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Section 1: 10-Q (FORM 10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2019
Commission file number: 001-35424
________________________________ 
HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
________________________________ 
Washington
 
91-0186600
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification No.)
601 Union Street, Suite 2000
Seattle, Washington 98101
(Address of principal executive offices)
(Zip Code)
(206) 623-3050
(Registrant’s telephone number, including area code) 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
HMST
Nasdaq Global Select Market


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o
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
 
o
Accelerated Filer
 
x
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
o
 
 
 
 
 
 
Emerging growth Company
 
o
 
 
 
 
 
 
 
 
 
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 12(a) of the Exchange Act.
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x



The number of outstanding shares of the registrant's common stock as of May 8, 2019 was 27,041,106.6.
 





PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
ITEM 2
 

2




 
 
 
ITEM 3
ITEM 4
 
ITEM 1
ITEM 1A
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6

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


3


PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

(in thousands, except share data)
 
March 31,
2019
 
December 31,
2018
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (includes interest-earning instruments of $44,221 and $28,534)
 
$
67,690

 
$
57,982

Investment securities (includes $812,432 and $851,968 carried at fair value)
 
816,878

 
923,253

Loans held for sale (includes $52,946 and $52,186 carried at fair value)
 
56,928

 
77,324

Loans held for investment (net of allowance for loan losses of $43,176 and $41,470; includes $4,830 and $4,057 carried at fair value)
 
5,345,969

 
5,075,371

Mortgage servicing rights (includes $68,250 and $75,047 carried at fair value)
 
95,942

 
103,374

Other real estate owned
 
838

 
455

Federal Home Loan Bank stock, at cost
 
32,533

 
45,497

Premises and equipment, net
 
85,635

 
88,112

Lease right-of-use assets
 
104,712

 

Goodwill
 
29,857

 
22,564

Other assets
 
171,776

 
173,445

Assets of discontinued operations
 
362,647

 
474,844

Total assets
 
$
7,171,405

 
$
7,042,221

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
5,178,334

 
$
4,888,558

Federal Home Loan Bank advances
 
599,590

 
932,590

Accounts payable and other liabilities
 
124,365

 
169,160

Federal funds purchased and securities sold under agreements to repurchase
 
27,000

 
19,000

Long-term debt
 
125,509

 
125,462

Lease liabilities
 
120,237

 

Liabilities of discontinued operations
 
249,339

 
167,931

Total liabilities
 
6,424,374

 
6,302,701

Commitments and contingencies (Note 8)
 

 

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, 27,038,257 shares and 26,995,348 shares
 
511

 
511

Additional paid-in capital
 
342,049

 
342,439

Retained earnings
 
411,826

 
412,009

Accumulated other comprehensive loss
 
(7,355
)
 
(15,439
)
Total shareholders' equity
 
747,031

 
739,520

Total liabilities and shareholders' equity
 
$
7,171,405

 
$
7,042,221


See accompanying notes to interim consolidated financial statements (unaudited).

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended March 31,
 
(in thousands, except share data)
2019
 
2018
 
Interest income:
 
 
 
 
Loans
$
62,931

 
$
51,488

 
Investment securities
5,564

 
5,559

 
Other
188

 
64

 
 
68,683

 
57,111

 
Interest expense:
 
 
 
 
Deposits
14,312

 
7,788

 
Federal Home Loan Bank advances
4,642

 
2,229

 
Federal funds purchased and securities sold under agreements to repurchase
304

 
32

 
Long-term debt
1,744

 
1,584

 
Other
124

 
30

 
 
$
21,126

 
$
11,663

 
Net interest income
47,557

 
45,448

 
Provision for credit losses
1,500

 
750

 
Net interest income after provision for credit losses
46,057

 
44,698

 
Noninterest income:
 
 
 
 
Net gain on loan origination and sale activities
2,607

 
1,447

 
Loan servicing income
1,043

 
908

 
Depositor and other retail banking fees
1,745

 
1,937

 
Insurance agency commissions
625

 
543

 
(Loss) gain on sale of investment securities available for sale, net
(247
)
 
222

 
Other
2,319

 
2,039

 
 
8,092

 
7,096

 
Noninterest expense:
 
 
 
 
Salaries and related costs
25,279

 
27,205

 
General and administrative
8,182

 
8,366

 
Amortization of core deposit intangibles
333

 
406

 
Legal
(204
)
 
704

 
Consulting
1,408

 
682

 
Federal Deposit Insurance Corporation assessments
821

 
861

 
Occupancy
4,968

 
4,530

 
Information services
7,088

 
6,810

 
Net (cost)/ benefit from operation and sale of other real estate owned
(29
)
 
(93
)
 
 
47,846

 
49,471

 
Income from continuing operations before income taxes
6,303

 
2,323

 
Income tax expense from continuing operations
1,245

 
569

 
Income from continuing operations
$
5,058

 
$
1,754

 
(Loss) income from discontinued operations before income taxes (includes net loss on disposal of $12,224 for the three months ended March 31, 2019)
(8,440
)
 
5,449

 
Income tax (benefit) expense from discontinued operations
(1,667
)
 
1,337

 
(Loss) income from discontinued operations
(6,773
)
 
4,112

 
NET (LOSS) INCOME
$
(1,715
)
 
$
5,866

 
 
 
 
 
 
Basic earnings per common share:
 
 
 
 
Income from continuing operations
$
0.19

 
$
0.07

 
(Loss) income from discontinued operations
(0.25
)
 
0.15

 
Basic earnings per share
$
(0.06
)
 
$
0.22

 
 
 
 
 
 
Diluted earnings per common share
 
 
 
 
  Income from continuing operations
$
0.19

 
$
0.06

 
(Loss) income from discontinued operations
(0.25
)
 
0.15

 
Diluted earnings per share
$
(0.06
)
 
$
0.22

 
Basic weighted average number of shares outstanding
27,021,507

 
26,927,464

 
Diluted weighted average number of shares outstanding
27,185,175

 
27,159,000

 
See accompanying notes to interim consolidated financial statements (unaudited).

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
Net (loss) income
$
(1,715
)
 
$
5,866

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 $2,502 and $(2,658)
9,969

 
(10,000
)
Reclassification adjustment for net losses (gains) included in net income, net of tax (benefit) expense of $(52) and $46
195

 
(176
)
Other comprehensive income (loss)
10,164

 
(10,176
)
Comprehensive income (loss)
$
8,449

 
$
(4,310
)

See accompanying notes to interim consolidated financial statements (unaudited).

6


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)

 
(in thousands, except share data)
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
January 1, 2018
26,888,288

 
$
511

 
$
339,009

 
$
371,982

 
$
(7,122
)
 
$
704,380

Net income

 

 

 
5,866

 

 
5,866

Common stock issued
83,786

 

 
122

 

 

 
122

Share-based compensation expense

 

 
771

 

 

 
771

Other comprehensive loss

 

 

 

 
(10,176
)
 
(10,176
)
Balance, March 31, 2018
26,972,074

 
$
511

 
$
339,902

 
$
377,848

 
$
(17,298
)
 
$
700,963

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
26,995,348

 
$
511

 
$
342,439

 
$
412,009

 
$
(15,439
)
 
$
739,520

Net loss

 

 

 
(1,715
)
 

 
(1,715
)
Common stock issued
42,909

 

 
62

 

 

 
62

Share-based compensation expense

 

 
(452
)
 

 

 
(452
)
Cumulative effect of adoption of new accounting standards

 

 

 
1,532

 
(2,080
)
 
(548
)
Other comprehensive income

 

 


 

 
10,164

 
10,164

Balance, March 31, 2019
27,038,257

 
$
511

 
$
342,049

 
$
411,826

 
$
(7,355
)
 
$
747,031


See accompanying notes to interim consolidated financial statements (unaudited).

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$
(1,715
)
 
$
5,866

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
9,883

 
6,051

Provision for credit losses
1,500

 
750

Net fair value adjustment and gain on sale of loans held for sale
(25,560
)
 
(14,359
)
Gain on sale of mortgage servicing rights, gross
(6,206
)
 

Fair value adjustment of loans held for investment
(85
)
 
124

Origination of mortgage servicing rights
(7,916
)
 
(15,288
)
Change in fair value of mortgage servicing rights
14,260

 
(21,148
)
Net loss (gain) on sale of investment securities
247

 
(222
)
Net gain on sale of loans originated as held for investment
(1,613
)
 

Net fair value adjustment, gain on sale and provision for losses on other real estate owned
(64
)
 
(92
)
Loss on disposal of fixed assets

 
64

Loss (recovery) on lease abandonment and exit costs
11,425

 
(266
)
Net deferred income tax (benefit) expense
(40,515
)
 
1,906

Share-based compensation (recovery) expense
(390
)
 
882

Origination of loans held for sale
(1,036,635
)
 
(1,450,347
)
Proceeds from sale of loans originated as held for sale
1,047,718

 
1,606,661

Changes in operating assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable and other assets
3,077

 
(6,787
)
Increase (decrease) in accounts payable and other liabilities
20,372

 
(6,539
)
Net cash (used in) provided by operating activities
(12,217
)
 
107,256

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(6,683
)
 
(70,007
)
Proceeds from sale of investment securities
94,998

 
16,875

Principal repayments and maturities of investment securities
28,022

 
27,383

Proceeds from sale of other real estate owned
518

 
459

Proceeds from sale of loans originated as held for investment
148,585

 

Proceeds from prior sale of mortgage servicing rights
1,052

 

Net cash provided by disposal of discontinued operations
166,250

 

Origination of loans held for investment and principal repayments, net
(337,197
)
 
(275,065
)
Purchase of property and equipment
(638
)
 
(3,579
)
Net cash used for acquisitions
(32,554
)
 

Net cash provided by (used in) investing activities
62,353

 
(303,934
)

8


 
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
271,459

 
$
288,026

Proceeds from Federal Home Loan Bank advances
2,224,300

 
2,613,400

Repayment of Federal Home Loan Bank advances
(2,557,300
)
 
(2,740,900
)
Proceeds from federal funds purchased and securities sold under agreements to repurchase
2,967,000

 
495,000

Repayment of federal funds purchased and securities sold under agreements to repurchase
(2,959,000
)
 
(470,000
)
Repayment of lease principal
(455
)
 

Proceeds from Federal Home Loan Bank stock repurchase
48,632

 
44,307

Purchase of Federal Home Loan Bank stock
(35,668
)
 
(39,591
)
Proceeds from stock issuance, net

 
11

Net cash (used in) provided by financing activities
(41,032
)
 
190,253

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
9,104

 
(6,425
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
 
 
 
Cash, cash equivalents and restricted cash, beginning of year
58,586

 
73,909

Cash, cash equivalents and restricted cash, end of period
67,690

 
67,484

Less restricted cash included in other assets

 
1,195

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
67,690


$
66,289

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
22,563

 
$
12,067

Federal and state income taxes (refunded) paid, net
(7,387
)
 
(4
)
Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
180

 

Loans transferred from held for investment to held for sale
153,794

 
36,626

Loans transferred from held for sale to held for investment
3,867

 
5,040

Ginnie Mae loans recognized (derecognized) with the right to repurchase, net
(27,278
)
 
8,598

Receivable from sale of mortgage servicing rights
18,315

 

Acquisition:
 
 
 
Assets acquired
115,038

 

Liabilities assumed
74,942

 

Goodwill
7,293

 


See accompanying notes to interim consolidated financial statements (unaudited).

9


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

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/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, Union Street Holdings LLC, HS Cascadia Holdings LLC and YNB Real Estate LLC. HomeStreet Bank was formed in 1986 and is a state-chartered commercial bank.

The Company's accounting and 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, management 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. Some of these estimates require application of management's most difficult, subjective or complex judgments and result in amounts 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, allowance for credit losses (Note 4, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 7, Mortgage Banking Operations), valuation of investment securities (Note 3, Investment Securities), and valuation of derivatives (Note 6, Derivatives and Hedging Activities).

During the three months ended March 31, 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 home loan center-based mortgage origination business. 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 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 decision to sell or abandon the assets and personnel associated with the Company's HLC-related mortgage business and the mortgage servicing rights ("MSR") sales have met the criteria to be classified as discontinued operations and its operating results and financial condition have been 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 (unaudited) are presented on a consolidated operations basis, which includes results from both continuing and discontinued operations, for all periods presented.

In connection with the mortgage servicing rights ("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.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report on Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission ("2018 Annual Report on Form 10-K").

Share Repurchase Program
On March 28, 2019, the Board authorized a share repurchase program (the "Repurchase Program") pursuant to which the Company may purchase up to $75 million of its issued and outstanding common stock, no par value, at prevailing market rates at the time of such purchase.

10


There were no repurchases of our common stock during the quarter ended March 31, 2019.

Recent Accounting Developments

In April 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 – Financial Instruments. The new ASU provides narrow-scope amendments to help apply these recent standards. The transition requirements and effective date of this ASU for HomeStreet is January 1, 2020 with early adoption permitted for certain amendments. The Company is currently assessing this standard’s impact on our consolidated results of operations and financial condition.

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. ASU 2018-16 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018, with early adoption permitted. 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 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 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 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted this ASU on January 1, 2019 and elected the mentioned transition option.

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 amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. 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. Adoption for this ASU is required for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. 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 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

11


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 on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated 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 credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that 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 useful 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 plans to adopt this ASU on January 1, 2020 and is still evaluating the effects this ASU will have on the Company's consolidated financial statements.

The Company has formed a cross-functional project team and engaged third-party consultants who have jointly developed an implementation plan to satisfy the requirements of the ASU. The project team continues to work on developing and implementing the currently expected credit loss ("CECL") model including data and assumption validation, identifying key interpretive issues, documenting process flows and internal controls, and beginning parallel testing with our existing allowance model. We also engaged a third-party firm to evaluate our CECL model. The Company anticipates that an increase to the allowance for credit losses will be recognized upon adoption of the ASU to provide for the expected credit losses over the estimated life of the financial assets (principally loans); however, management is still assessing the magnitude of the increase which will depend on economic conditions and the composition and trends in the Company's loan portfolio at the date of adoption. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan 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. The Company has begun developing and implementing processes to address the provisions of this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be 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 will be 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. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after
December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the date of initial application. 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 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

12


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 11 Leases for the impact of the adoption of this guidance.


NOTE 2–DISCONTINUED OPERATIONS:

On March 29, 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 71% of HomeStreet's total single family mortgage loans serviced for others portfolio as of December 31, 2018. The sale resulted in a $774 thousand pre-tax increase in income from discontinued operations during the quarter. The Company expects to finalize the servicing transfer for these loans in the second and third quarters of 2019, and is subservicing these loans until the transfer dates. These loans are excluded from the Company's MSR portfolio at March 31, 2019.

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 being sold or abandoned largely represent 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 constitute commitment to a plan of exit or disposal of certain long-lived assets (through sale or abandonment) and termination of employees. Further, the Company has determined that the shift from a large-scale home-loan center based originator and servicer to a branch-focused product offering represents a strategic shift. As a result, the HLC-related mortgage banking operations are reported separately from the continuing operations as held-for-sale or as discontinued operations. In addition, the former Mortgage Banking operating segment and reporting unit has been eliminated and the remaining personnel, assets and liabilities of the segment are incorporated into the other operations of the Company. This has resulted in a recast of the financial statements in the current and all comparative periods as detailed below.

Subsequently, on April 4, 2019 the Company entered into a plan of sale of the HLC based mortgage origination business assets and transfer of personnel to Homebridge Financial Services, Inc. – ("Homebridge").

Assets being sold to Homebridge include up to 50 stand-alone HLCs and the transfer of certain related mortgage personnel. These HLCs, along with certain other mortgage banking related assets and liabilities that are expected to be sold or abandoned separately within one year, are classified as discontinued operations in the accompanying Consolidated Statements of Financial Condition and Consolidated Statements of Operations. Certain components of the Company's former Mortgage Banking segment, including MSRs on certain mortgage loans that were not part of the sales and have been classified as continuing operations in the financial statements because they remain part of the Company's ongoing operations.



13



The following table summarizes the calculation of the net loss on disposal of discontinued operations.
 
 
Three Months Ended March 31,
(in thousands)
 
2019
 
Proceeds from asset sales
 
$
183,151

 
Book value of asset sales
 
176,944

 
Gain on assets sold
 
6,207

 
Transaction costs
 
6,418

 
Compensation expense related to the transactions
 
1,117

 
Facility and IT related costs
 
10,896

 
Total costs
 
18,431

 
Net loss on disposal
 
$
(12,224
)
 
 
 
 
 


The carrying amount of major classes of assets and liabilities related to discontinued operations consisted of the following.

(in thousands)
 
March 31, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Loans held-for-sale carried at fair value
 
$
307,550

 
$
269,683

Mortgage serving rights
 

 
177,121

Premises and equipment, net
 
5,291

 
6,689

Other assets(1)
 
49,806

 
21,351

Assets of discontinued operations
 
$
362,647

 
$
474,844

LIABILITIES
 
 
 
 
Deposits
 
219,100

 
162,850

Accrued expenses and other liabilities
 
30,239

 
5,081

Liabilities of discontinued operations
 
$
249,339

 
$
167,931

    
(1) Includes $15.0 million and $15.5 million in derivatives at March 31, 2019 and December 31, 2018, respectively.


Statements of Operations of Discontinued Operations
 
 
Three Months Ended March 31,
 
 
2019
 
2018
(in thousands)
 
 
 
 
Net interest income
 
$
2,145

 
$
3,012

Noninterest income
 
39,269

 
53,735

Noninterest expense
 
49,854

 
51,298

(Loss) income before income taxes
 
(8,440
)
 
5,449

Income tax (benefit) expense
 
(1,667
)
 
1,337

(Loss) income from discontinued operations
 
$
(6,773
)
 
$
4,112




14


Statements of Cash Flow for Discontinued Operations

 
 
Three Months Ended March 31,
 
 
2019
 
2018
(in thousands)
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(31,117
)
 
$
86,228

Net cash provided by (used in) investing activities
 
178,096

 
(1,670
)
Net cash provided by discontinued operations
 
$
146,979

 
$
84,558




NOTE 3–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale and held to maturity.
 
 
At March 31, 2019
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
116,017

 
$
41

 
$
(3,912
)
 
$
112,146

Commercial
30,524

 
78

 
(220
)
 
30,382

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
159,131

 
440

 
(3,263
)
 
156,308

Commercial
124,572

 
233

 
(1,836
)
 
122,969

Municipal bonds
351,499

 
3,694

 
(3,833
)
 
351,360

Corporate debt securities
18,904

 
50

 
(490
)
 
18,464

U.S. Treasury securities
11,216

 
8

 
(187
)
 
11,037

Agency debentures
9,880

 

 
(114
)
 
9,766

 
$
821,743

 
$
4,544

 
$
(13,855
)
 
$
812,432

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Municipal bonds(1)
$
4,446

 
$
46

 
$

 
$
4,492

 
$
4,446

 
$
46

 
$

 
$
4,492


(1) In conjunction with adopting ASU 2017-12, in Q1 2019, we transferred $66.2 million in HTM securities to AFS.

15


 
At December 31, 2018
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
112,852

 
$
19

 
$
(4,910
)
 
$
107,961

Commercial
34,892

 
109

 
(487
)
 
34,514

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
171,412

 
221

 
(4,889
)
 
166,744

Commercial
118,555

 
140

 
(2,021
)
 
116,674

Municipal bonds
393,463

 
1,526

 
(9,334
)
 
385,655

Corporate debt securities
21,177

 
1

 
(1,183
)
 
19,995

U.S. Treasury securities
11,211

 
6

 
(317
)
 
10,900

Agency debentures
9,876

 

 
(351
)
 
9,525

 
$
873,438

 
$
2,022

 
$
(23,492
)
 
$
851,968

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
11,071

 
$

 
$
(274
)
 
$
10,797

Commercial
17,307

 
30

 
(311
)
 
17,026

Collateralized mortgage obligations
15,624

 
10

 
(65
)
 
15,569

Municipal bonds
27,191

 
190

 
(319
)
 
27,062

Corporate debt securities
92

 

 

 
92

 
$
71,285

 
$
230

 
$
(969
)
 
$
70,546


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by either collateral or revenues from the specific project being financed) issued by various municipal corporations. As of March 31, 2019 and December 31, 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 March 31, 2019 and December 31, 2018, substantially all securities held had ratings available by external ratings agencies.


16


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.

 
At March 31, 2019
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(428
)
 
$
1,844

 
$
(3,484
)
 
$
106,250

 
$
(3,912
)
 
$
108,094

Commercial

 

 
(220
)
 
24,580

 
(220
)
 
24,580

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 
(3,263
)
 
124,299

 
(3,263
)
 
124,299

Commercial
(305
)
 
17,966

 
(1,531
)
 
79,387

 
(1,836
)
 
97,353

Municipal bonds
(11
)
 
8,405

 
(3,822
)
 
183,339

 
(3,833
)
 
191,744

Corporate debt securities

 

 
(490
)
 
12,475

 
(490
)
 
12,475

U.S. Treasury securities

 

 
(187
)
 
9,732

 
(187
)
 
9,732

Agency debentures

 

 
(114
)
 
9,766

 
(114
)
 
9,766

 
$
(744
)
 
$
28,215

 
$
(13,111
)
 
$
549,828

 
$
(13,855
)
 
$
578,043

* There were no held to maturity securities in an unrealized loss position at March 31, 2019
 
 
 
 

 
At December 31, 2018
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(34
)
 
$
1,269

 
$
(4,876
)
 
$
104,822

 
$
(4,910
)
 
$
106,091

Commercial

 

 
(487
)
 
18,938

 
(487
)
 
18,938

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(131
)
 
24,085

 
(4,758
)
 
128,899

 
(4,889
)
 
152,984

Commercial
(350
)
 
22,051

 
(1,671
)
 
73,429

 
(2,021
)
 
95,480

Municipal bonds
(1,283
)
 
85,057

 
(8,051
)
 
201,189

 
(9,334
)
 
286,246

Corporate debt securities
(104
)
 
5,557

 
(1,079
)
 
14,213

 
(1,183
)
 
19,770

U.S. Treasury securities

 

 
(317
)
 
9,598

 
(317
)
 
9,598

Agency debentures

 

 
(351
)
 
9,525

 
(351
)
 
9,525

 
$
(1,902
)
 
$
138,019

 
$
(21,590
)
 
$
560,613

 
$
(23,492
)
 
$
698,632

 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(31
)
 
$
2,314

 
$
(243
)
 
$
6,197

 
$
(274
)
 
$
8,511

Commercial
(24
)
 
2,800

 
(287
)
 
11,256

 
(311
)
 
14,056

Collateralized mortgage obligations
(65
)
 
10,597

 

 

 
(65
)
 
10,597

Municipal bonds
(102
)
 
7,210

 
(217
)
 
11,273

 
(319
)
 
18,483

 
$
(222
)
 
$
22,921

 
$
(747
)
 
$
28,726

 
$
(969
)
 
$
51,647


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

17


securities as of March 31, 2019 and December 31, 2018. In addition, as of March 31, 2019 and December 31, 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.

 
At March 31, 2019
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$
6,326

 
1.64
%
 
$
105,820

 
2.12
%
 
$
112,146

 
2.09
%
Commercial

 

 
18,784

 
2.42

 
7,887

 
2.44

 
3,711

 
3.00

 
30,382

 
2.50

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

 
156,308

 
2.43

 
156,308

 
2.43

Commercial

 

 
15,823

 
2.93

 
29,473

 
2.97

 
77,673

 
2.48

 
122,969

 
2.65

Municipal bonds
5,073

 
2.10

 

 

 
7,658

 
3.23

 
338,629

 
3.61

 
351,360

 
3.58

Corporate debt securities
1,025

 
3.40

 
7,755

 
3.59

 
9,591

 
3.49

 
93

 
6.15

 
18,464

 
3.54

U.S. Treasury securities

 

 
11,037

 
1.90

 

 

 

 

 
11,037

 
1.90

Agency debentures

 

 

 

 
9,766

 
2.28

 

 

 
9,766

 
2.28

Total available for sale
$
6,098

 
2.32
%
 
$
53,399

 
2.63
%
 
$
70,701

 
2.79
%
 
$
682,234

 
2.97
%
 
$
812,432

 
2.93
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 

 
1,801

 
2.88

 
2,691

 
2.03

 

 

 
4,492

 
2.37

Total held to maturity
$

 
%
 
$
1,801

 
2.88
%
 
$
2,691

 
2.03
%
 
$

 
%
 
$
4,492

 
2.37
%
 


18


 
At December 31, 2018
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$
7,094

 
1.62
%
 
$
100,867

 
2.05
%
 
$
107,961

 
2.03
%
Commercial

 

 
14,175

 
2.20

 
16,737

 
2.99

 
3,602

 
2.90

 
34,514

 
2.66

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

 
166,744

 
2.43

 
166,744

 
2.43

Commercial

 

 
9,008

 
2.42

 
29,292

 
2.88

 
78,374

 
2.42

 
116,674

 
2.53

Municipal bonds
5,670

 
2.12

 
16,276

 
2.24

 
30,659

 
2.89

 
333,050

 
3.51

 
385,655

 
3.39

Corporate debt securities

 

 
3,949

 
2.96

 
13,608

 
3.31

 
2,438

 
3.65

 
19,995

 
3.29

U.S. Treasury securities

 

 
10,900

 
1.87

 

 

 

 

 
10,900

 
1.87

Agency debentures

 

 

 

 
9,525

 
2.23

 

 

 
9,525

 
2.23

Total available for sale
$
5,670

 
2.12
%
 
$
54,308

 
2.24
%
 
$
106,915

 
2.81
%
 
$
685,075

 
2.90
%
 
$
851,968

 
2.84
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$

 
%
 
$
10,797

 
2.82
%
 
$
10,797

 
2.82
%
Commercial

 

 
12,147

 
2.51

 
4,879

 
2.64

 

 

 
17,026

 
2.55

Collateralized mortgage obligations

 

 
7,205

 
3.59

 

 

 
8,364

 
2.94

 
15,569

 
3.24

Municipal bonds

 

 
1,790

 
2.85

 
5,651

 
2.29

 
19,621

 
3.24

 
27,062

 
3.01

Corporate debt securities

 

 

 

 

 

 
92

 
6.00

 
92

 
6.00

Total held to maturity
$

 
%
 
$
21,142

 
2.91
%
 
$
10,530

 
2.45
%
 
$
38,874

 
3.07
%
 
$
70,546

 
2.93
%


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended March 31,
(in thousands)
2019
 
2018
 
 
 
 
Proceeds
$
94,998

 
$
16,875

Gross gains
372

 
223

Gross losses
(619
)
 
(1
)


19


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

(in thousands)
At March 31,
2019
 
At December 31,
2018
 
 
 
 
Federal Home Loan Bank to secure borrowings
$
46,984

 
$
63,179

Washington and California State to secure public deposits
114,491

 
126,565

Securities pledged to secure derivatives in a liability position
623

 
5,077

Other securities pledged
5,014

 
5,147

Total securities pledged as collateral
$
167,112

 
$
199,968



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 March 31, 2019 and December 31, 2018.

Tax-exempt interest income on securities available for sale totaling $2.8 million and $2.3 million for the three months ended March 31, 2019 and 2018, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 4–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, and Note 5, Loans and Credit Quality, within our 2018 Annual Report on Form 10-K.

The Company's portfolio of loans held for investment is divided into two portfolio segments, consumer loans and commercial loans, which are the same segments used to determine the allowance for loan losses. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity and other loans within the consumer loan portfolio segment and non-owner occupied commercial real estate, multifamily, construction/land development, owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment.


20


Loans held for investment consist of the following: 
(in thousands)
At March 31,
2019
 
At December 31,
2018
 
 
 
 
Consumer loans
 
&