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
5/20 © HomeStreet, Inc. All Rights Reserved. HomeStreet and the logo are registered trademarks of HomeStreet, Inc.
2019 Annual Report to Shareholders
HomeStreet, Inc. (together with its consolidated subsidiaries, “HomeStreet,” the “Company,” “we,” “our” or “us”), a
Washington corporation, is a diversified financial services company founded in 1921, headquartered in Seattle,
Washington, serving customers primarily on the West Coast of the United States, including Hawaii. We are
principally engaged in commercial banking, consumer banking, and real estate lending, including commercial
real estate and single family mortgage lending. In addition to the banking and lending operations of our wholly
owned subsidiaries, HomeStreet also sells insurance products and services for consumer clients under the name
HomeStreet Insurance. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation.
HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans
including mortgage loans, deposit products, private banking and cash management services. Our loan products
include commercial business 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.
Our branch network is primarily located in large metropolitan markets of the Western United States which
promotes convenience for our customers and helps us build our market share through growth of commercial and
consumer account deposits.
HomeStreet Capital Corporation, a Washington corporation, sells and services multifamily mortgage loans
originated by HomeStreet Bank under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS®")1.
1 DUS® is a registered trademark of Fannie Mae
SEATTLE
METRO
WASHINGTON
Retail deposit branches (62)
Primary stand-alone lending centers (4)
Primary stand-alone insurance office (1)
OREGON
IDAHO
CALIFORNIA
UTAH
HAWAII
SOUTHERN
CALIFORNIA
Board of Directors1
Mark K. Mason, Chairman
Donald R. Voss, Lead Independent Director
David A. Ederer, Chairman Emiritus 2
Scott M. Boggs
Sandra A. Cavanaugh
Thomas E. King 2
George “Judd” Kirk 2
James R. Mitchell, Jr.
Mark R. Patterson
Nancy D. Pellegrino
Douglas I. Smith
Executive Officers
Mark K. Mason
Chairman, President
and Chief Executive Officer 3,4
Mark R. Ruh
Executive Vice President
and Chief Financial Officer 3,4,5
William D. Endresen
Executive Vice President,
Commercial Real Estate and
Commercial Capital President 4
Godfrey B. Evans
Executive Vice President, General Counsel,
Chief Adminstrative Officer and Corporate Secretary 3,4
Erik Hand
Executive Vice President,
Residential Lending Director 4
Troy Harper
Executive Vice President,
Chief Information Officer 3,4
Jay C. Iseman
Executive Vice President,
Chief Credit Officer 3,4
Paulette Lemon
Executive Vice President,
Retail Banking Director 4
Edward C. Schultz
Executive Vice President,
Director of Commercial Banking 4
Jeff Todhunter
Executive Vice President,
Residential Construction Lending Director 4
Darrell S. van Amen
Executive Vice President,
Chief Investment Officer and Treasurer 3,4
Mary L. Vincent
Executive Vice President,
Chief Risk Officer 3,4
1 Members of the Board of HomeStreet, Inc. are also members of the Board
of HomeStreet Bank.
2 Mr. Ederer, Mr. King and Mr. Kirk will not stand for reelection at the
Annual Meeting.
3 HomeStreet, Inc.
4 HomeStreet Bank
5 Mr. Ruh has tendered his resignation from the Company effective
June 5, 2020 and is expected to step down from the position of EVP, CFO
effective with the assumption of that role by John Michel on May 4, 2020.
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
Annual Meeting: May 21, 2020
As part of our precautions regarding the COVID-19
outbreak, we are planning for the possibility that the
Annual Meeting may be held solely by means of
remote communications. If we take this step, we will
announce the decision to do so in advance, and
details on how to participate will be posted on our
website and filed with the Securities and Exchange
Commission as additional proxy materials.
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.
To our fellow Shareholders,
At the time of this writing, our business, economy, and communities have been significantly impacted by the
COVID-19 pandemic. This is a period of enormous stress on the global, national, regional, and local economies,
and our Company will be adversely affected in ways we are still trying to quantify. The situation is changing rapidly,
with a lot of unknowns, and our customers, employees and communities are all experiencing adverse impacts and
personal tragedies. Moreover, we must acknowledge that there is the potential for permanent changes in the way we
interact and do business. Nevertheless, I believe that our Company is well positioned as we face this crisis.
At present, we have a strong capital position, well in excess of the levels to be considered well-capitalized under
regulatory standards for both the Bank and the Company. We have ample liquidity and access to more from our
contingent sources. We believe our loan portfolio is conservatively underwritten, and that most of our borrowers
are in an economic position that should allow them to persevere through this crisis. Where we have borrowers who
are disproportionately impacted by the virus and its effects on our economy, we are working with them to defer or
modify payments, pursue other forbearances and, where appropriate, extend additional credit. We have assisted many
of these borrowers with Paycheck Protection Loans under the CARES Act which will provide additional assistance
during this challenging time. Additionally, while we significantly reduced the size of our mortgage banking business
in 2019, our continuing mortgage banking business is experiencing the benefits of lower interest rates and related
high levels of refinancing. This additional income will, we believe, mitigate any negative impact to our earnings
from credit losses and additional expenses incurred during this crisis.
With respect to our 2019 results, asset quality remained strong throughout the year, with nonperforming assets
totaling 0.21 percent of total assets at the end of the year. As a result of the current COVID-19 pandemic, we expect
to experience some deterioration of our loan portfolio credit quality with commercial loans most at risk. Our loan
portfolio has, by design, limited concentrations by product type, industry, and geography in order to limit our risk
of exposure to any one part of the market, however, to mitigate additional risk to our portfolio, we have temporarily
suspended lending to certain borrowers operating in the most adversely affected businesses and industries. Much
of our team that saw us through the great recession and helped us resolve a large portfolio of troubled assets and
recapitalize the institution in 2012, remain at the Company in key positions. This experience will be invaluable as we
navigate the current crisis.
During 2019 and the first quarter of 2020, before the advent of the COVID-19 related economic impacts, we
implemented some significant changes at HomeStreet to achieve our strategy of greater efficiency and profitability
while emerging as a leading West Coast regional bank.
After thoughtful consideration by the Board of Directors, in the first and second quarter of 2019 we executed on the
Board’s decision to substantially reduce our mortgage banking business, including the divestiture of our stand-alone
home loan center-based mortgage origination business and related servicing. The successful completion of these
divestitures avoided significant costs of liquidation, and most of our employees associated with these centers
were transferred to the acquiror of the assets of the home loan centers. At the same time, we sold a majority of the
mortgage servicing rights related to loan origination associated with those home loan centers. Finally, during the
fourth quarter of 2019, we completed the sale of our ownership interest in our former mortgage joint venture, WMS
Series, LLC.
In addition to reducing our exposure to mortgage banking and to focus on our commercial and consumer banking
operations, we have also been executing a plan to meaningfully improve our operating efficiency and profitability.
The plan identified a range of expense reduction opportunities that involves organizational, operational, technology,
real estate, and personnel changes. We have forecasted substantial completion of this plan for some time in 2021,
however, we do not yet know what the impact will be on the plan of changes to our economic conditions coming out
of the COVID-19 pandemic.
Alongside these strategic, operational and cost structure changes, we continue to refresh our Board of Directors
and add new members with business expertise and experience in banking and financial services who might also
bring fresh perspectives to our Board. In October of 2019 we added Nancy D. Pellegrino, who brings over 30 years
of wealth management and private banking experience and furthers our stated goals of increased diversity on our
Board. In January of 2020, we also announced the appointment of James R. Mitchell to the Board. He is the founder
and former chief executive of Puget Sound Bank, with over 40 years of commercial banking experience. We added
these directors prior to our upcoming 2020 annual meeting of the shareholders to give the Board time to transition
as three of our current directors will not be standing for re-election at the Annual Meeting as they have reached the
age limitation set forth in our Principles of Corporate Governance. We believe we are making great progress toward
our Board diversification goals and we look forward to the contribution and fresh perspectives of our new Board
members.
The Board recognizes that our shareholders have supported the development of the Company and the recent
significant changes to our strategy, all of which were pursued with the goals of reducing earnings volatility,
improving profitability and, ultimately, enhancing shareholder value. While some of these actions, and specifically
the current initiative to improve operating efficiency, are obviously still a work in progress, and there is additional
uncertainty in the near term as we work through the impacts of the COVID-19 pandemic on our economy, our
customers and our industry, it is clear to the Board that the foundation for improvement has been laid. In 2019, the
capital markets rewarded these actions as the total shareholder return of our stock price was 60.1% in comparison to
the Keefe Bruyette & Woods Regional Bank Index return that was 23.9%.
Reflecting our progress in improving and stabilizing earnings, the Board initiated a quarterly common stock
dividend that was paid on February 21, 2020. In determining this dividend, the Board considered numerous factors.
First, the Board acknowledged that both the consistency and absolute level of the Company’s current profitability
continue to have much room for improvement. At the same time, the Board believes the strategic changes
implemented have substantially reduced earnings volatility and presented a clearer path to continued improvement.
While the Board will continue to assess the impact of economic changes, including those caused by the COVID-19
pandemic, on our ability to pay dividends and the amount of any dividends that might be declared, we have not
suspended our dividend policy at this time.
During 2019 we established a common stock share repurchase program, repurchasing 3,187,259 shares during
2019 and an additional 580,278 shares during 2020. In total, these repurchases represent 13.9% of the total shares
outstanding prior to the initiation of the repurchase program. On March 23, 2020, following the declaration of
the COVID-19 pandemic, we suspended our share repurchase program as we believe it is prudent to preserve our
capital to provide more protection against potential credit losses and provide more support for lending activities that
may become crucial to supporting our communities. We anticipate restarting our share repurchase program when
appropriate.
While HomeStreet is an essential business in our communities, providing banking products to our customers during
this crisis, we recognize that our employees are taking significant risks in reporting to work and fulfilling these
duties. We have instituted a work from home program for those functions that do not require an in office or customer
facing presence. To keep our customers and employees safe, we have installed barriers where appropriate and
implemented a comprehensive social distancing policy that contains robust sanitation and disinfecting protocols at
locations for confirmed or presumed COVID-19 diagnoses throughout the Company. Acknowledging the potential
hardships our frontline employees face, we have increased the benefits to our employees during this time to include:
no out-of-pocket charges for COVID-19 related medical care; additional paid time off for employees that are
required to interact with customers as part of their job duties; COVID Time Off if an employee is confirmed with a
COVID-19 diagnosis, is quarantined by a healthcare provider, or is affected by a workplace closure, which does not
get charged against an employee’s sick or vacation time; and lastly, under certain circumstances, a furlough program
that would allow employees to step away from their job without quitting while still retaining their medical benefits.
There is still much work ahead of us and the ultimate impact of the current COVID-19 pandemic is still largely
unknown. Management is working closely with our Board, our regulators and our advisors as we plan and execute
our response to the significant disruptions caused by the COVID-19 pandemic. On behalf of the entire Board of
Directors, I want to commend the courage and dedication of our employees in pursuing our goals and serving
our customers and communities during this time of personal risk and uncertainty. As a regional community bank,
HomeStreet Bank plays an important role in supporting our local communities through this crisis. HomeStreet is
well positioned to help our customers and communities weather the financial storm.
Finally, I want to think you, our shareholders, for your continued support and confidence in our Company.
Mark K. Mason
Chairman of the Board, President, and Chief Executive Officer
HomeStreet, Inc.
UNITED STATES
SECURITIES AN D EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
FORM 10-K
_______________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35424
_______________________________
HOMESTREET, INC.
(Exact name of registrant as specified 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 offices) (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
Trading Symbol(s)
HMST
Securities registered pursuant to Section 12(g) of the Act:
None.
_______________________________
Name of each exchange on which registered
Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth Company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of June 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common
stock held by non-affiliates was approximately $645.8 million, based on a closing price of $29.64 per share of common stock on the Nasdaq Global
Select Market on such date. Shares of common stock held by each executive officer and director and by each person known to the Company who
beneficially owns more than 10% of the outstanding common stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate 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, 2020 was 23,685,849.6.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, will be incorporated by reference from the registrant’s definitive
proxy statement relating to the annual meeting of the shareholders to be held in 2020, to be filed with the Securities and Exchange Commission
within 120 days of the end of the fiscal year to which this Report relates. If a definitive proxy statement of the registrant is not filed within such
period, the registrant will instead file such information on an amendment to this Report within such 120 days of the end of the registrant’s fiscal year
to which this report relates.
TABLE OF CONTENTS
PART 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A
UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3
MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
ITEM 6
ITEM 7
ITEM 7A
ITEM 8
ITEM 9
ITEM 9A
ITEM 9B
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . .
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . .
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . .
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
ITEM 10
ITEM 11
ITEM 12
1
1
1
16
34
34
34
34
35
35
36
39
81
85
169
169
172
173
173
173
MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . .
173
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
ITEM 14
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTIFICATIONS
EXHIBIT 21
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32
174
174
175
175
179
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.
i
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
financial items; management’s plans and objectives for future operations or programs; future operations, plans,
regulatory compliance or approvals; anticipated restructuring or resource optimization plans and activities and
expected cost savings from and timing of these plans and 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; expectations relating to our industry,
regulatory environment and the economy as a whole 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 differ, 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 financial reporting purposes.
ITEM 1 BUSINESS
General
HomeStreet, Inc. (together with its consolidated subsidiaries, “HomeStreet,” the “Company,” “we,” “our” or “us”),
a Washington corporation, is a diversified financial services company founded in 1921, headquartered in Seattle,
Washington, serving customers primarily on the West Coast of the United States, including Hawaii. We are
principally engaged in commercial banking, consumer banking, and real estate lending, including commercial real
estate and single family mortgage lending. In addition to the banking and lending operations of our wholly owned
subsidiaries, HomeStreet also sells insurance products and services for consumer clients under the name HomeStreet
Insurance. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation.
HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans
including mortgage loans, deposit products, private banking and cash management services. Our loan products include
commercial business 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. Our branch network
is primarily located in large metropolitan markets of the Western United States which promotes convenience for our
customers and helps us build our market share through growth of commercial and consumer account deposits.
HomeStreet Capital Corporation, a Washington corporation, sells and services multifamily mortgage loans
originated by HomeStreet Bank under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS®”)1.
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, all of which are
registered pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended.
1
DUS® is a registered trademark of Fannie Mae
1
At December 31, 2019, we had total assets of $6.81 billion, net loans held for investment of $5.07 billion, deposits
of $5.34 billion and shareholders’ equity of $679.7 million.
We provide diversified financial products and services to our customers through bank branches, ATMs, online,
mobile and telephone banking channels. These products and services include deposit products, single family
residential mortgage loans, consumer, business and agricultural portfolio loans, insurance products and cash
management services. We originate construction loans, bridge loans, and permanent loans for our portfolio on single
family residences, and on office, retail, industrial and multifamily properties. We originate multifamily real estate
loans through our Fannie Mae DUS® business, and after origination those loans are sold to or securitized by Fannie
Mae, with the Company generally retaining the servicing rights. The majority of our mortgage loans are sold to
or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, with the right to service these loans retained. We are a
rated originator and servicer of jumbo loans, allowing us to sell the loans to other securitizers. 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 (“MSRs”). We manage the loan funding and the interest
rate risk associated with the secondary market loan sales and the retained single family MSRs. In addition, through
the Commercial Real Estate division of HomeStreet Bank, we originate permanent commercial real estate loans
primarily up to $15 million in size, a portion of which we pool for sale and sell into the secondary market.
Recent Developments
The Board of Directors approved an addition to our share repurchase program for up to $25 million of our common
stock in January 2020, and our regulators have confirmed no objections to that repurchase. In February the Board
increased the authorization by an additional $10 million, conditional on the non-objection of our regulators.
Assuming no objections from our regulators for the additional repurchase authorization, we expect to commence
repurchases in the first or second quarter of 2020. This represents, in aggregate amount of shares of the Company’s
common stock, no par value, from shareholders, which represents approximately 5.2% of the Company’s currently
outstanding common stock based on the closing price of the stock as of March 2, 2020. This authorization is in
addition to the 3.4 million shares of common stock that the Company repurchased in 2019 and early 2020.
In January 2020 HomeStreet’s Board of Directors approved a new dividend policy that contemplates the payment
of quarterly cash dividends on our common stock when, if and in an amount declared by the Board after taking into
consideration, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset
growth. The first dividend declared under this policy was a cash dividend of $0.15 per share for the first quarter
of 2020, which was paid on February 21, 2020 to shareholders of record as of the close of business on February 5,
2020. The dividend rate to be paid will be reassessed each quarter by the Board of Directors in accordance with the
dividend policy.
Business Strategy
Since our initial public offering (IPO) in February of 2012, we have steadily grown our banking presence to diversify
our earnings and mitigate the impact of the earnings volatility of our mortgage banking business. As a part of our
growth strategy we opened several de novo retail deposit branches between 2012 and 2019 to expand our branch
network and increase our core deposit base, while also expanding our offerings of community banking products
and services. We have focused our de novo branch openings 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. In 2018, we added three de novo branches in
the Puget Sound area. In 2019, we added two de novo branches in Northern California. Overall, from our IPO through
December 31, 2019, we have added 24 de novo branches and acquired nine branches. At the same time, we grew and
diversified 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, enter new markets and add to or acquire additional
professionals for our commercial and consumer lending teams. Between 2013 and 2019, we acquired four banks,
expanding our network in Eastern Washington and Southern California, and nine individual branches to complement
our existing networks in Washington, Oregon and California. We believe that our acquisitions have accelerated our
growth of interest-earning commercial banking assets, strengthened our core deposit base, increased our geographic
diversification and added experienced commercial and consumer banking professionals in key target markets.
2
In 2019, we took additional steps to rebalance the mix of our business toward commercial and consumer banking
by significantly reducing our presence in the mortgage banking industry. In late 2018 and early 2019 our Board
of Directors reviewed the challenges that confronted our former single family Mortgage Banking segment and
the mortgage industry in general and determined that it would be in the best interests of the Company and its
shareholders to explore a potential sale of the home loan center (“HLC”)-based single family mortgage origination
business and related MSRs. These challenges included substantially lower origination volume due to changes in
market interest rates resulting in lower revenue and increased regulations on loan underwriting and loan disclosures
resulting in higher mortgage origination costs. Additionally, a persistently flat yield curve by historical standards
made hedging the change in value of our MSRs less effective, thereby reducing our risk management results. The
decision to exit the HLC-based mortgage banking business aligned with our long-term strategic goal of reducing
the impact of this cyclical and volatile earnings stream and was made only after we felt we had substantially
exhausted opportunities to improve the performance of the now former Mortgage Banking segment. Following this
determination, the Board approved a plan to sell the Bank’s stand-alone home loan centers and related mortgage
servicing rights, which was accomplished in three separate transactions. Our legacy Mortgage Banking segment was
discontinued effective March 31, 2019 when the Bank’s Board of Directors adopted a plan of exit or disposal of our
HLC-based mortgage banking business.
On March 29, 2019, HomeStreet Bank successfully closed and settled two separate sales of the rights to service
an aggregate of $14.26 billion in total unpaid principal balances of single family mortgage loans for Fannie Mae,
Freddie Mac and Ginnie Mae, representing 71% of HomeStreet’s total single family mortgage loans serviced for
others portfolio as of December 31, 2018. The Company finalized the servicing transfer for these loans to their
respective buyers in the second and third quarters of 2019 and subserviced the loans until the transfer date.
In April 2019, the Bank entered into an agreement with Homebridge Financial Services Inc (“Homebridge”) to
sell substantially all of the assets of the HLC-based mortgage origination business and transfer related personnel to
Homebridge. In a series of closings in June and July 2019, the bank sold substantially all of the assets associated
with the 47 HLC, satellite and fulfillment offices and facilitated the transfer of 464 related mortgage personnel.
Homebridge paid the net book value of the acquired assets, which was approximately $4.9 million, plus a premium
of $1.0 million, which was reduced by $1.5 million for reimbursement by HomeStreet of certain transaction
expenses incurred by Homebridge, as well as the assumption of certain home loan center and fulfillment office
lease obligations. Additionally, in June 2019, we closed the remaining four stand-alone HLCs that were not sold to
Homebridge, which left us with no remaining stand-alone single family residential lending centers.
In order to further reduce the Company’s exposure to the mortgage business and solidify its focus on commercial
and consumer banking, in November 2019, we completed the sale of our ownership interest in WMS Series, LLC,
an affiliated business arrangement that we had partially owned with various members of Windermere Real Estate
Company franchises that operates a single family mortgage origination business from certain Windermere offices
under the name Penrith Home Loans.
The assets sold or abandoned largely represented the majority of the Company’s prior Mortgage Banking segment,
the activities of which related to originating, servicing, underwriting, funding and selling single family residential
mortgage loans. The Bank has continued to originate mortgages through its bank locations, online banking and
affinity lending relationships.
Any remaining activity for these HLCs, along with certain other mortgage banking-related assets and liabilities that
are expected to be sold or abandoned, are classified as discontinued operations in the accompanying Consolidated
Statements of Financial Condition and Consolidated Statements of Operations. Certain remaining components of
the Company’s former Mortgage Banking segment, including MSRs on certain mortgage loans that were not sold as
part of the MSR sales described above and our remaining single-family mortgage origination and servicing business,
have been classified as continuing operations.
Our legacy Mortgage Banking segment was discontinued effective March 31, 2019 when the Bank’s Board of
Directors adopted a plan of exit or disposal of our HLC-based mortgage banking business. Thus, discontinued
operations reported in the first quarter of 2019 included our entire mortgage banking business as did all comparative
periods presented. Effective April 1, 2019, the newly organized bank location-based mortgage banking business
commenced operations and the associated revenues and expenses were reported as part of the Company’s continuing
operations beginning in the second quarter of 2019.
3
After the successful 2019 sale of our home loan center-based mortgage origination business and servicing rights,
our strategy continues to be growing our commercial and consumer banking business and diversifying our earnings.
Included in our strategy is a focus on efficiency and profitability which has resulted in substantial organizational and
operational changes, reflecting our more simplified business structure and lower growth goals.
We also 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 benefit from being one of only 25 companies nationally that is
an approved Fannie Mae DUS® seller and servicer. We will continue to support 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 will then seek to replace with permanent financing upon completion of the
projects. We also originate commercial real estate construction loans, bridge loans and permanent loans for our
portfolio, primarily on office, retail, industrial and multifamily property types located within our geographic
footprint and regularly sell those types of loans to other investors.
While we continue to focus on growing and strengthening our commercial banking business, we have suspended
future de novo deposit branch openings while we execute our strategy of improving efficiency and overall
profitability.
Our market focus is concentrated primarily in the major metropolitan markets in the Western United States,
which are characterized by larger populations, lower unemployment and generally higher growth than many other
metropolitan areas. These markets are the Seattle/Puget Sound and eastern areas of Washington, the Portland,
Oregon area, the Hawaiian Islands, the San Francisco Bay Area of California, and Southern California, including
Los Angeles, Orange, Riverside, and San Diego Counties. We believe there is a significant opportunity for a
well-capitalized, community-focused bank to compete effectively in West Coast markets, especially those that are
not well served by existing community banks. Our strategy is to offer responsive and personalized service while
providing a full range of financial services to small- and middle-market commercial and consumer customers, to
build loyalty and grow market share, both organically in our existing locations and teams opportunistically through
strategic acquisitions.
In 2019, following the reduction of our mortgage banking business we took steps to improve productivity and
reduce total corporate expenses, reflecting the substantial reduction in the size and complexity of our operations
and our lower growth plan going forward. Since the second quarter of 2019, we have been working with an outside
consulting firm that specializes in bank efficiency on an enterprise-wide profitability improvement project. The
goal of this project is to analyze and improve all of our corporate expenses and business line processes, including
contract terms, occupancy and technology costs, organization and staffing improvements, and other cost savings and
efficiency proposals. The project includes the following initiatives:
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Simplify the organizational structure by reducing management levels and management redundancy
Consolidate similar functions currently residing in multiple organizations
Renegotiate, where possible, our technology contracts
Identify and eliminate redundant or unnecessary systems and services
Rationalize staffing levels to recognize the significant changes in work volumes and Company growth
rates
Eliminate excess occupancy costs consistent with reduced personnel
We began executing on the efficiency initiatives in the third quarter of 2019 and expect these reductions and
enhancements will continue through 2020 and beyond.
4
Market and Competition
We view our market as the major metropolitan coastal areas of 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 significant number of large and mid-sized
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 financial crisis. We believe these markets can be well served
by a strong regional bank like ours that is focused on providing consumers and businesses with quality customer
service and a competitive array of deposit and lending products.
As of December 31, 2019, we operated 62 full service bank branches in the State of Washington, Northern
California, Southern California, the Portland, Oregon area and the State of Hawaii, as well as four primary
stand-alone commercial lending centers located in Central Washington, Southern California, Boise, Idaho, and Salt
Lake City, Utah.
The financial services industry is highly competitive. We compete with other banks, credit unions, mortgage
banking companies, insurance companies, finance companies, and investment and mutual fund companies. In
particular, we compete with many financial institutions with greater resources, including the capacity to make larger
loans, fund extensive advertising campaigns and offer 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-qualified employees and attracting new customers who seek long-term stability, local decision-making, quality
products and outstanding expertise and customer service.
Employees
As of December 31, 2019, we employed 1,071 full-time equivalent employees, compared to 2,036 full-time
equivalent employees at December 31, 2018.
Where You Can Obtain Additional Information
We file 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 file 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 Form 10-K or any of our other securities filings. The SEC’s website, www.sec.gov, contains
reports, proxy and information statements, and other information that we file or furnish electronically with the SEC.
5
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 qualified 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 financial 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 file 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 regularly considered that could contain wide-ranging potential changes
to the competitive landscape for financial 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 affected. Any change in policies, legislation or regulation,
whether by the Federal Reserve, the WDFI, the FDIC, the Washington state 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 significant 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 classification of assets and
establishment of adequate loan loss reserves for regulatory purposes.
Our operations and earnings will be affected by domestic economic conditions and the monetary and fiscal 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 financial
institutions through its power to implement national monetary and fiscal policy including, among other things,
actions taken in order to curb inflation or combat a recession. The Federal Reserve affects 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 influence over reserve
requirements to which banks are subject. From December 2015 through December 2018, the Federal Reserve
increased short-term interest rates nine times. Since the beginning of 2019, however, the Federal Reserve has
lowered short-term interest rates four times. 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 financial 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 affecting 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 in 2016 to a bank holding
company that has elected to be a financial 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.”
6
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 codified this requirement and extended 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 generally prohibits a bank holding company, including the Company, directly or indirectly (or through
one or more subsidiaries), from acquiring:
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control of another depository institution (or a holding company parent) without prior approval of the
Federal Reserve (as “control” is defined 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 any class 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 financial and managerial resources and future prospects of the company and the
institutions involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of
the community and competitive factors. In addition, nonbank acquisitions by a bank holding company are generally
limited to the acquisition of up to 5% of the outstanding share of any class of voting securities of a company unless
the Federal Reserve has previously determined that the nonbank activities are closely related to banking or prior
approval is obtained from the Federal Reserve.
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 defined by the Federal Reserve. Under the Change in Bank Control Act, the Federal
Reserve has 60 days from the filing of a complete notice to act (the 60-day period may be extended), taking into
consideration certain factors, including the financial and managerial resources of the acquirer and the antitrust
effects 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 influence 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 effect 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 financial 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.
7
The Company’s ability to pay dividends to shareholders is significantly 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.”
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. The Federal banking regulators have adopted the 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 our 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.
In addition to the Final Guidance, the Dodd-Frank Act contains a number of provisions
Dodd-Frank Act.
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 financial 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 financial institutions with $1 billion or more in assets. On June 10, 2016, these
regulators published a modified 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 financial 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
“indemnification” 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.
8
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, offer various
banking services to its customers and establish branch offices. 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 in an amount greater than its retained earnings without the approval of the WDFI. This
restriction is 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 filing a notice or an application with the WDFI, which has the authority to disapprove the
notice or application. Washington law defines “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, officers 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. The amount of federal deposit insurance coverage is $250,000, per depositor, for each account
ownership category at each depository institution. The $250,000 amount is subject to periodic adjustments.
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. 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 flexibility to adopt assessment rates without additional rule-making
provided that the total base assessment rate increase or decrease does not exceed 2 basis points. In the future, if the
reserve ratio reaches certain levels, these assessment rates will generally be lowered. As of December 31, 2019, the
Bank’s assessment rate was 4.96 basis points on average assets less average tangible equity capital.
In addition, in the past, all FDIC-insured institutions were 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 last of these obligations matured in 2019 and accordingly, FDIC-insured
institutions are no longer required to make payments related to the obligations.
9
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 reflect, 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. 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 financial institutions subject
to the Rules, including both the Company and the Bank, are required to establish a “conservation buffer,” 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
buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and
discretionary bonuses to executive officers.
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 finally 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.
The Rules made changes in the methods of calculating certain risk-based assets, which in turn affects 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 finance 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.
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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 buffer.
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 modified by the Rules, the
framework establishes five capital categories; under the Rules, a bank is:
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•
“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 specific 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%;
“significantly 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 classified 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 affiliates, ability to pay bonuses and raises to senior executives and pursuing new
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.
Capital Simplification Rule
Following the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the
“EGRRCPA”) in May 2018, the federal banking regulators (including the FDIC and the Federal Reserve) issued a
new rule, the Community Bank Leverage Ratio (“CBLR”), intended to simplify capital rules for certain community
banks and their holding companies. Qualifying community banking organizations can elect to be under a new capital
framework rather than the current capital framework. The new rule is effective beginning in 2020. We have elected
to remain under the existing capital framework rather than under the new CLBR framework. Qualifying community
banks have the right to opt into and out of the CLBR framework at any time and for any reason.
Limitations on Transactions with Affiliates
Transactions between the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate 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 affiliates
of the Bank. Generally, Section 23A limits the extent to which the Bank or its subsidiaries may engage in “covered
11
transactions” with any one affiliate 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 affiliates 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-affiliate. The term “covered transaction” includes the making of loans to an affiliate, the purchase of
or investment in the securities issued by an affiliate, the purchase of assets from an affiliate, the acceptance of
securities issued by an affiliate 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 affiliate, or certain transactions with an affiliate
that involves the borrowing or lending of securities and certain derivative transactions with an affiliate.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans, derivatives, repurchase
agreements and securities lending to executive officers, directors and principal shareholders of the Bank and its
affiliates.
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 benefits. In general, the guidelines
require appropriate systems and practices to identify and manage the risks and exposures specified 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 officer, 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 confidentiality 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 diversification 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.
The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on
loan-to-value ratios for different 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 identified 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 flow 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
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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 five 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. Generally, the implemented regulations provide
various ways in which the retention of risk requirement can be satisfied and also describes exemptions from the
retention requirements for various types of assets, including mortgages.
Volcker Rule
Certain provisions of the Dodd-Frank Act are commonly known as the “Volcker Rule.” Subject to certain exceptions,
the Volcker Rule generally prohibits banks and affiliated companies from engaging in proprietary trading of certain
securities, derivatives, commodity futures and options on those instruments, for their own account. The Volcker
Rule also imposes restrictions on banks and their affiliates from acquiring or retaining an ownership interest in,
sponsoring or having certain other relationships with hedge funds or private equity funds.
Section 203 of the EGRRCPA amends the Volker Rule to exempt any institution that does not have, or is not
controlled by a company that has, more than $10 billion in total consolidated assets and total trading assets and
liabilities that are more than five percent of total consolidated assets. As a result, the Bank is exempt from the Volker
Rule until such time that its assets exceed $10 billion or its total trading assets and liabilities are more than five
percent of total consolidated assets.
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 qualified 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 officers’ 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 financial 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
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.
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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 2019 that reserves be maintained as follows:
•
•
•
Net transaction accounts up to $16.3 million are exempt from reserve requirements.
A reserve of 3.0% for transaction accounts over $16.3 million up to $124.2 million.
A reserve of 10% for any transaction accounts over $124.2 million.
In 2020, the regulations generally require that reserves be maintained as follows:
•
•
•
Net transaction accounts up to $16.9 million are exempt from reserve requirements.
A reserve of 3.0% of the aggregate is required for transaction accounts over $16.9 million up to
$127.5 million.
A reserve of 10% is required for any transaction accounts over $127.5 million.
Federal Home Loan Bank System
The Federal Home Loan Bank system consists of 11 regional Federal Home Loan Banks. Among other benefits,
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”). As a member of the Des Moines FHLB, the Bank is required to own stock in the Des Moines
FHLB. As of December 31, 2019, we owned $22.4 million of stock in the FHLB based on this obligation.
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 dividends on the Bank’s capital stock
generally 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 affected 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 defined 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 effect in 2015 impose additional requirements on the Bank’s ability to pay dividends. See “Regulation and
Supervision of HomeStreet Bank — Capital and Prompt Corrective Action Requirements — Capital Requirements.”
Liquidity
The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. See
“Management’s Discussion and Analysis — Liquidity Risk and Capital Resources.”
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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 affirmative obligation on the Bank to report currency transactions
that exceed certain thresholds and to report other transactions determined to be suspicious. The Bank Secrecy Act
requires financial institutions, including the Bank, to meet certain customer due diligence requirements, including
obtaining a certification from the individual opening the account on behalf of the legal entity that identifies the
beneficial 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 Office of Foreign Asset Control’s list of Specially
Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office
of Foreign Asset Control (“OFAC”) has issued guidance directed at financial institutions in which it asserted that it
may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts 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 financial institution or
creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate
identity theft “red flags” 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 affiliates 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
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 flood
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 financial 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, fines, civil money penalties, 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 financial products and services under federal consumer financial
laws. The CFPB has broad rulemaking authority with respect to these laws and exclusive examination and primary
enforcement authority regarding such laws with respect to banks with assets of more than $10 billion.
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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
imposed a variety of requirements on entities that service mortgage loans and significantly 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 final 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.
Future Legislation or Regulation
The Trump administration, Congress, the regulators and various states continue to focus attention on the financial
services industry. Proposals that affect the industry will likely continue to be introduced. We cannot predict whether
any of these proposals will be enacted or adopted or, if they are, the effect they would have on our business, our
operations or our financial condition or on the financial services industry generally.
ITEM 1A RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could
differ 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 meet our cost reduction and efficiency goals on the timeline we have projected or on the
scale we have anticipated.
Beginning in the second quarter of 2019, following the divestiture of our HLC-based mortgage business, we turned
our focus to improving corporate efficiency in our continuing operations and implementing cost cutting measures
across the organization, including setting goals for cost savings based on reductions in technology expenses and
personnel as well as organizational restructuring. In the first quarter of 2020 we revised our previously disclosed
expectations for the timeline on which we expect to meet these goals. We believe that we will be able to meet
most if not all of these goals and now expect to substantially complete implementation of the related cost-cutting
and efficiency measures before the end of the third quarter of 2021. However, we can offer no assurances that
all of the cost cutting measures identified can be fully implemented, that the implementation can be completed
within that time frame, or that other developments will not arise in the interim to make these cost cutting measures
less feasible or have less impact on the efficiency of the organization. We may not be successful in renegotiating
contracts for technology services, which may limit our ability to effectively cut costs in that area. We may incur
additional unexpected costs as a part of the process which may lower the benefit of the cost cutting initiatives. If the
cost cutting initiatives take longer to implement, if we are not able to implement them on the scale we anticipate,
or if developments occur that limit or offset those cost savings in whole or in part, we may not be able to meet the
efficiency and cost reduction goals we have set for the Company on the projected timeline or at all, which could
adversely impact our overall results of operations and our stock price. We may not be successful in reducing our
overall expenses and improving our efficiency ratio to the level of our peers in the near term, or at all.
Our recent and proposed stock repurchases may not enhance our long-term shareholder value.
In the second quarter of 2019, we began repurchasing shares of our outstanding common stock in open market
transactions pursuant to a series of stock repurchase plans that were approved by the Board of Directors of the
Company, as well as a one time negotiated transaction with an investor group in the third quarter of 2019. Through
December 31, 2019 we repurchased an aggregate 3,187,259 shares for a total return to shareholders of approximately
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$98.5 million in capital. In January 2020, the Board of Directors authorized an additional stock repurchase plan,
conditioned on approval or non-objection from our regulators, which was recently obtained, of up to $25 million
in additional outstanding shares of our common stock, negotiated transactions and otherwise, which we expect to
begin in the first quarter of 2020. In February the Board increased the authorization by an additional $10 million
conditional on the non-objection of our regulators. Assuming no objections from our regulators for the additional
repurchase authorization, we expect to commence repurchases in the first or second quarter of 2020. While the intent
of the repurchases is to return capital to shareholders to improve the long-term value of our stock, we cannot be
assured that our stock repurchase programs will actually enhance long-term shareholder value. Repurchases pursuant
to our stock repurchase programs may affect our stock price and increase its volatility in the short term, and the
existence of a stock repurchase program may also cause our stock price to be higher than it would be in the absence
of such a program and potentially may have reduced the market liquidity for our stock during the time the plan is in
effect. Additionally, repurchases under our stock repurchase program have reduced our equity and regulatory capital
ratios, which could impact our ability to pursue possible future strategic opportunities and acquisitions. There can
be no assurance that any stock repurchases will enhance shareholder value because the market price of our common
stock may decline below the levels at which we repurchased shares of stock. Although our stock repurchase program
is intended to enhance long-term shareholder value, in the short term our stock price may fluctuate and shareholders
may not immediately see an increase to the value of their holdings.
If we are not able to retain or attract key employees, we could experience a disruption in our ability to implement
our strategic plan which would have a material adverse effect on our business.
The Company is going through a time of transition: in 2019 we divested our HLC-based mortgage business and
have continued since that time to significantly reduce our employee headcount, slow the growth of our continuing
operations and implement steps aimed at improving our profitability and efficiency. These transitions have resulted
in some uncertainty among our continuing employees because we have also eliminated a number of corporate
positions in order to improve the efficiency of our remaining operations and reduce our overhead expenses, which
may cause some employees who we would want to retain, either in the near-term or long-term, to seek other
opportunities. If a key employee or a substantial number of employees depart whom we were seeking to retain, it
may negatively impact our ability to conduct business as usual. The low unemployment rates in many of our primary
job markets, including Seattle, may leave us especially vulnerable to the loss of these employees. Similarly, this
uncertainty may make it more challenging for us to attract and retain qualified and desirable candidates to fill open
positions at the Company. The loss of key personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business.
Changes in interest rates, competition in our industry, operational costs and other factors beyond our control may
adversely impact our profitability.
Factors outside of our control, including changing interest rate environments, regulatory decisions, increased
competition, a flattening yield curve and other forces of market volatility, can have a significant impact on our
financial condition and results of operations, including decreasing net interest income, decreasing profitability,
increasing the cost of loan origination and adversely impacting our hedging strategies. For instance, the declining
interest rate environment in the third quarter of 2019, which resulted in a temporary inversion of the yield curve, had
an adverse impact on our net interest margin. Lower rates prompted an increase in loan prepayments, which reduced
the overall yield of our loan portfolio because higher interest loans were replaced with loans originated with lower
interest rates, impacting our results of operations. On the other hand, increases in interest rates in 2018, combined
with other factors, negatively impacted our origination volume, especially with respect to single family mortgages.
While we are subject to these market forces, we do not have any control over them and may not be able to predict
changes that could have a significant impact on us.
We may incur significant losses as a result of ineffective 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 due to market forces including, among other things, fluctuations in interest rates that can impact
the changing expectations of mortgage prepayment activity and speed. 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
financial derivative instruments. Hedging is a complex process, requiring sophisticated models, experienced and
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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, and our hedging activities may be impacted
by unforeseen or unexpected changes. Therefore, our hedging activities may be insufficient or fail to reduce the
impact of interest rate fluctuations on single family loans held for sale and MSRs.
Natural disasters or impacts of a pandemic in our geographic markets may negatively impact our financial
results.
Our primary markets are located in geographic regions that are at risk for earthquakes, wildfires, volcanic eruptions,
floods, mudslides, outbreaks, epidemics, pandemics and other natural disasters. Certain communities in our markets
have suffered significant losses from natural disasters, including devastating wildfires in California, Oregon and
Washington, and volcanic eruptions and hurricanes in Hawaii. While the impacts of these natural disasters on our
business have not been material to date, we have in the past had temporary office closures during these events and
certain of our customers have experienced losses from these events.
In addition, our headquarters are located in King County, Washington, which has seen a higher initial infection and
fatality rate from the COVID-19 virus than the rest of the United States, and most of our branches are located in
states where cases of COVID-19 have already been identified. We may experience impacts from quarantines, market
downturns and changes in consumer behavior related to pandemic fears and impacts on our workforce if the virus
becomes widespread in any of our markets. We cannot predict the full impact of COVID-19 or any other future
global pandemic on our business, but we could suffer financial losses as a result of the crisis. In addition, downturns
in the global market related to pandemic fears could result in a lowering of interest rates as a stimulus to boost
consumer spending, which could further negatively impact our results of operations.
If the COVID-19 pandemic becomes more pronounced in our markets, or if a more significant natural disaster or
pandemic were to occur in the future, our operations in areas impacted by such events could experience an adverse
financial impact due to office closures and market changes. In addition, our financial results could be impacted due
to an inability of our customers to meet their loan commitments in a timely manner because of their losses, including
a decrease in revenues for certain businesses in areas impacted by quarantines during a pandemic or other changes in
consumer behavior, a reduction in housing inventory due to losses caused by natural disaster, and negative impacts to
the local economy as it seeks to recover from these disasters.
Our business is geographically confined to certain metropolitan areas of the Western United States, and events
and conditions that disproportionately affect those areas may pose a more pronounced risk for our business.
Although we presently have retail deposit branches in four states, with lending offices in these states and two others,
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, Orange County, Riverside 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 many have experienced
disproportionately significant economic volatility compared to the rest of the United States in the past. In addition,
many of these areas have experienced a constriction in the availability of houses for sale in recent periods 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 affect the Western United States and our
primary markets in that region, may have an unusually pronounced impact on our business. Because our operations
are not more geographically diversified, we may lack the ability to mitigate those impacts from operations in other
regions of the United States.
The significant concentration of real estate secured loans in our portfolio has had a negative impact on our asset
quality and profitability 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. Our real estate secured lending is generally sensitive
to national, regional and local economic conditions, making loss levels difficult to predict. Declines in real estate
sales and prices, significant increases in interest rates, unforeseen natural disasters and a decline in prevailing
economic conditions may result in higher than expected loan delinquencies, foreclosures, problem loans, other real
estate owned (“OREO”), net charge-offs 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 significantly, as they did in the
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last recession, the collateral for our loans may provide less security and reduce our ability to recover the principal,
interest and costs due on defaulted loans. Such declines may have a greater effect on our earnings and capital than on
the earnings and capital of financial institutions whose loan portfolios are more diversified.
Deterioration in the real estate markets in which we operate and higher than normal delinquency and default rates on
loans could cause other adverse consequences for us, including:
•
•
•
•
•
Reduced cash flows 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.
Proxy contests commenced against the Company have caused us to incur substantial costs, diverted the attention
of the Board of Directors and management, taken up management’s attention and resources, caused uncertainty
about the strategic direction of our business and adversely affected our business, operating results and financial
condition, and future proxy contests could do so as well.
A proxy contest or other activist campaign and related actions, such as the recent contest by Roaring Blue Lion
Capital Management and related entities in 2018 and 2019, could have a material and adverse effect on us for the
following reasons:
•
Activist investors may attempt to effect changes in the Company’s strategic direction and how the
Company is governed, or to acquire control over the Company.
• 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 proxy contest, as was the case with our 2018 proxy fight, which would serve as a further distraction
to our Board of Directors, senior management and employees and could require the Company to incur
significant 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 difficult to attract and retain qualified personnel and business partners.
Proxy contests and related actions by activist investors could cause significant fluctuations in our stock
price based on temporary or speculative market perceptions or other factors that do not necessarily
reflect the underlying fundamentals and prospects of our business.
We may have deficiencies in internal controls over financial reporting that we have not discovered which may
result in our inability to maintain control over our assets or to identify and accurately report our financial
condition, results of operations, or cash flows.
Our internal controls over financial reporting are intended to ensure we maintain accurate records, promote the
accurate and timely reporting of our financial information, maintain adequate control over our assets, and detect
unauthorized acquisition, use or disposition of our assets. Effective internal and disclosure controls are necessary for
us to provide reliable financial reports, effectively prevent fraud, and operate successfully as a public company. If we
cannot provide reliable financial reports or prevent fraud, our reputation and operating results may be harmed.
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As part of our ongoing monitoring of internal controls, from time to time we have discovered deficiencies in our
internal controls that have required remediation. In the past, these deficiencies have included “material weaknesses,”
defined as a deficiency or combination of deficiencies that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.
Management has a process in place to document and analyze all identified internal control deficiencies and
implement measures sufficient to remediate those deficiencies. To support our strategic initiatives, as well as to
reflect the strategic shift in the business and to create operating efficiencies, we have implemented, and will continue
to implement, new systems and processes. We will continue to realign our resources, including reductions in certain
areas of corporate support operations, in line with our new strategies. If our change management processes are not
sound and adequate resources are not deployed to support these implementations and changes, we may experience
additional internal control deficiencies that could expose the Company to operating losses. Moreover, any failure to
maintain effective controls or timely implement 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.
Our allowance for credit losses may prove inadequate or we may be negatively affected by credit risk exposures.
Future additions to our allowance for credit losses, as well as charge-offs in excess of reserves, will reduce our
earnings.
Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain
an allowance for credit losses to reflect 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 specific 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. Generally, our nonperforming loans and OREO reflect operating difficulties 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 affect our financial condition, results of operations
and cash flows.
On January 1, 2020, the Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments,
the new accounting standard promulgated by the Financial Accounting Standards Board (“FASB”), regarding the
recognition of credit losses. This standard makes significant changes to the accounting and disclosures for credit
losses on financial instruments recorded on an amortized cost basis, including our loans held for investment.
The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses
for financial assets measured over the contractual life of an instrument based on historical experience, current
conditions and reasonable and supportable forecasts. The standard provides significant flexibility and requires a
high degree of judgment in order to develop an estimate of expected lifetime losses. Providing for lifetime losses
for our loan portfolio is a change to the previous method of allowances for loan losses that are based on probable
and incurred losses over a short-term horizon. As it is a new model, we do not yet have experience with it and how it
may perform in different business cycles or changes to our loan portfolio. The new methodology is likely to be much
more sensitive to changes in inputs such as economic forecasts and other factors which may cause significant impact
on the allowance, and could create volatility in the loan loss provision and net income particularly in periods of
downturn. Regulators may impose additional capital buffers to absorb this volatility. Moreover, with the new model
we have risk of complying with the new accounting standard which are still subject to review by our auditors and
regulators.
In addition, as we acquired new operations, we added to our books the loans previously held by the acquired
companies or related to the acquired branches, including loans acquired from Silvergate Bank in March 2019. If 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 credit
losses, and adversely affect our financial condition, results of operations and cash flows stemming from losses on
those acquired loans.
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Uncertainty relating to the London Interbank Offered Rate (LIBOR) calculation process and potential
phasing out of LIBOR may adversely affect our results of operations.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA), which regulates
LIBOR, announced that the FCA intends to stop persuading or compelling banks to submit rates for the calibration
of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR
on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what
extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional
reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no consensus exists as to
what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any
such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures, or other
securities or financial arrangements, given LIBOR’s role in determining market interest rates globally. The Federal
Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large
U.S. financial institutions, selected a new index calculated by short-term repurchase agreements, backed by Treasury
securities (SOFR) to replace LIBOR. SOFR is observed and backward looking, which stands in contrast with
LIBOR under the current methodology, which is an estimated forward-looking rate and relies, to some degree, on
the expert judgment of submitting panel members. Given that SOFR is a secured rate backed government securities,
it will be a rate that does not take into account bank credit risk (which is different for LIBOR). SOFR is therefore
likely to be lower than LIBOR and is less likely to correlate with the funding costs of financial institutions. Whether
or not SOFR attains market traction as a LIBOR replacement tool remains in question, although some transactions
using SOFR have been completed in 2019, and the future of LIBOR remains uncertain at this time. Uncertainty as to
the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect
LIBOR rates and the value of LIBOR-based loans, and to a lesser extent, securities in our portfolio, and may impact
the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated
debentures and trust preferred securities. If LIBOR rates are no longer available, and we are required to implement
substitute indices for the calculation of interest rates under our loan agreements with our borrowers or our existing
borrowings, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation
with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which
could have an adverse effect on our results of operations.
Our accounting policies and methods are fundamental to how we report our financial 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 significant 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 financial models to value certain
of these assets. These models are complex and use asset-specific 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 because we must make judgments about the effect of matters that are
inherently uncertain. Different assumptions could result in significant changes in valuation, which in turn could
affect earnings or result in significant changes in the dollar amount of assets reported on the balance sheet. From
time to time, we may choose to retire or replace existing financial models and reassess assumptions underlying the
models, which may impact our valuation estimates.
Our funding sources may prove insufficient to replace deposits and support our future growth.
We must maintain sufficient 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, including Federal Home Loan Bank advances, proceeds from the sale of loans, federal
funds purchased, brokered certificates of deposit and issuance of equity or debt securities. Adverse operating results
or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources
and could make our existing funds more volatile. Our financial flexibility may be materially constrained if we are
unable to maintain our access to funding or if adequate financing is not available to accommodate future growth
at acceptable interest rates. When interest rates change, the cost of our funding may change at a different rate than
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our interest income, which may have a negative impact on our net interest income and, in turn, our financial 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 profitability would be
adversely affected. 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 affect profitability measures and the market price of our common
stock and could dilute the holders of our outstanding common stock.
Since our IPO in 2012, we have maintained our capital ratios at a level that is higher than regulatory minimums. We
may choose to have lower capital ratios in the future in order to take advantage of growth opportunities, including
acquisition and organic loan growth, to return additional capital to our shareholders 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
significantly, 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 financial 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 financial
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 effect on our business, financial
condition, results of operations and prospects. In addition, any capital raising alternatives could dilute the holders of
our outstanding common stock and may adversely affect the market price of our common stock.
Changes in government-sponsored enterprises and their ability to insure or to buy our loans in the secondary
market may result in significant changes in our ability to recognize income on sale of our loans to third parties.
We originate a substantial portion of our single family mortgage loans for sale to government-sponsored enterprises
(“GSE”) such as Fannie Mae, Freddie Mac and Ginnie Mae. Changes in the types of loans purchased by these
GSEs or the program requirements for those entities could adversely impact our ability to sell certain of the
loans we originate for sale. For example, as a result of Section 309 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act, which was enacted into law in May 2018, a few of our VA-qualified loans we had
originated for sale to Ginnie Mae were deemed to be ineligible for sale to Ginnie Mae under the revised terms of that
entity’s program and we were required to find a different way to sell these loans. Such changes are difficult to predict
and can have a negative impact on our cash flow and results of operations.
The integration of recent and future acquisitions could consume significant resources and may not be successful.
We completed four whole-bank acquisitions and acquired nine stand-alone branches between September 2013 and
December 31, 2019, all of which required substantial resources and costs related to the acquisition and integration
process. 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, including 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 the Company, including risks that arise after the transaction is completed.
Difficulties 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 financial 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.
22
If we breach any of the representations or warranties we make to a purchaser or securitizer of our loans or MSRs,
we may be liable to the purchaser or securitizer for certain costs and damages.
When we sell or securitize loans, we are required to make certain representations and warranties to the purchaser
about the loans and the manner in which they were originated. Our agreements require us to repurchase 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 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 financial 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.
In 2019, we sold a substantial portion of our MSRs related to our large scale mortgage business, which may increase
our exposure to these risks in the short term due to the volume of MSR sales outside of our historical ordinary
course of business.
If we experience increased repurchase and indemnity demands on loans or MSRs that we have sold or that we
sell from our portfolios in the future, our liquidity, results of operations and financial condition may be adversely
affected.
If we breach any representations or warranties or fail to follow guidelines when originating a FHA/HUD-insured
loan or a VA-guaranteed loan, we may lose the insurance or guarantee on the loan and suffer 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
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 indemnifications against loss or loans declared ineligible for their
programs. In the past, monetary penalties and losses from indemnifications have not created material losses to the
Bank. FHA/HUD perform regular audits, and HUD’s Inspector General is active in enforcing FHA regulations with
respect to individual loans, including partnering with the Department of Justice (“DOJ”) to bring lawsuits against
lenders for systemic violations. The penalties resulting from such lawsuits can be 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 significant
origination of FHA/HUD insured and VA guaranteed loans, if the DOJ were to find 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.
Changes in fee structures by third party loan purchasers may decrease our loan production volume and the
margin we can recognize on loans and may adversely impact our results of operations.
Changes in the fee structures by third party loan purchasers may increase our costs of doing business and, in turn,
increase the cost of loans to our customers and the cost of selling loans to third party loan purchasers. Increases in
those costs could in turn decrease our margin and negatively impact our profitability. 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 profitability with respect to loans held for sale.
In addition, any significant 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 flows.
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
customers. 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 variety 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
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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.
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, including commercial 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, if we were to be an 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 affected property, and we may find it difficult or impossible to use or sell the
property prior to or following any environmental remediation. If we become subject to significant environmental
liabilities, our business, financial condition and results of operations could be materially and adversely affected.
Market-Related Risks
Fluctuations in interest rates could adversely affect the value of our assets and reduce our net interest income and
noninterest income, thereby adversely affecting our earnings and profitability.
Interest rates may be affected by many factors beyond our control, including general and economic conditions
and the monetary and fiscal policies of various governmental and regulatory authorities. For example, unexpected
increases in interest rates can result in a higher percentage of rate lock customers closing loans, which would in turn
increase our costs relative to income. On the other hand, decreases in interest rates may increase loan prepayment
speeds, resulting in an overall decrease in the yield of our loan portfolio, and may have a negative impact on our net
interest margins and results of operations. Changes in interest rates over the past year have impacted our business.
Rising interest rates in 2018 reduced our mortgage revenues by reducing the market for refinancing, thereby
negatively impacting demand for certain of our residential loan products and the revenue realized on the sale of
loans and our noninterest income and, to a lesser extent, our net interest income. Subsequently, decreasing interest
rates in 2019 negatively impacted our net interest margin while also reducing the overall yield of our loans held for
investment portfolio because existing loans bearing higher interest rates were prepaid at a faster rate and replaced in
the portfolio with lower interest rate loans.
Market volatility in interest rates also can be difficult 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 difference 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 affect our financial
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
and interest payable on our deposits, tend to be more sensitive to short term rates while our assets 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 fixed rate loans do not fluctuate with interest rate changes and adjustable rate loans often have
a specified period of reset. As a result, a flattening or an inversion of the yield curve, such as occurred in the third
quarter of 2019, is likely to have a negative impact on our net interest income.
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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 fluctuations. 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 fluctuations may impact the value of these securities and as a result, shareholders’
equity, and may cause material fluctuations from quarter to quarter. Failure to hold our securities until maturity or
until market conditions are favorable for a sale could adversely affect our financial condition.
The financial 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 financial
technology (or “fintech”) companies that rely heavily on technology to provide financial services and often target a
younger customer demographic. The significant competition in attracting and retaining deposits and making loans
as well as in providing other financial 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 effectively 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, financial condition or results of operations may be adversely affected.
We have significantly decreased our home loan mortgage origination capacity with our new business model
which may limit our ability to increase our volume significantly in the event of a significant improvement in the
mortgage market.
Due to increases in mortgage rates after many years of record low rates and a nationwide contraction in the number
of homes available for sale, which is especially acute in our primary markets, we experienced a significant reduction
in the overall number of mortgage products being purchased in the past two to three years as compared to prior
periods. In response to those market conditions, in 2019 we sold or divested substantially all of the assets related
to our stand alone home loan center-based mortgage origination business, including a significant portion of our
mortgage servicing rights portfolio originated through those channels. We facilitated the transfer of a significant
number of our related employees to the purchaser of those assets and terminated a number of other related positions.
We also sold our interest in WMS Series LLC, an affiliated entity owned by us and Windermere Real Estate which
originated single family loans that were generally immediately sold to HomeStreet pursuant to a correspondent
purchase arrangement. Our branch based mortgage business which commenced operations on April 1, 2019 is
significantly smaller than our legacy HLC based mortgage origination business. If the mortgage market were to
significantly improve, we would not have the capacity to originate mortgages to the volume levels we have had in
recent years, which would limit our ability to capitalize on that market.
The price of our common stock is subject to volatility.
The price of our common stock has fluctuated in the past and may face additional and potentially substantial
fluctuations in the future. Among the factors that may impact our stock price are the following:
•
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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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•
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•
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•
•
•
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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 offerings by us of debt or equity securities;
Repurchase activity by us under our stock repurchase program;
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 financial conditions of the country or the regions in which we operate;
Trends in real estate in our primary markets;
Trends relating to the economic markets generally; or
Changes in laws and regulations affecting financial institutions.
The stock markets in general experience substantial price and trading fluctuations. 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 are unrelated or disproportionate to changes in operating performance of the Company. Such volatility may have
an adverse effect on the trading price of our common stock.
A decline in certain economic conditions continue to pose significant challenges for us and could adversely affect
our financial 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. A
substantial amount of our revenue and earnings comes from the net interest income and noninterest income that we
earn from our commercial lending and mortgage banking businesses. Our operations have been, and will continue
to be, materially affected 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 financial markets resulting from these factors, or any other events or factors that
may signal a return to a recessionary economic environment, could dampen consumer confidence, adversely impact
the models we use to assess creditworthiness, and materially adversely affect our financial results and condition.
A downturn in the economy and an increase in unemployment, which also would likely result in a decrease in
consumer and business confidence and spending, may lead to a drop in demand for our credit products, including
our mortgages, which will reduce our net interest income and noninterest income and our earnings. Significant
and unexpected market developments may also make it more challenging for us to accurately forecast our expected
financial results.
A change in federal monetary policy could adversely impact our revenues from lending activities.
The Federal Reserve Board is responsible for regulating the supply of money in the United States, and as a result, its
monetary policies strongly influence 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. 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 affect the value of financial
instruments we hold, including debt securities, 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 portion of our revenue is derived from residential mortgage lending which is a market sector that experiences
significant volatility.
Historically, a substantial portion of our consolidated net revenues (net interest income plus noninterest income)
have been derived from originating and selling residential mortgages. While we have recently significantly decreased
the size of our residential mortgage business through the sale of our HLC-based mortgage business and our interest
in WMS Series LLC, we expect to continue to offer mortgage lending on a smaller scale, and therefore will remain
subject to the volatility of that market sector. Residential mortgage lending in general has experienced substantial
volatility in recent periods due to changes in interest rates, a significant lack of housing inventory caused by an
increase in demand for housing at a time of decreased supply in our principal markets, and other market forces
beyond our control. Lack of housing inventory limits our ability to originate purchase mortgages because it may take
longer for loan applicants to find 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 financial 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 affect 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 affect
our business.
We may incur losses due to changes in prepayment rates.
Our loan servicing rights carry interest rate risk because the total amount of servicing fees earned, as well as changes
in fair-market value, fluctuate based on expected loan prepayments (affecting the expected average life of a portfolio
of residential mortgage servicing rights). The rate of prepayment of loans generally may be impacted by changes in
interest rates and general economic conditions while residential mortgage loans also may be influenced by pressures
in the local real estate markets, among other things. During periods of declining interest rates, or increases in real
estate values, many borrowers refinance their loans. Changes in prepayment rates are therefore difficult for us to
predict. The loan servicing fee income (related to the loan servicing rights corresponding to a loan) decreases as
loans are prepaid. Consequently, in the event of an increase in prepayment rates, we would expect the fair value of
portfolios of loan servicing rights to decrease along with the amount of loan servicing income received. In the first
quarter of 2019, we sold a significant portion of our mortgage servicing rights, however we continue to be exposed
to such risks on a smaller scale with respect to the servicing rights we expect to retain going forward.
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 financial 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 difficult 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 insurance premiums assessed, require us to increase
our allowance for loan losses, require customer restitution and impose fines or other penalties. For example,
in November 2019, we entered into a Stipulation and Consent to the Issuance of an Order to Pay Civil Money
Penalty (the “Stipulation and Consent”) with the FDIC based on alleged violations of the Real Estate Settlement
Procedures Act raised by the FDIC during a 2016 compliance examination relating to certain marketing programs.
These marketing programs, all of which we have terminated, were associated with the stand-alone home loan
center mortgage origination business that we discontinued in 2019, and is accounted for in discontinued operations.
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We paid a civil money penalty of $1.35 million in connection with the Stipulation and Consent. We have fully
resolved the matters that were at issue in the Stipulation and Consent without any additional sanctions. In addition,
we have, in the past, been subject to specific 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 or other legal or regulatory deficiencies is required.
In addition, recent political shifts in the United States may result in additional significant changes in legislation
and regulations that impact us, although the possibility, nature and extent of any repeals or revisions to Dodd-Frank
or any other regulations impacting financial institutions are not presently known and we cannot predict whether or
not 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 federal or state
authorities, or other pertinent bodies, will enact legislations, laws, rules or regulations that will impact our business
or operations. Further, an increasing amount of the regulatory authority that pertains to financial institutions is in the
form of informal “guidance” such as handbooks, guidelines, examination manuals, field interpretations by regulators
or similar provisions that will affect 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 affect our cost of doing business and our
profitability.
Changes in regulation of our industry have 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 potential fines, penalties and litigation.
Policies and regulations enacted by CFPB may negatively impact our residential mortgage loan business and
increase our compliance risk.
Our consumer business, including our mortgage, credit card, and other consumer lending and non-lending
businesses, may be adversely affected 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
financial products and services. For example, in January 2014 federal regulations promulgated by the CFPB took
effect 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 significant. In addition, the secondary
market demand for loans that do not fall within the presumptively safest category of a “qualified mortgage” as
defined by the CFPB is uncertain. Furthermore, the CFPB is considering allowing the “GSE Patch” provision of
these regulations to expire. The “GSE Patch” grants a safe harbor to lenders, such as HomeStreet, to originate loans
over a 43 percent debt to income (“DTI”) ratio and to use Fannie Mae and Freddie Mac standards for documentation.
The impact of the expiration of this provision on HomeStreet and the U.S. mortgage market is uncertain. Finally,
the 2014 regulations also require changes to certain loan servicing procedures and practices, which have 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 differently 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 findings by our regulators, leading to enforcement actions, fines and penalties, such as those
associated with the recent Stipulation and Consent discussed above.
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In addition to RESPA compliance, the Bank is also subject to the CFPB’s Final Integrated Disclosure Rule,
commonly known as TRID, which became effective in October 2015. Among other things, TRID requires lenders
to combine the initial Good Faith Estimate and Initial Truth in Lending disclosures into a single new Loan Estimate
disclosure and the HUD-1 and Final TIL disclosures into a single new Closing Disclosure. The definition 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 significant systems modifications, process
and procedure changes. Failure to comply with these new requirements may result in payment of restitution to
customers for disclosure defects, regulatory penalties for disclosure and other violations under RESPA and the Truth
In Lending Act (“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 financial 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 effect 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 files 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, financial condition and results
of operations. For instance, judges interpreting legislation and judicial decisions made during the recent financial
crisis could allow modification 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 affect 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
profitability 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 affect 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 offer 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
affordable products, failing to disclose key features, limitations, or costs related to products and services, failing
to provide advertised benefits, selling unnecessary insurance to borrowers, repeatedly refinancing 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 financial activities. As a company that originates
single family mortgage loans, we also, inherently, have a significant amount of risk of noncompliance with fair
29
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 significant regulatory actions including, but not limited to,
sanctions, fines or referrals to the Department of Justice and restrictions on our ability to execute our growth and
expansion plans. If we offer 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, offering 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.
If our enterprise risk management framework is not effective at mitigating risk and loss to us, we could suffer
unexpected losses and our results of operations could be materially adversely affected.
Our enterprise risk management framework seeks to achieve an appropriate balance between risk and return, which
is critical to optimizing stockholder value. We have established processes and procedures intended to identify,
measure, monitor, report, analyze and control the types of risk to which we are subject. These risks include
liquidity risk, credit risk, price risk, interest rate risk, operational risk, legal and compliance risk, strategic risk, and
reputational risk, among others. We also maintain a compliance program to identify, measure, assess, and report
on our adherence to applicable laws, policies and procedures. While we assess and improve these programs on an
ongoing basis, there can be no assurance that our risk management or compliance programs, along with other related
controls, will effectively mitigate all risk and limit losses in our business. However, as with any risk management
framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the
future, risks that we have not appropriately anticipated or identified. If our risk management framework proves
ineffective, we could suffer unexpected losses, our business financial condition and results of operations could be
materially adversely affected, and we could be subject to regulatory criticism or restrictions.
Significant legal or regulatory actions could subject us to substantial uninsured liabilities and reputational harm
and have a material adverse effect on our business and results of operations.
We are from time to time subject to claims and proceedings related to our operations. These claims and legal actions
could include supervisory or enforcement actions by our regulators, or criminal proceedings by prosecutorial
authorities, or claims by former and current employees, including class, collective and representative actions. Such
actions are a substantial management distraction and could involve large monetary claims, including civil money
penalties or fines imposed by government authorities and significant defense costs. For example, since 2016 we
used considerable management time and resources and incurred additional legal and other costs associated with the
matters resulting in the recent Stipulation and Consent Agreement with the FDIC in November 2019, pursuant to
which we recently paid a penalty of $1.35 million.
To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that
we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money
penalties or fines imposed by government authorities and may not cover all other claims that might be brought
against us, including certain wage and hour class, collective and representative actions brought by employees or
former employees. In addition, such insurance coverage may not continue to be available to us at a reasonable
cost or at all. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our
business, prospects, results of operations and financial condition. Substantial legal liability or significant regulatory
action against us could cause significant reputational harm to us and/or could have a material adverse impact on our
business, financial condition, results of operations and prospects.
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 buffer” that
took full effect on January 1, 2019. This conservation buffer consists of common equity Tier 1 capital and is now
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required to be 2.5% above existing minimum capital ratio requirements. This means that, in order to prevent certain
regulatory restrictions, the common equity Tier 1 capital ratio requirement is now 7.0%, the Tier 1 risk-based ratio
requirement is 8.5% and the total risk-based capital ratio requirement is 10.5%. Any institution that does not meet
the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock
repurchases and discretionary bonuses to executive officers.
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 MSRs and deferred tax assets. For more on these regulatory requirements and
how they apply to the Company and the Bank, see “Business — Regulation and Supervision of HomeStreet Bank —
Capital and Prompt Corrective Action Requirements — Capital Requirements” in our Annual Report on Form 10-K
for the year ended December 31, 2018. 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.
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 significant
portion of our earnings to support the Bank’s operations. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and Capital Resources Capital Management” as well as
“Regulation and Supervision of HomeStreet Bank — Capital and Prompt Corrective Action Requirements” in this
Annual Report on Form 10-K. If the Bank cannot pay dividends to us, we may be limited in our ability to service
our debt, fund the Company’s operations and acquisition plans and pay dividends to the Company’s shareholders.
In the first quarter of 2020, the Board of Directors adopted a policy to pay quarterly dividends to holders of our
common stock, however, the declaration of such dividends in any quarter as well as the amount of any quarterly
dividend remains subject to board approval, cash flow limitations, capital requirements, capital and strategic needs
and other factors.
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 confidential or proprietary information, damage
our reputation, increase our costs and cause losses.
Information security risks for financial 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 financial 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 confidential 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 confidential 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 confidential, proprietary and other information or that of our customers, or disrupt our operations
or those of our customers or third parties.
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To date we are not aware of any material losses that we have incurred relating to cyber-attacks or other information
security breaches, but there can be no assurance that we will not suffer 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 evolve our Internet banking and mobile banking channel, our
expanding operations and the outsourcing of a significant 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 significant 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 insufficient to
prevent all physical and electronic break-ins, denial of service and other cyber-attacks or security breaches.
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 financial losses, the inability of our customers
to transact business with us, employee productivity losses, technology replacement costs, incident response costs,
violations of applicable privacy and other laws, regulatory fines, 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 affect our results of operations or financial 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,
financial intermediaries, agents 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 interruptions or failures of their own systems,
cybersecurity or ransomware attacks, capacity constraints or failures of their own internal controls. Specifically, 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 significant impact on our operations if we do not have controls to cover
those issues. Additionally, during the third quarter of 2019, we were advised by a third party providing services with
access to certain of our systems that they had been subjected to a cybersecurity incident. We took measures to limit
our vulnerability to such an attack and reviewed our own systems to determine that there was no apparent impact to
our systems. However, the interruption caused by the breach in this third party’s systems has limited their ability to
provide us with contracted services which had the potential to increase our costs of doing business. To date, none of
our third party vendors or service providers has notified us of any security breach in their systems that has breached the
integrity of our confidential customer data. However, such third parties may also be targets of cyber-attacks, computer
viruses, malicious code, unauthorized access, hackers, ransomware attacks or information security breaches that could
compromise the confidential or proprietary information of HomeStreet and our customers.
In addition, if any third-party service providers experience difficulties 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
materially increase. If an interruption were to continue for a significant period of time, our business financial
condition and results of operations could be materially adversely affected.
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 findings 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 reflect 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 monetary
penalties.
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In addition, in order to safeguard our online financial transactions, we must provide secure transmission of
confidential information over public networks. Our Internet banking system relies on third party encryption and
authentication technologies necessary to provide secure transmission of confidential information. Advances in
computer capabilities, new discoveries in the field 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 effect on our business, financial condition and results of
operations.
The failure to protect our customers’ confidential information and privacy could adversely affect our business.
We are subject to federal and state privacy regulations and confidentiality 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 confidential information we
obtain from our existing vendors and customers. These obligations generally include protecting such confidential
information in the same manner and to the same extent as we protect our own confidential information, and in
some instances may impose indemnity obligations on us relating to unlawful or unauthorized disclosure of any such
information.
Recently passed legislation in the European Union (the General Data Protection Regulation, or GDPR) and in
California (the California Privacy Act) may increase the burden and cost of compliance specifically in the realm of
consumer data privacy. We are still evaluating the potential impact of these new regulations on our business and do
not yet know exactly what the impact may be but anticipate that there will be at least some added cost and burden
as a result of these measures. In addition, other federal, state or local governments may try to implement similar
legislation, which could result in different privacy standards for different geographical regions, which could require
significantly more resources for compliance.
If we do not properly comply with privacy regulations and contractual obligations that require us to protect
confidential information, or if we experience a security breach or network compromise, we could experience adverse
consequences, including regulatory sanctions, penalties or fines, increased compliance costs, remedial costs such as
providing credit monitoring or other services to affected 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 effect on
our business, financial 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 fire, 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 effect on our business, financial condition and results of operations
as well as our reputation and customer or vendor relationships.
We continually encounter technological change, and we may have fewer resources than many of our competitors
to invest in technological improvements.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial
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 efficiencies 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 effectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers.
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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 effect of deterring or delaying attempts
by our shareholders to remove or replace management, to commence proxy contests, or to effect changes in control.
These provisions include:
•
•
•
•
•
A phased-out classified Board of Directors so that until 2022, only a portion of our board of directors
will be elected each year;
Elimination of cumulative voting in the election of directors;
Procedures for advance notification 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 significant shareholders. These provisions,
alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests
or changes in control. These restrictions may limit a shareholder’s ability to benefit 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 offices, which are located in downtown Seattle at 601 Union Street, Suite 2000, Seattle, WA 98101.
This lease provides sufficient space to conduct the management of our business. The Company conducts its Commercial
and Consumer Banking activities in locations in Washington, California, Oregon, Hawaii, Idaho, and Utah. As of
December 31, 2019, we operated in four primary commercial lending centers, 62 retail deposit branches, and one
insurance office. As of such date, we also operated three facilities for the purpose of administrative and other functions
in addition to the principal offices: a call center and operations support facility located in Federal Way, Washington; a
loan fulfillment center in Lynnwood, Washington, and an operations support center in Spokane, Washington. Of these
properties, we own five of the retail deposit branches, the call center and operations support facility in Federal Way
and we own 50% of a retail branch through a joint venture. All facilities are in a good state of repair and appropriately
designed for use as banking or administrative office 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 effect on our business, financial position or our results of operations. There are currently no matters that,
in the opinion of management, would have a material adverse effect on our consolidated financial 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
Common Stock
Our common stock is traded on the Nasdaq Global Select Market under the symbol “HMST.”
As of March 2, 2020, there were 2,326 shareholders of record of our common stock.
Dividend Policy
In January 2020 HomeStreet’s Board of Directors approved a new dividend policy that contemplates the payment
of quarterly cash dividends on our common stock when, if and in an amount declared by the Board after taking into
consideration, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset
growth. The first dividend declared under this policy was a cash dividend of $0.15 per share for the first quarter
of 2020, which was paid on February 21, 2020 to shareholders of record as of the close of business on February 5,
2020. The dividend rate to be paid will be reassessed each quarter by the Board of Directors in accordance with the
dividend policy.
While the adoption of a quarterly dividend policy by the Board of Directors indicates the intention of the Board of
Directors to consider a quarterly dividend going forward, our ability to pay dividends to shareholders is dependent
on many factors, including those cited in the dividend policy as well as the Bank’s ability to pay dividends to the
Company. The Bank’s ability to pay dividends will be 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. See “Business Regulation and Supervision — Regulation and Supervision of HomeStreet
Bank — Capital and Prompt Corrective Action Requirements — Capital Requirements.” Therefore, we cannot assure
that we will be able to continue to pay a regular dividend in any future period.
Sales of Unregistered Securities
There were no sales of unregistered securities in the fourth quarter of 2019.
Purchases of Equity Securities by the Issuer
Shares repurchased, on a settlement-date basis, pursuant to the common equity repurchase program during the
three months ended December 31, 2019, were as follows.
(in thousands, expect share and per share
information)
October . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November . . . . . . . . . . . . . . . . . . . . . . . . . .
December . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shares of
common stock
purchased(1)
Average
price paid
per share of
common stock(2)
—
31.53
32.63
31.87
— $
363,838
167,961
531,799 $
Total number
of shares
purchased as
part of publicly
announced plan
Dollar value
of remaining
authorized for
repurchase(3)
— $
363,443
167,815
531,258
25,000
13,542
8,067
(1)
(2)
(3)
Includes shares of the Company’s common stock acquired by the Company in connection with satisfaction of tax
withholding obligations on vested restricted stock units.
Excludes commissions cost.
Stock repurchases in the fourth quarter of 2019 were made pursuant to a Board authorized share repurchase program
approved on September 26, 2019 pursuant to which the Company could purchase up to $25.0 million of its issued and
outstanding common stock, no par value, at prevailing market rates at the time of such purchase.In the first quarter of
2020, the Board authorized additional share repurchase programs pursuant to which the Company can repurchase up to
an additional $35 million of its common stock at prevailing market rates.
35
Stock Performance Graph
This performance graph shall not be deemed “soliciting material” or to be “filed” 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 filing of HomeStreet, Inc. under
the Securities Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison from December 31, 2014 through December 31, 2019 of the cumulative
total return for our common stock, the Russell 2000 Index (RUT) and the KBW Regional Banking Index (KRX).
The graph assumes that $100 was invested at the market close on December 31, 2014 in the common stock of
HomeStreet, Inc., the Russell 2000 Index, the KBW Regional Banking Index and data for HomeStreet, Inc., 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.
225
200
175
150
125
100
75
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
HomeStreet, Inc.
Russell 2000 Index
KBW Regional Banking Index
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 Form 10-K.
The following table sets forth selected historical consolidated financial and other data for each of the periods ended
as described below. The selected historical consolidated financial data as of December 31, 2019 and 2018 and for
each of the years ended December 31, 2019, 2018 and 2017 have been derived from, and should be read together
with, our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. The
selected historical consolidated financial data as of December 31, 2017, 2016 and 2015 and for each of the years
ended December 31, 2017, 2016 and 2015 have been derived from our audited consolidated financial statements
for those years, which are not included in this Form10-K. Certain prior period amounts have been reclassified to
conform to the current year’s presentation, including discontinued operations. You should read the summary selected
historical consolidated financial and other data presented below in conjunction with “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our financial 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 financial statements and have included, in our opinion, all adjustments that we consider
necessary for a fair presentation of the financial information set forth in that information.
36
(dollars in thousands, except share data)
Income statement data (for the period ended):
2019
At or for the Years Ended December 31,
2017
2016
2018
Net interest income . . . . . . . . . . . . . . . . . . . $
(Reversal) provision for credit losses . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . . . .
Income tax expense (benefit) from
continuing operations . . . . . . . . . . . . . . .
Income (loss) from continuing operations . .
(Loss) income from discontinued
operations before income taxes . . . . . . .
Income tax (benefit) expense from
$
$
189,390
(500)
74,432
215,614
189,963
3,000
36,533
195,241
174,541
750
42,597
190,614
$
$
154,015
4,100
35,683
178,029
48,708
28,255
25,774
7,988
40,720
2,032
26,223
(16,894)
42,668
7,569
3,503
4,066
2015
120,020
6,100
29,367
156,293
(13,006)
(8,882)
(4,124)
(28,285)
17,610
40,415
83,208
69,913
discontinued operations . . . . . . . . . . . . .
(5,077)
3,806
14,137
29,123
24,470
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . $
(23,208)
17,512
$
13,804
40,027
$
26,278
68,946
Basic income (loss) per common share:
Income (loss) from continuing operations . .
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . .
Basic income (loss) per common share . . . . . $
Diluted income (loss) per common share:
Income (loss) from continuing operations . . .
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income (loss) per common share . . . . $
Common shares outstanding . . . . . . . . . . . . . .
Weighted average number of shares
outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . $
Financial position (at year end):
25,573,488
25,770,783
28.45
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 advances . . . . . .
Federal funds purchased and securities
sold under agreements to repurchase . . .
Total shareholders’ equity . . . . . . . . . . . . . . $
57,880
943,150
208,177
5,072,784
97,603
1,393
6,812,435
5,339,959
346,590
125,000
679,723
Financial position (averages):
Investment securities . . . . . . . . . . . . . . . . . $
Loans held for investment . . . . . . . . . . . . .
Total interest-earning assets . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . . . . .
Federal Home Loan Bank advances . . . . . .
Total interest-bearing liabilities . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . $
850,695
5,283,225
6,483,937
4,509,632
407,071
5,096,550
721,360
1.57
(0.91)
0.66
$
1.55
0.97
0.51
1.48
0.97
$
1.59
0.98
2.57
1.57
(0.90)
0.65
23,890,855
$
0.51
1.47
26,995,348
$
0.97
2.54
26,888,288
$
$
26,970,916
27,168,135
27.39
57,982
923,253
77,324
5,075,371
103,374
455
7,042,221
4,888,558
932,590
$
$
26,864,657
27,092,019
26.20
72,718
904,304
114,182
4,506,466
86,689
664
6,742,041
4,535,919
979,201
19,000
739,520
$
—
704,380
916,840
4,866,210
6,348,072
4,051,903
867,141
5,059,411
741,035
$ 1,023,702
4,178,326
5,998,521
3,588,515
1,037,650
4,755,221
675,877
$
$
$
$
37
54,085
58,151
0.17
2.20
2.36
0.16
2.18
2.34
26,800,183
24,615,990
24,843,683
23.48
53,932
1,043,851
157,259
3,819,027
72,739
5,243
6,243,700
4,184,903
868,379
—
629,284
834,671
3,668,263
5,307,118
3,145,137
942,593
4,189,582
566,148
$
$
$
$
$
$
$
$
$
$
$
$
45,443
41,319
(0.20)
2.18
1.98
(0.20)
2.18
1.98
22,076,534
20,818,045
21,059,201
21.08
32,684
572,164
97,151
3,192,720
51,353
7,531
4,894,495
3,073,717
1,018,159
—
465,275
523,756
2,834,511
4,150,089
2,499,538
795,368
3,368,160
442,105
$
$
$
$
$
$
$
$
$
$
$
$
(dollars in thousands, except share data)
Financial performance:(8)
2019
At or for the Years Ended December 31,
2017
2018
2016
Return on average shareholders’ equity(1) . .
Return on average total assets . . . . . . . . . .
Net interest margin(2) . . . . . . . . . . . . . . . . . .
Efficiency ratio(3) . . . . . . . . . . . . . . . . . . . .
2.43%
0.25%
3.01%
94.02%
5.40%
0.57%
3.23%
88.88%
10.20%
1.05%
3.31%
86.79%
10.27%
1.01%
3.45%
82.40%
2015
9.35%
0.91%
3.63%
85.33%
Asset quality:
Allowance for credit losses . . . . . . . . . . . . . $
Allowance for loan losses/total loans(4). . . .
Allowance for loan losses/nonaccrual
loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans(5)(6) . . . . . . . . . . . . . $
Nonaccrual loans/total loans . . . . . . . . . . .
Other real estate owned . . . . . . . . . . . . . . . $
Total nonperforming assets . . . . . . . . . . . . . $
Nonperforming assets/total assets . . . . . . .
Net recoveries (charge-offs) . . . . . . . . . . . . $
Regulatory capital ratios for the Bank:
Tier 1 leverage capital (to average assets) . .
Common equity Tier 1 capital
(to risk-weighted assets) . . . . . . . . . . . . .
Tier 1 risk-based capital
42,837
$
42,913
$
39,116
$
35,264
$
30,659
0.82%
0.81%
0.83%
0.88%
0.91%
324.80%
12,861
0.25%
1,393
14,254
0.21%
424
$
$
$
$
356.92%
11,619
0.23%
455
12,074
0.17%
797
$
$
$
$
251.63%
15,041
0.33%
664
15,705
0.23%
3,102
$
$
$
$
165.52%
20,542
0.53%
5,243
25,785
0.41%
505
$
$
$
$
170.54%
17,168
0.53%
7,531
24,699
0.50%
2,035
10.56%
10.15%
9.67%
10.26%
9.46%
13.50%
13.82%
13.22%
13.92%
13.04%
(to risk-weighted assets) . . . . . . . . . . . . .
13.50%
13.82%
13.22%
13.92%
13.04%
Total risk-based capital
(to risk-weighted assets) . . . . . . . . . . . . .
14.37%
14.72%
14.02%
14.69%
13.92%
Regulatory capital ratios for the Company:
Tier 1 leverage capital (to average assets) . .
Common equity Tier 1 capital
(to risk-weighted assets) . . . . . . . . . . . . .
Tier 1 risk-based capital
10.16%
9.51%
9.12%
9.78%
9.95%
11.43%
11.26%
9.86%
10.54%
10.52%
(to risk-weighted assets) . . . . . . . . . . . . .
12.52%
12.37%
10.92%
11.66%
11.84%
Total risk-based capital
(to risk-weighted assets) . . . . . . . . . . . . .
13.40%
13.27%
11.61%
12.34%
12.70%
SUPPLEMENTAL DATA:
Loans serviced for others
Commercial . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618,876
Single family(7)(8) . . . . . . . . . . . . . . . . . . . . .
7,023,441
Total loans serviced for others . . . . . . . . . . . . $ 8,642,317
$ 1,542,477
20,151,735
$ 21,694,212
$ 1,391,196
22,631,147
$ 24,022,343
$ 1,177,363
19,488,456
$ 20,665,819
$ 1,003,880
15,347,811
$ 16,351,691
(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) Noninterest expense divided by total revenue (net interest income and noninterest income).
(4)
Includes loans acquired with bank acquisitions. Excluding acquired loans, allowance for loan losses/total loans was
0.86%, 0.85%, 0.90%, 1.00% and 1.10% at December 31, 2019, 2018, 2017, 2016 and 2015, respectively.
(5) Generally, loans are placed on nonaccrual status when they are 90 or more days past due, unless payment is insured by the
(6)
FHA or guaranteed by the VA.
Includes $1.3 million and $1.9 million of nonperforming loans at December 31, 2019 and 2018, respectively, which are
guaranteed by the Small Business Administration (“SBA”).
(7) On March 29, 2019, the Company closed and settled two sales of the rights to service $14.26 billion in total unpaid
principal balance of single family mortgage loans representing 71% of single family mortgage loans serviced for others
portfolio as of December 31, 2018.
Includes both continuing and discontinued operations.
(8)
38
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 identified as using words such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” and similar
expressions (or the negative of these terms). Such statements involve inherent risks and uncertainties, many of
which are difficult to predict and are generally beyond the control of the Company and are subject to risks and
uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-K, particularly in
Item 1A “Risk Factors,” that could cause actual results to differ significantly from those projected. Although we
believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We undertake no obligation to, and expressly disclaim any
such obligation to update, or clarify any of the forward-looking statements after the date of this Form 10-K to reflect
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 diversified financial services company founded in 1921, headquartered in Seattle, Washington,
serving customers primarily on the West Coast of the United States, including Hawaii. We are principally engaged in
commercial banking, consumer banking, and real estate lending, including commercial real estate and single family
mortgage banking operations.
HomeStreet, Inc. is a bank holding company that has elected to be treated as a financial holding company. Our
primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. We also sell insurance products and
services for consumer clients under the name HomeStreet Insurance.
HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans,
mortgage loans, deposit products, private banking and cash management services and other banking services. Our
loan products include commercial business loans and agriculture loans, consumer loans, single family residential
mortgages, loans secured by commercial real estate and construction loans for residential and commercial real estate
projects.
HomeStreet Capital Corporation, a Washington corporation, sells and services multifamily mortgage loans
originated by HomeStreet Bank under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS®”)1.
We generate revenue by earning net interest income and noninterest income. Net interest income is primarily the
difference 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 insurance sales.
Since our IPO, we have been strategically focused on becoming a leading West Coast regional commercial bank,
growing commercial banking to diversify our earnings and actively reducing our exposure to the single family
lending mortgage business and its more cyclical and volatile earnings results. This includes the exit of our
stand-alone home loan center (“HLC”)-based mortgage business and sale of related mortgage servicing rights in
early 2019 (“HLC Business Sale”). In late 2019, we finalized the sale of our ownership interest in WMS Series LLC,
our former joint venture. Following these transactions, we focused primarily on commercial and consumer banking
including our smaller single family mortgage lending business conducted through our bank locations, online and
affinity networks.
1
DUS® is a registered trademark of Fannie Mae
39
In connection with the HLC Business Sale, we eliminated segment reporting in the first quarter of 2019 and
classified all remaining activity for these HLCs, along with certain other mortgage banking related assets and
liabilities that are expected to be sold or abandoned within approximately one year, as discontinued operations in the
accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Operations. Prior
period financial statements have been reclassified to conform with this financial statement presentation. Certain
components of the Company’s former Mortgage Banking segment, including mortgage servicing rights (“MSRs”) on
certain mortgage loans that were not sold as part of this divestiture, along with our remaining single family mortgage
origination and servicing business, were reported in continuing operations beginning on April 1, 2019 based on the
Company’s intent (“Retained MB Business”).
We continue to take steps to improve productivity and reduce total corporate expenses, reflecting the substantial
reduction in the size and complexity of our operations and our lower growth plan going forward. During 2019,
we worked with an outside consulting firm that specializes in bank efficiency on an enterprise-wide profitability
improvement project. The goal of this project is to analyze and improve all of our corporate expenses and business
line processes, including contract terms, occupancy and technology costs, organization and staffing improvements,
and other cost savings and efficiency proposals. The project includes the following initiatives:
•
•
•
•
•
•
Simplify the organizational structure by reducing management levels and management redundancy
Consolidate similar functions currently residing in multiple organizations
Renegotiate, where possible, our technology contracts
Identify and eliminate redundant or unnecessary systems and services
Rationalize staffing levels to recognize the significant changes in work volumes and Company growth rates
Eliminate excess occupancy costs consistent with reduced personnel
We began executing on the efficiency initiatives in the third quarter of 2019 and expect these reductions and
enhancements will continue through 2020 and beyond.
In 2019, we made progress towards achieving these goals of improving efficiency and profitability with
organizational and operational changes which resulted in substantial reductions in operating costs and headcount,
with FTE falling to 1,027 at February 1, 2020. These reductions are meaningful progress toward achieving our
efficiency and profitability improvement goals. However, our profitability goals have been challenged by reduced
revenue from a lower interest rate environment and persistently flat yield curve, which have had an adverse impact
on the balances of loans held for investment and our net interest margin. In addition, certain operational, technology
and real estate cost reductions will occur later than originally anticipated impacting both our efficiency and
profitability goals. We expect these reductions and enhancements will continue through 2020 and beyond.
In addition to proactively reducing our exposure to single family mortgage lending by exiting the HLC-based
mortgage banking business, in 2019 we continued to grow our overall banking business. In 2019, we opened two
de novo retail branches in San Jose and Santa Clara, CA and completed the acquisition of a retail bank branch and
associated commercial lending team in San Diego County, CA. Our retail branch network continued to perform well,
with total deposits from continuing operations increasing 9.2% over December 31, 2018.
As of December 31, 2019, we had 36 retail branches in Washington, 19 retail branches in California, four retail
branches in Hawaii and three retail branches in Oregon. We also had four primary stand-alone commercial lending
centers and one stand-alone insurance office. While we continue to focus on growing and strengthening our banking
business, we have temporarily suspended future de novo deposit branch openings while we focus on our strategy of
improving efficiency and profitability.
As part of our capital management strategy, in 2019, we repurchased a total of 3,187,259 shares of our common
stock at an average price of $30.75 per share. From January 2, 2020 through March 2, 2020, we repurchased
244,918 shares of our common stock at an average price of $32.87 per share.
40
Management’s Overview of 2019 Financial Performance
Results for 2019, 2018 and 2017 reflect the impact of the adoption in the first quarter of 2019 of a plan of exit
or disposal with respect to the stand-alone home loan center-based mortgage origination and related servicing
businesses, which comprised the bulk of our legacy mortgage banking business, as discontinued operations.
Discontinued operations reported in the first quarter of 2019 included our entire former mortgage banking business
as did all prior periods presented. Effective April 1, 2019, the newly organized bank location-based mortgage
banking business commenced operations and the associated direct revenues and direct expenses were reported as
part of the Company’s continuing operations beginning in the second quarter of 2019 (“Retained MB Business”).
Recent Developments
The Board of Directors approved an addition to our share repurchase program for up to $25 million of our common
stock in January 2020, and our regulators have confirmed no objections to that repurchase. In February, the
Board increased the authorization by an additional $10 million conditional on the non-objection of our regulators.
Assuming no objections from our regulators for the additional repurchase authorization, we expect to commence
repurchases in the first or second quarter of 2020. This represents, in aggregate approximately 5.2% of the
Company’s currently outstanding common stock based on the closing price of the stock as of March 2, 2020. This
authorization is in addition to the 3.4 million shares of common stock that the Company repurchased in 2019 and
early 2020.
On January 23, 2020, the Board declared a quarterly dividend for the first quarter of 2020 at $0.15 per share, which
was paid on February 21, 2020 to shareholders of record as of the close of the market on February 5, 2020.
Consolidated Financial Performance
(in thousands, except per share data and ratios)
Selected statement of operations data
At or for the Years Ended December 31,
2018
2019
2017
Total net revenue(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 263,822
215,614
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(500)
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,988
Income tax expense (benefit) from continuing operations . . . . . . . . .
40,720
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
(28,285)
(Loss) income from discontinued operations before income taxes . . .
(5,077)
Income tax (benefit) expense from discontinued operations . . . . . . .
(23,208)
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . .
17,512
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$ 226,496
195,241
3,000
2,032
26,223
17,610
3,806
13,804
40,027
$
$ 217,138
190,614
750
(16,894)
42,668
40,415
14,137
26,278
68,946
$
Financial performance
Diluted income (loss) per common share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . $
Diluted income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Return on average common shareholders’ equity . . . . . . . . . . . . . . . .
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.55
$
(0.90) $
0.65
$
2.43%
0.25%
3.01%
$
$
$
0.97
0.51
1.47
5.40%
0.57%
3.23%
1.57
0.97
2.54
10.20%
1.05%
3.31%
(1)
Total net revenue is net interest income and noninterest income.
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 have remained above
current “well-capitalized” regulatory minimums since the Company’s initial public offering in 2012, even with the
implementation of the more stringent Basel III capital requirements.
41
Under the Basel III standards, the Bank’s Tier 1 leverage and total risk-based capital ratios at December 31, 2019
were 10.56% and 14.37% and at December 31, 2018 were 10.15% and 14.72%, respectively. The Company’s Tier 1
leverage and total risk-based capital ratios were 10.16% and 13.40% at December 31, 2019, and 9.51% and 13.27%
at December 31, 2018, respectively.
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 financial 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
affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements
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, different estimates and assumptions could reasonably have been
made and used by management, instead of those we applied, which might have produced different results that could
have had a material effect on the financial statements.
We have identified the following accounting policies and estimates that, due to the inherent judgments and
assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical
to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in
the preparation of the Company’s financial statements are appropriate. For a further description of our accounting
policies, see Note 1, Summary of Significant Accounting Policies in the financial 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 loans
held for investment portfolio. Determining the appropriateness of the allowance is complex and requires judgment
by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan
portfolio, considering the factors then prevailing, may result in significant 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: first, an asset-specific component involving the identification of impaired loans and the measurement
of impairment for each individual loan identified; and second, a formula-based component for estimating probable
principal losses for all other loans.
Based upon this methodology, management establishes an asset-specific 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 financial condition, guarantor support and the
probability of collecting scheduled principal and interest payments when due.
When a loan is identified as impaired, we measure impairment as the difference between the recorded investment
in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate or
based on the loan’s observable market price. For impaired collateral-dependent loans, impairment is measured as
the difference 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”). If our chief
appraiser determines that market conditions, changes to the property, changes in intended use of the property or
42
other factors indicate that an appraisal is no longer reliable, a more frequent appraisal or internal collateral valuation
may be required to assess whether a change in collateral value requires an additional adjustment to carrying value.
A collateral valuation is a restricted appraisal 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, fixed 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 pools.
Loans are designated into loan pools based on 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 risk rating or delinquency status. 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 Asset Quality
Rating (“AQR”) or delinquency status using two-year analysis periods for commercial portfolios and one-year
analysis periods for consumer portfolios, 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 (“Q-Factors”) for
each loan pool, including changes in:
•
•
•
•
•
•
•
•
•
lending policies and procedures;
international, national, regional and local economic business conditions and developments that affect 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 classified or graded loans and the volume of
nonaccrual loans;
the quality of our loan review system;
the value of underlying collateral for collateral-dependent loans;
the existence and effect of any concentrations of credit and changes in the level of such concentrations; and
the effect of external factors such as competition and legal and regulatory requirements on the level of
estimated credit losses in the existing portfolio.
Q-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 Q-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 significant qualitative factors.
The allowance for loan losses, as reported in our consolidated statements of financial 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 6, Loans and Credit Quality in the
notes to the financial statements of this Form 10-K.
43
Allowance for Credit Losses for Loans Held for Investment
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments — Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit losses (“CECL”). The measurement of
the expected credit losses under the CECL methodology, like the allowance, is complex and requires judgment by
management about the effect of matters that are inherently uncertain. Many of the assumptions and judgments used
in the CECL methodology are similar to those used in the Allowance for Loan Losses methodology. However, the
CECL methodology incorporates the following differences:
Amortized Cost Basis
The measurement of the expected credit losses under the CECL methodology is applicable to loans held for
investment measured at amortized cost.
Amortized cost is the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for
loans accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and
unamortized premiums or discounts on purchased loans. Accrued interest receivable is reported separately in Other
Assets in the Consolidated Statements of Financial Condition as the Bank has elected to exclude accrued interest
receivable from the allowance for credit losses.
Collectively Evaluated Component
In estimating the expected credit losses for loans collectively evaluated, loans are segregated into loan pools.
Loans are designated into loan pools based on similar risk characteristics, such as product types, or areas of risk
concentration. Credit loss assumptions are estimated using a model that further categorizes loan pools based on
risk rating or delinquency status. 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 risk rating or
delinquency status using life of loan default rates.
Life of Loan Loss Rates
Historical life of loan loss rates provide the basis for the estimation of expected credit losses. The model uses
statistical analysis to determine the life of loan default rates for the quantitative component of the allowance for
credit losses (“ACL”) and analyzes losses and recoveries over time without constraint.
Qualitative Factors
The allowance for credit losses for loans held for investment that are collectively evaluated also considers qualitative
factors (“Q-Factors”) for each loan pool. The Q-Factors adjust the expected historic loss rates for current and
forecasted conditions that are not incorporated into the historical loss information. The Bank has established a
methodology for adjusting historical expected loss rates based on these more recent or forecasted changes. The
Q-Factor methodology is based on a blend of quantitative analysis and management judgment, including changes in:
•
•
•
•
•
•
•
•
Portfolio Credit Quality
Remaining Payments
Volume & Nature
Collateral Values
Economic
Credit Culture
Business Environment
Management Overlay
44
Management has assigned weightings for each Q-Factor as well as individual metrics within each Q-Factor with
respect to the relative importance of that factor or metric specific to each portfolio type. The Q-Factors above are
evaluated using a seven-point scale ranging from significant improvement to significant deterioration.
Current Conditions and Reasonable and Supportable Forecasts
Management estimates the allowance for credit losses balance using relevant available information, from internal
and external sources relating to past events, current conditions, and reasonable and supportable forecasts.
The Bank has chosen two years as the forecast period based on management judgment and has determined that
reasonable and supportable forecasts should be made for two of the Q-Factors: Economic and Collateral values.
The CECL Q-Factor methodology bounds the Q-Factor adjustments by a minimum and maximum range, based
on the Bank’s own expected loss pool history. The rating of the Q-Factor on the seven-point scale, along with
the allocated weight, determines the final expected loss adjustment. The model is constructed so that the total of
the Q-Factor adjustments plus the current expected loss rate cannot exceed the maximum or minimum historical
two-year loss rate for that pool, which is aligned with the Bank’s determined forecast period. Loss rates beyond two
years are not adjusted in the Q-Factor process, and the model reverts to the historical mean loss rates.
Asset-Specific Component
For loans that do not share similar risk characteristics with other loans, the expected credit loss for individually
evaluated loans is equal to the amount by which the net realizable value of the loan is less than the amortized cost
basis of the loan, except when the loan is collateral dependent, which is when the borrower is experiencing financial
difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. In
these cases, the expected credit loss is measured as the difference between the amortized cost basis of the loan and
the fair value of the collateral. The fair value of the collateral is adjusted for the estimated costs to sell if repayment
or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.
For further information on the allowance for loan losses, see Note 1, Summary of Significant Accounting Policies and
Note 6, Loans and Credit Quality in the notes to the financial statements of this Form 10-K.
Fair Value of Financial Instruments and Single Family MSRs
A portion of our assets are carried at fair value, including single family 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 defined as the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
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 reflecting the amount realized in an actual sale or
transfer of the asset or liability in a current market exchange.
A three-level valuation hierarchy has been established by the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“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 financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is
significant to the fair value measurement. The levels are defined as follows:
•
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the measurement date. An active market for the asset or liability is a
market in which transactions for the asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.
45
•
•
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in
active markets and inputs that are observable for the asset or liability for substantially the full term of the
financial instrument.
Level 3 — Unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions
of what market participants would use in pricing the asset or liability.
Significant 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 significant inputs used. The classification of Level 2 or Level 3 is based upon the specific facts and
circumstances of each instrument or instrument category and judgments are made regarding the significance of the
Level 3 inputs to an instrument’s fair value measurement in its entirety. If Level 3 inputs are considered significant,
the instrument is classified as Level 3.
As of December 31, 2019, 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, certain
investment securities available 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 significant modeling variables used to measure the fair value of the Company’s financial instruments,
including the significant inputs used in the valuation of single family MSRs. Additionally, ALCO periodically
obtains an independent review of the MSR valuation process and procedures, including a review of the model
architecture and the valuation assumptions. We obtain an MSR valuation from an independent valuation firm
monthly to assist with the validation of our fair value estimate and the reasonableness of the assumptions used in
measuring fair value.
For further information on the fair value of financial instruments and single family MSRs, see Note 1 Summary of
Significant Accounting Policies; Note 13 Mortgage Banking Operations, and Note 19 Fair Value Measurement, in
the notes to the financial statements of this Form 10-K.
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.
46
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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 effect of additional interest income that would have been recorded during the period if the loans
had been accruing, was $1.9 million, $1.4 million and $1.5 million for the years ended December 31, 2019, 2018
and 2017, 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 affected 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), and (3) the net change.
Years Ended December 31,
2019 vs. 2018
Increase (Decrease)
Due to
Rate
Volume
Total
Change
2018 vs. 2017
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. . . . . . . . . . .
9 $
(111) $
(102) $
378 $
(50) $
(660)
(1,259)
5,001
3,091
(1,748)
(8,874)
21,541
10,808
(2,408)
(10,133)
26,542
13,899
1,555
4,357
7,358
13,648
(2,646)
(10,855)
31,091
17,540
Liabilities:
Deposits
Interest-bearing demand accounts . . . . . . . .
Savings accounts . . . . . . . . . . . . . . . . . . . . .
Money market accounts . . . . . . . . . . . . . . . .
Certificate accounts . . . . . . . . . . . . . . . . . . .
Total interest-bearing deposits . . . . . . . . .
2
(157)
8,692
11,015
19,552
(174)
(133)
1,379
7,671
8,743
(172)
(290)
10,071
18,686
28,295
(80)
(111)
6,608
7,484
13,901
(206)
(82)
2,047
2,518
4,277
328
(1,091)
(6,498)
38,449
31,188
(286)
(193)
8,655
10,002
18,178
Federal Home Loan Bank advances. . . . . . . . .
Federal funds purchased and securities sold
5,821
(13,506)
(7,685)
7,468
(1,556)
5,912
under agreements to repurchase. . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . . . . . .
250
59
579
24,978
Total changes in net interest income . . $ (22,447) $ 14,546 $ (7,901) $ (8,367) $ 14,577 $ 6,210
9
(8)
164
25,538
725
288
12
(3,738)
734
280
176
21,800
60
13
573
22,015
190
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6
2,963
Net Income
Comparison of 2019 to 2018
Net income, which included both continuing and discontinued operations, was $17.5 million in the year
ended December 31, 2019, a decrease of $22.5 million, or 56.2%, from $40.0 million for the year ended
December 31, 2018. The decrease in net income in 2019 was primarily due to the $20.6 million loss on disposal and
restructuring-related expenses, net of tax, taken in the year ended December 31, 2019 compared to the $5.0 million
in restructuring related expenses, net of tax, taken in the year ended December 31, 2018, a $4.9 million non-cash,
tax benefit from the revaluation of our deferred tax liability related to the Tax Reform Act taken in 2018, a decline in
48
single-family mortgage servicing income related to the first quarter 2019 sales of single family mortgage servicing
rights and a decline in single family net gain on mortgage loan sale and origination activities primarily from the
HLC Business Sale. This decrease is partially offset by a reduction in noninterest expense from reduced salaries
and commissions on lower closed loan volume, lower headcount, reductions in non-personnel costs from both cost
savings initiatives and the HLC Business Sale.
Comparison of 2018 to 2017
For the year ended December 31, 2018, net income was $40.0 million, a decrease of $28.9 million, or 41.9%, from
$68.9 million for the year ended December 31, 2017. Included in net income for the year ended December 31, 2018
and 2017 was a non-cash, tax reform benefit from the revaluation of our deferred tax liability related to the Tax
Reform Act of $4.9 million and $23.3 million, respectively, and restructuring and merger-related costs (net of tax)
of $5.0 million and $2.8 million, respectively. The decrease in net income was primarily due to the reduction in tax
reform benefit and the decline in mortgage loan production substantially driven by lower single-family mortgage
loan volume. The decrease in net income was partially offset by a reduction in noninterest expense as a result of our
2018 and 2017 cost savings initiatives and reduced commissions on lower closed loan volume.
Net Income from Continuing Operations
Comparison of 2019 to 2018
Net income from continuing operations increased in the year ended December 31, 2019 compared to the year ended
December 31, 2018 primarily due to the inclusion, beginning in April 2019, of $6.7 million after-tax, of income from
the Retained MB Business. In the comparative period, income and expense associated with the legacy MB Business
was in discontinued operations. Excluding this impact, the improvement resulted from an increase in gain on loan
origination and sale activities related to higher volumes and improved margin of loans sold. The increase is partially
offset by the $4.9 million non-cash, tax benefit from the revaluation of our deferred tax liability related to the Tax
Reform Act recorded in 2018 and savings related to reduced headcount and our cost saving initiatives.
Comparison of 2018 to 2017
Net income from continuing operations decreased in the year ended December 31, 2018 compared to the year ended
December 31, 2017. Included in net income for the years ended December 31, 2018 and 2017 was a non-cash,
tax benefit from the revaluation of our deferred tax liability related to the Tax Reform Act of $4.9 million and
$23.3 million, respectively. The decrease in net income was primarily due to the reduction in tax reform benefit, a
lower gain on loan origination and sale activities and an increase in noninterest expense. The decrease was partially
offset by an increase in net interest income.
Net Income from Discontinued Operations
Comparison of 2019 to 2018
During the year ended December 31, 2019, the Company completed the HLC Business Sale, which primarily
comprised the Company’s former Mortgage Banking segment. The Company determined that this sale met the
criteria for classification as discontinued operations and the related operating results and financial condition are
presented as discontinued operations on the consolidated financial statements.
Net loss from discontinued operations was $23.2 million for the year ended December 31, 2019 compared to net
income from discontinued operations of $13.8 million for the year ended December 31, 2018. The decrease in net
income from discontinued operations in the year ended December 31, 2019 was primarily due to an increase in
restructuring and loss on disposal charges, the impact from revenues and expenses associated with the Retained MB
Business, which were reflected in continuing operations beginning April 2019, a reduction in single family mortgage
loan origination and sale activities and related noninterest expense as we wound down the operations of our
stand-alone home loan center-based mortgage business and lower servicing income due to the first quarter sales of
mortgage servicing rights. This decrease was partially offset by reduced commissions on lower closed loan volume,
savings associated with lower headcount and other savings related to our cost reduction initiatives.
49
Comparison of 2018 to 2017
The decrease in net income from discontinued operations in the year ended December 31, 2018 compared to the year
ended December 31, 2017 was primarily due to a reduction in single family mortgage net gain on loan origination
and sale activities and related noninterest expense on lower production volumes as the mortgage market weakened.
This decrease was partially offset by reduced commissions on lower closed loan volume, savings associated with
lower headcount and other savings related to our prior cost reduction initiatives.
Net Interest Income
Our profitability depends significantly on net interest income, which is the difference between income earned on our
interest-earning assets, primarily loans and investment securities, and interest paid on interest-bearing liabilities. Our
interest-bearing liabilities consist primarily of deposits and borrowed funds, including our outstanding trust preferred
securities, senior unsecured notes and advances from the Federal Home Loan Bank (“FHLB”).
Comparison of 2019 to 2018
Net interest income on a tax equivalent basis for the year ended December 31, 2019 decreased $7.9 million, or
3.8%, from December 31, 2018. The net interest margin decreased to 3.01% for the year ended December 31, 2019
from 3.23% for the year ended December 31, 2018. The decrease in both net interest income and net interest margin
from the year ended December 31, 2018 was primarily due to a higher balance of high cost certificate of deposit
accounts, partially offset by higher balances and yields on loans held for investment. The continued flattening of the
yield curve during the period adversely affected our net interest margin because the cost of interest-bearing liabilities
increased more quickly than the yield on our interest-earning assets.
Total average interest-earning assets increased by $135.9 million, or 2.1%, in 2019 compared to 2018 as a result of
both organic and acquired loan growth.
Total interest income on a tax equivalent basis in 2019 increased $13.9 million, or 5.1%, from 2018 resulting from
higher average balances of loans held for investment, which increased $417.0 million, or 8.6%, from 2018.
Total interest expense in 2019 increased $21.8 million, or 32.0%, from 2018.The increases resulted from higher rates
paid on interest-bearing deposits, FHLB advances and wholesale deposits including brokered CDs as market interest
rates rose.
Comparison of 2018 to 2017
Net interest income on a tax equivalent basis for the year ended December 31, 2018 increased $6.2 million, or 3.1%,
from December 31, 2017 as a result of growth in loans held for investment. The net interest margin decreased to
3.23% for the year ended December 31, 2018 from 3.31% for the year ended December 31, 2017. The decrease in
the net interest margin from the year ended December 31, 2017 was primarily due to our cost of interest-bearing
liabilities, which increased more rapidly than our yield on interest-earning assets. The flattening of the yield curve
during the period adversely affected our net interest margin because the cost of interest-bearing liabilities increased
more quickly than the yield on our interest-earning assets.
Total average interest-earning assets increased by $349.6 million, or 5.8%, in 2018 compared to 2017 primarily as a
result of organic loan growth.
Total interest income on a tax equivalent basis in 2018 increased $31.2 million, or 12.9%, from 2017 resulting from
higher average balances of loans held for investment, which increased $687.9 million, or 16.5%, from 2017 and
repricing of interest earning assets due to higher market interest rates.
Total interest expense in 2018 increased $25.0 million, or 57.8%, from 2017. The increase resulted from higher
rates on interest-bearing deposits, FHLB advances and wholesale deposits including brokered CDs as market
interest rates rose.
50
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 profile has continued to improve since our
initial public offering in 2012. Credit quality remained strong from December 31, 2019 and 2018.
Comparison of 2019 to 2018
The Company had a reversal of provision for credit losses for the year ended December 31, 2019 of $500 thousand
compared to a $3.0 million provision for credit losses for the year ended December 31, 2018. The decrease in credit
loss provision was primarily due to a reduction in loan balances and continued recoveries.
Nonaccrual loans were $12.9 million at December 31, 2019, an increase of $1.2 million, or 10.7%, from
$11.6 million at December 31, 2018. Nonaccrual loans as a percentage of total loans increased to 0.25% at
December 31, 2019 compared to 0.23% at December 31, 2018. Net loan recoveries were $424 thousand in 2019
compared to net loan recoveries of $797 thousand in 2018. Overall, the allowance for credit losses, which includes
the reserve for unfunded commitments, was $42.8 million, or 0.84% of loans held for investment at December 31,
2019, compared to $42.9 million, or 0.84% of loans held for investment at December 31, 2018.
Comparison of 2018 to 2017
The Company recorded a $3.0 million provision for credit losses for the year ended December 31, 2018 compared
to a $750 thousand provision for credit losses for the year ended December 31, 2017. The increase in credit loss
provision was due in part to lower net recoveries in the year ended December 31, 2018 as compared to the same
period in 2017.
Nonaccrual loans were $11.6 million at December 31, 2018, a decrease of $3.4 million, or 22.8%, from
$15.0 million at December 31, 2017. Nonaccrual loans as a percentage of total loans decreased to 0.23% at
December 31, 2018 compared to 0.33% at December 31, 2017. Net loan recoveries were $797 thousand in 2018
compared to net loan recoveries of $3.1 million in 2017. Overall, the allowance for credit losses, which includes the
reserve for unfunded commitments, was $42.9 million, or 0.84% of loans held for investment at December 31, 2018,
compared to $39.1 million, or 0.86% of loans held for investment at December 31, 2017.
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 from continuing operations consisted of the following.
(dollars in thousands)
Noninterest income
Net gain on loan origination and sale
Years Ended December 31,
2019
Dollar
Change
Percent
Change
2018
Dollar
Change
Percent
Change
2017
activities . . . . . . . . . . . . . . . . . . . . . . $ 44,122 $ 32,256
4,131
Loan servicing income . . . . . . . . . . . . .
Depositor and other retail banking
7,802
272% $ 11,866 $ (8,160)
340
3,671
113
(41)% $ 20,026
3,331
10
fees . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance agency commissions . . . . . . .
(Loss) gain on sale of investment
7,926
2,292
(93)
99
(1)
5
8,019
2,193
824
289
11
15
7,195
1,904
securities available for sale . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
(242)
1,748
Total noninterest income . . . . . . . . . . . . . . $ 74,432 $ 37,899
(7)
12,297
51
(103)
17
235
10,549
(254)
897
104% $ 36,533 $ (6,064)
(52)
9
489
9,652
(14)% $ 42,597
Comparison of 2019 to 2018
The increase in noninterest income in 2019 compared to 2018 was primarily due to $31.0 million of noninterest
income related to the inclusion, beginning in April 2019, of the revenues from the Retained MB Business. In the
comparable period, noninterest income related to the legacy MB business was in discontinued operations. Excluding
this impact, noninterest income increased primarily due to an increase in net gain on loan origination and sale
activities related to an increase in volume and profit margin on loans sold.
Comparison of 2018 to 2017
The decrease in noninterest income in 2018 compared to 2017 was primarily due to both lower volume and profit
margin on DUS loan sales.
The significant components of our noninterest income are described in greater detail, as follows.
Gain on loan origination and sale activities consisted of the following.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gain on loan origination and sale activities(2) . . . . . . . . $
Years Ended December 31,
2018
2017
2019
17,492 $
86,686
104,178 $
11,776 $
174,473
186,249 $
20,027
235,849
255,876
(1)
(2)
Includes $60.1 million, $174.4 million and $235.9 million from discontinued operations for the years ended 2019, 2018
and 2017, respectively.
Includes loans originated as held for investment.
Comparison of 2019 to 2018
The increase in gain on loan origination and sale activities from continuing operations in 2019 compared to 2018
is primarily due to $26.9 million in gains related to the inclusion, beginning in April 2019, of the revenues from
the Retained MB Business, (gain on sale associated with the legacy MB business was included in discontinued
operations for the comparative period) and an increase in volume and profit margin on CRE HCC loans sold.
Comparison of 2018 to 2017
The decrease in gain on loan origination and sale activities from continuing operations in 2018 compared to 2017
was due to both a lower volume and margin on DUS loan sales.
Loans serviced for others consisted of the following.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At December 31,
2019
1,618,876 $
7,023,441
8,642,317 $
2018
1,542,477
20,151,735
21,694,212
Includes both continuing and discontinued operations at December 31, 2018.
(1)
(2) On March 29, 2019 the Company settled two sales of the rights to service $14.26 billion in total unpaid principal balance
of single family mortgage loans serviced representing 71% of the Company’s total single family mortgage loans serviced
for others portfolio as of December 31, 2018.
Mortgage repurchase losses, which management records an estimated liability for, have the effect of reducing
gain on mortgage loan origination and sale activities. The following table presents the effect 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 14, Commitments, Guarantees and
Contingencies to the financial statements in this Form 10-K.
52
(in thousands)
Effect of changes to the mortgage repurchase liability
recorded in net gain on loan origination and sale
activities:(1)
New loan sales(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other changes in estimated repurchase losses(3) . . . . . . . . . .
$
Years Ended December 31,
2018
2017
2019
648 $
(422)
226 $
1,092 $
838
1,930 $
2,528
(2,354)
174
Includes both continuing and discontinued operations.
(1)
(2) Represents the estimated fair value of the repurchase or indemnity obligation recognized as a reduction of proceeds on new
loan sales.
(3) Represents changes in estimated probable future repurchase losses on previously sold loans.
Loan servicing income consisted of the following.
(dollars in thousands)
Commercial loan servicing income, net:
2019
Dollar
Change
Servicing fees and other . . . . . . . . . . . . $ 9,116 $ 1,063
(836)
Amortization of capitalized MSRs . . . .
227
Commercial loan servicing income . . . . .
Single family servicing income, net:
Servicing fees and other . . . . . . . . . . . . . .
Changes in fair value of single family
(5,219)
3,897
(32,443)
28,442
Years Ended December 31,
Percent
Change
Dollar
Change
2018
Percent
Change
2017
13% $ 8,053 $
19
6
(4,383)
3,670
790
(451)
339
11% $ 7,263
(3,932)
11
3,331
10
(53)
60,885
1,956
3
58,929
MSRs due to amortization(1) . . . . . . . . .
Single family servicing income . . . . . . . .
(20,670)
7,772
14,035
(18,408)
(40)
(70)
(34,705)
26,180
746
2,702
(2)
12
(35,451)
23,478
Risk management, single family MSRs:
Changes in fair value of MSR due
to changes in model inputs and/or
assumptions(2)(3) . . . . . . . . . . . . . . . . .
Net (loss) gain from derivatives
(16,224)
(55,572)
(141)
39,348
40,505
(3,501)
(1,157)
economically hedging MSR . . . . . . .
54,909
(663)
Single family servicing income . . . . . . . . $ 5,983 $ (19,071)
Total loan servicing income(4) . . . . . . . . . . $ 9,880 $ (18,844)
14,435
(1,789)
(50,206)
(40,474)
(136)
59
(9,701)
(1,126)
(76)% $ 25,054 $ (6,999)
(66)% $ 28,724 $ (6,660)
(516)
(113)
9,732
8,575
(22)% $ 32,053
(19)% $ 35,384
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which affect future prepayment speed and cash flow projections.
Includes pre-tax loss of $919 thousand and pre-tax gain of $573 thousand, net of transaction costs and prepayment
reserves, resulting from the sales of single family MSR for year ended December 31, 2019 and December 31, 2018,
respectively.
Includes $3.0 million, $25.1 million and $32.1 million from discontinued operations for the years ended December 31,
2019, 2018 and 2017, respectively.
(3)
(4)
Comparison of 2019 to 2018
The decrease in loan servicing income in 2019 compared to 2018 was primarily due to a lower average unpaid
principal balance of loans serviced for others due to our sales of single-family mortgage servicing rights and lower
risk management results.
53
Risk management results fluctuate as market conditions change, including changes in interest rates and prepayment
speed expectations. Loan servicing fees collected in 2019 decreased compared to 2018 primarily due to the sales of
mortgage servicing rights. Our loans serviced for others portfolio decreased to $8.64 billion at December 31, 2019
from $21.69 billion at December 31, 2018. The reduction in balance from these periods was mainly due to the sale of
$14.26 billion of single-family loans serviced for others in the first quarter of 2019, partially offset by the growth of
the portfolio in second half of 2019.
MSR risk management results represent changes in the fair value of single family MSRs due to changes in model
inputs and assumptions net of the gain/(loss) from derivatives economically hedging MSRs. The fair value of MSRs
is sensitive to changes in interest rates, primarily due to the effect of prepayment speeds on underlying mortgage
loans. MSRs typically increase in value when interest rates rise because rising interest rates tend to decrease
mortgage prepayment speeds, and therefore increase the expected life of the net servicing cash flows of the MSR
asset. Certain other changes in MSR fair value relate to factors other than interest rate changes and are generally not
within the scope of the Company’s MSR economic hedging strategy. These factors may include but are not limited
to the impact of changes to the housing price index, prepayment model assumptions, the level of home sales activity,
changes to mortgage spreads, valuation discount rates, costs to service and policy changes by U.S. government
agencies.
Comparison of 2018 to 2017
The decrease in loan servicing income in 2018 compared to 2017 was primarily due to lower risk management
results offset by higher servicing income. The lower risk management results were primarily driven by a more
volatile interest rate environment, the flattening of the yield curve and increased negative convexity cost. The higher
servicing income was primarily attributed to higher average balances of loans serviced for others. Loan servicing
fees collected in 2018 increased compared to 2017 primarily as a result of higher average balances of loans serviced
for others during the year. Although our loans serviced for others average balances were higher year over year,
our loans serviced for others portfolio decreased to $21.69 billion at December 31, 2018 from $24.02 billion at
December 31, 2017. The decrease in balance from these periods was mainly due to the sale of $4.90 billion of
single-family loans serviced for others in the second quarter of 2018, partially offset by the growth of the portfolio in
second half of 2018.
Depositor and other retail banking fees for 2019 decreased slightly from 2018. The following table presents the
composition of depositor and other retail banking fees for the periods indicated.
(dollars in thousands)
Fees:
Monthly maintenance and
Years Ended December 31,
2019
Dollar
Change
Percent
Change
2018
Dollar
Change
Percent
Change
2017
deposit-related fees . . . . . . . . . . . . . . $ 3,303 $
Debit Card/ATM fees . . . . . . . . . . . . . .
Other fees . . . . . . . . . . . . . . . . . . . . . . .
4,370
261
(75)
(16)
(22)
(2)% $ 3,378 $
—
(8)
4,386
283
293
474
59
9% $ 3,085
3,912
224
12
26
Total depositor and other retail banking
fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,934 $
(113)
(1)% $ 8,047 $
826
11% $ 7,221
(1)
Includes $8 thousand, $28 thousand and $26 thousand from discontinued operations for the years ended December 31,
2019, 2018 and 2017, respectively.
54
Noninterest Expense
Noninterest expense from continuing operations consisted of the following.
(dollars in thousands)
Noninterest expense
Years Ended December 31,
2019
Dollar
Change
Percent
Change
2018
Dollar
Change
Percent
Change
2017
Salaries and related costs . . . . . . . . . $ 122,189 $ 17,147
930
General and administrative . . . . . . . .
Amortization of core deposit
33,862
16% $ 105,042 $ 3,251
(4,850)
32,932
3
3% $ 101,791
37,782
(13)
intangibles . . . . . . . . . . . . . . . . . . .
Legal . . . . . . . . . . . . . . . . . . . . . . . . .
Consulting . . . . . . . . . . . . . . . . . . . . .
Federal Deposit Insurance
Corporation assessments . . . . . . . .
Occupancy . . . . . . . . . . . . . . . . . . . . .
Information services . . . . . . . . . . . . .
Net benefit of operation and sale of
other real estate owned . . . . . . . . .
1,634
1,559
4,055
1,820
22,242
28,325
9
(1,814)
1,586
(1,988)
4,139
297
1
(54)
64
(52)
23
1
1,625
3,373
2,469
3,808
18,103
28,028
(85)
2,070
(213)
810
1,122
2,131
(5)
159
(8)
27
7
8
1,710
1,303
2,682
2,998
16,981
25,897
67
Total noninterest expense . . . . . . . . . . . $ 215,614 $ 20,373
(72)
(48)
391
(139)
10% $ 195,241 $ 4,627
(74)
(530)
2% $ 190,614
Comparison of 2019 to 2018
The increase in noninterest expense in 2019 compared to 2018 was primarily due to $26.3 million of expenses
related to the inclusion, beginning in April 2019, of the expenses from the Retained MB Business. In the comparable
period, expenses related to the legacy MB business were in discontinued operations. Excluding this impact,
noninterest expense decreased in both periods primarily due to savings related to reduced headcount and our cost
saving initiatives.
Included in noninterest expense in 2019 and 2018 was $4.5 million and $22 thousand in restructuring-related costs,
respectively.
Salaries and related costs increased primarily due to $20.1 million in costs related to the inclusion, beginning in April
2019, of the expenses from the Retained MB Business. In the comparable period, salaries and related costs related to
the legacy MB business were in discontinued operations, partially offset by a reduction in salaries primarily related to
a decrease in full-time equivalent employees at December 31, 2019 compared to December 31, 2018.
General and administrative and Information services costs increased primarily due to the $2.7 million in costs
related to the inclusion, beginning in April 2019, of the expenses from the Retained MB Business. In the comparable
period, general and administrative costs related to the legacy MB business were in discontinued operations. The
increase was partially offset by a reduction in personnel associated expenses related to our cost savings initiatives.
Comparison of 2018 to 2017
The increase in noninterest expense in 2018 compared to 2017 was primarily due to an increase in salaries and
related costs, as well as an increase in information services costs. The increase was partially offset by a decrease in
general and administrative costs.
Salaries and related costs increased primarily due to an increase in commissions on CRE loan sales.
General and administrative and Information services costs decreased primarily due to a reduction in office
locations and a reduction in personnel related expenses related to our cost savings initiatives.
55
Income Tax Expense
Comparison of 2019 to 2018
For the year ended December 31, 2019, income tax expense from continuing operations was $8.0 million with an
effective tax rate of 16.4% (inclusive of discrete items) compared to income tax expense from continuing operations
of $2.0 million and an effective tax rate of 7.2% (inclusive of discrete items) for the year ended December 31, 2018.
The Company’s effective income tax rate for the year ended December 31, 2019 differed from the Federal and state
combined statutory tax rate of 23.5% primarily due to the benefit received from tax-exempt interest and BOLI
income.
The increase in our 2019 effective income tax rate compared to 2018 is primarily related to the non-cash, benefit
of $4.9 million recorded in 2018 for the revaluation our net deferred tax liability position related to the Tax
Reform Act.
Comparison of 2018 to 2017
For the year ended December 31, 2018 income tax expense from continuing operations was $2.0 million with
an effective tax rate of 7.2% (inclusive of discrete items) compared to income tax benefit from continuing
operations of $16.9 million and an effective tax rate of (65.6)% (inclusive of discrete items) for the year ended
December 31, 2017.
The Company’s effective income tax rate for the year ended December 31, 2018 differed from the Federal and state
combined statutory tax rate of 23.6% primarily due to a net tax benefit of $3.7 million, comprised of a $4.9 million
tax benefit from the revaluation of our net deferred tax liability position related to the Tax Reform Act and a
$1.2 million expense related to the filing of our 2017 tax return, but unrelated to tax reform.
The increase in our 2018 effective income tax rate compared to 2017 is primarily related to the non-cash, benefit of
$23.3 million recorded at December 31, 2017 for the revaluation our net deferred tax liability position related to the
Tax Reform Act. The increase was partially offset by the decrease in the Federal statutory rate from 35% to 21%.
Capital Expenditures
Comparison of 2019 to 2018
During 2019, our net expenditures for property and equipment were $2.3 million, compared to net expenditures of
$9.7 million during 2018. The decrease was primarily due to the slower expansion of our commercial and consumer
banking business as we focused on our strategy of improved efficiency and profitability.
Comparison of 2018 to 2017
During 2018, our net expenditures for property and equipment were $9.7 million, compared to net expenditures of
$42.3 million during 2017. The decrease was primarily due to the slower expansion of our commercial and consumer
banking business.
Review of Financial Condition — Comparison of December 31, 2019 to December 31, 2018
Total assets were $6.81 billion at December 31, 2019 and $7.04 billion at December 31, 2018, a decrease of
$229.8 million, or 3.3%, primarily due to a decline in assets related to discontinued operations.
Cash and cash equivalents were $57.9 million at December 31, 2019 compared to $58.0 million at December 31,
2018, a decrease of $102 thousand, or 0.2%.
Investment securities were $943.2 million at December 31, 2019 compared to $923.3 million at December 31, 2018,
an increase of $19.9 million, or 2.2%, as we added to our investment portfolio in order to maintain our liquidity
ratios after the decline in our loans held for sale balances related to the HLC Business Sale.
56
We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of
interest income. We designate the vast majority of these securities as available for sale. We held securities having a
carrying value of $4.4 million at December 31, 2019, 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:
At December 31,
2019
2018
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,283 $
37,972
91,695 $
38,025
112,852 $
34,892
107,961
34,514
Collateralized mortgage obligations:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities available for sale . . . . . . . . . $
292,370
156,693
333,303
18,391
1,296
—
933,308 $
291,618
156,154
341,318
18,661
1,307
—
938,778 $
171,412
118,555
393,463
21,177
11,211
9,876
873,438 $
166,744
116,674
385,655
19,995
10,900
9,525
851,968
Mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) primarily represent
securities issued by government sponsored enterprises (“GSEs”). Most of the MBS and CMO securities in our
investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of
general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either
collateral or revenues from the specific project being financed) issued by various municipal corporations. As of
December 31, 2019 and 2018, 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 5, Investment Securities to the financial statements of this
Form 10-K.
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 premiums or accretion of
discounts relating to such instruments, thereby changing the net yield on such securities. At December 31, 2019,
the aggregate net premium associated with our MBS portfolio was $3.8 million, or 3.0%, of the aggregate unpaid
principal balance, compared with $5.9 million or 3.5% at December 31, 2018. The aggregate net premium
associated with our CMO portfolio as of December 31, 2019 was $4.4 million, or 1.0%, of the aggregate unpaid
principal balance compared with $3.4 million or 1.1% at December 31, 2018. There is also reinvestment risk
associated with the cash flows from such securities and the market value of such securities may be adversely
affected by changes in interest rates.
Management monitors the portfolio of securities classified as available for sale for impairment, primarily resulting
from credit deterioration of the issuer or underlying collateral. 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 flows, the length of time the security’s fair value has
been less than amortized cost 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.
57
Based on this evaluation, management concluded that unrealized losses as of December 31, 2019 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, 2019 were considered other than temporary.
Loans held for sale were $208.2 million at December 31, 2019 compared to $77.3 million at December 31, 2018, an
increase of $130.9 million, or 169.2%. Loans held for sale include single family and multifamily residential loans,
typically sold within 30 days of origination or transfer to held for sale. The increase in the loans held for sale balance
was primarily due to an increase in commercial loans.
Loans held for investment, net decreased $2.6 million, or 0.1%, from December 31, 2018. The decrease was
primarily due to a decline in single family loans. Included in the change were $86.4 million of acquired commercial
and industrial loans and $23.5 million of acquired non-owner occupied commercial real estate loans.
Commercial real estate loans increased $189.3 million, or 7.9%, commercial and industrial loans increased
$132.9 million, or 17.5% compared to 2018. These increases were primarily from acquired loans. Consumer loans
decreased $325.8 million, or 16.9% from 2018, this included a decrease in home equity loans of $38.0 million, or
6.7%, and a $287.8 million, or 21.2%, decrease in single family loans related to a decrease in interest rates and lower
originations related to exit of the HLC business.
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.
(dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
Amount
Percent
2019
2018
At December 31,
2017
2016
2015
Consumer loans:
Single family . . . . . . . . . . . . . . $ 1,070,332(1)
Home equity and other . . . . . . .
532,926
1,603,258
21% $ 1,358,175(1)
10
31
570,923
1,929,098
27% $ 1,381,366(1)
11
38
453,489
1,834,855
30% $ 1,083,822(1)
10
40
359,874
1,443,696
28% $ 1,203,180
256,373
9
1,459,553
37
37%
8
45
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 and
net deferred loan fees and
costs . . . . . . . . . . . . . . . . . . . . .
Net deferred loan fees and costs . .
Allowance for loan losses . . . . . . .
894,896
996,498
702,399
2,593,793
478,172
414,880
893,052
18
20
14
52
9
8
17
701,928
908,015
794,544
2,404,487
429,158
331,004
760,162
14
18
16
48
8
6
14
622,782
728,037
687,631
2,038,450
391,613
264,709
656,322
14
16
15
45
9
6
15
588,672
674,219
636,320
1,899,211
282,891
223,653
506,544
15
18
17
50
7
6
13
445,903
426,557
583,160
1,455,620
154,800
154,262
309,062
5,090,103
24,453
5,114,556
(41,772)
$ 5,072,784
100% 5,093,747
23,094
5,116,841
(41,470)
$ 5,075,371
100% 4,529,627
14,686
4,544,313
(37,847)
$ 4,506,466
100% 3,849,451
3,577
3,853,028
(34,001)
$ 3,819,027
100% 3,224,235
(2,237)
3,221,998
(29,278)
$ 3,192,720
14
13
18
45
5
5
10
100%
(1)
Includes $3.5 million and $4.1 million and $5.5 million and $18.0 million of loans at December 31, 2019, 2018, 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.
58
The following table shows the composition of the loan portfolio by fixed-rate and adjustable-rate loans.
(dollars in thousands)
Adjustable-rate loans:
At December 31,
2019
2018
Amount
Percent
Amount
Percent
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . .
Non-owner occupied commercial real estate . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . .
Owner occupied commercial real estate . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustable-rate loans. . . . . . . . . . . . . . . . . . . .
783,754
507,958
761,225
972,804
535,585
333,495
341,255
4,236,076
Fixed-rate loans:
15% $ 1,011,877
539,050
10
580,543
15
871,809
19
659,444
10
285,485
7
244,780
7
4,192,988
83
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . .
286,578
24,968
6
1
346,298
31,873
Commercial real estate loans:
Non-owner occupied commercial real estate . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . .
Owner occupied commercial real estate . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . .
Total fixed-rate loans . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for investment . . . . . . . . . . . . . .
133,671
23,694
166,814
144,677
73,625
854,027
5,090,103
Less:
3
—
3
3
1
17
121,385
36,206
135,100
143,673
86,224
900,759
100% 5,093,747
Net deferred loan fees and costs . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . .
24,453
(41,772)
Loans held for investment, net . . . . . . . . . . . . . . . . . . . . $ 5,072,784
23,094
(41,470)
$ 5,075,371
The following tables show the contractual maturity of our loan portfolio by loan type.
20%
10
11
17
13
5
5
81
7
1
2
1
3
3
2
19
100%
December 31, 2019
Loans due after one year
by rate characteristic
After
one year
through
five years
Within
one year
After
five years
Total
Fixed-rate
Adjustable-
rate
(in thousands)
Consumer:
Single family . . . . . . . . . . . . . . . . . . . . . . . $ 1,694 $ 1,880 $ 1,066,758 $ 1,070,332 $ 286,208 $ 782,430
507,958
Home equity and other . . . . . . . . . . . . . . .
1,290,388
Total consumer . . . . . . . . . . . . . . . . . . .
530,196
1,596,954
532,926
1,603,258
22,338
308,546
2,630
4,324
100
1,980
Commercial real estate loans:
Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . .
Total commercial real estate . . . . . . . . .
Commercial and industrial loans:
5,551
3,550
602,048
611,149
106,458
34,610
97,810
238,878
782,887
958,338
2,541
1,743,766
894,896
996,498
702,399
2,593,793
133,398
21,996
77,022
232,416
755,946
970,952
23,329
1,750,227
Owner occupied commercial real estate . .
Commercial business . . . . . . . . . . . . . . . .
Total commercial and industrial . . . . . .
332,237
45,515
260,728
152,416
592,965
197,931
Total loans held for investment . . . . $ 711,685 $ 438,789 $ 3,939,629 $ 5,090,103 $ 744,838 $ 3,633,580
478,172
414,880
893,052
419,826
179,083
598,909
133,105
70,771
203,876
12,831
83,381
96,212
59
(in thousands)
Consumer:
December 31, 2018
Loans due after one year
by rate characteristic
After
one year
through
five years
Within
one year
After
five years
Total
Fixed-rate
Adjustable-
rate
Single family . . . . . . . . . . . . . . . . . . . . . . . $ 2,357 $ 2,602 $ 1,353,216 $ 1,358,175 $ 345,281 $ 1,010,537
Home equity and other . . . . . . . . . . . . . . .
539,050
Total consumer . . . . . . . . . . . . . . . . . . .
1,549,587
570,795
1,924,011
570,923
1,929,098
31,872
377,153
1
2,358
127
2,729
Commercial real estate:
Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . .
Total commercial real estate . . . . . . . . .
Commercial and industrial:
8,829
12,141
606,758
627,728
66,477
44,419
156,674
267,570
626,622
851,455
31,112
1,509,189
701,928
908,015
794,544
2,404,487
114,882
24,753
96,292
235,927
578,217
871,121
91,494
1,540,832
Owner occupied commercial real estate . .
Commercial business . . . . . . . . . . . . . . . .
Total commercial and industrial . . . . . .
284,073
51,097
187,548
147,195
471,621
198,292
Total loans held for investment . . . . $ 695,645 $ 468,591 $ 3,929,511 $ 5,093,747 $ 836,062 $ 3,562,040
429,158
331,004
760,162
373,877
122,434
496,311
140,901
82,081
222,982
4,184
61,375
65,559
The following table presents loan origination and loan sale volumes.
(in thousands)
Loans originated
Real estate
Single family
Years Ended December 31,
2018
2017
2019
Originated by HomeStreet(1) . . . . . . . . . . . . . . . . . . . $
Originated by WMS Series LLC(2) . . . . . . . . . . . . . .
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(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Multifamily DUS®(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CRE Non-DUS®(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single family(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,105,664 $
605,708
3,711,372
1,219,781
144,339
90,363
800,539
5,966,394
210,784
265,794
6,442,972 $
3,783,639 $
214,124
12,404
617,336
141,663
4,769,166 $
5,791,510 $
517,461
6,308,971
827,477
181,290
52,132
1,144,442
8,514,312
213,272
506,633
9,234,217 $
6,057,784 $
225,323
19,414
346,384
243,054
6,891,959 $
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
7,508,949
347,084
26,841
321,699
—
8,204,573
(1)
(2)
(3)
(4)
Includes both continuing and discontinued operations.
Loans originated by WMS Series LLC and purchased by HomeStreet Bank.
Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS®”) is a registered trademark of Fannie Mae.
Loans originated as Held for Investment.
Mortgage servicing rights from continuing operations were $97.6 million at December 31, 2019 compared to
$103.4 million at December 31, 2018, a decrease of $5.8 million, or 5.6%. The decrease was primarily due to a
decline in single family MSR fair value related to a decline in interest rates.
Federal Home Loan Bank stock was $22.4 million at December 31, 2019 compared to $45.5 million at December 31,
2018, a decrease of $23.1 million, or 50.8%. FHLB stock is carried at par value and can only be purchased or
redeemed at par value in transactions between the FHLB and its member institutions. Cash dividends received on
FHLB stock are reported in other income.
60
Other assets were $180.1 million at December 31, 2019, compared to $171.3 million at December 31, 2018, an
increase of $8.8 million, or 5.2%.
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(1) . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
At December 31,
2018
2017
704,743 $
612,540 $
579,504
373,832
219,182
2,224,494
2,817,508
3,522,251
1,614,533
203,175
5,339,959 $
376,137
245,795
1,935,516
2,557,448
3,169,988
1,579,806
301,614
5,051,408 $
461,349
293,858
1,834,154
2,589,361
3,168,865
1,190,689
401,398
4,760,952
(1)
Includes zero, $162.8 million and $225.0 million in servicing deposits related to discontinued operations for the periods
ended December 31, 2019, 2018 and 2017, respectively.
Deposits at December 31, 2019 increased $288.6 million, or 5.7%, from December 31, 2018. The increase in deposits
from December 31, 2018 was a result of competitive rates offered on money markets accounts, which increased
$289.0 million, and noninterest bearing accounts — checking and savings, which increased $92.2 million. The
increase also included $74.5 million in deposits related to the acquisition of a retail deposit branch in San Marcos,
San Diego County, California from Silvergate Bank, which was completed in the first quarter of 2019, including
$42.7 million of noninterest-bearing accounts and $31.8 million of money market and savings accounts. Certificates
of deposit increased by $34.7 million, or 2.2%, since December 31, 2018, with consumer and business accounts
increasing $496.8 million as a result of competitive rates offered and institutional accounts increasing $57.2 million,
offset by a $518.9 million decline in brokered deposit balances. Consumer deposits can be sensitive to changes in
interest rates, therefore, the Company continues to actively monitor the adequacy of its offered deposit rates.
At December 31, 2018, deposits increased $290.5 million, or 6.1%, from December 31, 2017. Certificates of
deposits increased by $389.1 million, or 32.7% from December 31, 2017. This increase was offset by a decline in
non-brokered deposits because rates paid on these deposits increased at a slower pace than market rates.
Borrowings
FHLB advances were $346.6 million at December 31, 2019 compared to $932.6 million at December 31, 2018.
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. The loan portfolio exhibits some
seasonality and varies over time and is partly funded by FHLB advances to supplement bank deposit funding.
The reduction in advances was largely due to an increase in brokered deposits as well as other deposits and the
contraction of the balance sheet which reduced our reliance on wholesale borrowings. As of December 31, 2019,
2018 and 2017, FHLB borrowings had weighted average interest rates of 1.86%, 2.63% and 1.58%, respectively.
Of the total FHLB borrowings outstanding as of December 31, 2019, $341.0 million mature prior to December 31,
2020. We had $943.3 million and $492.7 million of additional borrowing capacity with the FHLB as of
December 31, 2019 and 2018, respectively.
We may also borrow, on a collateralized basis, from the Federal Reserve Bank of San Francisco (“FRBSF” or
“Federal Reserve Bank”). At December 31, 2019 and 2018, we did not have any outstanding borrowings from
the FRBSF. Based on the amount of qualifying collateral available, borrowing capacity from the FRBSF was
$267.1 million and $333.5 million at December 31, 2019 and 2018, respectively. The FRBSF is not contractually
required to offer credit to us, and our access to this source for future borrowings may be discontinued at any time.
Long-term debt was $125.7 million and $125.5 million at December 31, 2019 and 2018, respectively. The balance
at December 31, 2019 represented $63.8 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
61
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 common stock, and the variable interest entity trust is not
consolidated in our financial statements.
Shareholders’ Equity
Shareholders’ equity was $679.7 million at December 31, 2019 compared to $739.5 million at December 31, 2018.
This decrease was primarily related to share repurchases of $98.5 million during the year ended December 31, 2019,
partially offset by other comprehensive income of $21.8 million and net income of $17.5 million recognized during
the year ended December 31, 2019. Other comprehensive income (loss) represents unrealized gains and losses on the
valuation of our available for sale investment securities portfolio at December 31, 2019.
Shareholders’ equity, on a per share basis, was $28.45 per share at December 31, 2019, compared to $27.39 per
share at December 31, 2018.
Return on Equity and Assets
The following table presents certain information regarding our returns on average equity and average total assets.
Return on assets(1)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on equity(2)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity to assets ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.25%
2.43%
10.17%
0.57%
5.40%
10.56%
1.05%
10.20%
10.26%
Years Ended December 31,
2018
2017
2019
(1) Net income divided by average total assets.
(2) Net income divided by average common shareholders’ equity.
(3) Average equity divided by average total assets.
(4) Net income includes both continuing and discontinued operations.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial
instruments (which include commitments to originate loans and commitments to purchase loans) include potential
credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These
transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity
risks, (3) diversify our funding sources, and/or (4) optimize capital.
For more information on off-balance sheet arrangements, see Note 14, Commitments, Guarantees and Contingencies
to the financial 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 financial 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, 2019 and 2018 was $52.8 million and $33.8 million,
respectively.
Credit agreements. We extend secured and unsecured open-end loans to meet the financing needs
of our customers. These commitments include unused consumer portfolio lines of $485.1 million and
$462.0 million as of December 31, 2019 and 2018, respectively, and commercial portfolio lines of
62
•
•
•
$722.2 million and $852.9 million at December 31, 2019 and 2018, respectively. Within the commercial
portfolio, undistributed construction loan proceeds, where the Company has an obligation to advance
funds for construction progress payments, were $435.2 million and $607.2 million at December 31, 2019
and 2018, 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, 2019 and 2018, was $2.2 million and $10.3 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, the Company and Fannie Mae share losses on
a pro rata basis, where the Company is responsible for losses incurred up to one-third of the principal
balance on each loan with two-thirds of the loss covered by Fannie Mae. The total principal balance of
loans outstanding under the DUS® program as of December 31, 2019 and 2018 was $1.55 billion and
$1.46 billion, respectively, and our loss reserves were $2.8 million and $2.5 million as of December 31,
2019 and 2018, 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’ Affairs (“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
investors 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. For 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 efforts or through loss mitigation
activities, the loan may be resold into another Ginnie Mae pool. The Company’s liability for mortgage
loan repurchase losses incorporates probable losses associated with such indemnification.
As of December 31, 2019 and 2018, 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
$7.10 billion and $20.24 billion, respectively. The recorded mortgage repurchase liability for loans sold
on a servicing-retained and a servicing-released basis was $2.9 million and $3.1 million at December 31,
2019 and 2018, respectively. The Company’s mortgage repurchase liability reflects 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 $475 thousand, $1.8 million and $541
thousand were incurred for the years ended December 31, 2019, 2018 and 2017, respectively.
63
•
•
•
•
Leases. Prior to the adoption of ASU No. 2016-02 in the first quarter of 2019, rental expense under
non-cancelable operating leases totaled $27.7 million and $26.1 million for the years ended 2018 and
2017, respectively.
Small business investment company (“SBIC”) investment funds. Between 2016 and 2019 we entered
into agreements to invest $24.9 million over time in SBIC investment funds. At December 31, 2019 and
2018 we had unfunded commitments of $15.7 million and $11.1 million, respectively, related to these
agreements.
Low income housing tax credit partnerships. We are entered into agreements to invest $30.1 million
in partnerships that encourage and assist corporations in investing in the ownership of residential rental
property located throughout the United States that qualify for the Low-Income Housing Tax Credit.
At December 31, 2019 and 2018, we had $2.8 million and $7.9 million, respectively, in unfunded
commitments related to this agreement.
Tax exempt bond partnerships. Between 2018 and 2019, we entered into partnerships to invest
$10.0 million in Tax Exempt LIHTC Debt Fund with anticipated Community Reinvestment Act
consideration. At December 31, 2019 and 2018, we had $5.0 million and $4.9 million, respectively, in
unfunded commitments related to this agreement.
Derivative Counterparty Credit Risk
Derivative financial 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 financial 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. In addition, we obtain collateral in connection with our derivative contracts. Required collateral levels
vary depending on the credit risk rating and the type of counterparty. Generally, we may accept collateral in the form
of cash, U.S. Treasury securities and other marketable securities. Based on provisions contained in master netting
agreements, we net cash collateral received against derivative assets. We also pledge collateral on our own derivative
positions which can be applied against derivative liabilities. 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, 2019 and 2018, our net exposure to the credit risk of derivative counterparties was
$8.8 million and $19.8 million, respectively.
Contractual Obligations
The following table summarizes our significant fixed and determinable contractual obligations, within the categories
described below, by payment date or contractual maturity as of December 31, 2019. The payment amounts for
financial 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.
(in thousands)
Deposits(1) . . . . . . . . . . . . . . . . . $
FHLB advances . . . . . . . . . . . . .
Long term debt . . . . . . . . . . . . .
Trust preferred securities(2) . . . .
Interest(3) . . . . . . . . . . . . . . . . . .
Operating and financing leases . .
Purchase obligations(4) . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . $
Within
one year
After one
but within
three years
After three
but within
five years
More than
five years
5,007,837 $
341,000
—
—
23,689
16,668
3,405
5,392,599 $
302,538 $
—
—
—
17,858
28,198
2,200
350,794 $
29,455 $
—
—
—
13,921
21,715
14
65,105 $
129 $
5,590
65,000
61,857
30,764
72,854
—
236,194 $
Total
5,339,959
346,590
65,000
61,857
86,232
139,435
5,619
6,044,692
(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations
due less than one year.
64
Trust preferred securities are included in long-term debt on the consolidated statements of financial 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, 2019 rates, which we held constant until maturity.
(4) Represents agreements to purchase goods or services.
Enterprise Risk Management
All financial institutions manage and control a variety of business and financial risks that can significantly affect
their financial performance. Among these risks are credit risk; market risk, which includes interest rate risk and price
risk; liquidity risk; and operational risk. We are also subject to risks associated with compliance/legal, strategic and
reputational matters.
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 first 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 Officer, establishes the risk governance framework and assesses, tests and reports on risks by business
unit and on an enterprise-wide basis. The legal department, under the supervision of our General Counsel, also
operates as a part of our second line of defense. 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 Officer 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, model risk management and regulatory affairs functions. The Chief Audit Officer 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 significant 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 specifically 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
financial reporting and internal and external audit.
Finance Committee. The Finance Committee oversees the consolidated Company’s and subsidiaries’
activities related to balance sheet management, major financial 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 loan and lease losses policy, the allowance for
credit losses policy, loan loss reserves, large borrower exposure and concentrations, and approval of
counterparties.
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, benefits, 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-qualified 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 identification and assessment of the significant risks and the related infrastructure to
address such risks and monitors the Company’s compliance with its risk appetite and risk limit structures
65
and effective 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 profile.
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 significance of these risks and the impact they may have on our
business.
Credit Risk Management
Credit risk is defined 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, risk-based reporting 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 Officer’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. 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 Officer’s role also includes direct oversight of appraisal and environmental functions. The Chief
Credit Officer reports directly to the Chief Executive Officer.
The Loan Committee provides direction and oversight within our risk management framework. The committee seeks
to ensure effective portfolio risk analysis and policy review and to support sound implementation of defined business
and risk strategies. Additionally, the Loan Committee periodically approves credit larger than authority delegated to
the members of the Loan Committee, either individually or in combination. The members of the Loan Committee are
the Chief Executive Officer, Chief Credit Officer, and the Commercial Banking Director. The Deputy Chief Credit
Officer serves as an Alternate Member of the Loan Committee.
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 Officer.
Credit limits for capital markets counterparties, including derivative counterparties, are defined in the Company’s
Counterparty Risk policy, which is reviewed annually by the Bank Loan Committee, with final 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 Officer and Treasurer reports directly to both
the Chief Executive Officer and Chief Financial Officer.
66
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 qualified third-party
providers. We use state certified 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 definition 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 five 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 qualified
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 portfolio loans secured by real estate that are graded special mention or
substandard, property values are determined quarterly 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 verification with a recognized guide for new
equipment to a valuation opinion by a professional appraiser for multiple pieces of used equipment.
67
Loan Modifications
We have modified loans for various reasons for borrowers not experiencing financial difficulties. Those
modifications generally are short-term extensions granted to allow time for receipt of appraisals and other financial
reporting information to facilitate underwriting of loan extensions and renewals.
Our policy allows modifications for borrowers with financial difficulty 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 modification
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 payment restructures, and to a lesser extent,
interest rate reductions for periods of three years or less to reduce payments and provide the borrower time to resolve
their financial difficulties. In each case, we carefully analyze the borrower’s current financial condition to assure that
they can make the modified payment.
Asset Quality and Nonperforming Assets
Our credit quality remained strong with nonperforming assets (“NPAs”) remaining low at $14.3 million, or 0.21%
of total assets at December 31, 2019, compared to $12.1 million, or 0.17% of total assets at December 31, 2018. The
deterioration from December 31, 2018 was primarily due to an increase in commercial nonperforming loans.
Nonaccrual loans of $12.9 million, or 0.25% of total loans at December 31, 2019, increased $1.2 million, or 10.7%,
from $11.6 million, or 0.23% of total loans at December 31, 2018. Net recoveries in 2019 were $424 thousand
compared with net recoveries of $797 thousand in 2018 and net recoveries of $3.1 million in 2017.
At December 31, 2019, our loans held for investment portfolio, net of the allowance for loan losses, was
$5.07 billion, a decrease of $2.6 million from December 31, 2018. The allowance for loan losses was $41.8 million,
or 0.82% of loans held for investment, compared to $41.5 million, or 0.81% of loans held for investment at
December 31, 2018.
The Company had a reversal of provision for credit losses of $500 thousand for the year ended December 31, 2019
compared to a $3.0 million of provision for credit losses for the year ended December 31, 2018 and a $750 thousand
provision for credit losses for the year ended December 31, 2017. 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 6, Loans
and Credit Quality to the financial 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”.
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 specific reserve.
(in thousands)
Impaired loans:
At December 31, 2019
Unpaid
Principal
Balance(2)
Related
Allowance
Recorded
Investment
Loans with no related allowance recorded. . . . . . . . . . . . . . $
Loans with an allowance recorded. . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
66,326(1) $
2,425
68,751(1) $
67,200 $
2,804
70,004 $
—
153
153
68
(in thousands)
Impaired loans:
At December 31, 2018
Unpaid
Principal
Balance(2)
Related
Allowance
Recorded
Investment
Loans with no related allowance recorded. . . . . . . . . . . . . . $
Loans with an allowance recorded. . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
71,237(1) $
1,847
73,084(1) $
73,113 $
1,847
74,960 $
—
233
233
(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(1)(3) $
5,150
83,846(1)
$
80,904 $
5,288
86,192 $
—
289
289
(1)
Includes $59.8 million, $65.8 million and $69.6 million in single family performing troubled debt restructurings (“TDRs”)
at December 31, 2019, 2018 and 2017, respectively.
(2) Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest
paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $231 thousand of fair value option loans.
(3)
The Company had impaired loan balances of $68.8 million, $73.1 million and $83.8 million at December 31, 2019,
2018 and 2017, respectively. At December 31, 2019 the Company had 313 impaired loan relationships compared to
349 at December 31, 2018. Included in the total impaired loan relationship amounts were 290 single family TDR
loan relationships totaling $61.5 million at December 31, 2019 and 320 single family TDR relationships totaling
$67.6 million at December 31, 2018. The decrease in the number of impaired loan relationships at December 31,
2019 from 2018 was primarily due to a decrease in the number of single family impaired loans. At December 31,
2019, there were 284 single family impaired relationships totaling $59.8 million that were performing per their
current contractual terms. Additionally, the impaired loan balance included $48.9 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,
2019 was $74.7 million, compared to $75.8 million for the year ended December 31, 2018. Impaired loans of
$2.4 million and $1.8 million had a valuation allowance of $153 thousand and $233 thousand at December 31, 2019
and 2018, respectively.
69
The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.
2019
Percent of
Allowance
to Total
Allowance
Loan
Category
as a % of
Total Loans(1)
Amount
At December 31,
2018
Percent of
Allowance
to Total
Allowance
Loan
Category
as a % of
Total Loans(1)
Amount
Amount
2017
Percent of
Allowance
to Total
Allowance
Loan
Category
as a % of
Total Loans(1)
(dollars in thousands)
Consumer loans
Single family. . . . . . . . . . . . . . . . $ 6,450
6,843
Home equity and other . . . . . . . .
13,293
Commercial real estate loans
Non-owner occupied commercial
real estate . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . .
Construction/land development . .
7,249
7,015
8,679
22,943
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . .
3,640
2,961
6,601
Total allowance for credit losses . . . $ 42,837
15%
16
31
17
17
20
54
8
7
15
100%
21% $ 8,217
7,712
10
15,929
31
18
20
14
52
5,496
5,754
9,539
20,789
3,282
9
2,913
8
17
6,195
100% $ 42,913
19%
18
37
13
13
22
48
8
7
15
100%
27% $ 9,412
7,081
11
16,493
38
14
18
16
48
4,755
3,895
8,677
17,327
2,960
8
2,336
6
14
5,296
100% $ 39,116
24%
18
42
12
10
22
44
8
6
14
100%
30%
10
40
14
16
15
45
9
6
15
100%
(1)
Excludes loans held for investment balances that are carried at fair value.
Allowance for loan losses (which excludes the allowance for unfunded commitments) represented 0.82% of loans
held for investment at December 31, 2019 compared to 0.81% at December 31, 2018, which primarily reflected
the continuing strong credit quality of the Company’s loan portfolio. Excluding acquired loans, the allowance for
loan losses was 0.86% of loans held for investment at December 31, 2019 compared to 0.85% at December 31,
2018. Nonperforming assets were $14.3 million, or 0.21% of total assets at December 31, 2019, compared to
$12.1 million, or 0.17% of total assets at December 31, 2018.
The following tables present the composition of TDRs by accrual and nonaccrual status.
(dollars in thousands)
Consumer
At December 31, 2019
Number of
accrual
Accrual
relationships Nonaccrual
Number of
nonaccrual
relationships
Total
Total
number of
relationships
Single family(1) . . . . . . . . . . . . . . $ 59,809
853
Home equity and other. . . . . . . .
60,662
Commercial and industrial loans
Commercial business . . . . . . . . .
48
48
$ 60,710
284 $
11
295
2
2
297 $
1,694
9
1,703
222
222
1,925
6 $ 61,503
862
1
62,365
7
270
1
1
270
8 $ 62,635
290
12
302
3
3
305
(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $48.9 million at December 31, 2019.
70
(dollars in thousands)
Consumer
At December 31, 2018
Number
of accrual
Accrual
relationships Nonaccrual
Number of
nonaccrual
relationships
Total
Total
number of
relationships
Single family(1) . . . . . . . . . . . . . . . $ 65,835
1,237
Home equity and other. . . . . . . . .
67,072
Commercial real estate loans
Multifamily . . . . . . . . . . . . . . . . .
Construction/land development . .
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
492
726
1,218
846
103
949
$ 69,239
314 $
16
330
1,740
—
1,740
1
1
2
—
—
—
1
3
4
336 $
—
164
164
1,904
6 $ 67,575
1,237
68,812
—
6
—
—
—
492
726
1,218
846
267
1,113
—
1
1
7 $ 71,143 $
320
16
336
1
1
2
1
4
5
343
(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $52.4 million at December 31, 2018.
(in thousands)
Consumer
At December 31, 2017
Number
of accrual
Accrual
relationships Nonaccrual
Number of
nonaccrual
relationships
Total
Total
number of
relationships
Single family(1) . . . . . . . . . . . . . . . $ 69,555
1,254
Home equity and other. . . . . . . . .
70,809
Commercial real estate loans
Multifamily . . . . . . . . . . . . . . . . .
Construction/land development . .
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
507
454
961
876
377
1,253
$ 73,023
280 $
16
296
2,451
36
2,487
1
1
2
—
—
—
1
3
4
302 $
—
62
62
2,549
11 $ 72,006
1,290
2
73,296
13
—
—
—
507
454
961
—
876
1
439
1,315
1
14 $ 75,572
291
18
309
1
1
2
1
4
5
316
(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $46.7 million at December 31, 2017.
The Company had TDR balances of $62.6 million, $71.1 million and $75.6 million at December 31, 2019, 2018 and
2017, respectively. TDR balances continue to decline and included $48.9 million, $52.4 million and $46.7 million of
loan balances insured by the FHA or guaranteed by the VA as of December 31, 2019, 2018 and 2017, respectively.
TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan
tables above. The Company had no unfunded commitments related to TDR loans at December 31, 2019, and 2017,
and $15 thousand at December 31, 2018.
71
(in thousands)
Loans accounted for on a nonaccrual basis:(1)
Consumer
2019
2018
At December 31,
2017
2016
2015
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,364
1,160
Home equity and other. . . . . . . . . . . . . . . . . . . . . . . .
6,524
$ 8,493
948
9,441
$ 11,091
1,404
12,495
$ 12,717
1,571
14,288
$ 12,119
1,576
13,695
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 . . . . . . . . . . . . . . . . . . . . . . . . .
2,891
3,446
6,337
12,861
1,393
Total nonperforming assets . . . . . . . . . . . . . . . . . . $ 14,254
Loans 90 days or more past due and accruing(2) . . . . . . $ 19,702
Accruing TDR loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,710
1,925
Nonaccrual TDR loans. . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDR loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,635
—
—
72
72
374
1,732
2,106
11,619
455
$ 12,074
$ 39,116
$ 69,239
1,904
$ 71,143
—
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
$ 40,486
$ 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
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 . .
324.80%
0.25%
0.21%
356.92%
0.23%
0.17%
251.63%
0.33%
0.23%
165.52%
0.53%
0.41%
170.54%
0.53%
0.50%
(1)
(2)
If interest on nonaccrual loans under the original terms had been recognized, such income is estimated to have been
$1.9 million, $1.4 million and $1.5 million for the years ended December 31, 2019, 2018 and 2017.
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.
Delinquent loans and other real estate owned by loan type consisted of the following.
At December 31, 2019
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
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . $
Home equity and other. . . . . .
5,694 $
837
6,531
4,261 $
372
4,633
5,364 $
1,160
6,524
19,702(1) $ 35,021 $
—
19,702
2,369
37,390
Commercial and industrial loans
Owner occupied commercial
real estate . . . . . . . . . . . . . .
Commercial business . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . $
—
44
44
6,575 $
—
—
—
4,633 $
2,891
3,446
6,337
12,861 $
—
—
—
19,702
2,891
3,490
6,381
$ 43,771 $
1,393
—
1,393
—
—
—
1,393
(1)
FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if
they are determined to have little to no risk of loss. At December 31, 2019, these past due loans totaled $19.7 million.
72
At December 31, 2018
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
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . . . $
Home equity and other. . . . . . . . .
9,725 $
145
9,870
3,653 $
100
3,753
8,493 $
948
9,441
39,116(1) $ 60,987 $
—
39,116
1,193
62,180
Commercial real estate loans
Construction/land development . .
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
—
—
—
—
72
72
—
—
72
72
—
—
—
9,870 $
—
—
—
3,753 $
374
1,732
2,106
11,619 $
—
—
—
39,116
374
1,732
2,106
$ 64,358 $
455
—
455
—
—
—
—
—
455
(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, 2018, these past due loans totaled $39.1 million.
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
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . . . $
Home equity and other. . . . . . . . .
10,493 $
750
11,243
4,437 $
20
4,457
11,091 $
1,404
12,495
37,171(1) $ 63,192 $
—
37,171
2,174
65,366
Commercial real estate loans
Multifamily . . . . . . . . . . . . . . . . .
Construction/land development . .
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
—
641
641
—
—
—
302
78
380
—
—
—
302
719
1,021
—
377
377
12,261 $
—
—
—
4,457 $
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 as
they have little to no risk of loss. At December 31, 2017, these past due loans totaled $37.2 million.
73
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, 2019
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, 2018
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.
Loan Underwriting Standards
Percentage(1)
Percentage(1)
1.9%
0.1%
0.1%
0.6%
3.8%
13.4%
31.5%
48.6%
100.0%
1.8%
0.1%
0.1%
0.5%
4.2%
12.7%
31.4%
49.2%
100.0%
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 financial reserves, loan amount and lien position in assessing whether to originate a loan. Single family and
home equity borrowers are particularly susceptible to downturns in economic trends that negatively affect housing
prices 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, the quality and reliability of cash expected to flow through the borrower (including the outflow to other
lenders) and prior known experiences with the borrower. We use this information to assess financial capacity,
profitability and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general
economic conditions, liquidity and availability of long-term financing.
Additional considerations for commercial permanent loans secured by real estate:
Our underwriting standards for commercial permanent loans generally require that the loan-to-value ratio for
these loans not exceed 75% of appraised value or discounted cash flow value, as appropriate, and that commercial
properties attain debt coverage ratios (net operating income divided by annual debt servicing) of 1.25 or better.
74
Our underwriting standards for multifamily residential permanent loans generally require that the loan-to-value
ratio for these loans not exceed 80% of appraised value, cost, or discounted cash flow value, as appropriate, and that
multifamily residential properties attain debt coverage ratios of 1.15 or better. However, underwriting standards can
be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards
while balancing the need to remain competitive in our lending practices.
Additional considerations for commercial construction loans secured by real estate:
We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but
include loan-to-value limits, term limits, loan advance limits and pre-leasing requirements, as applicable.
Our underwriting guidelines for commercial real estate construction loans generally require that the loan-to-value
ratio not exceed 75% and 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 influenced by competition and other factors. However, we endeavor
to maintain the highest practical underwriting standards while balancing the need to remain competitive in our
lending practices.
Liquidity and Capital Resources
Liquidity risk management is primarily intended to ensure we are able to maintain sources of cash to adequately
fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying
any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced
by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc.,
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., HSC and the Bank have different funding needs and sources of liquidity and separate regulatory
capital requirements.
HomeStreet, Inc.
The main source of liquidity for HomeStreet, Inc. is proceeds from dividends from the Bank and HSC. HomeStreet,
Inc. has raised capital through the issuance of common stock, senior debt and trust preferred securities. Additionally,
we also have an available line of credit from which we can borrow up to $30.0 million. At December 31, 2019, we
did not have an outstanding balance on this line of credit.
Historically, the main cash outflows have been distributions to shareholders, interest and principal payments to
creditors and payments of operating expenses. HomeStreet, Inc.’s ability to pay dividends to shareholders depends
substantially on dividends received from the Bank. We did not pay a dividend to shareholders in 2019, 2018 or 2017.
In January 2020, our Board of Directors adopted a dividend policy for the consideration of regular quarterly cash
dividends on shares of HomeStreet, Inc. common stock and declared a quarterly dividend for the first quarter of
2020 at $0.15 per share, and was paid on February 21, 2020 to shareholders of record as of the close of market on
February 5, 2020.
In 2019, HomeStreet, Inc.’s Board of Directors authorized two stock repurchase programs of up to $100 million of
our common stock as well as a privately negotiated stock repurchase from a group of investors. The Bank completed
dividends to HomeStreet, Inc. of $110.0 million as the primary source of liquidity to fund the two repurchase
programs, although repurchases may be funded from one or a combination of existing cash balances, free cash flow
and other available liquidity sources. Under these programs in 2019 we repurchased 1,494,858 shares pursuant to
those plans. In addition, on July 11, 2019 we repurchased 1,692,401 shares, outside of these repurchase plans, in a
single transaction from an investor group. In the first quarter of 2020, the Board of Directors approved additional
stock repurchase programs for up to $35 million of our common stock, which we expect to begin implementing in
the first or second quarter of 2020.
75
HomeStreet Capital Corporation
HomeStreet Capital generates positive cash flow from operations from its servicing fee income on the DUS®
portfolio, net of its costs to service the DUS® portfolio. Additional uses are HomeStreet Capital’s costs to purchase
the servicing rights on new production from the Bank. Minimum liquidity and reporting requirements for DUS®
lenders such as HomeStreet Capital are set by Fannie Mae. HomeStreet Capital’s liquidity management therefore
consists of meeting Fannie Mae requirements and its own operational requirements.
HomeStreet Bank
The Bank’s primary sources of funds include deposits, advances from the 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 inflows and outflows and loan prepayments are greatly influenced
by interest rates, economic conditions and competition. The Bank uses the primary liquidity ratio as a measure of
liquidity. The primary liquidity ratio is defined as net cash, short-term investments and other marketable assets as
a percent of net deposits and short-term borrowings. At December 31, 2019, our primary liquidity ratio was 18.7%
compared with 19.4% at December 31, 2018 and 18.1% at December 31, 2017.
At December 31, 2019, 2018 and 2017, the Bank had available borrowing capacity of $943.3 million, $492.7 million
and $579.2 million, respectively, from the FHLB, and $267.1 million, $333.5 million and $331.5 million,
respectively, from the Federal Reserve Bank of San Francisco.
Cash Flows
For the years ended December 31, 2019, 2018 and 2017, cash, cash equivalents and restricted cash decreased
$706 thousand, decreased $15.3 million and increased $17.5 million, respectively. The following discussion
highlights the major activities and transactions that affected our cash flows during these periods.
Cash flows from operating activities
The Company’s operating assets and liabilities are used to support our lending activities, including the origination
and sale of mortgage loans. For the year ended December 31, 2019, net cash of $258.8 million was provided by
operating activities, primarily from proceeds from the sale of loans held for sale, partially offset by the net fair value
adjustment and gain on sale of loans held for sale and the recognition of deferred taxes from the sale of mortgage
servicing rights. We believe that cash flows from operations, available cash balances and our ability to generate cash
through short-term debt are sufficient to fund our operating liquidity needs. For the year ended December 31, 2018,
net cash of $286.0 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. For the year ended December 31, 2017, net cash of $159.3 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.
Cash flows from investing activities
The Company’s investing activities primarily include available-for-sale securities and loans originated as held for
investment. For the year ended December 31, 2019, net cash of $83.9 million was provided by investing activities,
primarily due to $769.4 million proceeds from sale of loans held for investment, $184.9 million from proceeds
from sale of investment securities, $182.2 million proceeds from our disposal of discontinued operations and
$145.8 million from principal repayments and maturities of investment securities, partially offset by $822.5 million
cash used for the origination of portfolio loans net of principal repayments and $330.5 million of cash used for
the purchase of investment securities. For the year ended December 31, 2018, net cash of $565.2 million was
used in investing activities, primarily due to $1.13 billion cash used for the origination of portfolio loans net of
principal repayments and $189.7 million of cash used for the purchase of investment securities, and $9.7 million
used for the purchase of property and equipment, partially offset by $46.1 million from proceeds from sale of
investment securities, $548.8 million proceeds from sale of loans held for investment and $106.8 million from
principal repayments and maturities of investment securities. For the year ended December 31, 2017, net cash of
76
$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, $368.1 million purchases of investment securities, and $42.3 million
used for the purchases of property and equipment, partially offset by $397.5 million from proceeds from the sale of
investment securities, $324.7 million from proceeds from the sale of loans held for investment and $105.8 million
from principal repayments and maturities of investment securities.
Cash flows from financing activities
The Company’s financing activities are primarily related to customer deposits and net proceeds from the FHLB. For
the year ended December 31, 2019, net cash of $343.5 million was used in financing activities, primarily resulting
from $586.0 million net repayment from FHLB advances, $106.0 million net proceeds from Fed Funds purchased
and $98.5 million in repurchases of our common stock, partially offset by $213.6 million growth in deposits. For the
year ended December 31, 2018, net cash of $263.9 million was provided by financing activities, primarily resulting
from a $290.2 million growth in deposits, partially offset by $46.5 million net repayment from FHLB advances.
For the year ended December 31, 2017, net cash of $414.4 million was provided by financing activities, primarily
resulting from $309.8 million growth in deposits and $111.0 million net proceeds from FHLB advances.
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 reflect, 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.
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 total risk-weighted assets. The Tier
1 risk-based capital ratio is the ratio of the institution’s total Tier 1 capital to its total risk-weighted assets. The total
risk-based capital ratio is the ratio of the institution’s total capital to its total risk-weighted assets. The Tier 1 leverage
capital 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 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.
77
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 affects 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 finance 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.
Specifically, 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 buffer began in 2016 and had it not been halted, it would have taken full effect 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 buffer.
At December 31, 2019, the Bank’s capital ratios continued to meet the regulatory capital category of “well
capitalized” as defined by the FDIC’s prompt corrective action rules.
78
The following tables present regulatory capital information for HomeStreet, Inc. and HomeStreet Bank for the
December 31, 2019, 2018 and 2017 respectively, under Basel III.
HomeStreet Bank
(dollars in thousands)
Tier 1 leverage capital
At December 31, 2019
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) . . . . . . . . . . . . . . $ 712,596
10.56% $ 269,930
4.0% $
337,413
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
712,596
13.50
237,451
Tier 1 risk-based capital
(to risk-weighted assets) . . . . . . . . .
712,596
13.50
316,602
Total risk-based capital
(to risk-weighted assets) . . . . . . . . .
758,303
14.37
422,136
4.5
6.0
8.0
342,985
422,136
6.5
8.0
527,669
10.0
HomeStreet, Inc.
(dollars in thousands)
Tier 1 leverage capital
At December 31, 2019
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) . . . . . . . . . . . . . . $ 691,323
10.16% $ 272,253
4.0% $
340,316
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
631,323
11.43
248,523
Tier 1 risk-based capital
(to risk-weighted assets) . . . . . . . . .
691,323
12.52
331,364
Total risk-based capital
(to risk-weighted assets) . . . . . . . . .
739,812
13.40
441,818
4.5
6.0
8.0
358,977
441,818
6.5
8.0
552,273
10.0
HomeStreet Bank
(dollars in thousands)
Tier 1 leverage capital
At December 31, 2018
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) . . . . . . . . . . . . . . $ 707,710
10.15% $ 278,898
4.0% $
348,622
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
707,710
13.82
230,471
Tier 1 risk-based capital
(to risk-weighted assets) . . . . . . . . .
707,710
13.82
307,295
Total risk-based capital
(to risk-weighted assets) . . . . . . . . .
753,742
14.72
409,726
4.5
6.0
8.0
332,902
409,726
6.5
8.0
512,158
10.0
79
HomeStreet, Inc.
(dollars in thousands)
Tier 1 leverage capital
At December 31, 2018
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) . . . . . . . . . . . . . . $ 667,301
9.51% $ 280,592
4.0% $
350,740
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
607,388
11.26
242,832
Tier 1 risk-based capital
(to risk-weighted assets) . . . . . . . . .
667,301
12.37
323,776
Total risk-based capital
(to risk-weighted assets) . . . . . . . . .
715,848
13.27
431,701
4.5
6.0
8.0
350,757
431,701
6.5
8.0
539,626
10.0
HomeStreet Bank
(dollars 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) . . . . . . . . . . . . . . $ 649,864
9.67% $ 268,708
4.0% $
335,885
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
649,864
13.22
221,201
Tier 1 risk-based capital
(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
HomeStreet, Inc.
(dollars 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
5.0%
Common equity tier 1 capital
(to risk-weighted assets) . . . . . . . . .
555,120
9.86
253,293
Tier 1 risk-based capital
(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
Impact of Inflation
The consolidated financial statements presented in this Form 10-K have been prepared in accordance with U.S.
GAAP, which requires the measurement of financial 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
inflation. The impact of inflation is reflected 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 effects of general levels of inflation.
Accounting Developments
See Financial Statements and Supplementary Data — Note 1, Summary of Significant Accounting Policies for a
discussion of accounting developments.
80
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest
rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary
market risks to which we are exposed are price and interest rate risks. Price risk is defined as the risk to current or
anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered into as
part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital
arising from movements in interest rates.
For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This
includes loans, mortgage servicing rights, investment securities, deposits, borrowings, long-term debt and derivative
financial instruments. Due to the nature of our current operations, we are not subject to foreign currency exchange
or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our
various markets 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 identifies and manages the sensitivity of earnings or capital to changing interest rates to
achieve our overall financial objectives. ALCO is a management-level committee whose members include the Chief
Investment Officer, acting as the chair, the Chief Executive Officer, Chief Financial Officer 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 fits 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 affecting net interest income. Changes in net
interest rates (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets
and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and
changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities
portfolio while maintaining a balance between risk and return. The Company’s funding strategy is to grow core
deposits while we efficiently supplement using wholesale borrowings.
We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate
simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing
characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity
depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities,
including the maturity structure of assets and liabilities and their repricing characteristics during the periods of
changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities
respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate
changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the
volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as
interest rate sensitivity gaps.
81
The following table presents sensitivity gaps for these different intervals.
(dollars in thousands)
Interest-earning assets:
3 Mos.
or Less
More Than
3 Mos. to
6 Mos.
More Than
6 Mos. to
12 Mos.
December 31, 2019
More Than
12 Mos. to
3 Yrs.
More Than
3 Yrs. to
5 Yrs.
More Than
5 Yrs.
Non-Rate-
Sensitive
Total
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 . . . . . . .
Assets of discontinued operations . .
Total assets . . . . . . . . . . . . . . . . . . . . $ 1,882,435
57,880
—
69,452
208,177
1,546,926
1,882,435
—
Interest-bearing liabilities:
NOW accounts(2) . . . . . . . . . . . . . . . . $ 373,832
Statement savings accounts(2) . . . . . .
219,182
Money market accounts(2) . . . . . . . .
2,224,494
Certificates of deposit . . . . . . . . . . .
779,445
Federal funds purchased and
securities sold under agreements
to repurchase . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . .
Long-term debt(3) . . . . . . . . . . . . . . .
Total interest-bearing liabilities . . .
Non-interest bearing
liabilities . . . . . . . . . . . . . .
Liabilities of discontinued
operations . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’
125,000
341,000
60,650
4,123,603
—
—
equity . . . . . . . . . . . . . . . . . . . . . . $ 4,123,603
Interest sensitivity gap . . . . . . . . . . . $ (2,241,168)
Cumulative interest sensitivity gap. . . $ (2,241,168)
Cumulative interest sensitivity gap
$
— $
—
39,517
—
360,223
399,740
—
— $
—
69,145
—
590,862
660,007
—
— $
—
198,061
—
1,125,030
1,323,091
—
— $
—
154,045
—
900,890
1,054,935
—
22,399
412,930
—
590,625
1,025,954
—
— $
$ 399,740
$ 660,007
$ 1,323,091
$ 1,054,935
$ 1,025,954
— $
57,880
—
22,399
—
943,150
208,177
—
— 5,114,556
— 6,346,162
437,645
28,628
$ 6,812,435
437,645
28,628
$
$ 466,273
$
— $
—
—
202,196
— $
—
—
335,823
— $
—
—
268,785
— $
—
—
28,282
— $
—
—
2
— $ 373,832
219,182
—
— 2,224,494
— 1,614,533
—
—
—
202,196
—
—
—
—
—
335,823
—
—
—
—
—
268,785
—
—
—
—
—
28,282
—
—
—
5,590
65,000
70,592
125,000
—
346,590
—
—
125,650
— 5,029,281
—
1,100,828
1,100,828
2,603
679,723
2,603
679,723
—
$ 202,196
$ 197,544
$ (2,043,624)
$ 335,823
$ 324,184
$ (1,719,440)
$ 268,785
$ 1,054,306
$ (665,134)
$
28,282
$ 1,026,653
$ 361,519
$
70,592
$ 955,362
$ 1,316,881
$ 1,783,154
$ 6,812,435
as a percentage of total assets . . .
(33)%
(30)%
(25)%
(10)%
5%
19%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities . . . . . .
46%
53%
63%
87%
107%
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, 2019, 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.
Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net
interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning
asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability
remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying
interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not
82
reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest
margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our
actual exposure to changes in interest rates.
The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio
value as of December 31, 2019 and 2018 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, 2019
December 31, 2018
Percentage Change
Net Interest
Income(2)
Net Portfolio
Value(3)
Net Interest
Income(2)
Net Portfolio
Value(3)
(7.2)%
(3.4)
2.7
2.2%
(2.5)%
0.1
(6.4)
(21.2)%
(8.3)%
(4.1)
5.0
9.0%
(13.5)%
(7.0)
(0.8)
(7.0)%
(1)
(2)
(3)
For purposes of our model, we assume interest rates will not go below zero. This “floor” limits the effect of a potential
negative interest rate shock in a low rate environment like the one we are currently experiencing.
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, 2019 and 2018 we believe our net interest income sensitivity did not exhibit a strong bias to
either an increase in interest rates or a decline in interest rates. The changes in sensitivity reflect the impact of both
lower 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 and 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 influences on our deposits.
Risk Management Instruments
We originate fixed-rate residential home mortgages primarily for sale into the secondary market. These loans are
hedged against interest rate fluctuations 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 financial 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 h edging 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.
83
The following table presents the financial instruments classified as derivatives.
(in thousands)
Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Eurodollar futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
At December 31, 2019
Fair value
Notional
amount
Asset
derivatives
Liability
derivatives
651,838 $
124,379
688,516
2,232,000
3,696,733 $
830 $
2,281
27,097
3
30,211 $
(492)
(58)
(10,889)
—
(11,439)
We may implement other hedge transactions using forward loan sales, futures, option contracts and interest rate
swaps, interest rate floors, financial futures, forward rate agreements and U.S. Treasury options on futures or bonds.
Prior to considering any hedging activities, we analyze the costs and benefits of the hedge in comparison to other
viable alternative strategies.
84
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 financial condition of HomeStreet, Inc. and
subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of
operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, 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 financial reporting as of December 31, 2019, 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, 2020, expressed an unqualified opinion
on the Company’s internal control over financial reporting.
Emphasis of Matter — Discontinued Operations
As discussed in Note 1 and Note 2 to the financial statements, the Company sold or abandoned operations associated
with the Company’s former home loan center-based mortgage origination business and related servicing during the
year ended December 31, 2019. The results of the former home loan center-based mortgage origination business
and related servicing have been presented as discontinued operations in the accompanying consolidated financial
statements.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm 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 financial 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 financial 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 financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 6, 2020
We have served as the Company’s auditor since 2013.
85
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share data)
ASSETS
At December 31,
2019
2018
Cash and cash equivalents (includes interest-earning instruments of $28,489 and
$28,534) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
57,880 $
Investment securities (includes $938,778 and $851,968 carried at fair value) . . . . . .
Loans held for sale (includes $79,335 and $52,186 carried at fair value) . . . . . . . . . .
Loans held for investment (net of allowance for loan losses of $41,772 and
943,150
208,177
57,982
923,253
77,324
$41,470; includes $3,468 and $4,057 carried at fair value). . . . . . . . . . . . . . . . . . .
Mortgage servicing rights (includes $68,109 and $75,047 carried at fair value) . . . .
Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank stock, at cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,075,371
103,374
455
45,497
88,112
—
22,564
171,255
477,034
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,812,435 $ 7,042,221
5,072,784
97,603
1,393
22,399
76,973
94,873
28,492
180,083
28,628
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,339,959 $ 4,888,558
932,590
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
169,970
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,000
Federal funds purchased and securities sold under agreements to repurchase . . . .
125,462
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
167,121
6,302,701
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
346,590
79,818
125,000
125,650
113,092
2,603
6,132,712
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding,
0 shares and 0 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, no par value, authorized 160,000,000 shares, issued and
—
—
outstanding, 23,890,855 shares and 26,995,348 shares . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
511
342,439
412,009
(15,439)
739,520
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,812,435 $ 7,042,221
511
300,218
374,673
4,321
679,723
See accompanying notes to consolidated financial statements.
86
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Reversal) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depositor and other retail banking fees . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance agency commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) gain on sale of investment securities available for sale . . . . . . . . . .
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 from operation and sale of other real estate owned . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . . . . . .
Income tax expense (benefit) from continuing operations . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations before income taxes (includes
net loss on disposal of $21.6 million in 2019 and zero in both 2018 and
2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense from discontinued operations . . . . . . . . . . . . .
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . .
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per common share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per common share
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
256,192
20,531
883
277,606
70,389
9,342
1,033
6,822
630
88,216
189,390
(500)
189,890
44,122
7,802
7,926
2,292
(7)
12,297
74,432
122,189
33,862
1,634
1,559
4,055
1,820
22,242
28,325
(72)
215,614
48,708
7,988
40,720
(28,285)
(5,077)
(23,208)
17,512
1.57
(0.91)
0.66
1.55
(0.90)
0.65
$
$
$
$
$
$
228,350
22,645
467
251,462
41,995
12,374
298
6,647
185
61,499
189,963
3,000
186,963
11,866
3,671
8,019
2,193
235
10,549
36,533
105,042
32,932
1,625
3,373
2,469
3,808
18,103
28,028
(139)
195,241
28,255
2,032
26,223
17,610
3,806
13,804
40,027
0.97
0.51
1.48
0.97
0.51
1.47
$
$
$
$
$
$
190,345
21,753
222
212,320
23,912
7,624
5
6,067
171
37,779
174,541
750
173,791
20,026
3,331
7,195
1,904
489
9,652
42,597
101,791
37,782
1,710
1,303
2,682
2,998
16,981
25,897
(530)
190,614
25,774
(16,894)
42,668
40,415
14,137
26,278
68,946
1.59
0.98
2.57
1.57
0.97
2.54
Basic weighted average number of shares outstanding . . . . . . . . . . . . . . . . . .
Diluted weighted average number of shares outstanding . . . . . . . . . . . . . . . .
25,573,488
25,770,783
26,970,916
27,168,135
26,864,657
27,092,019
See accompanying notes to consolidated financial statements.
87
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 $5,656, $(2,163) and $1,942. . . . . . . . . . . .
Reclassification adjustment for net losses (gains) included in net
income, net of tax expense (benefit) of $(2), $49 and $172 . . . .
Other comprehensive income (loss). . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
17,512 $
40,027 $
68,946
21,834
(8,132)
3,607
6
21,840
39,352 $
(185)
(8,317)
31,710 $
(317)
3,290
72,236
See accompanying notes to consolidated financial statements.
88
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Number of
shares
(in thousands, except share data)
Balance, December 31, 2016 . . . . . . . . 26,800,183
—
Net income . . . . . . . . . . . . . . . . . . . . . .
—
Share-based compensation expense . . .
88,105
Common stock issued . . . . . . . . . . . . . .
—
Other comprehensive income . . . . . . . .
Balance, December 31, 2017 . . . . . . . . 26,888,288
—
Net income . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation expense . . .
—
107,060
Common stock issued . . . . . . . . . . . . . .
—
Other comprehensive loss . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . 26,995,348
—
Net income . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation recovery . . .
—
Cumulative effect of adoption of new
accounting standards . . . . . . . . . . . .
Common stock issued . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . .
Common stock repurchased and
—
104,080
—
Common
stock
$
511
—
—
—
—
511
—
—
—
—
511
—
—
—
—
—
Additional
paid-in
capital
$ 336,149
—
2,502
358
—
339,009
—
3,012
418
—
342,439
—
(434)
Retained
earnings
$ 303,036
68,946
—
—
—
371,982
40,027
—
—
—
412,009
17,512
—
Accumulated
other
comprehensive
income (loss)
$
Total
temporary
equity
Total
permanent
equity
(10,412) $
—
—
—
3,290
(7,122)
—
—
—
(8,317)
(15,439)
—
—
— $ 629,284
68,946
—
2,502
—
358
—
—
3,290
704,380
—
40,027
—
3,012
—
—
418
(8,317)
—
739,520
—
17,512
—
(434)
—
—
—
—
(548)
376
21,840
—
376
—
1,532
—
—
(2,080)
—
21,840
(3,208,573)
retired . . . . . . . . . . . . . . . . . . . . . . . .
—
Reclassification to temporary equity . .
Balance, December 31, 2019 . . . . . . . . 23,890,855
$
—
—
511
(20,287)
(21,876)
(25,521)
(30,859)
$ 300,218 $ 374,673
$
—
—
4,321 $
(52,735)
52,735
(98,543)
—
— $ 679,723
See accompanying notes to consolidated financial statements.
89
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Years Ended December 31,
2018
2017
2019
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by
17,512 $
40,027 $
68,946
operating activities:
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . .
(Reversal ) provision for credit losses . . . . . . . . . . . . . . . . . . . . . . .
Net fair value adjustment and gain on sale of loans held for sale . .
Gain on sale of mortgage servicing rights, gross . . . . . . . . . . . . . .
Loss on sale of HLC mortgage originations assets, net . . . . . . . . .
Fair value adjustment of loans held for investment . . . . . . . . . . . . .
Origination of mortgage servicing rights . . . . . . . . . . . . . . . . . . . .
Change in fair value of mortgage servicing rights . . . . . . . . . . . . .
Net loss (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 and exit costs . . . . . . . . . . . . . . . . . . .
Net deferred income tax (benefit) expenses . . . . . . . . . . . . . . . . . .
Share-based compensation (recovery) expense . . . . . . . . . . . . . . .
Origination of loans held for sale . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans originated as held for sale . . . . .
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other assets. . . . . .
Decrease in accounts payable and other liabilities . . . . . . . . . . . . .
Decrease in lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . .
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 . . . . . .
Loans purchased from other third parties . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of mortgage servicing rights . . . . . . . . . . . . . . . .
Mortgage servicing rights purchased from third parties . . . . . . . . . . .
Capital expenditures related to other real estate owned . . . . . . . . . . .
Net cash provided by disposal of discontinued operations . . . . . . . . .
Origination of loans held for investment and principal
repayments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . .
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (paid) acquired from acquisitions . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . .
39,499
(500)
(78,994)
(6,206)
1,036
(282)
(34,606)
35,902
7
(9,534)
24,893
3,000
(93,766)
—
—
(107)
(61,871)
(6,711)
(235)
(1,956)
22,645
750
(218,331)
—
—
(1,030)
(78,412)
36,615
(489)
(4,600)
(144)
124
16,619
(29,903)
(163)
(3,757,549)
4,097,511
(171)
244
5,096
12,777
3,361
(6,075,290)
6,448,808
(383)
215
5,054
(2,094)
2,856
(7,763,844)
8,084,916
14,198
(32,547)
(13,150)
258,830
(330,532)
184,871
145,771
1,138
769,354
—
3,269
(14)
—
182,189
(822,474)
—
(2,257)
(47,389)
83,926
(8,030)
(4,058)
—
286,011
(189,660)
46,081
106,798
836
548,770
(1,953)
65,373
(4)
—
—
(1,132,521)
808
(9,724)
—
(565,196)
26,470
(19,957)
—
159,327
(368,071)
397,492
105,801
6,105
324,745
—
—
(565)
(57)
—
(998,638)
—
(42,286)
19,285
(556,189)
90
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Years Ended December 31,
2018
2017
2019
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
213,572 $
290,152 $
7,598,300
(8,184,300)
11,729,500
(11,776,000)
309,798
10,972,200
(10,861,200)
agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,051,703
3,511,070
875,166
Repayment of federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from line of credit draws . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of line of credit draws . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of lease principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from Federal Home Loan Bank stock repurchase . . . . . . . .
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . .
Proceeds from debt issuance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments from equity raise, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock issuance, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . .
(10,945,703)
20,000
(20,000)
(1,694)
161,254
(138,156)
—
—
(98,543)
105
(343,462)
(3,492,070)
30,000
(30,000)
—
179,789
(178,647)
—
—
—
68
263,862
(875,166)
—
—
—
187,766
(194,058)
(65)
(45)
11
414,407
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(706)
(15,323)
17,545
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Cash, cash equivalents and restricted cash, beginning of year . . . . . .
Cash, cash equivalents and restricted cash, end of year . . . . . . . . . . .
Less restricted cash included in other assets . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . $
58,586
57,880
—
57,880 $
73,909
58,586
604
57,982 $
56,364
73,909
1,191
72,718
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal and state income taxes paid (refunded), net . . . . . . . . . . . .
93,325 $
33,625
67,552 $
(5,785)
42,889
(21,885)
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 . . .
Receivable from sale of mortgage servicing rights . . . . . . . . . . . . .
Acquisition:
Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Right-of-use assets obtained in exchange for lease
obligations:
915
916,483
8,705
(28,281)
2,117
116,402
74,941
5,928
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7,805)
(1,033)
See accompanying notes to consolidated financial statements.
455
634,205
71,584
(1,674)
3,337
1,125
419,494
100,049
3,534
—
—
—
—
—
—
—
—
—
—
—
91
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 diversified financial services company
serving customers primarily on the West Coast of the United States, including Hawaii. The Company is principally
engaged in commercial banking, mortgage banking, and consumer/retail banking activities. The Company’s
consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries,
HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the “Bank”), and the Bank’s
subsidiaries, HomeStreet Reinsurance, Ltd., Continental Escrow Company, HomeStreet Foundation, HS Properties,
Inc., HS Evergreen Corporate Center LLC, Union Street Holdings LLC, HS Cascadia Holdings LLC and YNB Real
Estate LLC. HomeStreet Bank was formed in 1986 and is a state-chartered commercial bank.
The Company’s accounting and financial reporting policies conform 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 financial statements, the Company is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and
revenues and expenses during the reporting periods and related disclosures. These estimates that require application
of management’s most difficult, subjective or complex judgments often result in the need to make estimates
about the effect of matters that are inherently uncertain and may change in future periods. Management has made
significant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business
combinations (Note 3, Business Combinations), allowance for credit losses (Note 6, Loans and Credit Quality),
valuation of residential mortgage servicing rights and loans held for sale (Note 13, Mortgage Banking Operations),
valuation of certain loans held for investment (Note 6, Loans and Credit Quality), valuation of investment securities
(Note 5, Investment Securities), valuation of derivatives (Note 12, Derivatives and Hedging Activities), and taxes
(Note 15, Income Taxes). Actual results could differ materially from those estimates. Certain amounts in the financial
statements from prior periods have been reclassified to conform to the current financial statement presentation.
These reclassifications are immaterial and have no effect on net income, comprehensive income, cash flows, total
assets or total shareholders’ equity as previously reported.
Discontinued Operations
During 2019, the Company’s Board of Directors (the “Board”) adopted a Resolution of Exit or Disposal of Home
Loan Center (“HLC”) Based Mortgage Banking Operations to sell or abandon the assets and transfer or terminate
the personnel associated with the Company’s high-volume HLC-based mortgage origination business and related
servicing. The Company also successfully closed and settled two separate sales of the rights to service $14.26 billion
in total unpaid principal balance of single family mortgage loans serviced for others, representing in the aggregate
approximately 71% of HomeStreet’s total single family mortgage loans serviced for others portfolio at December 31,
2018. These two actions largely represent the Company’s former Mortgage Banking segment. In accordance with
Accounting Standards Codification (ASC) 205-20, the Company determined that the Board’s decision to sell or
abandon the assets and personnel associated with the Company’s HLC-based mortgage business and the related
mortgage servicing rights (“MSR”) sales met the criteria to be classified as discontinued operations and its operating
results and financial condition are presented as discontinued operations in the consolidated financial statements
for the current and all comparative periods which have been recast to conform to the new presentation (see Note 2,
Discontinued Operations for additional information). Unless otherwise indicated, information included in these
notes to the consolidated financial statements are presented on a consolidated operations basis, which includes
results from both continuing and discontinued operations, for all periods presented.
At the end of the second quarter 2019, we also entered into a non-binding letter of interest to sell our ownership
interest in WMS LLC at which time related operations also met the criteria to be included in discontinued operations
and were reported for all periods presented.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Cash and Cash Equivalents
Cash and cash equivalents include cash, interest-earning overnight deposits at other financial institutions, and other
investments with original maturities equal to three months or less. For the consolidated statements of cash flows,
the Company considered cash equivalents to be investments that are readily convertible to known amounts, so
near to their maturity that they present an insignificant risk of change in fair value due to changes in interest rates,
and purchased in conjunction with cash management activities. Restricted cash of $5.1 million and $4.7 million
at December 31, 2019 and 2018, respectively, is included in cash and cash equivalents for FNMA DUS® pledged
securities and related reserves. In addition, we had restricted cash of $604 thousand at December 31, 2018 and
is included in accounts receivable and other assets for reinsurance-related reserves, with no similar balance at
December 31, 2019.
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 certificates of deposit that meet the definition of a security as HTM investments.
Investment securities that we might not hold until maturity are classified as AFS and are reported at fair value in
the statement of financial 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 flows, 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 effective 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 specific
identification method.
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 fully recover the amortized cost basis of the security.
Debt securities are classified 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 difference 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 to yield in a manner consistent
with the amortization of any premium or discount, and will offset or mitigate the impact 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.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
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
difference 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.
Federal Home Loan Bank Stock
As a borrower from the Federal Home Loan Bank of Des Moines (“FHLB”), the Company is required to purchase
an amount of FHLB stock based on our membership and 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 flows, 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
classified 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 market 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.
In certain cases, the fair value may be based on a discounted cash flow 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 fair value of the 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 effectively offset the change in the fair value of derivative instruments that are used as economic hedges of
loans held for sale.
Multifamily and SBA loans held for sale are accounted for at the lower of amortized cost or fair value (LOCOM).
Fair values for loans are based on committed sale prices or calculated internally for loans not committed to a future
sale. LOCOM valuations are performed quarterly or at the time of transfer to or from loans held for sale. 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 classified 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-offs, interest
applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan
origination fees and costs and unamortized premiums or discounts on purchased loans. Deferred fees and costs and
premiums and discounts are amortized over the contractual terms of the underlying loans using the constant effective
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 profitability characteristics.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
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 as part of the balance sheet management process, 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.
Nonaccrual Loans
Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful,
generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal
balance has been charged off.
All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost
recovery method, all cash collected is applied first to reduce the outstanding principal balance. A loan may be
returned to accrual status if all delinquent principal and interest payments are brought current and the collectability
of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans
that are well-secured and in the process of collection are maintained on accrual status, even if they are 90 days or
more past due. Loans whose repayments are insured by the Federal Housing Administration (“FHA”) or guaranteed
by the Department of Veterans’ Affairs (“VA”) are maintained on accrual status even if 90 days or more past due.
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.
Troubled Debt Restructurings
A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons,
we grant a concession to a borrower experiencing financial difficulty that we would not otherwise consider.
A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may
be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal
or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is
insignificant relative to the frequency of payments, the debt’s original contractual maturity or original expected
duration.
TDRs 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 modification remain
on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until
the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally
demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period,
normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR and
deemed impaired regardless of the accrual or performance status until the loan is paid off. However, if the TDR
loan has been further modified in a subsequent restructuring with market terms and the borrower is not currently
experiencing financial difficulty, 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
reflected within the allowance for credit losses. Included in the allowance for credit losses is both the allowance for
loan loss reserves and unfunded commitment reserves. 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
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
portfolio, including unfunded loan commitments, as of the balance sheet date. The allowance for loan losses, as
reported in our consolidated statements of financial condition, is adjusted by a provision for loan losses, which is
recognized in earnings, and reduced by the charge-off of loan principal amounts, net of recoveries.
The loss estimation process involves procedures to appropriately consider the unique characteristics of its two
loan portfolios, the consumer loan portfolio and the commercial loan portfolio. These two portfolios 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 effect of matters that are inherently uncertain. Subsequent evaluations
of the overall loan portfolio, in light of the factors then prevailing, may result in significant 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.
Consumer Loan Portfolio
The consumer loan portfolio 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 a loan.
These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively
affect housing prices and demand and levels of unemployment.
Commercial Loan Portfolio
The commercial loan portfolio 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 financial position. These
other factors include measuring liquidity, the level and composition of net worth and leverage, evaluating all other
lender amounts and positions, analyzing expected cash flow through the obligors including the outflow to other
lenders and considering prior experience with the borrower. This information is used to assess adequate financial
capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general
economic conditions, liquidity, and availability of long-term financing.
Loan Loss Measurement
Allowance levels are influenced by loan volumes, loan asset quality ratings (“AQR”) migration or delinquency
status, historic loss experience and other conditions influencing loss expectations, such as economic conditions.
The methodology for evaluating the adequacy of the allowance for loan losses has two basic components: first, an
asset-specific component involving the identification of impaired loans and the measurement of impairment for each
individual loan identified; and second, a formula-based component for estimating probable loan principal losses for
all other loans.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Impaired Loans
When a loan is identified as impaired, impairment is measured based on net realizable value, or the difference
between the discounted value of the expected future cash flows, based on the original effective 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-offs 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 difference 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
certified appraisers. We require an independent third-party appraisal at least annually for substandard loans and other
real estate owned (“OREO”). Third party appraisals are obtained from a pre-approved list of independent, third party,
local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and
knowledge of the respective real estate market. Generally, appraisals are internally reviewed by the appraisal services
group to ensure the quality of the appraisal and the expertise and independence of the appraiser. For performing
consumer loans secured by real estate that are classified as collateral dependent, the Bank determines the fair value
estimates quarterly using automated valuation services. Once the impairment amount is determined, an asset-specific
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.
Estimate of Probable Loan Losses
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.
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 status using two-year analysis periods for the commercial portfolio and
one-year analysis periods for the consumer portfolio, 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 affect 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 classified 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 effect of any concentrations of credit, and changes in the level of such concentrations and (9) the effect
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.
97
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
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 financial 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 finalize determination of net realizable value.
Subsequent declines in net realizable value identified 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
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.
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 financial 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 flow 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 flows. 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 flows and curtailments over time. The significant 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.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Market expectations about loan duration, and correspondingly the expected term of future servicing cash flows, 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 13, Mortgage
Banking Operations.
Investment in WMS Series LLC
In November 2019, HomeStreet, Inc. finalized the sale of our ownership interest in WMS Series, LLC Limited
Liability Company (“WMS LLC”). Prior to this, HomeStreet/WMS, Inc. (Windermere Mortgage Services, Inc.),
was a wholly owned and consolidated subsidiary of the Bank, with an affiliated business arrangement with WMS
LLC. The Company and Windermere Real Estate each had 50% joint control over the governance of WMS LLC and
the underlying series. The operations of WMS LLC, which was subdivided into 27 individual operating series, were
recorded using the equity method of accounting. Prior to the sale, the Company recognized its proportionate share
of the results of operations of WMS LLC as income from WMS Series LLC in discontinued operations within the
Company’s consolidated statements of operations.
The equity method investment income from WMS LLC was $1.2 million, $160 thousand, and $598 thousand for
the years ended December 31, 2019, 2018, and 2017, respectively. The Company’s investment in WMS LLC, which
is included in discontinued operations was $1.8 million, at December 31, 2018. We had no similar investment at
December 31, 2019 due to the sale of our ownership interest in WMS LLC.
Prior to the sale and subsequent as transition services, the Company provided contracted services to WMS LLC
related to accounting, loan shipping, loan underwriting and insuring, quality control, secondary marketing, and
information systems support performed by Company employees on behalf of WMS LLC. The Company recorded
contracted and transition services income of $888 thousand, $853 thousand, and $844 thousand for the years ended
December 31, 2019, 2018 and 2017, respectively. Income related to WMS LLC contracted services prior to the sale
is classified in discontinued operations. Income related to WMS LLC transition contracted services is classified in
noninterest expense.
The Company purchased $612.6 million, $530.9 million and $574.3 million of single family mortgage loans from
WMS LLC for the years ended December 31, 2019, 2018 and 2017, respectively. The outstanding balance of the
secured line of credit was $12.6 million and $5.4 million at December 31, 2019 and 2018, respectively. The highest
outstanding balance of the secured line of credit was $18.3 million and $11.5 million during 2019 and 2018,
respectively. The line of credit was paid off and matured on January 15, 2020.
Premises and Equipment
Furniture and equipment and leasehold improvements are reported at historical 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.
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Leases
We determine if an arrangement is a lease at inception. Operating and finance leases are included in lease right-of-use
(“ROU”) assets, and lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an
underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from
the lease. The lease liability is recognized at commencement date based on the present value of lease payments over
the lease term. The right-of-use asset is based on the lease liability adjusted for the reclassification of certain balance
sheet amounts such as prepaid rent, lease incentives and deferred rent. As the rate implicit in most of our leases are
not readily determinable, we generally use our incremental borrowing rate based on the estimated rate of interest
for collateralized borrowing over a similar term of the lease payments at commencement date. Our lease terms may
include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We have
lease agreements with lease and non-lease components, which are generally accounted for separately. For certain
equipment leases we account for the lease and non-lease components as a single lease component.
Lease expense for operating leases is recognized on a straight-line basis over the non-cancelable lease term and
renewal periods that are considered reasonably certain. Lease expense for our financing leases is comprised of the
amortization of the right-of-use asset and interest expense recognized based on the effective interest method.
Goodwill
Goodwill is recorded upon completion of a business combination as the difference between the purchase price
and the fair value of net identifiable assets acquired. Subsequent to initial recognition, the Company tests
goodwill for impairment during the third quarter of each fiscal 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, 2019 or 2018, nor was any goodwill written off due to impairment during 2019, 2018 or 2017.
Changes in the carrying amount of goodwill are detailed in the following table:
Goodwill balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(in thousands)
22,564
—
22,564
5,928
28,492
Trust Preferred Securities
Trust preferred securities allow investors the ability to invest in subordinated debentures of the Company, which
provide the Company with long-term financing. 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
financial 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 financial position. The trust finances the purchase of the subordinated debentures with the proceeds
from the sale of its common and preferred securities.
The 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 five years
and has the right to call the preferred securities quarterly five years after issuance. These preferred securities are
non-voting and do not have the right to convert to shares of the issuer. The trust’s common securities issued to the
Company are not considered to be equity at risk because the equity securities were financed by the trust through the
purchase of the subordinated debentures from the Company. As a result, the Company holds no variable interest in
the trust, and therefore, is not the trust’s primary beneficiary.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
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 financing arrangements with the obligation to
repurchase securities sold reflected as a liability in the consolidated statements of financial 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 approximation of the fair value.
Income Taxes
Our income tax expense is the total of current year income tax due or refundable; change in deferred tax assets and
liabilities; and unrecognized tax positions; and reflects 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 different
states. Significant judgments and estimates are required in determining the consolidated income tax expense.
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
Changes in tax laws and rates may affect recorded deferred tax assets and liabilities and our effective tax rate in
the future. Such changes are accounted for in the period of enactment and are reflected 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 differences, projected future taxable income, tax planning
strategies, and recent financial 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 different jurisdictions. Accounting Standards Codification (“ASC”) 740 states that a tax benefit from
an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon
examination, including resolution of any related appeals or litigation, on the basis of its technical merits.
We record unrecognized tax positions 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 different from our current estimate of the unrecognized tax benefit liabilities. These
differences will be reflected as increases or decreases to income tax expense in the period in which new information
is available.
Derivatives and Hedging Activities
In order to reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as
certain mortgage loans held for sale or mortgage servicing rights, the Company utilizes derivatives, such as forward
sale commitments, interest rate futures, Eurodollar 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 financial 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
The accounting for changes in fair value of a derivative depends on whether or not the instrument has been
designated and qualifies 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 firm commitment (a fair
value hedge), or (2) a hedge of the variability in expected future cash flows associated with an existing recognized
asset or liability or a probable forecasted transaction (a cash flow 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 effective, 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 financial statement category as the hedged item.
In a cash flow hedge, the entire change in fair value of the derivative is deferred in OCI and will be released to
earnings when the hedged item/transaction impacts earnings.
The Company discontinues hedge accounting when (1) it determines that the derivative is no longer expected to be
highly effective in offsetting changes in fair value or cash flows 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 specified time period.
If the Company determines that the derivative no longer qualifies as a fair value or cash flow 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 affects 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
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, 2019 and December 31, 2018 the Company had no derivatives that
were designated as fair value hedges or cash flow 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 flows 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 affected 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
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 to hedge economically. Realized and unrealized 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.
The Company also executes interest rate swaps with commercial banking customers to facilitate their respective risk
management strategies. Those interest rate swaps are hedged by simultaneously entering into an offsetting interest
rate swap that the Company executes with a third party, such that the Company minimizes its net risk exposure.
Share-Based Employee Compensation
The Company has share-based employee compensation plans as more fully discussed in Note 18, Share-Based
Compensation Plans. Under the accounting guidance for stock compensation, compensation expense recognized
includes the cost for share-based awards, such as nonqualified 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 required for the vesting of an award are satisfied
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 defined as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. A fair value measurement assumes
that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability
or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company’s
approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing
fair value measurements. The degree of management judgment involved in estimating the fair value of a financial
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 financial 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, significant
management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in
significant changes in valuation. See Note 19, 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
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 specified agreement. The
Company initially records guarantees at the inception date fair value of the obligation assumed and records the
amount in other liabilities. For indemnifications 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
indemnifications, 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 indemnification expires).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Contingent liabilities, including those that exist as a result of a guarantee or indemnification, 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 residential mortgage 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 financial 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 residential mortgage loan sales are whole loan sale transactions with GSEs such as Fannie Mae,
Ginnie Mae and Freddie Mac.
The Company may be required to repurchase residential 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 14,
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.
Under the DUS 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 14,
Commitments, Guarantees, and Contingencies.
Earnings per Share
The Company calculates earnings per common share (“EPS”) using the two-class method. The two-class method
is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise
would have been available to common shareholders but does not require the presentation of basic and diluted EPS
for securities other than common shares. Under the two-class method, basic EPS is computed by dividing earnings
allocated to common shareholders by the weighted average number of common shares outstanding for the period.
Earnings allocated to common shareholders represents net income reduced by earnings allocated to participating
securities. Diluted EPS is computed in the same manner as basic earnings per share except that the denominator
is increased to include the effect of common stock equivalents (for example, stock options and unvested restricted
stock) unless those additional shares are anti-dilutive. For the diluted EPS computation, the treasury stock method
is applied and compared to the two-class method and whichever method results in a more dilutive impact is used to
calculate diluted EPS.
Segment Reporting
In connection with the MSR sales and Board resolution regarding the former Mortgage Banking segment, the
Company reassessed its reportable operating segments given these changes and associated changes made to its Chief
Operating Decision Maker (CODM) package as of March 31, 2019. The Company concluded that as of March 31,
2019 the CODM evaluates the Company’s performance on a consolidated, entity-wide basis and accordingly has
resulted in the elimination of segment reporting. The Company will no longer disclose operating results below the
consolidated entity level which is now the reportable segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
Advertising Expense
Advertising costs, which consists of media and marketing materials, are expensed as incurred. We incurred
$5.9 million, $6.9 million and $6.8 million in advertising expense during the years ended December 31, 2019, 2018
and 2017, respectively.
Recently Adopted Accounting Pronouncements
In October 2018, FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured
Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge
Accounting Purposes. ASU 2018-16 expands the list of U.S. benchmark interest rates permitted in the application
of hedge accounting by adding the OIS rate based on SOFR as an eligible benchmark interest rate. We adopted
ASU 2018-16 on January 1, 2019 and it did not have a material impact on the Company’s consolidated financial
statements.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements to Provide Entities
with Relief from the Costs of Implementing Certain Aspects of the New Leasing Standard, ASU No. 2016-02.
Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods
presented when transitioning to the new leasing standard, and (2) lessors may elect to not separate lease and
non-lease components from leases when certain conditions are met. The Company adopted this ASU on January 1,
2019 and elected both transition options.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement — Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or
ASU 2018-02. The amendments in this update allow a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The
update does not have any impact on the underlying ASC 740 guidance that requires the effect of a change in tax law
be included in income from continuing operations. The Company adopted this ASU in the first quarter of 2019 and
reclassified $1.5 million of stranded tax effects from AOCI to retained earnings at that time.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements
to Accounting for Hedging Activities. This standard better aligns an entity’s risk management activities and
financial 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 refine hedge accounting for both nonfinancial and financial risk components and align the recognition
and presentation of the effects of the hedge instruments and the hedged item in the financial statements. The
Company adopted the provisions of this guidance on January 1, 2019 and transferred approximately $66.2 million in
held to maturity securities to available for sale and recognized $548 thousand in AOCI.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees are required
to recognize the following for all leases: 1) a lease liability, which is the present value of a lessee’s obligation
to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or
control the use of, a specified asset for the lease term. All entities will classify leases to determine how to recognize
lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to
meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash
flows arising from leases. The intention is to require enough information to supplement the amounts recorded in
the financial statements so that users can understand more about the nature of an entity’s leasing activities. The
Company elected the transition option provided in ASU No. 2018-11 (see above), the modified retrospective
approach on January 1, 2019.
The Company elected certain relief options offered in ASU 2016-02, including the package of practical expedients
(no reassessment of whether any expired or existing contracts contain a lease, no reassessment of lease classification
for any expired or existing leases and no reassessment of initial direct costs for existing leases), and the option
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with original
terms of twelve months or less). The Company elected the hindsight practical expedient, which allows entities to
reassess their assumptions used when determining lease term and impairment of right-of-use assets. The Company
had facility and equipment lease agreements which were previously being accounted for as operating leases and
therefore not being recognized on the Company’s consolidated statement of condition. The new guidance required
these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a
corresponding lease liability. The provisions of ASU No. 2016-02 impacted the Company’s consolidated statements
of financial condition, along with the Company’s regulatory capital ratios. On January 1, 2019, upon adoption of
this standard, the Company recognized $120.8 million and $136.9 million increase in right-of-use assets and lease
liabilities, respectively, based on the present value of the expected remaining lease payments. As most of our leases
do not provide an implicit rate, the Company uses the FHLB Des Moines rate at lease commencement date in
determining the present value of lease payments. There was no related adjustment to retained earnings. Please see
Note 21, Leases for the impact of the adoption of this guidance.
Recent Accounting Pronouncements — Issued Not Yet Adopted
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No 2019-12, “Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 removes certain
exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is
effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted.
The Company does not expect ASU 2019-12 to have a material effect on the Company’s current financial position,
results of operations or financial statement disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework —
Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds, eliminates, and modifies
certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required
to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will
be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3
fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after
December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or
modified disclosure requirements and delay adoption of the added disclosure requirements until their effective date.
As ASU No. 2018-13 only revises disclosure requirements, it will not impact the Company’s consolidated financial
statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test.
ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment 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 fiscal years beginning after December 15, 2019 with early adoption permitted for annual or
interim goodwill impairment tests performed after January 1, 2017. The Company does not expect the adoption of
ASU 2017-04 to have a material impact on its consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current
U.S. GAAP requires an “incurred loss” methodology for recognizing credit losses that delay recognition until it is
probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more
decision-useful information about the expected credit losses on financial instruments and other commitments to
extend credit held by a reporting entity at each reporting date. The amendment affects loans, debt securities, trade
receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other
financial asset not excluded from the scope that has the contractual right to receive cash. The amendments in this
ASU replace the incurred loss impairment model in current U.S. GAAP with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to inform
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont.)
credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured
at amortized cost 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 financial asset(s) to present the net carrying
value at the amount expected to be collected on the financial asset. Our allowance for credit losses includes both
the allowance for loan losses and a separate allowance for losses related to unfunded loan commitments. 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 affect 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 relevant to users of the financial statements. The amendments in this ASU will be effective for fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted this
ASU on January 1, 2020.
The Company has completed the development of the credit loss models for all loan portfolios and has tested these
models and validated data inputs, as well as developed the policies, systems and controls that will be required to
implement CECL. Based on forecasted economic conditions and portfolio composition at December 31, 2019,
the adoption of the CECL standard is estimated to result in an increase in our allowance for credit losses of
approximately $3.7 million at January 1, 2020, a 9% increase, as compared to our December 31, 2019 aggregate
reserve levels. The estimated increase is driven by the fact that the allowance will cover expected credit losses over
the full expected life of the loan portfolios and will also consider forecasts of expected future economic conditions.
The extent of the impact of the adoption of CECL on the Company’s consolidated financial statements may vary and
will depend on, completion of the Company’s models, policies and management judgment’s, and the composition of
the loan portfolios. At adoption, on January 1, 2020, we recorded a cumulative-effect adjustment to retained earnings
equal to the change in the allowance for credit losses.
In addition, the current accounting policy and procedures for other-than-temporary impairment on investment
securities classified as available for sale will be replaced with an allowance approach. Based on the credit quality of
our existing debt securities portfolio, the Company determined the CECL allowance for credit losses for HTM and
AFS debt securities is not material.
NOTE 2 — DISCONTINUED OPERATIONS:
On March 31, 2019, based on mortgage market conditions and the operating environment, the Board adopted a
Resolution of Exit or Disposal of HLC Based Mortgage Banking Operations to sell or abandon the assets and
related personnel associated with those operations. The assets that were sold or abandoned largely represented
the Company’s former Mortgage Banking segment, the activities of which related to originating, servicing,
underwriting, funding and selling single family residential mortgage loans.
The Company determined that the above actions constituted commitment to a plan of exit or disposal of certain
long-lived assets (through sale or abandonment) and termination of employees. Further, the Company determined
that the shift from a large-scale HLC based originator and servicer to a branch-focused product offering represented
a strategic shift as we moved away from a higher cost, high volume sales-focused origination business to a lower
cost, lower volume model that targeted our bank customers. As a result, the HLC-related mortgage banking
operations are reported separately from the continuing operations as discontinued operations. In addition, the former
Mortgage Banking operating segment and reporting unit was eliminated. This has resulted in a recast of the financial
statements in the current and all comparative periods as detailed below.
In the first quarter of 2019, the Company successfully closed and settled two sales of the rights to service
$14.26 billion in total unpaid principal balance of single family mortgage loans serviced for Federal National
Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and Government
National Mortgage Association (“Ginnie Mae”), representing approximately 71% of HomeStreet’s total single family
mortgage loans serviced for others portfolio as of December 31, 2018. These sales resulted in a $919 thousand
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HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — DISCONTINUED OPERATIONS: (cont.)
pre-tax loss from discontinued operations during the year ended December 31, 2019. The Company finalized the
servicing transfer for these loans in 2019 and subserviced these loans through the transfer dates. These loans are
excluded from the Company’s MSR portfolio at December 31, 2019.
On April 4, 2019 the Company entered into a definitive agreement related to the sale of the HLC based mortgage
origination business assets and transfer of personnel to Homebridge Financial Services, Inc. — (“Homebridge”).
On June 24, 2019 the Company completed the sale with Homebridge. This sale included 47 stand-alone HLCs and
the transfer of certain related mortgage personnel. These HLCs, along with certain other mortgage banking related
assets and liabilities that were to be sold or abandoned within one year, are classified as discontinued operations
in the accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Operations.
HLCs that were not sold were closed during the second quarter and none remained as of December 31, 2019. Certain
remaining bank location-based components of the Company’s former Mortgage Banking segment, including MSRs
on certain mortgage loans that were not part of the sales and right-of-use assets and lease liabilities where we did not
obtain full landlord release have been classified as continuing operations based on management’s intent.
At the end of the second quarter 2019, we also entered into a non-binding letter of interest to sell our ownership
interest in WMS LLC at which time related operations also met the criteria to be included in discontinued operations
for all periods presented. The sales transaction was closed in November 2019, resulting in an immaterial loss on
disposal.
The following table summarizes the calculation of the net loss on disposal of discontinued operations.
(in thousands)
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Book value of assets sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on assets sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation expense related to the transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility and IT related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss on disposal of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
December 31,
2019
186,692
181,243
5,449
8,770
4,636
13,660
27,066
(21,617)
The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the
following.
(in thousands)
ASSETS
Loans held-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage serving rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
LIABILITIES
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2019
December 31,
2018
26,123 $
—
—
2,505
28,628 $
— $
2,603
2,603 $
269,683
177,121
6,689
23,541
477,034
162,850
4,271
167,121
(1)
Includes $227 thousand and $15.5 million of derivative balances at December 31, 2019 and December 31, 2018,
respectively.
108
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — DISCONTINUED OPERATIONS: (cont.)
Statements of Operations of Discontinued Operations
(in thousands)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations . . . . . . . . . . . . . . $
Cash Flows from Discontinued Operations
Year Ended December 31,
2018
2017
2019
5,858 $
63,713
97,856
(28,285)
(5,077)
(23,208) $
12,516 $
200,426
195,332
17,610
3,806
13,804 $
19,897
269,557
249,039
40,415
14,137
26,278
(in thousands)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . $
Net cash provided by (used in) investing activities . . . . . . . . . .
Year Ended December 31,
2018
2017
2019
238,212 $
185,458
201,001 $
64,849
111,682
(4,369)
NOTE 3 — BUSINESS COMBINATIONS:
Recent Acquisition Activity
On March 25, 2019, the Company completed its acquisition of a branch and its related deposits and loans in
San Diego County from Silvergate Bank, along with its business lending team. The application of the acquisition
method of accounting resulted in goodwill of $5.9 million.
On September 15, 2017, the Company completed its acquisition of one branch and its related deposits in San Diego
County, from Opus Bank. The application of the acquisition method of accounting resulted in goodwill of $389
thousand.
NOTE 4 — REGULATORY CAPITAL REQUIREMENTS:
The Company and Bank are subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s operations
and financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve
quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company and Bank’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about risk components, asset risk weighting, 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 risk-based capital, Tier 1
risk-based capital and total risk-based capital (as defined in the regulations). The regulators also have the ability to
impose elevated capital requirements in certain circumstances. At December 31, 2019 and 2018 the Bank’s capital
ratios meet the regulatory capital category of “well capitalized” as defined by the Rules.
109
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — REGULATORY CAPITAL REQUIREMENTS: (cont.)
The Bank’s and the Company’s capital amounts and ratios under Basel III are included in the following tables:
At December 31, 2019
Actual
For Minimum
Capital Adequacy
Purposes
To Be Categorized As
“Well Capitalized”
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet Bank
(dollars in thousands)
Tier 1 leverage capital
(to average assets) . . . . . . . . . . . . . . $ 712,596
10.56% $ 269,930
4.0% $ 337,413
5.0%
Common equity tier 1 capital
(to risk-weighted assets). . . . . . . . . .
712,596
13.50
237,451
Tier 1 risk-based capital
(to risk-weighted assets). . . . . . . . . .
712,596
13.50
316,602
Total risk-based capital
(to risk-weighted assets). . . . . . . . . .
758,303
14.37
422,136
4.5
6.0
8.0
342,985
422,136
6.5
8.0
527,669
10.0
At December 31, 2019
Actual
For Minimum
Capital Adequacy
Purposes
To Be Categorized As
“Well Capitalized”
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet, Inc.
(dollars in thousands)
Tier 1 leverage capital
(to average assets) . . . . . . . . . . . . . . $ 691,323
10.16% $ 272,253
4.0% $ 340,316
5.0%
Common equity tier 1 capital
(to risk-weighted assets). . . . . . . . . .
631,323
11.43
248,523
Tier 1 risk-based capital
(to risk-weighted assets). . . . . . . . . .
691,323
12.52
331,364
Total risk-based capital
(to risk-weighted assets). . . . . . . . . .
739,812
13.40
441,818
4.5
6.0
8.0
358,977
441,818
6.5
8.0
552,273
10.0
At December 31, 2018
Actual
For Minimum
Capital Adequacy
Purposes
To Be Categorized As
“Well Capitalized”
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet Bank
(dollars in thousands)
Tier 1 leverage capital
(to average assets) . . . . . . . . . . . . . . $ 707,710
10.15% $ 278,898
4.0% $ 348,622
5.0%
Common equity tier 1 capital
(to risk-weighted assets). . . . . . . . . .
707,710
13.82
230,471
Tier 1 risk-based capital
(to risk-weighted assets). . . . . . . . . .
707,710
13.82
307,295
Total risk-based capital
(to risk-weighted assets). . . . . . . . . .
753,742
14.72
409,726
4.5
6.0
8.0
332,902
409,726
6.5
8.0
512,158
10.0
110
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — REGULATORY CAPITAL REQUIREMENTS: (cont.)
At December 31, 2018
Actual
For Minimum
Capital Adequacy
Purposes
To Be Categorized As
“Well Capitalized”
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
HomeStreet, Inc.
(dollars in thousands)
Tier 1 leverage capital
(to average assets) . . . . . . . . . . . . . . $ 667,301
9.51% $ 280,592
4.0% $ 350,740
5.0%
Common equity tier 1 capital
(to risk-weighted assets). . . . . . . . . .
607,388
11.26
242,832
Tier 1 risk-based capital
(to risk-weighted assets). . . . . . . . . .
667,301
12.37
323,776
Total risk-based capital
(to risk-weighted assets). . . . . . . . . .
715,848
13.27
431,701
4.5
6.0
8.0
350,757
431,701
6.5
8.0
539,626
10.0
At periodic intervals, the FDIC and the Washington State Department of Financial Institutions (“WDFI”) routinely
examine the Bank’s financial statements as part of their legally prescribed oversight of the banking industry. Based
on their examinations, these regulators can direct that the Bank’s financial statements be adjusted in accordance with
their findings.
NOTE 5 — INVESTMENT SECURITIES:
The following tables set 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:
Amortized
cost
At December 31, 2019
Gross
Gross
unrealized
unrealized
losses
gains
Fair
value
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,283 $
37,972
120 $
411
(1,708) $
(358)
91,695
38,025
Collateralized mortgage obligations:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . .
HELD TO MATURITY
Municipal bonds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
292,370
156,693
333,303
18,391
1,296
933,308 $
935
684
8,997
313
11
11,471 $
(1,687)
(1,223)
(982)
(43)
—
(6,001) $
291,618
156,154
341,318
18,661
1,307
938,778
4,372
4,372 $
129
129 $
—
— $
4,501
4,501
(1)
In conjunction with adopting ASU 2017-12, in the first quarter of 2019, we transferred $66.2 million in HTM securities to
AFS.
111
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — INVESTMENT SECURITIES: (cont.)
(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:
Amortized
cost
At December 31, 2018
Gross
Gross
unrealized
unrealized
losses
gains
Fair
value
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,852 $
34,892
19 $
109
(4,910) $
(487)
107,961
34,514
Collateralized mortgage obligations:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . . . . . . . . . . . . .
171,412
118,555
393,463
21,177
11,211
9,876
873,438 $
$
221
140
1,526
1
6
—
2,022 $
(4,889)
(2,021)
(9,334)
(1,183)
(317)
(351)
(23,492) $
166,744
116,674
385,655
19,995
10,900
9,525
851,968
HELD TO MATURITY
Mortgage-backed securities:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized mortgage obligations . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . .
$
11,071 $
17,307
15,624
27,191
92
71,285 $
— $
30
10
190
—
230 $
(274) $
(311)
(65)
(319)
—
(969) $
10,797
17,026
15,569
27,062
92
70,546
Mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMO”) represent securities
primarily issued by government sponsored enterprises (“GSEs”). Most of the MBS and CMO securities in our
investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of
general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either
collateral or revenues from the specific project being financed) issued by various municipal corporations. As of
December 31, 2019 and 2018, all securities held, including municipal bonds and corporate debt securities, were rated
investment grade based upon external ratings where available and, where not available, based upon internal ratings
which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors
Services (“Moody’s”). As of December 31, 2019 and 2018, substantially all securities held had ratings available by
external ratings agencies.
112
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — INVESTMENT SECURITIES: (cont.)
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, 2019
12 months or more
Gross
unrealized
losses
Fair
value
Total
Gross
unrealized
losses
Fair
value
(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:
Residential . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . .
(409) $
(352)
18,440 $
21,494
(1,299) $
(6)
68,362 $
2,483
(1,708) $
(358)
86,802
23,977
Collateralized mortgage
obligations:
Residential . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . .
Corporate debt securities . . . .
(965)
(680)
(334)
(5)
171,708
67,160
39,127
3,689
(722)
(543)
(648)
(38)
29,264
41,605
45,869
1,743
$
(2,745) $ 321,618 $
(3,256) $ 189,326 $
(1,687)
(1,223)
(982)
(43)
200,972
108,765
84,996
5,432
(6,001) $ 510,944
There were no held to maturity securities in an unrealized loss position at December 31, 2019.
Less than 12 months
Gross
unrealized
losses
Fair
value
At December 31, 2018
12 months or more
Gross
unrealized
losses
Fair
value
Total
Gross
unrealized
losses
Fair
value
(in thousands)
AVAILABLE FOR SALE
Mortgage-backed securities:
Residential . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . .
(34) $
—
1,269 $
—
(4,876) $ 104,822 $
(487)
18,938
(4,910) $ 106,091
18,938
(487)
Collateralized mortgage
obligations:
Residential . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . .
Corporate debt securities . . . .
U.S. Treasury securities . . . . . .
Agency debentures . . . . . . . . .
HELD TO MATURITY
Mortgage-backed securities:
(131)
(350)
(1,283)
(104)
—
—
24,085
22,051
85,057
5,557
—
—
(4,758)
(1,671)
(8,051)
(1,079)
(317)
(351)
128,899
73,429
201,189
14,213
9,598
9,525
$
(1,902) $ 138,019 $
(21,590) $ 560,613 $
(4,889)
(2,021)
(9,334)
(1,183)
(317)
(351)
152,984
95,480
286,246
19,770
9,598
9,525
(23,492) $ 698,632
Residential . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . .
(31) $
(24)
2,314 $
2,800
(243) $
(287)
6,197 $
11,256
(274) $
(311)
8,511
14,056
Collateralized mortgage
obligations . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . .
(65)
(102)
(222) $
10,597
7,210
22,921 $
—
(217)
(747) $
—
11,273
28,726 $
(65)
(319)
(969) $
10,597
18,483
51,647
$
113
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — INVESTMENT SECURITIES: (cont.)
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-specific credit event. The Company has not identified any expected
credit losses on its debt securities as of December 31, 2019 and 2018. In addition, as of December 31, 2019 and
2018, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it
more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.
The following tables present the fair value of investment securities available for sale and held to maturity by
contractual maturity along with the associated contractual yield for the periods indicated below. Contractual
maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the effect
of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have
the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed
using the contractual coupon of each security weighted based on the fair value of each security and does not include
adjustments to a tax equivalent basis.
Within one year
Fair
Value
Weighted
Average
Yield
After one year
through five years
Fair
Value
Weighted
Average
Yield
At December 31, 2019
After five years
through ten years
Fair
Value
Weighted
Average
Yield
After
ten years
Total
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
(dollars in thousands)
AVAILABLE FOR SALE
Mortgage-backed
securities:
Residential . . . . . . . . . $ —
—
Commercial . . . . . . . .
Collateralized mortgage
obligations:
—
Residential . . . . . . . . .
—
Commercial . . . . . . . .
5,337
Municipal bonds . . . . . . .
1,007
Corporate debt securities . .
1,307
U.S. Treasury securities . .
Total available for sale . . $ 7,651
HELD TO MATURITY
Municipal bonds . . . . . . . $ —
Total held to maturity . . . $ —
—% $
—
3
7,514
1.30% $
2.73
5,428
20,631
1.67% $ 86,264
9,880
2.50
2.10% $ 91,695
38,025
2.32
2.08%
2.49
—
—
7,563
—
555
3.41
7,544
3.40
2.82
—
3.31% $ 23,179
—
2.20
3.90
3.64
—
—
68,470
13,000
10,022
—
2.87% $ 117,551
—
2.41
3.01
3.70
—
291,618
80,121
322,426
88
—
2.57% $ 790,397
2.39
2.31
3.61
6.10
—
291,618
156,154
341,318
18,661
1,307
2.84% $ 938,778
2.39
2.35
3.59
3.67
2.82
2.81%
—% $ 1,787
—% $ 1,787
2.90% $
2.90% $
2,714
2,714
2.09% $
2.09% $
—
—
—% $ 4,501
—% $ 4,501
2.41%
2.41%
114
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — INVESTMENT SECURITIES: (cont.)
Within one year
Fair
Value
Weighted
Average
Yield
After one year
through five years
Fair
Value
Weighted
Average
Yield
At December 31, 2018
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
(dollars in thousands)
AVAILABLE FOR SALE
Mortgage-backed
securities:
Residential . . . . . . . . . $ —
Commercial . . . . . . . .
—
Collateralized mortgage
obligations:
—
Residential . . . . . . . . .
—
Commercial . . . . . . . .
5,670
Municipal bonds . . . . . . .
—
Corporate debt securities . .
—
U.S. Treasury securities . .
—
Agency debentures . . . . .
Total available for sale . . $ 5,670
HELD TO MATURITY
Mortgage-backed
securities:
Residential . . . . . . . . . $ —
—
Commercial . . . . . . . .
Collateralized mortgage
—
obligations . . . . . . . . .
—
Municipal bonds . . . . . . .
—
Corporate debt securities . .
Total held to maturity . . . $ —
—% $ —
14,175
—
—% $
2.20
7,094
16,737
1.62% $ 100,867
3,602
2.99
2.05% $ 107,961
34,514
2.90
2.03%
2.66
—
—
2.12
—
—
—
—
9,008
16,276
3,949
10,900
—
2.12% $ 54,308
—
2.42
2.24
2.96
1.87
—
—
29,292
30,659
13,608
—
9,525
2.24% $ 106,915
166,744
—
78,374
2.88
333,050
2.89
2,438
3.31
—
—
2.23
—
2.81% $ 685,075
2.43
2.42
3.51
3.65
—
—
166,744
116,674
385,655
19,995
10,900
9,525
2.90% $ 851,968
—% $ —
12,147
—
—% $
2.51
—
4,879
—% $ 10,797
—
2.64
2.82% $ 10,797
17,026
—
7,205
—
1,790
—
—
—
—% $ 21,142
3.59
2.85
—
—
5,651
—
2.91% $ 10,530
—
2.29
—
8,364
19,621
92
2.45% $ 38,874
15,569
2.94
27,062
3.24
92
6.00
3.07% $ 70,546
2.43
2.53
3.39
3.29
1.87
2.23
2.84%
2.82%
2.55
3.24
3.01
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,
2018
2017
2019
184,871 $
894
(901)
46,081 $
310
(75)
397,492
1,214
(725)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
115
At
December 31,
2019
At
December 31,
2018
— $
200,571
—
4,332
204,903 $
63,179
126,565
5,077
5,147
199,968
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — INVESTMENT SECURITIES: (cont.)
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, 2019 and 2018.
Tax-exempt interest income on securities available for sale totaling $10.2 million, $8.5 million and $8.8 million
for the years ended December 31, 2019, 2018 and 2017, respectively, was recorded in the Company’s consolidated
statements of operations.
NOTE 6 — 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 Significant Accounting Policies.
The Company’s portfolio of loans held for investment is divided into two portfolios, consumer loans and commercial
loans, which are the same portfolios used to determine the allowance for loan losses. Within each loan portfolio,
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 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.
Loans held for investment consist of the following:
(in thousands)
Consumer loans
At December 31,
2019
2018
Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,070,332 $
532,926
1,603,258
1,358,175
570,923
1,929,098
Commercial real estate loans
Non-owner occupied commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
894,896
996,498
702,399
2,593,793
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
478,172
414,880
893,052
5,090,103
24,453
5,114,556
(41,772)
5,072,784 $
701,928
908,015
794,544
2,404,487
429,158
331,004
760,162
5,093,747
23,094
5,116,841
(41,470)
5,075,371
(1)
Includes $3.5 million and $4.1 million at December 31, 2019 and December 31, 2018, 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.
116
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
Loans in the amount of $2.01 billion and $2.16 billion at December 31, 2019 and 2018, respectively, were pledged
to secure borrowings from the FHLB as part of our liquidity management strategy. Additionally, loans totaling
$490.7 million and $502.7 million at December 31, 2019 and 2018, 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 officers, 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. There
were no material loans outstanding to these related parties and their associates at December 31, 2019 and 2018.
Credit Risk Concentrations
Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities
in the same geographic region, or when they have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic conditions. Loans held for investment are
primarily secured by real estate located in the Pacific Northwest, California and Hawaii. At December 31, 2019, we
had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of
single family and multifamily within the states of Washington and California, which represented 10.7% and 12.2%
of the total portfolio, respectively. At December 31, 2018 we had concentrations representing 10% or more of the
total portfolio by state and property type for the loan classes of single family and multifamily within the states of
Washington and California, which represented 13.1% and 10.2% 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, 2019. 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 financial 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 Significant Accounting Policies.
Activity in the allowance for credit losses was as follows.
(in thousands)
Allowance for credit losses (roll-forward):
Years Ended December 31,
2018
2017
2019
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries, net of charge-offs . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Components:
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Allowance for unfunded commitments . . . . . . . . . . . . . . . . .
Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . $
42,913 $
(500)
424
42,837 $
41,772 $
1,065
42,837 $
39,116 $
3,000
797
42,913 $
41,470 $
1,443
42,913 $
35,264
750
3,102
39,116
37,847
1,269
39,116
117
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — 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, 2019
Beginning
balance
Charge-offs
Recoveries
(Reversal of)
Provision
Ending
balance
Single family . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . .
8,217 $
7,712
15,929
— $
(272)
(272)
145 $
504
649
(1,912) $
(1,101)
(3,013)
6,450
6,843
13,293
Commercial real estate loans
Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . .
Total commercial real estate loans . . .
Commercial and industrial loans
5,496
5,754
9,539
20,789
—
—
—
—
—
—
215
215
1,753
1,261
(1,075)
1,939
Owner occupied commercial real estate . .
Commercial business . . . . . . . . . . . . . . .
Total commercial and industrial loans . .
Total allowance for credit losses . . . . . . . . . $
3,282
2,913
6,195
42,913 $
—
(315)
(315)
(587) $
—
147
147
1,011 $
358
216
574
(500) $
7,249
7,015
8,679
22,943
3,640
2,961
6,601
42,837
(in thousands)
Consumer loans
Year Ended December 31, 2018
Beginning
balance
Charge-offs
Recoveries
(Reversal of)
Provision
Ending
balance
Single family . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . .
9,412 $
7,081
16,493
(106) $
(488)
(594)
344 $
492
836
(1,433) $
627
(806)
8,217
7,712
15,929
Commercial real estate loans
Non-owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . .
Total commercial real estate loans . . .
Commercial and industrial loans
4,755
3,895
8,677
17,327
—
—
—
—
—
—
1,126
1,126
741
1,859
(264)
2,336
Owner occupied commercial real estate . .
Commercial business . . . . . . . . . . . . . . .
Total commercial and industrial loans . .
Total allowance for credit losses . . . . . . . . . $
2,960
2,336
5,296
39,116 $
—
(753)
(753)
(1,347) $
—
182
182
2,144 $
322
1,148
1,470
3,000 $
5,496
5,754
9,539
20,789
3,282
2,913
6,195
42,913
118
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
The following tables disaggregate our allowance for credit losses and recorded investment in loans by impairment
methodology.
At December 31, 2019
Allowance:
collectively
evaluated for
impairment
Allowance:
individually
evaluated for
impairment
Total
Loans:
collectively
evaluated for
impairment
Loans:
individually
evaluated for
impairment
Total
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . $
Home equity and other . . . . . .
Total consumer loans . . . . .
6,333 $
6,815
13,148
117 $ 6,450 $ 1,005,386 $
28
145
532,038
1,537,424
6,843
13,293
61,503 $ 1,066,889
532,901
1,599,790
863
62,366
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
7,249
7,015
8,679
—
—
—
7,249
7,015
894,896
996,498
8,679
702,399
—
—
—
894,896
996,498
702,399
22,943
— 22,943
2,593,793
— 2,593,793
3,640
2,953
6,593
—
8
8
3,640
2,961
475,281
411,386
2,891
3,494
478,172
414,880
6,601
886,667
6,385
893,052
impairment . . . . . . . . . . . . . . .
42,684
153
42,837
5,017,884
68,751
5,086,635
Loans held for investment
carried at fair value . . . . . . . . .
Total loans held for investment . . $
—
42,684 $
—
153 $ 42,837 $ 5,017,884 $
—
—
—
3,468(1)
68,751 $ 5,090,103
119
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
At December 31, 2018
Allowance:
collectively
evaluated for
impairment
Allowance:
individually
evaluated for
impairment
Total
Loans:
collectively
evaluated for
impairment
Loans:
individually
evaluated for
impairment
Total
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . $
Home equity and other . . . . . .
Total consumer loans . . . . .
8,151 $
7,671
15,822
66 $ 8,217 $ 1,286,556 $
41
107
569,673
1,856,229
7,712
15,929
67,575 $ 1,354,131
570,910
1,925,041
1,237
68,812
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
5,496
5,754
9,539
—
—
—
5,496
5,754
701,928
907,523
9,539
793,818
—
492
726
701,928
908,015
794,544
20,789
— 20,789
2,403,269
1,218
2,404,487
3,282
2,787
6,069
—
126
126
3,282
2,913
427,938
329,170
1,220
1,834
429,158
331,004
6,195
757,108
3,054
760,162
impairment . . . . . . . . . . . . . . .
42,680
233
42,913
5,016,606
73,084
5,089,690
Loans held for investment
carried at fair value . . . . . . . . .
Total loans held for investment . . $
—
42,680 $
—
233 $ 42,913 $ 5,016,606 $
—
—
—
4,057(1)
73,084 $ 5,093,747
(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.
120
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
Impaired Loans
The following tables present impaired loans by loan portfolio and loan class.
(in thousands)
With no related allowance recorded:
Consumer loans
Single family(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial loans . . . . . . . . . . . . . . . . . . . . .
Owner occupied commercial real estate . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
$
With an allowance recorded:
Consumer loans
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial loans
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
$
Total:
Consumer loans
Single family(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial loans
Owner occupied commercial real estate . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At December 31, 2019
Unpaid
principal
balance(2)
Related
allowance
Recorded
investment(1)
60,009 $
472
60,481
2,891
2,954
5,845
66,326 $
1,494 $
391
1,885
540
540
2,425 $
61,503 $
863
62,366
2,891
3,494
6,385
68,751 $
60,448 $
472
60,920
3,013
3,267
6,280
67,200 $
1,494 $
391
1,885
919
919
2,804 $
61,942 $
863
62,805
3,013
4,186
7,199
70,004 $
—
—
—
—
—
—
—
117
28
145
8
8
153
117
28
145
—
8
8
153
Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.
(1)
(2) Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest
paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $59.8 million in single family performing TDRs.
(3)
121
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
(in thousands)
With no related allowance recorded:
Consumer loans
At December 31, 2018
Unpaid
principal
balance(2)
Related
allowance
Recorded
investment(1)
Single family(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
66,725 $
743
67,468
67,496 $
769
68,265
Commercial real estate loans
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . .
492
726
1,218
492
726
1,218
Commercial and industrial loans
Owner occupied commercial real estate . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
1,220
1,331
2,551
71,237 $
1,543
2,087
3,630
73,113 $
$
With an allowance recorded:
Consumer loans
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial and industrial loans
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
$
850 $
494
1,344
503
503
1,847 $
850 $
494
1,344
503
503
1,847 $
Total:
Consumer loans
Single family(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . .
67,575 $
1,237
68,812
68,346 $
1,263
69,609
Commercial real estate loans
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . . . . . . . . . . . . . . . .
Total commercial real estate loans . . . . . . . . . . . . . . . .
492
726
1,218
492
726
1,218
Commercial and industrial loans
Owner occupied commercial real estate . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial and industrial loans . . . . . . . . . . . . .
Total impaired loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,220
1,834
3,054
73,084 $
1,543
2,590
4,133
74,960 $
—
—
—
—
—
—
—
—
—
—
66
41
107
126
126
233
66
41
107
—
—
—
—
126
126
233
Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.
(1)
(2) Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest
paid. Related allowance is calculated on net book balances not unpaid principal balances.
Includes $65.8 million in single family performing TDRs.
(3)
122
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
The following table provides the average recorded investment and interest income recognized on impaired loans by
portfolio and class.
Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . . . . $ 66,845 $
Home equity and other . . . . . . . . .
Total consumer loans . . . . . . . .
1,062
67,907
2,701 $ 69,022 $
2,636 $ 80,519 $
59
2,760
1,261
70,283
78
2,714
1,432
81,951
2,963
80
3,043
Commercial real estate loans
Non-owner occupied commercial
real estate . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . .
Construction/land development . .
Total commercial real estate
2
293
1,351
loans . . . . . . . . . . . . . . . . . . .
1,646
Commercial and industrial loans
Owner occupied commercial
real estate . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . .
Total commercial and industrial
loans . . . . . . . . . . . . . . . . . . .
2,927
2,211
5,138
$ 74,691 $
Credit Quality Indicators
—
14
—
14
112
37
149
—
676
625
1,301
1,912
2,303
4,215
—
25
24
49
93
104
197
686
824
917
2,427
2,922
2,533
5,455
2,923 $ 75,799 $
2,960 $ 89,833 $
—
25
73
98
170
144
314
3,455
Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate
loan classification and grading in accordance with applicable bank regulations. The Company’s risk rating
methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Company
differentiates its lending portfolios into homogeneous loans and non-homogeneous loans.
The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:
Pass. We have five pass risk ratings which represent a level of credit quality that ranges from no well-defined
deficiency or weakness to some noted weakness; however, the risk of default on any loan classified as pass is
expected to be remote. The five 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 profits and service all obligations and can absorb
severe market disturbances with little or no difficulty.
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 fluctuations within the business cycle; however, debt capacity
and debt service coverage remains strong. The borrower will have a strong demonstrated ability to produce
profits 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 identifiable risk associated with collection. The borrower exhibits a very strong
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.
123
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
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 efficient competition,
but should have modest reserves sufficient 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 financial 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 financial events. Reserves may be insufficient 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 flows or less-than
anticipated performance. Cash flow should still be adequate to cover debt service, and the negative
trends should be identified 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 deficiency.
A loan may also be a watch if financial information is late, there is a documentation deficiency, 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 classification. 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 significantly less than expected. There may be a temporary debt-servicing
deficiency or inadequate working capital as evidenced by a cash cushion deficiency, but not to the extent
that repayment is compromised. Material violation of financial covenants is common.
Loans with unresolved material issues that significantly cloud the debt service outlook, even though a
debt servicing deficiency does not currently exist.
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.
124
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
•
•
This rating may be assigned when a loan officer 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 classified must have a well-defined
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 deficiencies are not corrected. Loss potential, while existing in the
aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Loans
are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk.
A substandard loan normally has one or more well-defined 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-defined weaknesses:
•
•
•
•
•
•
•
Cash flow deficiencies 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 sufficiently 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 unprofitable or unsuccessful business operations, some form of restructuring of the business,
including liquidation of assets, has become the primary source of loan repayment. Cash flow 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 financial information.
Doubtful. Loans classified as doubtful, risk rated 9-Doubtful, have all the weaknesses inherent in one classified
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 specific pending factors, which may work towards
strengthening of the loan, classification 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 refinancing 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
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.
125
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
Loss. Loans classified 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.
Homogeneous loans maintain their original risk rating until they are greater than 30 days past due, and risk rating
reclassification 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 industrial homogeneous loans:
Watch. A homogeneous watch loan, risk rated 6, is 60-89 days past due from the required payment date at
month-end.
Special Mention. A homogeneous special mention loan, risk rated 7, is less than 90 days past due from the required
payment date at month-end.
Substandard. A homogeneous substandard loan, risk rated 8, is 90 or more days past due from the required
payment date at month-end.
Loss. A homogeneous loss loan, risk rated 10, is 120 days or more past due from the required payment date for
non-real estate secured closed-end loans or 180 days or more past due from the required payment date for open-end
loans and all loans secured by real estate. These loans are generally charged-off in the month in which the applicable
time period elapses.
The risk rating categories can be generally described by the following groupings for residential and home equity and
other homogeneous loans:
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 modified in a troubled debt restructure are not considered homogeneous. The risk
rating classification for such loans are based on the non-homogeneous definitions noted above.
126
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
The following tables summarize designated loan grades by loan portfolio and loan class.
(in thousands)
Consumer loans
Pass
Watch
At December 31, 2019
Special
mention
Substandard
Total
Single family . . . . . . . . . . . . . . . . . . . . . $ 1,053,648(1) $
Home equity and other . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . .
530,784
1,584,432
2,518 $
318
2,836
8,802 $
664
9,466
5,364 $ 1,070,332
532,926
1,160
1,603,258
6,524
Commercial real estate loans
Non-owner occupied commercial
real estate . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . .
Total commercial real estate loans . .
892,890
991,696
669,751
2,554,337
2,006
4,802
11,694
18,502
—
—
20,954
20,954
894,896
—
996,498
—
—
702,399
— 2,593,793
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . .
Total commercial and industrial
loans . . . . . . . . . . . . . . . . . . . . . . .
422,434
351,911
37,885
50,149
12,709
9,405
5,144
3,415
478,172
414,880
774,345
$ 4,913,114
$
88,034
109,372 $
22,114
52,534 $
8,559
893,052
15,083 $ 5,090,103
(1)
Includes $3.5 million of loans where a fair value option election was made at the time of origination and, therefore, are
carried at fair value with changes recognized in the consolidated statements of operations.
(in thousands)
Consumer loans
Pass
Watch
At December 31, 2018
Special
mention
Substandard
Total
Single family . . . . . . . . . . . . . . . . . . . . . $ 1,338,025(1) $
Home equity and other . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . .
569,370
1,907,395
2,882 $
95
2,977
8,775 $
510
9,285
8,493 $ 1,358,175
570,923
1,929,098
948
9,441
Commercial real estate loans
Non-owner occupied commercial
real estate . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . .
Construction/land development . . . . . .
Total commercial real estate loans . .
695,077
903,897
767,113
2,366,087
1,426
3,626
21,531
26,583
5,425
492
1,084
7,001
Commercial and industrial loans
Owner occupied commercial real
estate . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial business . . . . . . . . . . . . . .
Total commercial and industrial
loans . . . . . . . . . . . . . . . . . . . . . . .
392,273
299,225
22,928
14,331
11,087
15,427
691,498
$ 4,964,980
$
37,259
66,819 $
26,514
42,800 $
760,162
4,891
19,148 $ 5,093,747
(1)
Includes $4.1 million of loans 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.
127
—
—
4,816
4,816
2,870
2,021
701,928
908,015
794,544
2,404,487
429,158
331,004
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
As of December 31, 2019 and 2018, none of the Company’s loans were rated Doubtful or Loss.
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 and loan class.
At December 31, 2019
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 . . . . . . . . .
Total consumer loans . . . . . . . .
$
5,694
837
6,531
4,261
372
4,633
$ 25,066
1,160
26,226
$ 35,021
2,369
37,390
$ 1,035,311(1) $ 1,070,332
532,926
1,603,258
530,557
1,565,868
$ 19,702(2)
—
19,702
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 . . . . . . . . . . .
—
—
—
—
—
44
—
—
—
—
—
—
—
—
—
—
—
—
—
894,896
996,498
702,399
894,896
996,498
702,399
— 2,593,793
2,593,793
2,891
3,446
2,891
3,490
475,281
411,390
478,172
414,880
—
—
—
—
—
—
44
6,575
$
—
4,633
6,337
$ 32,563
6,381
$ 43,771
886,671
$ 5,046,332
893,052
—
$ 5,090,103 $ 19,702
$
128
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
At December 31, 2018
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 . . . . . . . . .
Total consumer loans . . . . . . . .
$
9,725
145
9,870
3,653
100
3,753
$ 47,609
948
48,557
$ 60,987
1,193
62,180
$ 1,297,188(1) $ 1,358,175
570,923
1,929,098
569,730
1,866,918
$ 39,116(2)
—
39,116
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 . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
72
72
—
—
72
72
701,928
908,015
794,472
701,928
908,015
794,544
2,404,415
2,404,487
374
1,732
374
1,732
428,784
329,272
429,158
331,004
—
—
—
—
—
—
—
9,870 $
—
2,106
3,753 $ 50,735
2,106
758,056
$ 64,358 $ 5,029,389
760,162
—
$ 5,093,747 $ 39,116
$
(1)
(2)
Includes $3.5 million and $4.1 million of loans at December 31, 2019 and 2018 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.
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 and loan class.
(in thousands)
Consumer loans
Accrual
At December 31, 2019
Nonaccrual
Total
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,064,968(1) $
531,766
1,596,734
5,364 $
1,160
6,524
1,070,332
532,926
1,603,258
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 . . . . . . . . . . . . . . .
894,896
996,498
702,399
2,593,793
475,281
411,434
886,715
5,077,242
$
—
—
—
—
2,891
3,446
6,337
12,861 $
$
894,896
996,498
702,399
2,593,793
478,172
414,880
893,052
5,090,103
129
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
(in thousands)
Consumer loans
Accrual
At December 31, 2018
Nonaccrual
Total
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Home equity and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,349,682(1) $
569,975
1,919,657
8,493 $
948
9,441
1,358,175
570,923
1,929,098
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 . . . . . . . . . . . . . . .
701,928
908,015
794,472
2,404,415
428,784
329,272
758,056
5,082,128
$
—
—
72
72
374
1,732
2,106
11,619 $
$
701,928
908,015
794,544
2,404,487
429,158
331,004
760,162
5,093,747
(1)
Includes $3.5 million and $4.1 million of loans at December 31, 2019 and 2018, 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.
130
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — 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 real estate loans
Construction/land development
Total commercial real estate
Commercial and industrial loans
Owner occupied commercial real estate
Commercial business
Total commercial and industrial
Total loans
Year Ended December 31, 2019
Number of
loan
modifications
Recorded
investment
Related
charge-offs
Concession type
Interest rate reduction
Payment restructure
21 $
118
3,925 $
25,795
Payment restructure
Interest rate reduction
Payment restructure
Payment restructure
Payment restructure
Payment restructure
Payment restructure
Payment restructure
1
21
119
140
1
1
1
1
1
2
2
116
3,925
25,911
29,836
4,675
4,675
4,675
5,840
259
6,099
6,099
Interest rate reduction
Payment restructure
21
122
143 $
3,925
36,685
40,610 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
131
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
(dollars in thousands)
Consumer loans
Single family
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
Year Ended December 31, 2018
Number of
loan
modifications
Recorded
investment
Related
charge-offs
Concession type
Interest rate reduction
Payment restructure
17 $
153
3,174 $
31,626
Interest rate reduction
Payment restructure
Payment restructure
Payment restructure
Interest rate reduction
Payment restructure
17
153
170
2
2
2
3,174
31,626
34,800
267
267
267
17
155
172 $
3,174
31,893
35,067 $
—
—
—
—
—
—
—
—
—
—
—
Year Ended December 31, 2017
Number of
loan
modifications
Recorded
investment
Related
charge-offs
Concession type
Interest rate reduction
Payment restructure
56 $
102
10,040 $
21,356
2
56
104
160
1
1
1
351
10,040
21,707
31,747
18
18
18
56
105
161 $
10,040
21,725
31,765 $
Payment restructure
Interest rate reduction
Payment restructure
Payment restructure
Payment restructure
Interest rate reduction
Payment restructure
132
—
—
—
—
—
—
—
—
—
—
—
—
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — LOANS AND CREDIT QUALITY: (cont.)
The following table presents loans that were modified as TDRs within the previous 12 months and subsequently
re-defaulted during the years ended December 31, 2019 and 2018, respectively. A TDR loan is considered
re-defaulted when it becomes doubtful that the objectives of the modifications will be met, generally when a
consumer loan TDR becomes 60 days or more past due on principal or interest payments or when a commercial loan
TDR becomes 90 days or more past due on principal or interest payments.
(dollars in thousands)
Consumer loans
Single family . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2019
2018
Number of loan
relationships
that
re-defaulted
Recorded
investment
Number of loan
relationships
that
re-defaulted
Recorded
investment
13 $
13 $
3,059
3,059
24 $
24 $
4,723
4,723
NOTE 7 — OTHER REAL ESTATE OWNED:
Other real estate owned consisted of the following.
(in thousands)
Single family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Activity in other real estate owned was as follows.
(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions related to sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Activity in the valuation allowance for other real estate owned was as follows.
At December 31,
2019
2018
1,393 $
—
1,393 $
455
—
455
Years Ended December 31,
2019
2018
455 $
1,933
(995)
1,393 $
664
455
(664)
455
(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Charge-offs), net of recoveries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended
December 31,
2017
3,095
33
(3,128)
—
There was no activity or balance in the valuation allowance for other real estate owned for the years ended
December 31, 2019 and 2018.
133
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — OTHER REAL ESTATE OWNED: (cont.)
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 benefit from operation and sale of other real estate owned . . . . . . . $
Years Ended December 31,
2018
2017
2019
29 $
—
(101)
(72) $
33 $
—
(172)
(139) $
(114)
—
(416)
(530)
At December 31, 2019, we had concentrations of 47% in California and 53% in Hawaii representing the balance
of other real estate owned. At December 31, 2018, we had concentrations within the state of Oregon, primarily in
Marion County, representing 100% of the total balance of other real estate owned. At December 31, 2017, we had
concentrations within the state of Washington, primarily in Spokane County, representing 77% of the total balance
of other real estate owned.
NOTE 8 — PREMISES AND EQUIPMENT, NET:
Premises and equipment consisted of the following.
(in thousands)
Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
At December 31,
2019
2018
$
56,849
46,088
34,558
137,495
(60,522)
76,973(1) $
70,692
52,596
34,552
157,840
(63,039)
94,801(1)
(1)
Includes zero and $6.7 million of premises and equipment related to discontinued operations as of December 31, 2019
and 2018.
Depreciation expense for the years ended December 31, 2019, 2018, and 2017, was $10.8 million, $13.9 million, and
$13.5 million, respectively. Includes both continuing and discontinued operations.
NOTE 9 — DEPOSITS:
Deposit balances, including stated rates, were as follows.
(in thousands)
Noninterest-bearing accounts(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOW accounts, 0.00% to 1.19% at December 31, 2019 and 0.00% to 1.44%
at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Statement savings accounts, due on demand, 0.05% to 1.13% at December 31,
2019 and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market accounts, due on demand, 0.00% to 2.42% at December 31,
At December 31,
2019
2018
907,918 $
914,154
373,832
376,137
219,182
245,795
2019 and 0.00% to 2.40% at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . .
2,224,494
1,935,516
Certificates of deposit, 0.10% to 3.06% at December 31, 2019 and 0.10% to
3.80% at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,614,533
5,339,959 $
1,579,806
5,051,408
$
(1)
Includes zero and $162.8 million in servicing deposits related to discontinued operations at December 31, 2019 and 2018,
respectively. These deposits were transferred to the MSR buyers concurrent with the transfer of the loan servicing.
134
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — DEPOSITS: (cont.)
There were $330.4 million and $191.8 million in public funds included in deposits at December 31, 2019 and 2018,
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,
2018
2017
2019
$
1,507
525
27,259
41,189
70,480(1) $
1,678 $
816
17,199
22,302
41,995 $
1,964
1,007
8,604
12,337
23,912
(1)
Includes $91 thousand in interest expense on deposits related to discontinued operations for the year ended December 31,
2019.
The weighted-average interest rates on certificates of deposit at December 31, 2019, 2018 and 2017 were 2.24%,
1.87% and 1.12% respectively.
Certificates 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
At
December 31,
2019
1,282,411
240,121
62,417
13,938
15,517
129
1,614,533
The aggregate amount of time deposits in denominations of more than $250 thousand at December 31, 2019 and
2018 was $222.9 million and $85.3 million, respectively. There were $266.5 million and $786.1 million of brokered
deposits at December 31, 2019 and 2018, respectively.
NOTE 10 — FEDERAL HOME LOAN BANK AND OTHER BORROWINGS:
Federal Home Loan Bank
The Company borrows funds through advances from the Des Moines FHLB. FHLB advances totaled $346.6 million
and $932.6 million as of December 31, 2019, and 2018, respectively.
Weighted-average interest rates on the advances were 1.86%, 2.63%, and 1.58% at December 31, 2019, 2018 and
2017, 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 45.0% of assets, subject to
collateralization requirements. Based on the amount of qualifying collateral available, borrowing capacity from the
FHLB was $943.3 million as of December 31, 2019. The FHLB is not contractually bound to continue to offer credit
to the Company, and the Company’s access to credit from this agency for future borrowings may be discontinued at
any time.
135
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — FEDERAL HOME LOAN BANK AND OTHER BORROWINGS: (cont.)
FHLB advances outstanding by contractual maturities were as follows.
(dollars in thousands)
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
At December 31, 2019
Advances
outstanding
Weighted-average
interest rate
341,000
—
—
—
5,590
346,590
1.80%
—
—
—
5.31
1.86%
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, 2019 and
2018, the Company held $22.4 million and $45.5 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 affects
the ultimate recoverability is influenced by criteria such as: (1) the significance 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, 2019, or 2018.
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, 2019 and 2018, there were no outstanding borrowings from the FRBSF. Based on the
amount of qualifying collateral available, borrowing capacity from the FRBSF was $267.1 million at December 31,
2019. The FRBSF is not contractually bound to offer 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, 2019 and 2018, we
had a $125.0 million and a $19.0 million balance of federal funds purchased and securities sold under agreements to
repurchase.
NOTE 11 — LONG-TERM DEBT:
At December 31, 2019 and 2018, the Company had long-term debt balance of $125.7 million and $125.5 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 offering price of 100% plus accrued interest, which represented $63.8 million of
long-term debt balance at December 31, 2019.
136
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 — LONG-TERM DEBT: (cont.)
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, 2019. 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:
HomeStreet Statutory
II
(dollars in thousands)
September 2005
Date issued . . . . . . . . . . .
Amount . . . . . . . . . . . . . .
$20,619
Interest rate . . . . . . . . . . . 3 MO LIBOR + 1.70% 3 MO LIBOR + 1.50% 3 MO LIBOR + 1.37% 3 MO LIBOR + 1.68%
December 2035
Maturity date . . . . . . . . . .
Call option(1) . . . . . . . . . .
Quarterly
III
February 2006
$20,619
IV
March 2007
$15,464
I
June 2005
$5,155
March 2036
Quarterly
June 2037
Quarterly
June 2035
Quarterly
(1) Call options are exercisable at par and are callable, without penalty on a quarterly basis, starting five years after issuance.
NOTE 12 — DERIVATIVES AND HEDGING ACTIVITIES:
To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as certain
mortgage loans held for sale or MSRs, the Company utilizes derivatives, such as forward sale commitments, futures,
option contracts, interest rate swaps and interest rate swaptions as risk management instruments in its hedging
strategy. Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated
statements of financial condition. The notional amount is generally not exchanged and is used as the basis for
interest and other contractual payments.
The use of derivatives as interest rate risk management instruments helps minimize significant, unplanned
fluctuations in earnings, fair value of assets and liabilities, and cash flows 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 significant adverse effect on net interest margin and cash flows. As a result of interest rate
fluctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect of
this gain or loss will generally be offset by the gain or loss on the derivatives linked to hedged assets or liabilities. In
a cash flow hedging strategy, management manages the variability of cash payments due to interest rate fluctuations
by the effective use of derivatives linked to hedged assets and liabilities.
We held no derivatives designated as a fair value, cash flow or foreign currency hedge instrument at December 31,
2019 or 2018. Derivatives are reported at their respective fair values in the other assets or accounts payable and other
liabilities line items on the consolidated statements of financial condition, with changes in fair value reflected in
current period earnings.
As permitted under U.S. GAAP, the Company nets derivative assets and liabilities when a legally enforceable
master netting agreement exists between the Company and the derivative counterparty, which are documented
under industry standard master agreements and credit support annexes. The Company’s master netting agreements
provide that following an uncured payment default or other event of default the non-defaulting party may promptly
terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting
party. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery
(which remains uncured following applicable notice and grace periods). The Company’s right of offset requires that
master netting agreements are legally enforceable and that the exercise of rights by the non-defaulting party under
these agreements will not be stayed, or avoided under applicable law upon an event of default including bankruptcy,
insolvency or similar proceeding.
137
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)
The collateral used under the Company’s master netting agreements is typically cash, but securities may be
used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to
counterparties is included in other assets on the Company’s consolidated statements of financial condition. Any
securities pledged to counterparties as collateral remain on the consolidated statement of financial condition. Refer
to Note 5, Investment Securities for further information on securities collateral pledged. At December 31, 2019, the
Company held $15.2 million collateral received from counterparties under derivative transactions. In 2018 we did
not hold any collateral received from counterparties under derivative transactions.
In addition, the Company periodically enters into certain commercial loan interest rate swap agreements in
order to provide commercial loan customers the ability to convert from variable to fixed interest rates. Under
these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to a swap
agreement. This swap agreement effectively converts the customer’s variable rate loan into a fixed rate. The
Company then enters into a corresponding swap agreement with a third-party in order to offset its exposure on
the variable and fixed components of the customer loan agreement. As the interest rate swap agreements with
the customers and third parties are not designated as hedges under the Derivatives and Hedging topic of the
FASB ASC 815, the instruments are marked to market in earnings. The notional amount of open interest rate swap
agreements at December 31, 2019 and 2018 were $144.1 million and $2.6 million, respectively. During the years
ended December 31, 2019 and 2018 there were $121 thousand and $5 thousand mark-to-market losses recorded to
“Other” noninterest income in our consolidated statements of operations. The Company had no similar activity in the
year ended December 31, 2017.
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 financial 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
Significant Accounting Policies.
The notional amounts and fair values for derivatives consist of the following.
At December 31, 2019
Fair value derivatives
Notional
amount
Asset
Liability
651,838 $
124,379
688,516
2,232,000
3,696,733
830 $
(492)
(58)
(10,889)
—
(11,439)
9,101
$ 8,797 $ (2,338)
2,281
27,097
3
30,211
(21,414)
(in thousands)
Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
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(2) . .
138
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)
At December 31, 2018
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(2) . .
Notional
amount
1,334,947 $
34,000
390,558
803,652
3,135,000
5,698,157
Asset
Liability
3,025 $ (5,340)
—
(5)
(11,549)
(110)
(17,004)
12,517
$ 19,754 $ (4,487)
203
10,289
14,566
—
28,083
(8,329)
(1)
(2)
Includes net cash collateral received of $12.3 million and net cash collateral paid of $4.2 million at December 31, 2019 and
2018, respectively, as part of netting adjustments.
Includes both continuing and discontinued operations.
The following tables present gross and net information about derivative instruments.
At December 31, 2019
Gross
fair value
Netting
adjustments/Cash
collateral(1)
Carrying
value
Securities
not offset in
consolidated
balance sheet
(disclosure-only
netting)
Net
amount
30,211 $
(11,439)
(21,414) $
9,101
8,797 $
(2,338)
— $
—
8,797
(2,338)
At December 31, 2018
Gross
fair value
Netting
adjustments/Cash
collateral(1)
Carrying
value
Securities
not offset in
consolidated
balance sheet
(disclosure-only
netting)
Net
amount
28,083 $
(17,004)
(8,329) $
12,517
19,754 $
(4,487)
— $
3,223
19,754
(1,264)
(in thousands)
Derivative assets . . . . . . . $
Derivative liabilities . . . .
(in thousands)
Derivative assets . . . . . . . $
Derivative liabilities . . . .
(1)
Includes net cash collateral received of $12.3 million and net cash collateral paid of $4.2 million at December 31, 2019 and
2018, respectively, as part of netting adjustments.
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.
139
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 — DERIVATIVES AND HEDGING ACTIVITIES: (cont.)
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:(1)
Years Ended December 31,
2018
2017
2019
Net (loss) gain on loan origination and sale activities(2). . . . $
Loan servicing income (loss)(3) . . . . . . . . . . . . . . . . . . . . . .
Other(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(19,394) $
14,435
121
(4,838) $
7,790 $
(40,474)
3
(32,681) $
(28,549)
9,732
—
(18,817)
Includes both continuing and discontinued operations.
(1)
(2) Comprised of IRLCs and forward contracts used as an economic hedge of IRLCs and single family mortgage loans held
for sale.
(3) Comprised of interest rate swaps, interest rate swaptions and futures and forward contracts used as an economic hedge of
single family MSRs.
(4) Comprised of interest rate swaps used as an economic hedge of loans held for investment.
NOTE 13 — MORTGAGE BANKING OPERATIONS:
Loans held for sale consisted of the following.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At December 31,
2019
2018
128,841 $
105,458
234,299 $
25,139
321,868
347,007
(1)
Includes loans from discontinued operations of $26.1 million and $269.7 million at December 31, 2019 and 2018,
respectively.
Loans sold proceeds consisted of the following.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans sold(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1)
(2)
Includes both continuing and discontinued operations.
Includes loans originated as held for investment.
Years Ended December 31,
2018
2019
843,864 $
591,121 $
3,925,302
4,769,166 $
6,300,838
6,891,959 $
2017
695,624
7,508,949
8,204,573
140
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — MORTGAGE BANKING OPERATIONS: (cont.)
Gain on loan origination and sale activities, including the effects of derivative risk management instruments,
consisted of the following.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gain on loan origination and sale activities(2) . . . . . . . $
Years Ended December 31,
2018
2017
2019
17,492 $
86,686
104,178 $
11,776 $
174,473
186,249 $
20,027
235,849
255,876
(1)
(2)
Includes $60.1 million, $174.4 million and $235.9 million from discontinued operations for the years ended 2019, 2018
and 2017, respectively.
Includes loans originated as held for investment.
The Company’s portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and
agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the
consolidated statements of financial condition as they are not assets of the Company.
The composition of loans serviced for others that contribute to loan servicing income is presented below at the
unpaid principal balance.
(in thousands)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single family(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans serviced for others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At December 31,
2019
1,618,876 $
7,023,441
8,642,317 $
2018
1,542,477
20,151,735
21,694,212
Includes both continuing and discontinued operations at December 31, 2018.
(1)
(2) On March 29, 2019, the Company closed and settled two sales of the rights to service $14.26 billion in total unpaid
principal balance of single family mortgage loans representing approximately 71% of single family mortgage loans
serviced for others portfolio as of December 31, 2018.
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 14,
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,
2019
2018
3,120 $
226
(475)
2,871 $
3,015
1,930
(1,825)
3,120
(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 expenses.
141
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — MORTGAGE BANKING OPERATIONS: (cont.)
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 $2.5 million and $2.5 million were recorded in
other assets as of December 31, 2019 and 2018, 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 financial condition. At December 31, 2019 and 2018, delinquent or defaulted mortgage loans currently in
Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled
$9.4 million and $37.7 million, respectively, with a corresponding amount recorded within accounts payable and
other liabilities on the consolidated statements of financial condition. The recognition of previously sold loans does
not impact the accounting for the previously recognized MSRs.
Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the
following.
(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 assumptions(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain (loss) from derivatives economically hedging MSR . . .
Loan servicing income(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
37,558 $
68,938 $
66,192
(20,670)
(5,219)
11,669
(34,705)
(4,383)
29,850
(35,451)
(3,932)
26,809
(16,224)
14,435
(1,789)
9,880 $
39,348
(40,474)
(1,126)
28,724 $
(1,157)
9,732
8,575
35,384
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which affect future prepayment speed and cash flow projections.
Includes pre-tax loss of $919 thousand and pre-tax gain of $573 thousand, net of transaction costs and prepayment
reserves, resulting from the sales of single family MSR for year ended December 31, 2019 and December 31, 2018,
respectively.
Includes $3.0 million, $25.1 million and $32.1 million from discontinued operations for the years ended December 31,
2019, 2018 and 2017, respectively.
(3)
(4)
The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly
transaction between market participants at the measurement date. The Company determines fair value using a
valuation model that calculates the net present value of estimated future cash flows. Estimates of future cash flows
include contractual servicing fees, ancillary income and costs of servicing, the timing of which are impacted by
assumptions, primarily expected prepayment speeds and discount rates, which relate to the underlying performance
of the loans.
142
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — MORTGAGE BANKING OPERATIONS: (cont.)
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,
2018
2017
2019
18.23%
9.31%
15.86%
10.29%
13.36%
10.27%
(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 based on market observations.
Key economic assumptions and the sensitivity of the current fair value for single family MSRs to immediate adverse
changes in those assumptions were as follows.
(dollars in thousands)
Fair value of single family MSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Expected weighted-average life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Constant prepayment rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact on fair value of 25 basis points adverse change in interest rates . . . . . . . . . . . . . . . . . . . $
Impact on fair value of 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,
2019
68,109
4.69
17.67%
(4,838)
(9,330)
9.20%
(2,098)
(4,059)
These sensitivities are hypothetical and subject to key assumptions of the underlying valuation model. As the
table above demonstrates, the Company’s methodology for estimating the fair value of MSRs is highly sensitive to
changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a
material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be
extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also,
in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without
changing any other assumption; in reality, changes in one factor may be associated with changes in another (for
example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a
slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for
refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited
by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be
appropriate if they are applied to a different point in time.
In March 2019, the Company successfully closed and settled two sales of the rights to service an aggregate of
$14.26 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, Ginnie
Mae and Freddie Mac representing 71% of HomeStreet’s total single family mortgage loans serviced for others
portfolio as of December 31, 2018. These sales resulted in a $919 thousand pre-tax loss from discontinued
operations for the year ended December 31, 2019, respectively. For more information, see Note. 2, Discontinued
Operations.
143
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 — MORTGAGE BANKING OPERATIONS: (cont.)
The changes in single family MSRs measured at fair value are as follows.
(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions and amortization:
Originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of single family MSRs . . . . . . . . . . . . . . . . . . . . . . .
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,
2018
2017
2019
252,168 $
258,560 $
226,113
28,774
14
(176,944)
(20,670)
(168,826)
55,608
—
(66,902)
(34,705)
(45,999)
68,499
565
—
(35,451)
33,613
(15,233)
68,109 $
39,607
252,168 $
(1,166)
258,560
(1) Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in market inputs, which include current market interest rates and prepayment model updates,
both of which affect future prepayment speed and cash flow projections.
MSRs resulting from the sale of multifamily loans are recorded at fair value and subsequently carried at the lower of
amortized cost or fair value. Multifamily MSRs are amortized in proportion to, and over, the estimated period the net
servicing income will be collected.
The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.
(in thousands)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Origination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
28,328 $
5,832
(4,666)
29,494 $
26,093 $
6,268
(4,033)
28,328 $
19,747
9,915
(3,569)
26,093
At December 31, 2019, the expected weighted-average life of the Company’s multifamily MSRs was 10.48.
Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
(in thousands)
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying value of multifamily MSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At
December 31,
2019
4,193
4,080
3,861
3,644
3,373
10,343
29,494
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 significant fluctuations, primarily due to the effect 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.
144
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Commitments
Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual
provisions. These commitments may be for specific periods or contain termination clauses and may require the
payment of a fee by the borrower. The total amount of unused commitments 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 financial statements. These include commitments to extend credit made as part of the
Company’s lending activities on loans the Company intends to hold in its loans held for investment portfolio. The
aggregate amount of these unrecognized unfunded loan commitments existing at December 31, 2019 and 2018 was
$52.8 million and $33.8 million, respectively.
In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the
financing needs of its customers. These commitments include unused consumer portfolio lines of $485.1 million and
$462.0 million as of December 31, 2019 and 2018, respectively, and commercial portfolio lines of $722.2 million
and $852.9 million at December 31, 2019 and 2018, respectively. Within the commercial portfolio, undistributed
construction loan proceeds, where the Company has an obligation to advance funds for construction progress
payments, were $435.2 million and $607.2 million at December 31, 2019 and 2018, 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. The Company has recorded an allowance for credit losses on
loan commitments, included in accounts payable and other liabilities on the consolidated statements of financial
condition, of $1.1 million and $1.4 million at December 31, 2019 and 2018, respectively.
The Company is in certain agreements to invest in qualifying small businesses and small enterprises, as well as
low income housing tax credit partnerships and a tax exempt bond partnership that have not been recognized in
the Company’s financial statements. At December 31, 2019 and 2018 we had $23.5 million and 23.9 million,
respectively, of future commitments to invest in these enterprises.
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 DUS program, the Company and Fannie Mae share losses on a pro rata basis, where the
Company is responsible for losses incurred up to one-third of principal balance on each loan with two-thirds of
the loss covered by Fannie Mae. For loans that have been sold through this program, a liability is recorded for this
loss sharing arrangement under the accounting guidance for guarantees. As of December 31, 2019 and 2018, the
total unpaid principal balance of loans sold under this program was $1.55 billion and $1.46 billion, respectively.
The Company’s reserve liability related to this arrangement totaled $2.8 million and $2.5 million at December 31,
2019 and 2018, respectively. There were no actual losses incurred under this arrangement during the years ended
December 31, 2019, 2018 and 2017.
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.
145
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 — COMMITMENTS, GUARANTEES AND CONTINGENCIES: (cont.)
These obligations expose the Company to mark-to-market and credit losses on the repurchased mortgage loans after
accounting for any mortgage insurance that we may receive. Generally, the maximum amount of future payments
the Company would be required to make for breaches of these representations and warranties would be equal to the
unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain
circumstances, accrued and unpaid interest on such loans and certain expenses.
The Company does not typically receive repurchase requests from the FHA or VA. As an originator of FHA-insured
or VA-guaranteed loans, the Company is responsible for obtaining the insurance with FHA or the guarantee with the
VA. If loans are later found not to meet the requirements of FHA or VA, through required internal quality control
reviews or through agency audits, the Company may be required to indemnify FHA or VA against losses. The loans
remain in Ginnie Mae pools unless and until they are repurchased by the Company. In general, once an FHA or VA
loan becomes 90 days past due, the Company repurchases the FHA or VA residential mortgage loan to minimize
the cost of interest advances on the loan. If the loan is cured through borrower efforts or through loss mitigation
activities, the loan may be resold into another Ginnie Mae pool. The Company’s liability for mortgage loan
repurchase losses incorporates probable losses associated with such indemnification.
The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and
conditions of these representations and warranties totaled $7.10 billion and $20.24 billion as of December 31, 2019
and 2018, respectively. At December 31, 2019 and 2018, the Company had recorded a mortgage repurchase liability
for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities
on the consolidated statements of financial condition, of $2.9 million and $3.1 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, 2019, 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, 2019.
NOTE 15 — INCOME TAXES:
On December 22, 2017, The President of the United States signed into law H.R. 1, 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% to 21% and makes many other changes to the U.S. tax code. In the year of 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
recognized a one-time, non-cash, $4.9 million deferred income tax benefit in our 2018 year-end provision and a
$23.3 million benefit in our 2017 year-end provision.
Income tax expense (benefit) from continuing operations consisted of following:
(in thousands)
Current expense (benefit)
Years Ended December 31,
2018
2017
2019
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,738 $
5,153
(11,205) $
(54)
(13,508)
(1,216)
Deferred (benefit) expense
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revaluation of deferred items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit investment amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) from continuing operations . . $
(28,313)
—
(4,292)
2,702
7,988 $
14,215
(4,899)
1,489
2,486
2,032 $
17,637
(23,325)
528
2,990
(16,894)
146
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — INCOME TAXES: (cont.)
Income tax expense (benefit) from continuing operations differed 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return to provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact from Federal Rate Change . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) from continuing
Years Ended December 31,
2018
2017
2019
8,933 $
1,078
(1,388)
(2,490)
6,400 $
686
(1,626)
(2,922)
2,237
(252)
(161)
—
—
31
2,648
220
1,238
(4,899)
(42)
329
9,852
376
(2,855)
(2,041)
1,716
(714)
(278)
(23,326)
76
300
operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,988 $
2,032 $
(16,894)
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and those amounts used for tax return purposes. The following is a
summary of the Company’s significant portions of deferred tax assets and liabilities:
(in thousands)
Deferred tax assets:
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal and state net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investment securities available for sale . . . . . . . . . . . . . . .
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
At December 31,
2019
2018
12,731 $
1,361
2,653
231
25,806
—
27
785
712
1,237
45,543
(20,946)
(133)
(12,048)
(25,406)
(1,159)
(4,588)
(885)
(167)
(65,332)
(19,789) $
12,959
2,407
2,319
37
2,386
4,498
1,399
1,247
1,187
1,422
29,861
(57,452)
(272)
(10,718)
—
—
(6,997)
(1,133)
(25)
(76,597)
(46,736)
147
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 — INCOME TAXES: (cont.)
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 financial condition.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income
will be generated to utilize the existing deferred tax assets. As of December 31, 2019, management determined that
sufficient 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.
Specifically, 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, 2019 and 2018, the Company has federal net operating loss carryforwards
totaling $3.4 million and $5.9 million, respectively, which are from tax years prior to 2018. As such, they can be
carryforward for a period of 20 years and will begin to expire between 2029 and 2036. The Tax Reform Act repeals
the corporate alternative minimum tax rules and makes any unused minimum tax credit partially refundable in
tax years 2019 – 2020, and fully refundable in the tax year 2021. As of December 31, 2019, the Company had
$825 thousand of minimum tax credit carryforwards. The Company also has state net operating loss carryforwards
as of December 31, 2019 and 2018 of $12.2 million and $18.3 million, respectively, that will expire at various dates
from 2020 to 2036.
Retained earnings at December 31, 2019 and 2018 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 had no recorded unrecognized tax position as of December 31, 2019. During 2018, we settled our
only unrecognized tax position and released the reserve. We periodically evaluate our exposure associated with filing
positions to determine if any new positions need to be recorded, and concluded no new positions were created during
the year.
A reconciliation of our unrecognized tax positions, excluding accrued interest and penalties, for the years ended
December 31, 2019, 2018 and 2017 is as follows:
(in thousands)
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Increases related to prior year tax positions . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
— $
—
—
— $
495 $
—
(495)
— $
419
76
—
495
We are currently under examination, or subject to examination, by various U.S. federal and state taxing authorities.
The Company is no longer subject to federal income tax examinations for tax years prior to 2015 or state income tax
examination for tax years prior to 2015, generally.
NOTE 16 — REVENUE:
On January 1, 2018, the Company adopted ASU No. 2014-09 Revenue from Contracts with Customers
(“Topic 606”). We elected to implement Topic 606 using the modified retrospective application, with the cumulative
effect recorded as an adjustment to retained earnings at January 1, 2018. Due to immateriality, we had no cumulative
effect to record. Since net interest income on financial assets and liabilities is excluded from this guidance, a
significant majority of our revenues are not subject to the new guidance.
148
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 — REVENUE: (cont.)
Our revenue streams that fall within the scope of Topic 606 are presented within noninterest income and are, in
general, recognized as revenue as we satisfy our obligation to the customer. Most of the Company’s contracts that fall
within the scope of this guidance are contracts with customers that are cancelable by either party without penalty and
are short-term in nature. These revenues include depositor and other retail and business banking fees, commission
income, credit card fees and sales of other real estate owned. For the year ended December 31, 2019, in scope
revenue streams were approximately 2.44% of our total revenues. As this standard is immaterial to our consolidated
financial statements, the Company has omitted certain disclosures in ASU 2014-09, including the disaggregation of
revenue table. Noninterest revenue streams within scope are discussed below.
Depositor and other retail and business banking fees
Depositor and other retail banking fees consist of monthly service fees, check orders, and other deposit account
related fees. The Company’s performance obligation for these fees is generally satisfied, and the related revenue
recognized, over the period in which the service is provided.
Commission Income
Commission income primarily consists of revenue received on insurance policies and monthly investment
management fees earned where the Company has acted as an intermediary between customers and the insurance
carriers or investment advisers.
Under Topic 606, the commissions received at the inception of the policy should be deferred and recognized over the
course of the policy. The Company’s performance obligation for commissions is generally satisfied, and the related
revenue generally recognized, over the course of the policy or over the period in which the services are provided,
generally monthly.
Credit Card Fees
The Company offers credit cards to its customers through a third party and earns a fee on each transaction and a fee
for each new account activation on a net basis. Revenue is recognized on a one-month lag when cash is received for
these fees which does not vary materially from recognizing revenue over the period the services are performed.
Sale of Real Estate Owned
A gain or loss, the difference between the cost basis of the property and its sale price, on other real estate owned is
recognized when the performance obligation is met, which is at the time the property title is transferred to the buyer.
NOTE 17 — 401(k) SAVINGS PLAN:
The Company maintains a 401(k) Savings Plan for the benefit 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 benefits 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 first 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, 2019, 2018, and 2017, included employer contributions
of $5.5 million, $7.5 million and $8.5 million, respectively.
149
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SHARE-BASED COMPENSATION PLANS:
For the year ended December 31, 2019, the Company recognized a net reversal of compensation cost of $434 thousand.
The net reversal of expense related to Performance Share Units (“PSUs”) that did not meet their performance
metrics. For the years ended December 31, 2018 and 2017, the Company recognized $3.0 million, and $2.5 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 officers, employees, directors and/or consultants are eligible to receive awards.
Awards which may be granted under the 2014 EIP include incentive stock options, non-qualified 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.
Nonqualified Stock Options
The Company grants nonqualified options to key senior management personnel. A summary of changes in
nonqualified stock options granted for the year ended December 31, 2019 is as follows:
Options outstanding at December 31, 2018 . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at December 31, 2019 . .
Options that are exercisable and expected to
be exercisable(1) . . . . . . . . . . . . . . . . . . . . . .
Options exercisable . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Exercise Price
11.91
7.53
12.49
Number
263,925 $
(30,924)
233,001
Weighted
Average
Remaining
Contractual
Term
3.2 years
0.0 years
2.2 years
233,001
233,001 $
12.49
12.49
2.2 years
2.2 years
Aggregate
Intrinsic Value(2)
(in thousands)
$
$
2,459
651
5,011
5,011
5,011
(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, 30,924 options have been exercised during the year ended December 31, 2019, resulting in
cash received and related income tax benefits totaling $326 thousand. As of December 31, 2019, 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, 2019, 2018 and 2017.
150
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — 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, 2018 . . . . . . . . . . . . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled or forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted shares outstanding at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
Weighted
Average
Grant Date
Fair Value
26.42
27.92
23.34
25.63
28.32
Number
292,217 $
129,987
(85,783)
(67,715)
268,706 $
At December 31, 2019, there was $3.2 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.
Certain restricted stock awards granted to senior management during the years ended December 31, 2019, 2018 and
2017, 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 based on
the Company’s stock price. PSUs are stock awards where the number of shares ultimately received by the employee
depends on the Company’s performance against specified targets and vest over a three-year period. Prior to 2019,
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.
For PSUs granted in 2019, grants must meet a performance goal related to relative total shareholder return
(“TSR”) over a three-year performance cycle. The performance goal over the respective performance cycles for the
total shareholder return performance shares (“TSR performance shares”) granted during 2019 is the Company’s
three-year total shareholder return relative to the three-year total shareholder return of companies in a performance
peer group. The fair value price at the date of grant for the TSR performance shares is determined using a Monte
Carlo simulation technique. In calculating the fair value of the award, the risk-free interest rate is based on the
yield of a Treasury Note with a term commensurate with the remaining term of the TSR performance shares. The
remaining term is based on the remainder of the performance cycle as of the date of grant. The expected volatility is
based on historical daily stock price returns. For the TSR performance shares, it was assumed that there would be no
forfeitures, based on the vesting term and the number of grantees.
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 final performance metrics to
the specified 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.
151
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 — SHARE-BASED COMPENSATION PLANS: (cont.)
The assumptions used for performance share units granted in 2019 are set forth in the table below:
Volatility of common stock(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average volatility of peer companies(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average correlation coefficient of peer companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
29.4%
24.5%
0.7272%
2.3%
2.69 years
—%
(1)
(2)
Expected volatilities are based on the daily closing price of our stock based on historical experience over a period which
approximates the expected term of the performance share units.
The risk-free interest rate is based on U.S. Treasury securities for the expected term of the performance share units.
NOTE 19 — FAIR VALUE MEASUREMENT:
The term “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. A fair value measurement assumes that
the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in
the absence of a principal market, the most advantageous market for the asset or liability. The Company’s approach
is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value
measurements.
Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements.
The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the
measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level
of input that is significant to the fair value measurement. The levels are defined as follows:
•
•
•
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the measurement date. An active market for the asset or liability is a
market in which transactions for the asset or liability take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in
active markets and inputs that are observable for the asset or liability for substantially the full term of the
financial instrument.
Level 3 — Unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions
of what market participants would use in pricing the asset or liability.
The Company’s policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed
to occur at the end of the reporting period.
Valuation Processes
The Company has various processes and controls in place to ensure that fair value measurements are reasonably
estimated. The Finance Committee of the Board provides oversight and approves the Company’s Asset/Liability
Management Policy (“ALMP”). The Company’s ALMP governs, among other things, the application and control of
the valuation models used to measure fair value. On a quarterly basis, the Company’s Asset/Liability Management
Committee (“ALCO”) and the Finance Committee of the Board review significant modeling variables used to
measure the fair value of the Company’s financial instruments, including the significant inputs used in the valuation
152
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
of single family MSRs. Additionally, ALCO periodically obtains an independent review of the MSR valuation
process and procedures, including a review of the model architecture and the valuation assumptions. The Company
obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value
estimate and the reasonableness of the assumptions used in measuring fair value.
The Company’s real estate valuations are overseen by the Company’s appraisal department, which is independent
of the Company’s lending and credit administration functions. The appraisal department maintains the Company’s
appraisal policy and recommends changes to the policy subject to approval by the Company’s Loan Committee and
the Credit Committee of the Board. The Company’s appraisals are prepared by independent third-party appraisers
and the Company’s internal appraisers. Single family appraisals are generally reviewed by the Company’s single
family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as
commercial real estate appraisals, are reviewed by the Company’s appraisal department.
We obtain pricing from third party service providers for determining the fair value of a substantial portion of our
investment securities available for sale. We have processes in place to evaluate such third party pricing services to
ensure information obtained and valuation techniques used are appropriate. For fair value measurements obtained
from third party services, we monitor and review the results to ensure the values are reasonable and in line with
market experience for similar classes of securities. While the inputs used by the pricing vendor in determining fair
value are not provided, and therefore unavailable for our review, we do perform certain procedures to validate the
values received, including comparisons to other sources of valuation (if available), comparisons to other independent
market data and a variance analysis of prices by Company personnel that are not responsible for the performance of
the investment securities.
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability
is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such
as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing
spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are
appropriate and consistent with those that would be used by other market participants. However, imprecision in
estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the
amount realized in an actual sale or transfer of the asset or liability in a current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and
assumptions, and classification of the Company’s assets and liabilities valued at fair value on a recurring basis.
Asset/Liability class
Investment securities
Valuation methodology, inputs and assumptions
Classification
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:
Level 3 recurring fair
value measurement.
• Expected prepayment speeds
• Estimated credit losses
• Market liquidity adjustments
153
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
Asset/Liability class
Loans held for sale
Single family loans, excluding
loans transferred from held for
investment
Mortgage servicing rights
Single family MSRs
Valuation methodology, inputs and assumptions
Classification
Fair value is based on observable market data,
including:
Level 2 recurring fair
value measurement.
• Quoted market prices, where available
• Dealer quotes for similar loans
• Forward sale commitments
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.
• Benchmark yield curve
• Estimated discount spread to the
benchmark yield curve
• Expected prepayment speeds
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 13, Mortgage Banking
Operations.
Level 3 recurring fair
value measurement.
Derivatives
Eurodollar futures
Fair value is based on closing exchange prices.
Interest rate swaps Interest
rate swaptions Forward sale
commitments
Fair value is based on quoted prices for
identical or similar instruments when available.
When quoted prices are not available, fair value
is based on internally developed modeling
techniques, which require the use of multiple
observable market inputs, including:
• Forward interest rates
• Interest rate volatilities
Level 1 recurring fair
value measurement.
Level 2 recurring fair
value measurement.
Interest rate lock and purchase loan
commitments
The fair value considers several factors
including:
Level 3 recurring fair
value measurement.
• Fair value of the underlying loan based
on quoted prices in the secondary market,
when available.
• Value of servicing
• Fall-out factor
154
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — 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:
Investment securities available for sale
Mortgage backed securities:
Fair Value at
December 31,
2019
Level 1
Level 2
Level 3
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,695 $
38,025
— $
—
89,831 $
38,025
1,864
—
Collateralized mortgage obligations:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . .
Single family loans held for sale(1) . . . . . . . . . . . . . .
Single family loans held for investment . . . . . . . . . .
Single family mortgage servicing rights . . . . . . . . . .
Derivatives(1)
Eurodollar futures . . . . . . . . . . . . . . . . . . . . . . . . .
Forward sale commitments . . . . . . . . . . . . . . . . . .
Interest rate lock and purchase loan
commitments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . .
291,618
156,154
341,318
18,661
1,307
105,458
3,468
68,109
3
830
2,281
27,097
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,146,024 $
—
—
—
—
—
—
—
—
3
—
291,618
156,154
341,318
18,573
1,307
105,458
—
—
—
830
—
—
—
88
—
—
3,468
68,109
—
—
—
—
3 $ 1,070,211 $
—
27,097
2,281
—
75,810
Liabilities:
Derivatives(1)
Forward sale commitments . . . . . . . . . . . . . . . . . . . .
Interest rate lock and purchase loan
commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . $
(1)
Includes both continuing and discontinued operations.
492
—
492
58
10,889
11,439 $
—
—
— $
—
10,889
11,381 $
—
58
—
58
155
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
(in thousands)
Assets:
Investment securities available for sale
Mortgage backed securities:
Fair Value at
December 31,
2018
Level 1
Level 2
Level 3
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
107,961 $
34,514
— $
—
107,961 $
34,514
—
—
Collateralized mortgage obligations:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . .
U.S. Treasury securities . . . . . . . . . . . . . . . . . . . .
Agency debentures . . . . . . . . . . . . . . . . . . . . . . .
Single family loans held for sale(1) . . . . . . . . . . . . .
Single family loans held for investment . . . . . . . . .
Single family mortgage servicing rights . . . . . . . . .
Derivatives(1)
Forward sale commitments . . . . . . . . . . . . . . . . .
Interest rate swaptions . . . . . . . . . . . . . . . . . . . . .
Interest rate lock and purchase loan
commitments . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities:
Derivatives(1)
166,744
116,674
385,655
19,995
10,900
9,525
321,868
4,057
252,168
3,025
203
—
—
—
—
—
—
—
—
—
—
—
166,744
116,674
385,655
19,995
10,900
9,525
319,177
—
—
3,025
203
—
—
—
—
—
—
2,691
4,057
252,168
—
—
10,289
14,566
1,458,144 $
—
—
— $ 1,188,939 $
—
14,566
10,289
—
269,205
Eurodollar futures . . . . . . . . . . . . . . . . . . . . . . . . $
Forward sale commitments . . . . . . . . . . . . . . . . .
Interest rate lock and purchase loan
commitments . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . $
110 $
110 $
— $
5,340
—
5,340
5
11,550
17,005 $
—
—
110 $
—
11,550
16,890 $
—
—
5
—
5
(1)
Includes both continuing and discontinued operations.
There were no transfers between levels of the fair value hierarchy during the years ended December 31, 2019 and
2018.
Level 3 Recurring Fair Value Measurements
The Company’s level 3 recurring fair value measurements consist of investment securities available for sale, 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, 2019 and 2018, see Note 13, Mortgage Banking Operations.
156
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
The fair value of IRLCs considers several factors including the fair value in the secondary market of the underlying
loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated
servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be
converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on loans held for sale, while
based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. The
significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the
time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets
closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted
by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified
servicing fees, servicing costs, and underlying portfolio characteristics. Because these inputs are not observable in
market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs
decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of
servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in
other significant unobservable inputs.
The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or
loss is realized at the time the loan closes, which generally occurs within 30-90 days. For IRLCs that fall out, any
unrealized gain or loss is reversed, which generally occurs at the end of the commitment period. The gains and losses
recognized on IRLC derivatives generally correlates to volume of single family interest rate lock commitments made
during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses
realized at settlement generally correlates to the volume of single family closed loans during the reporting period.
The Company uses the discounted cash flow model to estimate the fair value of certain loans that have been
transferred from held for sale to held for investment and single family loans held for sale when the fair value of
the loans is not derived using observable market inputs. The key assumption in the valuation model is the implied
spread to benchmark interest rate curve. The implied spread is not directly observable in the market and is derived
from third party pricing which is based on market information from comparable loan pools. The fair value estimate
of these certain single family loans that have been transferred from held for sale to held for investment and these
certain single family loans held for sale is sensitive to changes in the benchmark interest rate which might result in a
significantly higher or lower fair value measurement.
The Company transferred certain loans from held for sale to held for investment. These loans were originated as held
for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3
recurring assets as the valuation technique included a significant unobservable input. The total amount of held for
investment loans where fair value option election was made was $3.5 million and $4.1 million at December 31, 2019
and December 31, 2018, respectively.
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain
investment securities available for sale.
(dollars in thousands)
Fair Value
Valuation
Technique
Investment securities
available for sale(1) . . . $ 1,952 Income approach
At December 31, 2019
Significant
Unobservable Input
Implied spread to
benchmark interest
rate curve
Low
High
Weighted
Average
2.00%
2.00%
2.00%
(1)
In conjunction with adopting ASU 2017-12 in the first quarter of 2019, we transferred $66.2 million HTM securities to
AFS, therefore we did not have a similar balance at December 31, 2018.
157
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
The following information presents significant Level 3 unobservable inputs used to measure fair value of single
family loans held for investment where fair value option was elected.
(dollars in thousands)
Loans held for
Fair Value
Valuation
Technique
investment, fair
value option . . . . . . . . $ 3,468 Income approach
(dollars in thousands)
Loans held for
Fair Value
Valuation
Technique
investment, fair
value option . . . . . . . . $ 4,057 Income approach
At December 31, 2019
Significant
Unobservable Input
Implied spread to
benchmark interest
rate curve
At December 31, 2018
Significant
Unobservable Input
Implied spread to
benchmark interest
rate curve
Low
High
Weighted
Average
4.56%
6.87%
5.63%
Low
High
Weighted
Average
3.34%
5.15%
4.20%
The following information presents significant Level 3 unobservable inputs used to measure fair value of certain
single family loans held for sale where fair value option was elected. We had no loans held for sale with fair value
option at December 31, 2019.
(dollars in thousands)
Fair Value
Loans held for sale,
fair value option . . . $
2,691
Valuation
Technique
Income
approach
At December 31, 2018
Significant
Unobservable Input
Implied spread to
benchmark interest
rate curve
Market price
movement from
comparable bond
Low
High
Weighted
Average
4.26%
4.96%
4.40%
0.71%
1.09%
0.90%
The following information presents significant Level 3 unobservable inputs used to measure fair value of interest
rate lock and purchase loan commitments.
Fair Value
Valuation
Technique
At December 31, 2019
Significant
Unobservable Input
Low
High
Weighted
Average
(dollars in thousands)
Interest rate lock
and purchase loan
commitments, net(1) . . $ 2,223 Income approach
(1)
Includes both continuing and discontinued operations.
Fall out factor
Value of servicing
—%
0.55%
59.69%
1.77%
12.20%
1.14%
Fair Value
Valuation
Technique
At December 31, 2018
Significant
Unobservable Input
Low
High
Weighted
Average
(dollars in thousands)
Interest rate lock
and purchase loan
commitments, net(1) . . $ 10,284 Income approach
(1)
Includes both continuing and discontinued operations.
Fall out factor
Value of servicing
—%
0.54%
67.92%
1.64%
19.84%
0.93%
158
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
The following table presents fair value changes and activity for Level 3 investment securities available for sale.
(in thousands)
Investment securities
Beginning
balance
Additions
Transfers
Payoffs/Sales
Change in
mark to market
Ending
balance
Year Ended December 31, 2019
available for sale(1) . . .
— $
— $
2,379 $
(160) $
(267) $
1,952
(1)
In conjunction with adopting ASU 2017-12 in the first quarter of 2019, we transferred $66.2 million of HTM securities to
AFS, therefore we did not have any similar activity for the year ended December 31, 2018.
The following table presents fair value changes and activity for Level 3 loans held for sale and loans held for
investment.
(in thousands)
Loans held for sale . . . . . $
Loans held for
Beginning
balance
Year Ended December 31, 2019
Additions
Transfers
Payoffs/Sales
Change in
mark to market
Ending
balance
2,691 $
5,859 $
1,630 $
(10,060) $
(120) $
—
investment . . . . . . . . . .
4,057
2,043
(1,630)
(980)
(22)
3,468
(in thousands)
Loans held for sale . . . $
Loans held for
Beginning
balance
Year Ended December 31, 2018
Additions
Transfers
Payoffs/Sales
Change in
mark to market
Ending
balance
1,336 $
3,434 $
— $
(1,998) $
(81) $
2,691
investment . . . . . . . .
5,477
487
—
(1,672)
(235)
4,057
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,
2019
2018
10,284 $
36,487
(44,548)
2,223 $
12,925
91,251
(93,892)
10,284
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.
159
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of
comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable
inputs) to reflect the general assumptions that a market participant would make when analyzing the property for
purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of
certain commercial loans held for investment that are collateralized by real estate.
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
years ended December 31, 2019 and 2018 the Company didn’t apply any adjustments to the appraisal value of
OREO.
Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining
the fair value include geographic sales trends, the value of comparable surrounding properties as well as the
condition of the property.
These adjustments include management assumptions that are based on the type of collateral dependent loan and
may increase or decrease an appraised value. Management adjustments vary significantly depending on the location,
physical characteristics and income producing potential of each individual property. The quality and volume of
market information available at the time of the appraisal can vary from period-to-period and cause significant
changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these
unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to
period.
The following tables present assets that had changes in their recorded fair value during the years ended
December 31, 2019 and 2018 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,
2019
Year Ended December 31, 2019
Level 1
Level 2
Level 3
Total Gains
(Losses)
266 $
266 $
— $
— $
— $
— $
266 $
266 $
316
316
Year Ended December 31, 2018
(in thousands)
Loans held for investment(1) . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . . . . . . $
Level 1
Level 2
Level 3
Total Gains
(Losses)
1,607 $
1,607 $
— $
— $
— $
— $
1,607 $
1,607 $
(257)
(257)
Fair Value of
Assets Held at
December 31,
2018
(1) Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.
160
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 — FAIR VALUE MEASUREMENT: (cont.)
Fair Value of Financial Instruments
The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the
Company’s financial instruments other than assets and liabilities measured at fair value on a recurring basis.
(in thousands)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . $
Federal funds sold and securities
purchased under agreements to resell . . .
Investment securities held to maturity . . . .
Loans held for investment . . . . . . . . . . . . . .
Loans held for sale – multifamily and
other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights – multifamily . .
Federal Home Loan Bank stock . . . . . . . . .
Liabilities:
At December 31, 2019
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
57,880 $
57,880 $
57,880 $
— $
—
4,372
5,069,316
4,501
5,139,078
128,841
29,494
22,399
130,720
32,738
22,399
—
—
—
—
—
4,501
—
— 5,139,078
130,720
—
22,399
—
32,738
—
Time deposits . . . . . . . . . . . . . . . . . . . . . . . $ 1,614,533 $ 1,622,879 $
Federal Home Loan Bank advances . . . . . .
Federal funds purchased and securities
346,590
347,949
— $ 1,622,879 $
—
347,949
sold under agreements to repurchase . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . .
125,000
125,650
125,101
115,011
125,101
—
—
115,011
—
—
—
—
(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 – multifamily . .
Federal Home Loan Bank stock . . . . . . . . .
Liabilities:
At December 31, 2018
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
57,982 $
71,285
5,071,314
57,982 $
70,546
5,099,960
57,982 $
—
—
70,546
— $
—
—
— 5,099,960
25,139
28,328
45,497
25,139
31,168
45,497
—
—
—
25,139
—
45,497
—
31,168
—
Time deposits . . . . . . . . . . . . . . . . . . . . . . . $ 1,579,806 $ 1,575,139 $
Federal Home Loan Bank advances . . . . . .
Federal funds purchased and securities
932,590
935,021
— $ 1,575,139 $
—
935,021
sold under agreements to repurchase . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . .
19,000
125,462
19,021
112,475
19,021
—
—
112,475
161
—
—
—
—
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 — EARNINGS PER SHARE:
The following table summarizes the calculation of earnings per share.
(in thousands, except share and per share data)
EPS numerator:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Undistributed stock dividends share repurchase . . . . . . . . . . . . . . . . . . . .
Allocated undistributed earnings in share repurchase . . . . . . . . . . . . . . .
Income from continuing operations available to common shareholders . .
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . . . .
Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . $
EPS denominator:
Weighted average shares:
Years Ended December 31,
2018
2017
2019
40,720 $
(505)
(145)
40,070
(23,208)
16,862 $
26,223 $
—
—
26,223
13,804
40,027 $
42,668
—
—
42,668
26,278
68,946
Basic weighted-average number of common shares outstanding . . . . .
Dilutive effect of outstanding common stock equivalents(1) . . . . . . . . .
Diluted weighted-average number of common stock outstanding . . . .
25,573,488
197,295
25,770,783
26,970,916
197,219
27,168,135
26,864,657
227,362
27,092,019
Basic earnings per share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(Loss) income from discontinued operations . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.57 $
(0.91)
0.66 $
1.55 $
(0.90)
0.65 $
0.97 $
0.51
1.48 $
0.97 $
0.51
1.47 $
1.59
0.98
2.57
1.57
0.97
2.54
(1)
Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the years ended
December 31, 2019, 2018 and 2017 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 263, zero and 3,224 at
December 31, 2019, 2018 and 2017, respectively.
NOTE 21 — LEASES:
On January 1, 2019, we adopted new FASB guidance on the accounting for leases. We applied the modified
retrospective method of adoption and therefore, results for reporting periods beginning after January 1, 2019 are
presented under the new guidance while prior periods have not been adjusted.
We have operating and finance leases for corporate offices, commercial lending centers, retail deposit branches and
certain equipment. Our leases have remaining lease terms of up to 21 years some of which include options which are
reasonably certain to be exercised. Leases with an initial term of less than a year are not included in the Statement of
Financial Condition.
The Company, as sublessor, subleases certain office and retail space in which the terms of the subleases end by
December 2027. Under all of our executed sublease arrangements, the sublessees are obligated to pay the Company
sublease payments of $6.3 million in 2020, $5.1 million in 2021, $3.9 million in 2022, $2.4 million in 2023, $901
thousand in 2024 and $989 thousand thereafter.
In the year ended December 31, 2019, we incurred $5.0 million in impairment charges on lease right-of-use assets.
162
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 — LEASES: (cont.)
The components of lease expense were as follows.
(in thousands)
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance lease cost:
Amortization of right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental cash flow information related to leases was as follows.
Year Ended
December 31,
2019
14,538
28
2,030
340
6,627
(4,378)
19,185
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Year Ended
December 31,
2019
Operating cash flows from operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing cash flows from finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,054
340
1,694
Supplemental balance sheet information related to leases was as follows.
(in thousands, except lease term and discount rate)
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Finance lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Remaining lease term in years
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Discount Rate
December 31,
2019
86,789
104,579
8,084
8,513
11.87
15.46
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.48%
2.63%
Maturities of lease liabilities were as follows.
Operating
Leases
Finance
Leases
Year ended December 31,
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
15,149 $
13,912
12,399
10,637
10,205
65,616
127,918
23,339
104,579 $
1,519
1,297
590
473
400
7,238
11,517
3,004
8,513
163
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 — LEASES: (cont.)
Leases (Topic 840) Disclosures
Operating Leases
Prior to 2019, under the previous lease standard, we had non-cancelable operating leases for office space. Generally,
the office leases contain five-year renewal and space options. As of December 31, 2018, these leases had contractual
terms expiring through 2035. Total rent expense under non-cancellable operating leases totaled $27.7 million for the
year ended December 31, 2018.
Minimum rental payments for all non-cancelable leases were as follows.
(in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,770
20,671
18,825
16,418
13,274
40,717
132,675
At
December 31,
2018
NOTE 22 — 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cumulative effect of adoption of new accounting standards(1) . . . . .
Other comprehensive income (loss) before reclassifications . . . .
Amounts reclassified from accumulated other comprehensive
income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net current-period other comprehensive income (loss) . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2018
2017
2019
(15,439) $
(2,080)
21,834
(7,122) $
—
(8,132)
6
21,840
4,321 $
(185)
(8,317)
(15,439) $
(10,412)
—
3,607
(317)
3,290
(7,122)
(1) Reflects the January 1, 2019 adoption of ASU 2018-02 and ASU 2017-12. For additional information see Note 1, Summary
of Significant Accounting Policies.
The following table shows the affected line items in the consolidated statements of operations from reclassifications
of unrealized gain (loss) on available-for-sale securities from accumulated other comprehensive income (loss).
Affected Line Item in the Consolidated Statements of Operations
(in thousands)
(Loss) gain on sale of investment securities available for sale . . . . . $
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
164
Amount Reclassified from Accumulated
Other Comprehensive Income (Loss)
Years Ended December 31,
2018
2017
2019
(8) $
(2)
(6) $
234 $
49
185 $
489
172
317
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 — PARENT COMPANY FINANCIAL STATEMENTS:
Condensed financial information for HomeStreet, Inc. is as follows.
Condensed Statements of Financial Condition
(in thousands)
Assets:
At December 31,
2019
2018
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 income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholder’s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
16,638 $
4,370
785,821
806,829 $
1,456 $
125,650
127,106
—
511
300,218
374,673
4,321
679,723
806,829 $
12,399
5,375
848,333
866,107
1,125
125,462
126,587
—
511
342,439
412,009
(15,439)
739,520
866,107
Years Ended December 31,
2018
2017
2019
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax benefit . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(4,821) $
2,293
(4,856) $
2,193
(2,528)
110,000
107,472
(8,437)
99,035
2,623
(84,146)
17,512 $
(2,663)
9,523
6,860
(10,368)
(3,508)
(385)
43,920
40,027 $
(4,625)
1,904
(2,721)
4,000
1,279
(6,681)
(5,402)
3,381
70,967
68,946
3,290
72,236
Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,840
39,352 $
(8,317)
31,710 $
165
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 — PARENT COMPANY FINANCIAL STATEMENTS: (cont.)
Condensed Statements of Cash Flows
(in thousands)
Net cash provided by (used in) operating activities . . . . . . . . $
Cash flows from investing activities:
Years Ended December 31,
2018
2017
2019
101,628 $
Net purchases of and proceeds from investment securities . . . . . .
Net payments for investments in and advances to subsidiaries . .
Net cash provided by investing activities . . . . . . . . . . . . . . . .
1,049
—
1,049
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . .
Payment to repurchase common stock . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . .
Increase (decrease) in cash and cash equivalents . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . $
105
(98,543)
—
(98,438)
4,239
12,399
16,638 $
NOTE 24 — UNAUDITED QUARTERLY FINANCIAL DATA:
Our supplemental quarterly consolidated financial information is as follows.
Quarter Ended
(3,198) $
(3,395)
1,541
(113)
1,428
68
—
68
(1,702)
14,101
12,399 $
2,546
2,685
5,231
11
(6)
5
1,841
12,260
14,101
Dec. 31,
2019
(in thousands, except share data)
Interest income . . . . . . . . . . . . . . . . . . . . $ 66,767
21,255
Interest expense . . . . . . . . . . . . . . . . . . . .
45,512
Net interest income . . . . . . . . . . . . . . . . .
(2,000)
(Reversal) provision for credit losses . . .
Sept. 30,
2019
$ 70,077
22,943
47,134
—
June 30,
2019
$ 72,079
22,892
49,187
—
Mar. 31,
2019
$ 68,683
21,126
47,557
1,500
Dec. 31,
2018
$ 68,253
19,343
48,910
500
Sept. 30,
2018
$ 64,280
16,420
47,860
750
June 30,
2018
$ 61,818
14,073
47,745
1,000
Mar. 31,
2018
$ 57,111
11,663
45,448
750
Net interest income after
provision for credit losses . . . . .
Noninterest income . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . .
Net income from continuing
operations before income tax
expense (benefit) . . . . . . . . . . . . . . . .
Income tax expense (benefit) from
47,512
21,931
53,215
47,134
24,580
55,721
49,187
19,829
58,832
46,057
8,092
47,846
48,410
10,382
47,892
47,110
10,650
47,914
46,745
8,405
49,964
44,698
7,096
49,471
16,228
15,993
10,184
6,303
10,900
9,846
5,186
2,323
continuing operations . . . . . . . . . . . . .
3,123
Income from continuing operations . . . . $ 13,105
(Loss) income from discontinued
2,328
$ 13,665
$
1,292
8,892
$
1,245
5,058
(1,309)
$ 12,209
$
1,757
8,089
$
1,015
4,171
$
569
1,754
operations before income taxes . . . . . $
(3,357) $
190
$ (16,678) $
(8,440) $
3,959
$
4,561
$
3,641
$
5,449
Income tax (benefit) expense from
discontinued operations . . . . . . . . . . .
(1,240)
28
(2,198)
(1,667)
941
$
815
$
713
$
1,337
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . . . $
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 10,988
(2,117) $
162
$ 13,827
$ (14,480) $
(5,588) $
$
(6,773) $
3,018
(1,715) $ 15,227
$
3,746
$ 11,835
$
$
2,928
7,099
$
$
4,112
5,866
Basic earnings per common share:
Income from continuing operations . . .
(Loss) income from discontinued
0.54
0.55
0.32
0.19
0.45
0.30
0.15
operations . . . . . . . . . . . . . . . . . . . . $
Basic earnings per share . . . . . . . . . . . . . $
(0.09) $
$
0.45
0.01
0.55
$
$
(0.54) $
(0.22) $
(0.25) $
(0.06) $
0.11
0.56
$
$
0.14
0.44
$
$
0.11
0.26
$
$
0.07
0.15
0.22
Diluted earnings per common share:
Income from continuing operations . . $
(Loss) income from discontinued
0.54
$
0.54
$
0.32
$
0.19
$
0.45
$
0.30
$
0.15
$
0.06
operations . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . $
(0.09) $
$
0.45
0.01
0.55
$
$
(0.54) $
(0.22) $
(0.25) $
(0.06) $
0.11
0.56
$
$
0.14
0.44
$
$
0.11
0.26
$
$
0.15
0.22
166
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 25 — RESTRUCTURING:
In 2019, we took steps to restructure our corporate operations in order to improve productivity and reduce total
corporate expenses in light of a substantial reduction in the size and complexity of our Company and a lower growth
plan going forward. Throughout 2019, we began executing this restructuring plan which included:
•
•
•
•
•
•
Simplifying the organizational structure by reducing management levels and management redundancy
Consolidating similar functions currently residing in multiple organizations
Renegotiating, where possible, our technology contracts
Identifying and eliminating redundant or unnecessary systems and services
Rationalizing staffing appropriate to recognize the significant changes in work volumes and company
direction
Eliminate excess occupancy costs consistent with reduced personnel
The costs incurred include severance, retention, facility related charges and consulting fees. These restructuring
activities and related costs will continue through 2020.
Also in 2019, in connection with the Board of Directors approved plan of exit or disposal of our stand-alone home
loan-center based mortgage origination business and related mortgage servicing, the Company restructured certain
aspects of its infrastructure and back office operations, which resulted in certain indirect severance and other
employee related costs and impairment charges related to certain facilities and information systems. Cost directly
related to the plan of exit or disposal are not included in restructuring, but rather are characterized as gain loss on
disposal; for further information, see Note 2, Discontinued Operations.
In 2017, in response to changing market conditions and forecasts, we implemented restructuring plans in the
Company’s former Mortgage Banking segment to reduce operating costs and improve efficiency. In June 2018, the
Company implemented additional restructuring in the legacy Mortgage Banking segment to further reduce operating
costs and improve profitability.
Restructuring charges primarily consist of facility-related costs and severance costs and are included in the
occupancy and the salaries and related costs line items on our consolidated statement of operations in the applicable
periods for continuing operations and in income (loss) from discontinued operations for the applicable periods for
discontinued operations.
The following table summarizes the restructuring charges, the restructuring costs paid or settled during the years
ended December 31, 2019, 2018 and 2017, and the Company’s net remaining liability balance at December 31,
2019, 2018 and 2017 for both continuing and discontinued operations.
(in thousands)
Balance, December 31, 2016 . . . . . . . . . . . $
Restructuring charges . . . . . . . . . . . . . . .
Costs paid or otherwise settled . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . .
Costs paid or otherwise settled . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . .
Costs paid or otherwise settled . . . . . . . .
Balance, December 31, 2019 . . . . . . . . . . . $
Facility-related
costs
— $
3,072
(1,686)
1,386
5,762
(5,544)
1,604
1,373
(1,742)
1,235 $
167
Personnel-
related costs
Other
restructuring
costs
Total
— $
648
(648)
—
456
(456)
—
1,836
(1,326)
510 $
— $
—
—
—
—
—
—
1,302
(1,143)
159 $
—
3,720
(2,334)
1,386
6,218
(6,000)
1,604
4,511
(4,211)
1,904
HOMESTREET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26 — SUBSEQUENT EVENTS:
The Company has evaluated the events that have occurred subsequent to the year ended December 31, 2019 and has
included all material events that would require recognition in the 2019 consolidated financial statements, disclosure
in the notes to the consolidated financial statements or below.
The Board of Directors approved an addition to our share repurchase program for up to $25 million of our common
stock in January 2020, and our regulators have confirmed no objections to that repurchase. In February the Board
increased the authorization by an additional $10 million conditional on the non-objection of our regulators.
Assuming no objections from our regulators for the additional repurchase authorization, we expect to commence
repurchases in the first or second quarter of 2020. This authorization is in addition to the 3.4 million shares of
common stock that the Company repurchased in 2019 and early 2020.
In January 2020, HomeStreet’s Board of Directors approved a new dividend policy that contemplates the payment
of quarterly cash dividends on our common stock when, if and in an amount declared by the Board after taking into
consideration, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset
growth. The first dividend declared under this policy was a cash dividend of $0.15 per share for the first quarter
of 2020, which was paid on February 21, 2020 to shareholders of record as of the close of business on February 5,
2020. The dividend rate to be paid will be reassessed each quarter by the Board of Directors in accordance with the
dividend policy.
168
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
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act)
at December 31, 2019. 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 files or submits under the Exchange Act is recorded,
processed, summarized, and reported within the time periods specified 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 effective at December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) for the Company. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements
for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 financial reporting at December 31, 2019.
In making its assessment of internal control over financial 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, 2019, the Company’s
internal control over financial reporting was effective.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our consolidated financial
statements at, and for, the year ended December 31, 2019, has issued an audit report on the effectiveness of the
Company’s internal control over financial reporting at December 31, 2019, 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 CEO and CFO, also conducted an evaluation of
our internal control over financial reporting to determine whether any changes occurred during the quarter ended
December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
During the quarter ended March 31, 2019, as disclosed in our financial statements in Part III, Item 8 of this Annual
Report on Form 10-K, the Company sold a significant portion of its single family mortgage servicing rights.
The Company’s Board of Directors also authorized the exit or disposal of the Company’s home loan center-based
origination business which resulted in elimination of segment reporting in the first quarter of 2019. Subsequent
to the quarter ended March 31, 2019, the Company executed a definitive agreement with Homebridge Financial
Services, Inc. to sell the assets of up to 50 stand-alone, satellite, and fulfillment offices. The Company completed
the sale of assets related to 47 offices, including the sublease or assignment of leases of such offices, to Homebridge
Financial Services, Inc. during the quarter ended June 30, 2019 and closed all remaining mortgage offices.
169
In connection with the adoption of the resolution to exit or dispose of the home loan center-based mortgage business,
the sales of single family mortgage servicing rights and entering into a definitive agreement for the sale of assets to
Homebridge, the Company adopted discontinued operations accounting for the legacy Mortgage Banking segment.
Certain back office infrastructure and operations were also restructured as part of these activities. The combined
initiatives were determined to have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting process. We will continue to closely monitor internal control over financial
reporting until these initiatives are concluded.
170
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 financial reporting of HomeStreet, Inc. and subsidiaries (the “Company”)
as of December 31, 2019, 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 financial reporting included controls over the preparation of the schedules equivalent to the
basic financial 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, effective internal
control over financial reporting as of December 31, 2019, 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 financial statements as of and for the year ended December 31, 2019, of the
Company and our report dated March 6, 2020, expressed an unqualified opinion on those financial statements and
included an emphasis of matter paragraph regarding discontinued operations.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial 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 financial reporting based on our audit. We are a public accounting firm 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 effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness 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.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial 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 effect on the financial statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness 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, 2020
171
ITEM 9B OTHER INFORMATION
None.
172
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees,
including our principal executive officer and principal financial officer. 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 specified above and, to the extent required by the listing standards of the Nasdaq
Global Select Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.
The information required by this item with respect to our directors, our executive officers, our Audit Committee
and its members, and audit committee financial expert will be set forth in our definitive proxy statement for the
2020 annual meeting of stockholders (the “2020 Proxy Statement”) under the captions “Election of Directors” and”
“Executive Officers,” which information is incorporated herein by reference. The information required by this item
with respect to compliance with Section 16(a) of the Exchange Act will be set forth in our 2020 Proxy Statement
under the caption “Principal Shareholders — Delinquent Section 16(a) Reports,” which information is incorporated
herein by reference.
Our 2020 Proxy Statement is expected to be filed not later than 120 days after the end of our fiscal year ended
December 31, 2019.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this item will be set forth in the 2020 Proxy Statement under the captions “Executive
Compensation” and “Corporate Governance — Human Resources and Corporate Governance Committee Interlocks
and Insider Participation,” which information 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, 2019 under the
HomeStreet, Inc. 2014 Equity Incentive Plan (the “2014 Plan”).
(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
(c)
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a))
582,754(1) $
—(4)
582,754
$
12.49(2)
—
12.49(2)
938,581(3)
N/A
938,581
Plan Category
Plans approved by shareholders . . . . . . . . . . . . . . . .
Plans not approved by shareholders(4) . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) Consists of 233,001 shares subject to option grants awarded pursuant to the HomeStreet, Inc. 2010 Equity Incentive Plan
(the “2010 Plan”), 121,991 shares subject to Restricted Stock Units awarded under the 2014 Plan and 227,762 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 effect for any awards issued under that plan that are still outstanding, new awards may not be granted under the
2010 Plan.
173
(2)
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 reflects only the exercise price of the options issued under the 2010 Plan that are still
outstanding as of the date of this table.
(3) Consists of shares remaining available for issuance under the 2014 Plan.
(4)
The Company previously issued option awards as retention grants in 2010 that were outside of the 2010 Plan but subject to
the terms of that plan. All remaining retention grants were exercised during 2019 and as of December 31, 2019, there were
no awards outstanding that were granted outside of shareholder approved plans.
Except as disclosed above, the information required by this item will be set forth in the 2020 Proxy Statement under
the caption “Principal Shareholders” which information 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 2020 Proxy Statement under the caption “Certain
Relationships and Related Transactions,” which information is incorporated herein by reference.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be set forth in the 2020 Proxy Statement under the caption “Advisory
(Non-Binding) Ratification of Appointment of Independent Registered Public Accounting Firm,” which information
is incorporated herein by reference.
174
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
(i)
Financial Statements
The following consolidated financial 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, 2019 and 2018
Consolidated Statements of Operations for the three years ended December 31, 2019
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2019
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2019
Consolidated Statements of Cash Flows for the three years ended December 31, 2019
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
II — Valuation and Qualifying Accounts
All financial statement schedules for the Company have been included in the consolidated financial statements or
the related footnotes, or are either inapplicable or not required.
(iii) Exhibits
Exhibit
Number
3.1(1)
3.2(1)
4.1(2)
4.2(3)††
4.3
10.1*(4)
10.2*(5)
10.3*(5)
10.4*(6)
10.5*(7)
10.6*(7)
10.7*(4)
10.8*(4)
EXHIBIT INDEX
Description
Amended and Restated Bylaws of HomeStreet, Inc.
Restated Articles of Incorporation of HomeStreet, Inc.
Form of Common Stock Certificate
Indenture dated as of May 20, 2016 between HomeStreet, Inc. and Wells Fargo Bank, National
Association, as Trustee
Description of Securities
HomeStreet, Inc. 2010 Equity Incentive Plan
Amended and Restated 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 effective as of January 1, 2016
HomeStreet, Inc. Directors’ Deferred Compensation Plan, effective May 19, 1999, 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
10.9*(4)
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
175
Exhibit
Number
10.10*(8)
10.11*(8)
10.12*(9)
10.13*(8)
10.14(4)
10.15(4)
10.16(4)
10.17(10)†
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 February 26, 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.
10.18(11)
Twenty-First Amendment to Office Lease dated December 24, 2014.
10.19(7)
10.20(10)
10.21(4)
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.
10.22(12)† Master Agreement ML 02783 between HomeStreet Bank and Fannie Mae, dated March 15, 2010,
amended by Letter Agreement dated March 15, 2011
10.23(4)
10.24(4)
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
10.27(13)* HomeStreet Bank 2017 Performance-Based Award Incentive Compensation Plan
10.28(12)
10.30(15)
10.31(16)
10.32(14)†
10.33(17)
Master Agreement between HomeStreet Bank and Government National Mortgage Association
effective January 3, 2011
Purchase and Assumption Agreement dated as of April 4, 2019 by and between Homebridge Financial
Services, Inc., and HomeStreet Bank
Amendment No. 1 to Purchase and Assumption Agreement dated as of April 10, 2019 by and between
Homebridge Financial Services, Inc., and HomeStreet Bank
Agreement for the Bulk Purchase and Sale of Mortgage Servicing Rights dated June 29, 2018 between
HomeStreet Bank and Matrix Financial Services Corporation
Purchase Agreement dated July 10, 2019 among HomeStreet, Inc., Blue Lion Opportunity Master
Fund, L.P., Roaring Blue Lion Capital Management, L.P., Roaring Blue Lion, LLC, BLOF II LP,
Charles W. Griege, ,Jr. and Ronald K. Tanemura
21
Subsidiaries of HomeStreet, Inc.
176
Exhibit
Number
23.1
24.1
31.1
31.2
32(18)
101
104
(1)
(2)
(3)
(4)
Consent of Deloitte & Touche LLP
Description
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.
The following financial information included in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2019, formatted in Inline XBRL (eXtensible Business Reporting
Language) and contained in Exhibit 101: (i) the Consolidated Statements of Financial Condition as of
December 31, 2019 and December 31, 2018; (ii) the Consolidated Statements of Operations for the
three years ended December 31, 2019, (iii) the Consolidated Statements of Comprehensive Income for
the three years ended December 31, 2019; (iv) the Consolidated Statements of Shareholders’ Equity for
the three years ended December 31, 2019, (v) the Consolidated Statements of Cash Flows for the three
years ended December 31, 2019, and (vi) the Notes to Consolidated Financial Statements.
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31,
2019, formatted in Inline XBRL and contained in Exhibit 101.
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on July 31, 2019,
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) filed 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) filed 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) filed on May 19, 2011, and incorporated herein by reference.
(5) Amended in the fourth quarter of 2018 to make administrative revisions that were not material and did not require
shareholder approval. An updated version was filed as an exhibit to HomeStreet’s Annual Report on Form 10-K
(SEC File No. 001-35424) filed on March 6, 2019, and incorporated herein by reference.
(6) Amended in the second quarter of 2019 to make administrative revisions that were not material and did not require
(7)
(8)
(9)
shareholder approval. Updated revisions are filed herewith.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 11, 2016,
and incorporated herein by reference.
Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2018
and incorporated herein by reference
Filed as an exhibit to HomeStreet, Inc.’s current Report on Form 8-K (SEC File No. 001-35424) filed on September 12,
2017, and incorporated herein by reference.
(10) Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 17, 2014,
and incorporated herein by reference.
(11) Filed as an exhibit to HomeStreet, Inc.’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 25, 2015,
and incorporated herein by reference.
(12) Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File
No. 333-173980) filed on June 21, 2011, and incorporated herein by reference.
(13) Filed as an exhibit to HomeStreet’s Annual Report on Form 10-K (SEC File No. 001-35424) filed on March 6, 2019, and
incorporated herein by reference.
(14) Filed as an exhibit to HomeStreet Inc.’s Quarterly Report on Form 10-Q (SEC File No. 001-35424) filed on August 3,
2018, 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) filed on April 4, 2019, 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) filed on April 12, 2019,
and incorporated herein by reference.
(17) Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on July 11, 2019, and
incorporated herein by reference
177
†
(18) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise
subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934.
Certain portions of this exhibit constitute confidential information and have been redacted in accordance with
Regulation S-K, Item 601(b)(10).
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.
178
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, 2020.
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
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
file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming 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, 2020
/s/ David A. Ederer
David A. Ederer, Chairman Emeritus
Chairman Emeritus of the Board
March 6, 2020
/s/ Mark R. Ruh
Mark R. Ruh
/s/ Donald R. Voss
Donald R. Voss
/s/ Scott M. Boggs
Scott M. Boggs
/s/ Sandra A. Cavanaugh
Sandra A. Cavanaugh
/s/ Mark R. Patterson
Mark R. Patterson
Executive Vice President, Chief Financial Officer
and Principal Accounting Officer (Principal
Financial and Accounting Officer)
March 6, 2020
Lead Independent Director
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Director
Director
Director
179
Title
Signature
/s/ James R. Mitchell Jr.
James R. Mitchell Jr.
/s/ Thomas E. King
Thomas E. King
/s/ George W. Kirk
George W. Kirk
/s/ Nancy D. Pellegrino
Nancy D. Pellegrino
/s/ Douglas I. Smith
Douglas I. Smith
Director
Director
Director
Director
Director
Date
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
180
HomeStreet, Inc. (together with its consolidated subsidiaries, “HomeStreet,” the “Company,” “we,” “our” or “us”), a
Washington corporation, is a diversified financial services company founded in 1921, headquartered in Seattle,
Washington, serving customers primarily on the West Coast of the United States, including Hawaii. We are
principally engaged in commercial banking, consumer banking, and real estate lending, including commercial
real estate and single family mortgage lending. In addition to the banking and lending operations of our wholly
owned subsidiaries, HomeStreet also sells insurance products and services for consumer clients under the name
HomeStreet Insurance. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation.
HomeStreet Bank is a Washington state-chartered commercial bank providing commercial and consumer loans
including mortgage loans, deposit products, private banking and cash management services. Our loan products
include commercial business 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.
Our branch network is primarily located in large metropolitan markets of the Western United States which
promotes convenience for our customers and helps us build our market share through growth of commercial and
consumer account deposits.
HomeStreet Capital Corporation, a Washington corporation, sells and services multifamily mortgage loans
originated by HomeStreet Bank under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS®")1.
1 DUS® is a registered trademark of Fannie Mae
SEATTLE
METRO
WASHINGTON
Retail deposit branches (62)
Primary stand-alone lending centers (4)
Primary stand-alone insurance office (1)
OREGON
IDAHO
CALIFORNIA
UTAH
HAWAII
SOUTHERN
CALIFORNIA
Board of Directors1
Mark K. Mason, Chairman
Donald R. Voss, Lead Independent Director
David A. Ederer, Chairman Emiritus 2
Scott M. Boggs
Sandra A. Cavanaugh
Thomas E. King 2
George “Judd” Kirk 2
James R. Mitchell, Jr.
Mark R. Patterson
Nancy D. Pellegrino
Douglas I. Smith
Executive Officers
Mark K. Mason
Chairman, President
and Chief Executive Officer 3,4
Mark R. Ruh
Executive Vice President
and Chief Financial Officer 3,4,5
William D. Endresen
Executive Vice President,
Commercial Real Estate and
Commercial Capital President 4
Godfrey B. Evans
Executive Vice President, General Counsel,
Chief Adminstrative Officer and Corporate Secretary 3,4
Erik Hand
Executive Vice President,
Residential Lending Director 4
Troy Harper
Executive Vice President,
Chief Information Officer 3,4
Jay C. Iseman
Executive Vice President,
Chief Credit Officer 3,4
Paulette Lemon
Executive Vice President,
Retail Banking Director 4
Edward C. Schultz
Executive Vice President,
Director of Commercial Banking 4
Jeff Todhunter
Executive Vice President,
Residential Construction Lending Director 4
Darrell S. van Amen
Executive Vice President,
Chief Investment Officer and Treasurer 3,4
Mary L. Vincent
Executive Vice President,
Chief Risk Officer 3,4
1 Members of the Board of HomeStreet, Inc. are also members of the Board
of HomeStreet Bank.
2 Mr. Ederer, Mr. King and Mr. Kirk will not stand for reelection at the
Annual Meeting.
3 HomeStreet, Inc.
4 HomeStreet Bank
5 Mr. Ruh has tendered his resignation from the Company effective
June 5, 2020 and is expected to step down from the position of EVP, CFO
effective with the assumption of that role by John Michel on May 4, 2020.
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
Annual Meeting: May 21, 2020
As part of our precautions regarding the COVID-19
outbreak, we are planning for the possibility that the
Annual Meeting may be held solely by means of
remote communications. If we take this step, we will
announce the decision to do so in advance, and
details on how to participate will be posted on our
website and filed with the Securities and Exchange
Commission as additional proxy materials.
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.
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
5/20 © HomeStreet, Inc. All Rights Reserved. HomeStreet and the logo are registered trademarks of HomeStreet, Inc.
2019 Annual Report to Shareholders