approach

Signiﬁcant
Unobservable Input
Fall out factor

Low

—%

High
58.38%

Weighted
Average
12.05%

Value of servicing

0.69%

1.73%

1.09%

At December 31, 2016

Fair
Value
$ 19,219

Valuation
Technique
Income approach

Signiﬁcant
Unobservable Input
Fall out factor

Low
0.50%

High
60.34%

Weighted
Average
11.95%

(dollars in thousands)
Interest rate lock

and purchase loan
commitments, net

(dollars in thousands)
Interest rate lock

and purchase loan
commitments, net

Value of servicing

0.65%

2.27%

1.08%

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a
nonrecurring basis. These assets include certain loans held for investment and other real estate owned that are
carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair
values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use
the market approach and income approach methodologies. All impaired loans are subject to an internal evaluation
completed quarterly by management as part of the allowance process.

The fair value of commercial properties are generally based on third-party appraisals that consider recent
sales of comparable properties, including their income-generating characteristics, adjusted (generally based on
unobservable inputs) to reﬂ ect the general assumptions that a market participant would make when analyzing the
property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal
value of certain commercial loans held for investment that are collateralized by real estate. During the year ended
December 31, 2017, the Company recorded adjustments ranging from 0.00% to 100.00% to the appraisal values of
certain commercial loans held for investment that are collateralized by real estate.

During the year ended December 31, 2016, the Company recorded no adjustments to the appraisal values of certain
commercial loans held for investment that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial
loans held for investment that are not collateralized by real estate and to the appraisal value of OREO. During
the year ended December 31, 2017, the Company applied a range of stated value adjustments of 0.0% to 100.0%
to the stated value of commercial loans held for investment, with a weighted average of 46.7%. During the year
ended December 31, 2016, the Company applied a range of stated value adjustments of 7.0% to 63.4% to the stated
value of commercial loans held for investment, with a weighted average of 57.5% and a range of 0.0% to 49.1% to
the appraisal value of OREO, with a weighted average of 17.9%. During the year ended December 31, 2017, the
Company did not apply any adjustment to the appraisal value of OREO.

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

These adjustments include management assumptions that are based on the type of collateral dependent loan and
may increase or decrease an appraised value. Management adjustments vary signiﬁ cantly depending on the location,
physical characteristics and income producing potential of each individual property. The quality and volume of market

172

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

information available at the time of the appraisal can vary from period-to-period and cause signiﬁ cant changes to the
nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs
are generally not a reliable indicator for how fair value will increase or decrease from period to period.

The following tables present assets that had changes in their recorded fair value during the years ended
December 31, 2017 and 2016 and what we still held at the end of the respective reporting period.

(in thousands)
Loans held for investment(1) . . . $
Total . . . . . . . . . . . . . . . . . . . $

Fair Value of
Assets Held at
December 31,
2017

Year Ended December 31, 2017

Level 1

Level 2

Level 3

Total Gains
(Losses)

1,918 $
1,918 $

— $
— $

1,918 $
1,918 $

(163)
(163)

Year Ended December 31, 2016

Fair Value of
Assets Held at
December 31,
2016

(in thousands)
Loans held for investment(1) . . . $
Other real estate owned(2) . . . . .

Total . . . . . . . . . . . . . . . . . . . $

Level 1

Level 2

Level 3

Total Gains
(Losses)

4,586 $
5,933
10,519 $

— $
—
— $

4,586 $
5,933
10,519 $

(881)
(1,332)
(2,213)

(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.
(2) Represents other real estate owned where an updated fair value of collateral is used to adjust the carrying amount

subsequent to the initial classiﬁ cation as other real estate owned.

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 ﬁ nancial instruments other than assets and liabilities measured at fair value on a recurring basis.

Carrying
Value

Fair
Value

Level 1

Level 2

Level 3

At December 31, 2017

72,718 $

— $

—

(in thousands)
Assets:

Cash and cash equivalents . . . . . $
Investment securities held to

maturity . . . . . . . . . . . . . . . . .
Loans held for investment . . . . .
Loans held for sale –

multifamily and other . . . . . .

Mortgage servicing rights –

58,036
4,500,989

58,128
4,497,884

33,589

multifamily . . . . . . . . . . . . . .

26,093

28,362

Federal Home Loan Bank

stock . . . . . . . . . . . . . . . . . . .

46,639

Liabilities:

—
—

—

58,128
—

33,589

—
4,497,884

—

28,362

46,639

—

—
—

Deposits . . . . . . . . . . . . . . . . . . . $ 4,760,952 $ 4,739,563 $
Federal Home Loan Bank

advances . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . .

979,201
125,274

981,441
108,530

— $ 4,739,563 $

—
—

981,441
108,530

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17 — FAIR VALUE MEASUREMENT: (cont.)

Carrying
Value

Fair
Value

Level 1

Level 2

Level 3

At December 31, 2016

53,932 $

— $

—

(in thousands)
Assets:

Cash and cash equivalents . . . . . $
Investment securities held to

maturity . . . . . . . . . . . . . . . . .
Loans held for investment . . . . .
Loans held for sale – transferred
from held for investment . . . .

Loans held for sale –

49,861
3,801,039

49,488
3,840,990

17,512

multifamily and other . . . . . .

40,712

Mortgage servicing rights –

multifamily . . . . . . . . . . . . . .

19,747

21,610

Federal Home Loan Bank

stock . . . . . . . . . . . . . . . . . . .

40,347

Liabilities:

—
—

—

49,488
—

—
3,840,990

—

17,512

40,712

—

21,610

40,347

—

—
—

Deposits . . . . . . . . . . . . . . . . . . . $ 4,429,701 $ 4,410,213 $
Federal Home Loan Bank

advances . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . .

868,379
125,147

870,782
122,357

— $ 4,410,213 $

—
—

870,782
122,357

NOTE 18 — EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.

(in thousands, except share and per share data)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average shares:

Basic weighted-average number of common shares

Years Ended December 31,
2016

2015

2017

68,946 $

58,151 $

41,319

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,864,657

24,615,990

20,818,045

Dilutive effect of outstanding common stock

equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

227,362

227,693

241,156

Diluted weighted-average number of common stock

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,092,019

24,843,683

21,059,201

Earnings per share:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2.57 $
2.54 $

2.36 $
2.34 $

1.98
1.96

(1)

Excluded from the computation of diluted earnings per share (due to their antidilutive eff ect) for the years ended
December 31, 2017, 2016 and 2015 were certain stock options and unvested restricted stock issued to key senior
management personnel and directors of the Company. The aggregate number of common stock equivalents related to such
options and unvested restricted shares, which could potentially be dilutive in future periods, was 3,224, zero and zero at
December 31, 2017, 2016 and 2015, respectively.

NOTE 19 — BUSINESS SEGMENTS:

The Company’s business segments are determined based on the products and services provided, as well as the nature
of the related business activities, and they reﬂ ect the manner in which ﬁ nancial information is currently evaluated by
management. The Company organizes the segments into two lines of business: Commercial and Consumer Banking
Segment and Mortgage Banking Segment.

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 — BUSINESS SEGMENTS: (cont.)

A description of the Company’s business segments and the products and services that they provide is as follows.

Mortgage Banking originates single family residential mortgage loans for sale in the secondary markets. The
majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we
retain the right to service these loans. We have become a rated originator and servicer of jumbo loans, allowing
us to sell these loans to other securitizers. Additionally, we purchase loans from WMS Series LLC through a
correspondent arrangement with that company. We also sell loans on a servicing-released and servicing-retained
basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders or sold
on a servicing-released basis to correspondent lenders. On occasion, we may sell a portion of our MSR portfolio.
We reﬂ ect the results from the management of loan funding and the interest rate risk associated with the secondary
market loan sales and the retained single family mortgage servicing rights within this business segment.

We use various management accounting methodologies to assign certain income statement items to the responsible
operating segment, including:

•

a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges
between the segments, assigning to each segment a funding credit for its liabilities, such as deposits, and
a charge to fund its assets;

an allocation of charges for services rendered to the segments by centralized functions, such as corporate
overhead, which are generally based on each segment’s consumption patterns; and

an allocation of the Company’s consolidated income taxes which are based on the eff ective tax rate
applied to the segment’s pretax income or loss.

The FTP methodology is based on external market factors and aligns the expected weighted-average life of the
ﬁ nancial asset or liability to external economic data, such as the U.S. Dollar LIBOR/Swap curve, and provides a
consistent basis for determining the cost of funds to be allocated to each operating segment.

Financial highlights by operating segment were as follows.

(in thousands)
Condensed income statement:
Net interest income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Year Ended December 31, 2017
Commercial
and Consumer
Banking

Mortgage
Banking

Total

19,896 $
—
269,794
290,676
(986)
(27,871)
26,885 $
866,712 $

174,542 $
750
42,360
148,977
67,175
25,114
42,061 $
5,875,329 $

194,438
750
312,154
439,653
66,189
(2,757)
68,946
6,742,041

175

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 19 — BUSINESS SEGMENTS: (cont.)

(in thousands)
Condensed income statement:
Net interest income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Year Ended December 31, 2016
Commercial
and Consumer
Banking

Mortgage
Banking

Total

26,034 $
—
323,468
305,937
43,565
16,214
27,351 $
974,248 $

154,015 $
4,100
35,682
138,385
47,212
16,412
30,800 $
5,269,452 $

180,049
4,100
359,150
444,322
90,777
32,626
58,151
6,243,700

Year Ended December 31, 2015
Commercial
and Consumer
Banking

Mortgage
Banking

Total

28,318 $
—
251,870
243,970
36,218
12,916
23,302 $
848,445 $

120,020 $
6,100
29,367
122,598
20,689
2,672
18,017 $
4,046,050 $

148,338
6,100
281,237
366,568
56,907
15,588
41,319
4,894,495

(1) Net interest income is the diff erence between interest earned on assets and the cost of liabilities to fund those assets.

Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits
for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if
the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from
another segment.

NOTE 20 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

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

(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Other comprehensive income (loss) before

Years Ended December 31,
2016

2015

2017

(10,412) $

(2,449) $

1,546

reclassiﬁcations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,607

(6,313)

Amounts reclassiﬁed from accumulated other

comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive income (loss) . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(317)
3,290
(7,122) $

(1,650)
(7,963)
(10,412) $

(1,325)

(2,670)
(3,995)
(2,449)

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): (cont.)

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

Affected Line Item in the Consolidated Statements of Operations
(in thousands)
Gain on sale of investment securities available for sale . . . . . . . . . . . . . $
Income tax expense (beneﬁt) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

NOTE 21 — PARENT COMPANY FINANCIAL STATEMENTS:

Condensed ﬁ nancial information for HomeStreet, Inc. is as follows.

Amount Reclassiﬁed from Accumulated
Other Comprehensive Income (Loss)
Years Ended December 31,
2016

2017

2015

489 $
172
317 $

2,539 $
889
1,650 $

2,406
(264)
2,670

Condensed Statements of Financial Condition
(in thousands)
Assets:

At December 31,

2017

2016

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in stock of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities:

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity:

Preferred stock, no par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

14,101 $
7,319
807,398
828,818 $

1,021 $

123,417
124,438

—
511
339,009
371,982
(7,122)
704,380
828,818 $

12,260
9,700
732,135
754,095

1,521
123,290
124,811

—
511
336,149
303,036
(10,412)
629,284
754,095

Condensed Statements of Operations
(in thousands)
Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Loss) income before income tax beneﬁt and equity in income of

subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend from subsidiaries to parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

177

Years Ended December 31,
2016

2015

2017

(4,625) $
1,904

(2,680) $
1,622

(1,036)
1,686

(2,721)
4,000
1,279
6,681
(5,402)
(3,381)
70,967
68,946 $
3,290
72,236 $

(1,058)
4,697
3,639
7,746
(4,107)
(4,656)
57,602
58,151 $
(7,963)
50,188 $

650
13,181
13,831
7,239
6,592
(561)
34,166
41,319
(3,995)
37,324

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21 — PARENT COMPANY FINANCIAL STATEMENTS: (cont.)

Condensed Statements of Cash Flows
(in thousands)

Years Ended December 31,
2016

2015

2017

Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . $

(3,395) $

990 $

2,654

Cash ﬂows from investing activities:

Net purchases of and proceeds from investment securities . . . . . . . . . . .
Net payments for investments in and advances to subsidiaries . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . .

2,546
2,685
5,231

(5,029)
(116,090)
(121,119)

Cash ﬂows from ﬁnancing activities:

Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from equity raise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from and repayment of advances from subsidiaries . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by ﬁnancing activities . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . .

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . $

11
—
—
—
—
(6)
5
1,841
12,260
14,101 $

2,713
63,184
58,713
—
2
—
124,612
4,483
7,777
12,260 $

673
(992)
(319)

177
—
—
(5)
—
—
172
2,507
5,270
7,777

NOTE 22 — UNAUDITED QUARTERLY FINANCIAL DATA:

Our supplemental quarterly consolidated ﬁ nancial information is as follows.

Quarter Ended

Dec. 31,
2017

Sept. 30,
2017

(in thousands, except
share data)
Interest income . . . . . . . . $ 63,686 $ 61,981 $ 56,742 $ 55,274 $ 56,862 $ 55,330 $ 51,291 $ 46,054
5,363
Interest expense . . . . . . . .
Net interest income . . . . .
40,691
Provision for credit

Sept. 30,
2016

June 30,
2016

June 30,
2017

Mar. 31,
2017

Mar. 31,
2016

12,607
51,079

11,141
50,840

8,788
48,074

8,528
46,802

6,809
44,482

9,623
45,651

9,874
46,868

Dec. 31,
2016

—

losses . . . . . . . . . . . . . .
Net interest income
after provision for
51,079
credit losses . . . . . . .
72,801
Noninterest income . . . . .
Noninterest expense . . . . 106,838
Income before income tax
(beneﬁt) expense . . . . .

17,042

Income tax (beneﬁt)

250

500

—

350

1,250

1,100

1,400

50,590
83,884
114,697

46,368
81,008
111,244

45,651
74,461
106,874

47,724
73,221
117,539

45,552
111,745
114,399

43,382
102,476
111,031

39,291
71,708
101,353

19,777

16,132

13,238

3,406

42,898

34,827

9,646

expense . . . . . . . . . . . .

3,239
Net income . . . . . . . . . . . $ 34,915 $ 13,839 $ 11,209 $ 8,983 $ 2,294 $ 27,701 $ 21,749 $ 6,407
Basic earnings per

(17,873)

15,197

13,078

5,938

1,112

4,255

4,923

share . . . . . . . . . . . . . . $

1.30 $

0.51 $

0.42 $

0.33 $

0.09 $

1.12 $

0.88 $

0.27

Diluted earnings per

share . . . . . . . . . . . . . . $

1.29 $

0.51 $

0.41 $

0.33 $

0.09 $

1.11 $

0.87 $

0.27

178

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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 23 — RESTRUCTURING:

In 2017, we implemented a restructuring plan in our Mortgage Banking Segment to reduce our operating cost
structure and improve effi ciency. In 2017, we recorded a total restructuring charge of $3.7 million, consisting of
facility related cost of $3.1 million and severance cost of $648 thousand. The charges are included in the occupancy
and the salaries and related costs line items on our consolidated statement of operations for that period.

The following table summarizes the restructuring charges, the restructuring costs paid or settled during the year
ended December 31, 2017, and the Company’s net remaining liability balance at December 31, 2017.

(in thousands)
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . $

Restructuring charges
Costs paid or otherwise settled

Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . $

Facility
related costs

Personnel
related costs

Total

— $

3,072
(1,686)
1,386 $

— $

648
(648)

— $

—
3,720
(2,334)
1,386

NOTE 24 — SUBSEQUENT EVENTS:

The Company has evaluated the eff ects of events that have occurred subsequent to the year ended December 31,
2017, and has included all material events that would require recognition in the 2017 consolidated ﬁ nancial
statements or disclosure in the notes to the consolidated ﬁ nancial statements.

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ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

No disclosure required pursuant to Item 304 of Regulation S-K.

ITEM 9A CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management conducted an evaluation, under the supervision and with the participation of its CEO
and CFO, of the eff ectiveness of the design and operation of the Company’s disclosure controls and procedures (as
deﬁ ned in Rule 13a-15(e) of the Exchange Act) at December 31, 2017. The Company’s disclosure controls and
procedures are designed to ensure that information required to be disclosed by the Company in the reports that it
ﬁ les or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods
speciﬁ ed in the rules and forms of the SEC, and that such information is accumulated and communicated to the
Company’s management, including its CEO and CFO, as appropriate, to allow timely decisions regarding required
disclosure. Based upon the evaluation, the CEO and CFO concluded that the Company’s disclosure controls and
procedures were eff ective at December 31, 2017.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting (as
deﬁ ned in

Rule 13a-15(f) of the Exchange Act) for the Company. The Company’s internal control over ﬁ nancial reporting is a
process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding
the reliability of ﬁ nancial reporting and the preparation of the Company’s ﬁ nancial statements for external purposes
in accordance with

U.S. GAAP. Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of eff ectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the degree of compliance with the policies
or procedures may

deteriorate. Management has made a comprehensive review, evaluation, and assessment of the Company’s internal
control over ﬁ nancial reporting at December 31, 2017. In making its assessment of internal control over ﬁ nancial
reporting, management utilized the framework issued in 2013 by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal Control — Integrated Framework. Based on that assessment,
management concluded that, at December 31, 2017, the Company’s internal control over ﬁ nancial reporting was
eff ective.

Deloitte & Touche LLP, the independent registered public accounting ﬁ rm that audited our consolidated ﬁ nancial
statements at, and for, the year ended December 31, 2017, has issued an audit report on the eff ectiveness of the
Company’s internal control over ﬁ nancial reporting at December 31, 2017, which report is included below in this
Item 9A.

Changes in Internal Control Over Financial Reporting

As required by Rule 13a-15(d), our management, including our Chief Executive Offi cer and Chief Financial Offi cer,
also conducted an evaluation of our internal control over ﬁ nancial reporting to determine whether any changes
occurred during the quarter ended December 31, 2017 that have materially aff ected, or are reasonably likely to
materially aff ect, our internal control over ﬁ nancial reporting. There were no changes to our internal control over
ﬁ nancial reporting that occurred during the quarter ended December 31, 2017 that have materially aff ected, or are
reasonably likely to materially aff ect, our internal control over ﬁ nancial reporting.

180

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and Board of Directors of HomeStreet, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over ﬁ nancial reporting of HomeStreet, Inc. and subsidiaries (the “Company”) as
of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because management’s assessment
and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over
ﬁ nancial reporting included controls over the preparation of the schedules equivalent to the basic ﬁ nancial statements in
accordance with the instructions for the Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A.
In our opinion, the Company maintained, in all material respects, eff ective internal control over ﬁ nancial reporting as of
December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated ﬁ nancial statements as of and for the year ended December 31, 2017, of the
Company and our report dated March 6, 2018, expressed an unqualiﬁ ed opinion on those ﬁ nancial statements.

Basis for Opinion

The Company’s management is responsible for maintaining eff ective internal control over ﬁ nancial reporting and
for its assessment of the eff ectiveness of internal control over ﬁ nancial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over ﬁ nancial reporting based on our audit. We are a public accounting ﬁ rm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether eff ective internal control over ﬁ nancial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
ﬁ nancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
eff ectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Deﬁ nition and Limitations of Internal Control over Financial Reporting

A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance
regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over ﬁ nancial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material eff ect on the ﬁ nancial statements.

Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of eff ectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

/s/ Deloitte & Touche LLP

Seattle, Washington

March 6, 2018

ITEM 9B OTHER INFORMATION

None.

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PART III

ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be set forth in our deﬁ nitive proxy statement with respect to our 2018
annual meeting of stockholders (the “2018 Proxy Statement”) to be ﬁ led with the SEC, which is expected to be
ﬁ led not later than 120 days after the end of our ﬁ scal year ended December 31, 2017, and is incorporated herein by
reference.

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, offi cers and employees,
including our principal executive offi cer and principal ﬁ nancial offi cer. The Code of Business Conduct and Ethics is
posted on our website at http://ir.homestreet.com.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver
from, a provision of this Code of Business Conduct and Ethics by posting such information on our corporate
website, at the address and location speciﬁ ed above and, to the extent required by the listing standards of the Nasdaq
Global Select Market, by ﬁ ling a Current Report on Form 8-K with the SEC, disclosing such information.

ITEM 11 EXECUTIVE COMPENSATION

The information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by
reference.

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options,
warrants and rights under all of our existing equity compensation plans as of December 31, 2017 under the
HomeStreet, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).

(c)
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
(Excluding
Securities
Reﬂected in
Column
(a))
1,074,890(3)

N/A
1,074,890

(a)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights

(b)
Weighted
Average
Exercise Price
of Outstanding
Options,
Warrants, and
Rights

640,247(1) $
10,800(4) $
651,047 $

10.16(2)
1.07
9.80(2)

Plan Category
Plans approved by shareholders . . . . . . . . . . . . . . . . . . . . . . . .
Plans not approved by shareholders(4) . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1) Consists of 267,547 shares subject to option grants awarded pursuant to the HomeStreet, Inc. 2010 Equity Incentive Plan

(the “2010 Plan”), 152,209 shares subject to Restricted Stock Units awarded under the 2014 Plan and 231,291 shares
issuable under Performance Share Units awarded under the 2014 Plan, assuming maximum performance goals are met
under such awards, resulting in the issuance of the maximum number of shares allowed under those awards. The 2010 Plan
was terminated when the 2014 Plan was approved by our shareholders on May 29, 2014. While the terms of the 2010 Plan
remain in eff ect for any awards issued under that plan that are still outstanding, new awards may not be granted under the
2010 Plan.
Shares issued on vesting of Restricted Stock Units and Performance Share Units under the 2014 Plan are done without
payment by the participant of any additional consideration and therefore have been excluded from this calculation. The
weighted average exercise price reﬂ ects only the exercise price of the options issued under the 2010 Plan that are still
outstanding as of the date of this table.

(2)

(3) Consists of shares remaining available for issuance under the 2014 Plan.

182

(4) Consists of retention equity awards granted in 2010 outside of the 2010 Plan but subject to its terms and conditions.

Except as disclosed above, the information required by this item will be set forth in the 2018 Proxy Statement and is
incorporated herein by reference.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE

The information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by
reference.

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be set forth in the 2018 Proxy Statement and is incorporated herein by
reference.

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183

PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements and Financial Statement Schedules

(i)

Financial Statements

The following consolidated ﬁ nancial statements of the registrant and its subsidiaries are included in
Part II Item 8:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of December 31, 2017 and 2016

Consolidated Statements of Operations for the three years ended December 31, 2017

Consolidated Statements of Comprehensive Income for the three years ended December 31, 2017

Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2017

Consolidated Statements of Cash Flows for the three years ended December 31, 2017

Notes to Consolidated Financial Statements

(ii) Financial Statement Schedules

II — Valuation and Qualifying Accounts

All ﬁ nancial statement schedules for the Company have been included in the consolidated ﬁ nancial statements or the
related footnotes, or are either inapplicable or not required.

(iii) Exhibits

Exhibit
Number
3.1(1)
3.2(2)
3.3(3)
3.4(4)
4.1(5)
4.2
4.3(6)††

10.1*(7)
10.2*(8)
10.3*(8)
10.4*(8)
10.5*(9)
10.6*(9)
10.7*(7)

10.8*(7)

10.9*(10)

EXHIBIT INDEX

Description

Amended and Restated Bylaws of HomeStreet, Inc.
Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
First Amendment to Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
Amendment to Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
Form of Common Stock Certiﬁcate
Reference is made to Exhibit 3.1
Indenture dated as of May 20, 2016 between HomeStreet, Inc. and Wells Fargo Bank, National
Association, as Trustee
HomeStreet, Inc. 2010 Equity Incentive Plan
HomeStreet, Inc. 2014 Equity Incentive Plan
Standard Form of Restricted Stock Unit Agreement under the 2014 Plan
Standard Form of Performance Share Unit Agreement under the 2014 Plan
Amended and Restated HomeStreet, Inc. 401(k) Savings Plan, as of January 1, 2015
Amendment to the HomeStreet, Inc. 401(k) Savings Plan adopted as of January 1, 2016
HomeStreet, Inc. Directors’ Deferred Compensation Plan, effective February 1, 2004, as amended
and restated December 19, 2008, executed by HomeStreet, Inc. and HomeStreet Bank
HomeStreet, Inc. Executive Deferred Compensation Plan, effective February 1, 2004, as amended
and restated December 19, 2008, executed by HomeStreet, Inc., HomeStreet Bank and HomeStreet
Capital Corporation
Form of HomeStreet, Inc. Award Agreement for Nonqualiﬁed Stock Options and Standard Terms and
Conditions for Nonqualiﬁed Stock Options, granted October 22, 2010 and November 29, 2010

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Exhibit
Number
10.10*

10.11*

10.12*(11)

10.13*

10.14(7)
10.15(7)
10.16(7)
10.17(12)†

10.18(8)
10.19(9)

10.20(12)

10.21(7)

10.22(7)†

10.23(7)
10.24(7)†

10.25(10)

10.26(14)

10.27(8)

10.28(9)
10.28(10)

10.30(15)

10.31(13)
10.32(16)

12.1
21
23.1

Description

Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Mark Mason, dated
January 25, 2018
Amended and Restated Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and
William Endresen, dated January 25, 2018
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Mark R. Ruh, dated
September 11, 2017
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Godfrey Evans, dated
January 25, 2018
Form of Officer Indemniﬁcation Agreement for HomeStreet, Inc.
Form of Director Indemniﬁcation Agreement for HomeStreet, Inc.
Form of 2011 Director and Officer Indemniﬁcation for HomeStreet, Inc.
Office Lease, dated March 5, 1992, between Continental, Inc. and One Union Square Venture (“Office
Lease”), as amended by Supplemental Lease Agreement dated August 25, 1992, Second Amendment
to Lease dated May 6, 1998, Third Amendment to Lease dated June 17, 1998, Fourth Amendment to
Lease dated February 15, 2000, Fifth Amendment to Lease dated July 30, 2001, Sixth Amendment to
Lease dated March 5, 2002, Seventh Amendment to Lease dated May 19, 2004, Eighth Amendment
to Lease dated August 31, 2004, Ninth Amendment to Lease dated April 19, 2006, Tenth Amendment
to Lease dated July 20, 2006, Eleventh Amendment to Lease dated December 27, 2006, Twelfth
Amendment to Lease dated October 1, 2007, Thirteenth Amendment to Lease dated January 26,
2010, Fourteenth Amendment to Lease dated January 19, 2012, Fifteenth Amendment to Lease dated
May 24, 2012, Sixteenth Amendment to Lease dated September 12, 2012, Seventeenth Amendment
to Lease dated November 8, 2012, Eighteenth Amendment to Lease dated May 3, 2013, Nineteenth
Amendment to Lease dated May 28, 2013 and Twentieth Amendment to Lease dated June 19, 2013.
Twenty-First Amendment to Office Lease dated December 24, 2014.
Advances, Security and Deposit Agreement, dated as of June 1, 2015, between HomeStreet Bank and
the Federal Home Loan Bank of Des Moines
Letter Agreement, dated January 15, 2013, by HomeStreet Bank to Federal Reserve Bank of San
Francisco
Master Custodial Agreement for Custody of Single Family MBS Pool Mortgage Loans, dated
October 2009, between HomeStreet Bank, Federal National Mortgage Association, and U.S. Bank,
N.A.
Master Agreement ML 02783 between HomeStreet Bank and Fannie Mae, dated March 15, 2010,
amended by Letter Agreement dated March 15, 2011
Master Agreement, dated as of June 17, 2010, between HomeStreet Bank and Freddie Mac
Cash Pledge Agreement, dated as of June 1, 2010, between HomeStreet Bank and Federal Home
Loan Mortgage Corporation
Amended and Restated Limited Liability Company Agreement of Windermere Mortgage Services
Series LLC, dated May 1, 2005, including form of separate series designation
Correspondent Purchase and Sale Agreement, effective September 1, 2010, between HomeStreet
Bank and Windermere Mortgage Services Series LLC
HomeStreet, Inc. 2014 Management/Support Performance-Based Annual Incentive Compensation
Plan
HomeStreet Bank 2015 Performance-Based Annual Incentive Compensation Plan
Master Agreement between HomeStreet Bank and Government National Mortgage Association
effective January 3, 2011
Agreement and Plan of Merger dated as of September 25, 2015 between HomeStreet, Inc.,
HomeStreet Bank and Orange County Business Bank
Registration Rights Agreement dated May 20, 2016
At Market Issuance Agreement dated December 5, 2016 by and among HomeStreet, Inc., FBR
Capital Markets & Co. and Keefe, Bruyette & Woods, Inc
Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of HomeStreet, Inc.
Consent of Deloitte & Touche LLP

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Exhibit
Number
24.1

Description

32(17)

31.1

31.2

Powers of Attorney. Contained in the signature page of this Annual Report on Form 10-K and
incorporated herein by reference.
Certiﬁcation of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
Certiﬁcation of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
Certiﬁcations 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.
XBRL Instance Document
101.INS(18)
101.SCH(18)
XBRL Taxonomy Extension Schema Document
101.CAL(18) XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(18)
101.LAB(18) XBRL Taxonomy Extension Presentation Linkbase Document
XBRL Taxonomy Extension Deﬁnitions Linkbase Document
101.PRE(18)

XBRL Taxonomy Extension Label Linkbase Document

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on August 2, 2016,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 4 to Registration Statement on Form S-1 (SEC File No.
333-173980) ﬁ led on July 26, 2011, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on February 29,
2012, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on October 25, 2012,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 5 to Registration Statement on Form S-1 (SEC File No.
333-173980) ﬁ led on August 9, 2011, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on May 20, 2016,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No.
333-173980) ﬁ led on May 19, 2011, and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) ﬁ led on March 25, 2015,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) ﬁ led on March 11, 2016,
and incorporated herein by reference.

(10) Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No.

333-173980) ﬁ led on June 21, 2011, and incorporated herein by reference.

(11) Filed as an exhibit to HomeStreet, Inc.’s current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on September 12,

2017, and incorporated herein by reference.

(12) Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) ﬁ led on March 17, 2014,

and incorporated herein by reference.

(13) Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on May 20, 2016, and

incorporated herein by reference.

(14) Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 3 to Registration Statement on Form S-1 (SEC File No.

333-173980) ﬁ led on July 8, 2011, and incorporated herein by reference.

(15) Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on September 28,

2015, and incorporated herein by reference.

(16) Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) ﬁ led on December 6,

2016, and incorporated herein by reference.

(17) This exhibit shall not be deemed “ﬁ led” 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 ﬁ ling under the Securities
Act of 1933 or the Securities Exchange Act of 1934.

(18) As provided in Rule 406T of Regulation S-T, this information shall not be deemed “ﬁ led” for purposes of Section 11 and

12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability
under those sections.

Pursuant to Rule 405 of Regulation S-T, includes the following ﬁ nancial information included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting
Language) interactive data ﬁ les: (i) the Consolidated Statements of Operations for the three years ended December 31,
2017, (ii) the Consolidated Statements of Financial Condition as of December 31, 2017 and December 31, 2016, (iii) the

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Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the three years ended December 31,
2017, (iv) the Consolidated Statements of Cash Flows for the three years ended December 31, 2017, and (v) the Notes to
Consolidated Financial Statements.
Portions of this exhibit have been omitted pursuant to a conﬁ dential treatment order by the Securities and Exchange
Commission.
Instruments with respect to any other long-term debt of HomeStreet, Inc. and its consolidated subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount of securities authorized thereunder does not
exceed 10 percent of the total assets of HomeStreet, Inc. and its subsidiaries on a consolidated basis. HomeStreet, Inc.
hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
Management contract or compensation plan or arrangement.

†

††

Item 16

Form 10-K Summary

None.

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187

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 March 6, 2018.

SIGNATURES

HomeStreet, Inc.

By:

/s/ Mark K. Mason
Mark K. Mason
President and Chief Executive Officer

HomeStreet, Inc.

By:

/s/ Mark R. Ruh
Mark R. Ruh
Executive Vice President,
Chief Financial Officer and Principal Accounting Officer

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POWERS OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Mark K. Mason and Mark R. Ruh, and each of them his “or her” attorney-in-fact, with the power of
substitution, for him “or her” in any and all capacities, to sign any amendment to this Report on Form 10-K and to
ﬁ le the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conﬁ rming all that said attorney-in-fact, or his “or her” substitute or substitutes,
may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

/s/ Mark K. Mason
Mark K. Mason, Chairman

Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)

Date

March 6, 2018

/s/ David A. Ederer
David A. Ederer, Chairman Emeritus

Chairman Emeritus of the Board

March 6, 2018

/s/ Mark R. Ruh
Mark R. Ruh

/s/ Scott M. Boggs
Scott M. Boggs

/s/ Mark R. Patterson
Mark R. Patterson

/s/ Victor H. Indiek
Victor H. Indiek

/s/ Thomas E. King
Thomas E. King

/s/ George W. Kirk
George W. Kirk

/s/ Douglas I. Smith
Douglas I. Smith

/s/ Donald R. Voss
Donald R. Voss

March 6, 2018

Executive Vice President, Chief Financial Officer
and Principal Accounting Officer

Director

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