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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,~~June 30, 2018

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)

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ 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 2,~~August 1, 2018 was ~~26,976,811.6.~~26,985,537.6.



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at ~~March 31,~~June 30, 2018 and December 31, 2017		4
Interim Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended ~~March 31,~~June 30, 2018 and 2017		5
Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended ~~March 31,~~June 30, 2018 and 2017		6
Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2018 and 2017		7
Interim Consolidated Statements of Cash Flows (Unaudited) for the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2018 and 2017		8
Notes to Interim Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies		10
Note 2 – Investment Securities		1312
Note 3 – Loans and Credit Quality		1918
Note 4 – Deposits		3436
Note 5 – Derivatives and Hedging Activities		3536
Note 6 – Mortgage Banking Operations		3739
Note 7 – Commitments, Guarantees and Contingencies		4244
Note 8 – Fair Value Measurement		4345
Note 9 – Earnings Per Share		5356
Note 10 – Business Segments		5356
Note 11 – Accumulated Other Comprehensive Income		5558
Note 12 - Revenue		5558
Note 13 - Restructuring		5660
Note 14 - Subsequent events		5660
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements		5761
Summary Financial Data		5862
Management’s Overview of Financial Performance		6065
Critical Accounting Policies and Estimates		6368
Results of Operations		6469
Review of Financial Condition		7076
Business Segments		7379
Off-Balance Sheet Arrangements		7783
Enterprise Risk Management		7884
Credit Risk Management		78
~~Liquidity and Capital Resources~~		8384

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

PART I



ITEM 1.1 FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


(in thousands, except share data)	March 31, 2018			December 31, 2017			June 30, 2018			December 31, 2017

ASSETS
Cash and cash equivalents (including interest-earning instruments of $19,792 and $30,268)	$	66,289		$	72,718
Investment securities (includes $836,200 and $846,268 carried at fair value)	915,483			904,304
Loans held for sale (includes $451,665 and $577,313 carried at fair value)	500,533			610,902
Loans held for investment (net of allowance for loan losses of $39,090 and $37,847; includes $5,304 and $5,477 carried at fair value)	4,758,261			4,506,466
Mortgage servicing rights (includes $294,062 and $258,560 carried at fair value)	320,105			284,653
Cash and cash equivalents (including interest-earning instruments of $126,083 and $30,268)							$	176,218		$	72,718
Investment securities (includes $829,422 and $846,268 carried at fair value)							907,457			904,304
Loans held for sale (includes $527,088 and $577,313 carried at fair value)							568,514			610,902
Loans held for investment (net of allowance for loan losses of $39,480 and $37,847; includes $4,187 and $5,477 carried at fair value)							4,883,310			4,506,466
Mortgage servicing rights (includes $245,744 and $258,560 carried at fair value)							272,205			284,653
Other real estate owned	297			664			752			664
Federal Home Loan Bank stock, at cost	41,923			46,639			48,157			46,639
Premises and equipment, net	104,508			104,654			99,155			104,654
Goodwill	22,564			22,564			22,564			22,564
Other assets	194,093			188,477			185,545			188,477
Total assets	$	6,924,056		$	6,742,041		$	7,163,877		$	6,742,041
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	5,048,996		$	4,760,952		$	5,120,285		$	4,760,952
Federal Home Loan Bank advances	851,657			979,201			1,008,613			979,201
Accounts payable and other liabilities	172,119			172,234			173,145			172,234
Federal funds purchased and securities sold under agreements to repurchase	25,000			—
Other borrowings							30,007			—
Long-term debt	125,321			125,274			125,368			125,274
Total liabilities	6,223,093			6,037,661			6,457,418			6,037,661
Commitments and contingencies (Note 7)
Shareholders’ equity:
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares	—			—			—			—
Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 26,972,074 shares and 26,888,288 shares	511			511
Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 26,978,229 shares and 26,888,288 shares							511			511
Additional paid-in capital	339,902			339,009			340,723			339,009
Retained earnings	377,848			371,982			384,947			371,982
Accumulated other comprehensive loss	(17,298		)	(7,122		)	(19,722		)	(7,122		)
Total shareholders' equity	700,963			704,380			706,459			704,380
Total liabilities and shareholders' equity	$	6,924,056		$	6,742,041		$	7,163,877		$	6,742,041

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except share data)	2018		2017			2018			2017

Interest income:
Loans	$	61,409	$	51,198		$	117,345		$	100,704
Investment securities	5,527		5,419			11,086			11,051
Other	253		125			432			261
	67,189		56,742			128,863			112,016
Interest expense:
Deposits	9,562		5,867			17,350			11,490
Federal Home Loan Bank advances	4,782		2,368			8,418			4,769
Federal funds purchased and securities sold under agreements to repurchase	24		5			56			5
Long-term debt	1,662		1,514			3,246			2,993
Other	156		120			330			240
	16,186		9,874			29,400			19,497
Net interest income	51,003		46,868			99,463			92,519
Provision for credit losses	1,000		500			1,750			500
Net interest income after provision for credit losses	50,003		46,368			97,713			92,019
Noninterest income:
Net gain on loan origination and sale activities	57,049		65,908			105,368			126,189
Loan servicing income	7,032		8,764			14,606			18,003
Income from WMS Series LLC	322		406			311			591
Depositor and other retail banking fees	1,953		1,811			3,898			3,467
Insurance agency commissions	527		501			1,070			897
Gain on sale of investment securities available for sale	16		551			238			557
Other	2,490		3,067			4,729			5,765
	69,389		81,008			130,220			155,469
Noninterest expense:
Salaries and related costs	69,127		76,390			135,818			147,698
General and administrative	14,707		15,872			29,291			33,000
Amortization of core deposit intangibles	407		493			813			1,007
Legal	839		150			1,569			310
Consulting	758		771			1,635			1,829
Federal Deposit Insurance Corporation assessments	1,079		697			2,008			1,521
Occupancy	14,953		8,880			23,133			17,089
Information services	8,693		8,172			17,158			15,820
Net cost (benefit) from operation and sale of other real estate owned	2		(181		)	(91		)	(156		)
	110,565		111,244			211,334			218,118
Income before income taxes	8,827		16,132			16,599			29,370
Income tax expense	1,728		4,923			3,634			9,178
NET INCOME	$	7,099	$	11,209		$	12,965		$	20,192

Basic income per share	$	0.26	$	0.42		$	0.48		$	0.75
Diluted income per share	$	0.26	$	0.41		$	0.48		$	0.75
Basic weighted average number of shares outstanding	26,976,892		26,866,230			26,952,178			26,843,813
Diluted weighted average number of shares outstanding	27,156,329		27,084,608			27,157,664			27,071,028

Three Months Ended March 31,
(in thousands, except share data) 2018 2017

Interest income:
Loans $ 55,936
$ 49,506
Investment securities 5,559
5,632
Other 179
136
61,674
55,274
Interest expense:
Deposits 7,788
5,623
Federal Home Loan Bank advances 3,636
2,401
Federal funds purchased and securities sold under agreements to repurchase 32
—
Long-term debt 1,584
1,479
Other 174
120
13,214
9,623
Net interest income 48,460
45,651
Provision for credit losses 750
—
Net interest income after provision for credit losses 47,710
45,651
Noninterest income:
Net gain on loan origination and sale activities 48,319
60,281
Loan servicing income 7,574
9,239
(Loss) income from WMS Series LLC (11 ) 185
Depositor and other retail banking fees 1,945
1,656
Insurance agency commissions 543
396
Gain on sale of investment securities available for sale 222
6
Other 2,239
2,698
60,831
74,461
Noninterest expense:
Salaries and related costs 66,691
71,308
General and administrative 14,584
17,128
Amortization of core deposit intangibles 406
514
Legal 730
160
Consulting 877
1,058
Federal Deposit Insurance Corporation assessments 929
824
Occupancy 8,180
8,209
Information services 8,465
7,648
Net (benefit) cost from operation and sale of other real estate owned (93 ) 25
100,769
106,874
Income before income taxes 7,772
13,238
Income tax expense 1,906
4,255
NET INCOME $ 5,866
$ 8,983

Basic income per share $ 0.22
$ 0.33
Diluted income per share $ 0.22
$ 0.33
Basic weighted average number of shares outstanding 26,927,464
26,821,396
Diluted weighted average number of shares outstanding 27,159,000
27,057,449

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2018			2017

Net income	$	5,866		$	8,983		$	7,099		$	11,209		$	12,965		$	20,192
Other comprehensive income (loss), net of tax:
Other comprehensive (loss) income, net of tax:
Unrealized gain (loss) on investment securities available for sale:
Unrealized holding (loss) gain arising during the period, net of tax (benefit) expense of ($2,658) and $1,039	(10,000		)	1,930
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $46 and $2	(176		)	(4		)
Unrealized holding (loss) gain arising during the period, net of tax (benefit) expense of ($642) and $1,848 for the three months ended June 30, 2018 and 2017, and ($3,300) and $2,887 for the six months ended June 30, 2018 and 2017, respectively							(2,412		)	3,431			(12,412		)	5,361
Reclassification adjustment for net gains included in net income, net of tax expense of $4 and $193 for the three months ended June 30, 2018 and 2017, and $50 and $195 for the six months ended June 30, 2018 and 2017, respectively							(12		)	(358		)	(188		)	(362		)
Other comprehensive (loss) income	(10,176		)	1,926			(2,424		)	3,073			(12,600		)	4,999
Comprehensive income (loss)	$	(4,310	)	$	10,909
Comprehensive income							$	4,675		$	14,282		$	365		$	25,191

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

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			Number of shares	Common stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)			Total

Balance, January 1, 2017	26,800,183	$	511	$	336,149	$	303,036	$	(10,412	)	$	629,284		26,800,183	$	511	$	336,149	$	303,036	$	(10,412	)	$	629,284
Net income	—	—		—		8,983		—			8,983			—	—		—		20,192		—			20,192
Share-based compensation expense	—	—		643		—		—			643			—	—		1,211		—		—			1,211
Common stock issued	62,561	—		83		—		—			83			74,688	—		155		—		—			155
Other comprehensive income	—	—		—		—		1,926			1,926			—	—		—		—		4,999			4,999
Balance, March 31, 2017	26,862,744	$	511	$	336,875	$	312,019	$	(8,486	)	$	640,919
Balance, June 30, 2017														26,874,871	$	511	$	337,515	$	323,228	$	(5,413	)	$	655,841

Balance, January 1, 2018	26,888,288	$	511	$	339,009	$	371,982	$	(7,122	)	$	704,380		26,888,288	$	511	$	339,009	$	371,982	$	(7,122	)	$	704,380
Net income	—	—		—		5,866		—			5,866			—	—		—		12,965		—			12,965
Share-based compensation expense	—	—		771		—		—			771			—	—		1,460		—		—			1,460
Common stock issued	83,786	—		122		—		—			122			89,941	—		254		—		—			254
Other comprehensive loss	—	—		—		—		(10,176		)	(10,176		)	—	—		—		—		(12,600		)	(12,600		)
Balance, March 31, 2018	26,972,074	$	511	$	339,902	$	377,848	$	(17,298	)	$	700,963
Balance, June 30, 2018														26,978,229	$	511	$	340,723	$	384,947	$	(19,722	)	$	706,459

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,866		$	8,983		$	12,965		$	20,192
Adjustments to reconcile net income to net cash used in operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion	6,051			4,807			12,104			10,911
Provision for credit losses	750			—			1,750			500
Net fair value adjustment and gain on sale of loans held for sale	(14,359		)	(53,304		)	(44,297		)	(113,742		)
Fair value adjustment of loans held for investment	124			(157		)	31			(1,203		)
Origination of mortgage servicing rights	(15,288		)	(18,526		)	(33,369		)	(35,211		)
Change in fair value of mortgage servicing rights	(21,148		)	6,388			(24,878		)	21,722
Net gain on sale of investment securities	(222		)	(6		)	(238		)	(557		)
Net gain on sale of loans originated as held for investment	—			(83		)
Net loss (gain) on sale of loans originated as held for investment							628			(297		)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned	(92		)	(55		)	(92		)	(356		)
Loss on disposal of fixed assets	64			50			302			106
(Recovery) loss on lease abandonment	(266		)	—
Net deferred income tax expense	1,906			7,624
Loss on lease abandonment							5,802			502
Net deferred income tax (benefit) expense							(46		)	7,510
Share-based compensation expense	882			720			1,702			1,362
Origination of loans held for sale	(1,450,347		)	(1,640,341		)	(3,248,078		)	(3,665,396		)
Proceeds from sale of loans originated as held for sale	1,606,661			1,867,783			3,345,695			3,769,126
Changes in operating assets and liabilities:
Increase in accounts receivable and other assets	(6,787		)	(13,978		)
Decrease in accounts payable and other liabilities	(6,539		)	(21,905		)
Net cash provided by operating activities	107,256			148,000
Decrease (increase) in accounts receivable and other assets							3,437			(7,198		)
Increase (decrease) in accounts payable and other liabilities							2,347			(17,371		)
Net cash provided by (used in) operating activities							35,765			(9,400		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(70,007		)	(170,381		)	(97,842		)	(246,435		)
Proceeds from sale of investment securities	16,875			2,386			22,232			314,633
Principal repayments and maturities of investment securities	27,383			26,644			52,857			50,043
Proceeds from sale of other real estate owned	459			708			459			2,170
Proceeds from sale of loans originated as held for investment	—			1,469			230,527			23,780
Proceeds from sale of mortgage servicing rights							65,263			—
Mortgage servicing rights purchased from others	—			(354		)	—			(565		)
Capital expenditures related to other real estate owned	—			(57		)	—			(57		)
Origination of loans held for investment and principal repayments, net	(275,065		)	(137,267		)	(617,670		)	(420,530		)
Purchase of property and equipment	(3,579		)	(22,397		)	(5,926		)	(28,789		)
Net cash used in investing activities	(303,934		)	(299,249		)	(350,100		)	(305,750		)


	Three Months Ended March 31,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net	$	288,026		$	166,158		$	359,251		$	318,132
Proceeds from Federal Home Loan Bank advances	2,613,400			1,804,600			5,637,500			4,497,700
Repayment of Federal Home Loan Bank advances	(2,740,900		)	(1,810,600		)	(5,608,000		)	(4,498,700		)
Proceeds from federal funds purchased and securities sold under agreements to repurchase	495,000			88,000			796,000			326,618
Repayment of federal funds purchased and securities sold under agreements to repurchase	(470,000		)	(88,000		)	(796,000		)	(326,618		)
Proceeds from Federal Home Loan Bank stock repurchase	44,307			43,033
Proceeds from line of credit draws							30,000			—
Proceeds from Federal Home Loan Bank stock							98,621			91,939
Purchase of Federal Home Loan Bank stock	(39,591		)	(44,342		)	(100,139		)	(93,362		)
Proceeds from stock issuance, net	11			11			11			11
Payments from equity raise	—			(46		)	—			(46		)
Net cash provided by financing activities	190,253			158,814			417,244			315,674
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	(6,425		)	7,565
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH							102,909			524
Cash, cash equivalents and restricted cash, beginning of year	73,909			56,364			73,909			56,364
Cash, cash equivalents and restricted cash, end of period	67,484			63,929			176,818			56,888
Less restricted cash included in other assets	(1,195		)	(2,437		)	(600		)	(2,441		)
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	66,289		$	61,492		$	176,218		$	54,447
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid	$	12,067		$	8,016		$	28,825		$	19,757
Federal and state income taxes refunded, net	(4		)	(23,202		)	(112		)	(23,382		)
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	—			1,011			455			1,125
Loans transferred from held for investment to held for sale	36,626			2,871			252,567			113,278
Loans transferred from held for sale to held for investment	5,040			3,947			10,480			29,809
(Reduction in) Ginnie Mae loans recognized with the right to repurchase, net	8,598			(572		)
Ginnie Mae loans recognized with the right to repurchase (reduction in), net							1,992			(2,358		)
Receivable from sale of mortgage servicing rights							3,457			—

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

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 inon the ~~western~~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)~~("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. ~~These~~Some of these estimates ~~that~~ require application of management's most difficult, subjective or complex judgments ~~often~~and result in ~~the need to make estimates about the effect of matters~~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 3, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 6, Mortgage Banking Operations), valuation of certain loans held for investment (Note 3, Loans and Credit Quality), valuation of investment securities (Note 2, Investment Securities), and valuation of derivatives (Note 5, Derivatives and Hedging Activities). We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income, cash flows, total assets or total shareholder's equity as previously reported.

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 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, 2017, filed with the Securities and Exchange Commission ("2017 Annual Report on Form 10-K").

Recent Accounting Developments

~~Tax Reform~~

On December 22, 2017, new federal tax reform legislation was enacted in the United States ("2017 Tax Act"), resulting in significant changes from previous tax law. The new legislation reduced the federal corporate income tax rate to 21% from 35% and makes many other sweeping changes to the tax code, effective January 1, 2018. In the fourth quarter of 2017, we were required to revalue our deferred tax assets and liabilities at the new statutory rate upon enactment. As a result of this revaluation, in 2017, we recognized a one-time, non-cash $23.3 million tax benefit.

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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.~~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 ~~Cuts and Jobs~~ Act is recognized. The Company is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, or ASU 2017-12. This standard better aligns an entity's risk management activities and

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 is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and other Costs (Subtopic 320-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Adoption of ASU 2017-08 is required for fiscal years and interim periods within those fiscal years, beginning after December, 15, 2018, early adoption is permitted. The Company is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated 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 being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

~~Effective January 1, 2018, we adopted ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business,~~ for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will be applied prospectively and will impact how we assess acquisitions (or disposals) of assets or businesses. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

~~Effective January 1, 2018, we adopted ASU No. 2016-18,~~ ~~“Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the FASB Emerging Issues Task Force.”~~ This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents, including certain disclosures. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

~~Effective January 1, 2018, we adopted ASU 2016-15,~~ ~~Statement of Cash Flows (Topic 230):, Classification of Certain Cash Receipts and Cash Payments~~. The amendments in this ASU were issued to reduce diversity in how certain cash receipts and payments are presented and classified in the statement of cash flows in eight specific areas. The adoption of this standard did not have a material impact on the Company’s 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 methodology 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 is still evaluating the effects this ASU will have on the Company’s consolidated financial statements. The Company has formed an internal committee to oversee the project. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to

consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses; however, management is still assessing the magnitude of the increase and its impact on the Company's consolidated financial statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address the amendments of this ASU.

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. This ASU simplifies the accounting for sale and leaseback transactions. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application was permitted upon issuance of the ASU. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements. While we have not quantified the impact to our balance sheet, upon the adoption of this ASU we expect to report increased assets and liabilities on our consolidated statement of financial condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and certain equipment under non-cancelable operating lease agreements, which currently are not on our consolidated statement of financial condition.

~~Effective January 1, 2018, we adopted ASU No. 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. This ASU simplifies the impairment assessment of equity investments without readily determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the consolidated statement of financial position. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the consolidated statement of financial position or in the accompanying notes to the financial statements. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

~~Effective January 1, 2018, the company adopted ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~. This ASU clarifies the principles for recognizing revenue from contracts with customers requiring the application of a five step process: 1) identify the contract, 2) identify the performance obligation, 3) determine the transaction price of the contract, 4) allocate the transaction price to the performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted this ASU effective January 1, 2018 using the modified-retrospective transition method. The Company has concluded that substantially all of its revenue streams are not within the scope of the guidance, as they are governed by other accounting standards. The guidance did not have an impact on the company’s consolidated financial results for the quarter ended March 31, 2018 and there is no material change to disclosures as a result of the adoption of this guidance.

NOTE 2–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, 2018									At June 30, 2018
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

AVAILABLE FOR SALE
Mortgage-backed securities:
Residential	$	126,626	$	—	$	(5,270	)	$	121,356	$	121,537	$	2	$	(5,691	)	$	115,848
Commercial	32,022		22		(638		)	31,406		31,216		—		(862		)	30,354
Municipal bonds	382,216		1,030		(8,606		)	374,640		370,688		951		(9,840		)	361,799
Collateralized mortgage obligations:
Residential	175,748		—		(6,377		)	169,371		175,563		6		(7,050		)	168,519
Commercial	99,897		9		(2,179		)	97,727		113,926		27		(2,330		)	111,623
Corporate debt securities	22,740		2		(981		)	21,761		22,606		2		(1,129		)	21,479
U.S. Treasury securities	10,904		—		(415		)	10,489		10,907		—		(469		)	10,438
Agency debentures	9,865		—		(415		)	9,450		9,868		—		(506		)	9,362
	$	860,018	$	1,063	$	(24,881	)	$	836,200	$	856,311	$	988	$	(27,877	)	$	829,422

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	12,012	$	—	$	(258	)	$	11,754	$	11,430	$	—	$	(301	)	$	11,129
Commercial	21,875		14		(495		)	21,394		21,773		—		(649		)	21,124
Collateralized mortgage obligations	17,805		50		(49		)	17,806		17,341		45		(72		)	17,314
Municipal bonds	27,495		179		(455		)	27,219		27,396		169		(445		)	27,120
Corporate debt securities	96		—		—			96		95		—		—			95
	$	79,283	$	243	$	(1,257	)	$	78,269	$	78,035	$	214	$	(1,467	)	$	76,782



	At December 31, 2017
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

AVAILABLE FOR SALE
Mortgage-backed securities:
Residential	$	133,654	$	4	$	(3,568	)	$	130,090
Commercial	24,024		8		(338		)	23,694
Municipal bonds	389,117		2,978		(3,643		)	388,452
Collateralized mortgage obligations:
Residential	164,502		3		(4,081		)	160,424
Commercial	100,001		9		(1,441		)	98,569
Corporate debt securities	25,146		67		(476		)	24,737
U.S. Treasury securities	10,899		—		(247		)	10,652
Agency debentures	9,861		—		(211		)	9,650
	$	857,204	$	3,069	$	(14,005	)	$	846,268

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	12,062	$	35	$	(99	)	$	11,998
Commercial	21,015		75		(161		)	20,929
Collateralized mortgage obligations	3,439		—		—			3,439
Municipal bonds	21,423		339		(97		)	21,665
Corporate debt securities	97		—		—			97
	$	58,036	$	449	$	(357	)	$	58,128

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 Federal National Mortgage Association ("Fannie ~~Mae,~~ Mae"), Government National Mortgage Association ("Ginnie ~~Mae~~Mae") or Federal Home Loan Mortgage Corporation ("Freddie ~~Mac.~~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 revenues from the specific project being financed) issued by various municipal corporations. As of ~~March 31,~~June 30, 2018 and December 31, 2017, 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,~~June 30, 2018 and December 31, 2017, substantially all securities held had ratings available by external ratings agencies.

Investment securities available for sale and held to maturity that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.


	At March 31, 2018															At June 30, 2018
	Less than 12 months					12 months or more					Total					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		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value

AVAILABLE FOR SALE
Mortgage-backed securities:
Residential	$	(366	)	$	17,848	$	(4,904	)	$	103,082	$	(5,270	)	$	120,930	$	(343	)	$	13,874	$	(5,348	)	$	101,421	$	(5,691	)	$	115,295
Commercial	(326		)	15,693		(312		)	6,603		(638		)	22,296		(509		)	23,846		(353		)	6,508		(862		)	30,354
Municipal bonds	(3,300		)	186,208		(5,306		)	128,141		(8,606		)	314,349		(4,038		)	176,321		(5,802		)	125,662		(9,840		)	301,983
Collateralized mortgage obligations:
Residential	(1,303		)	62,441		(5,074		)	106,930		(6,377		)	169,371		(1,529		)	63,185		(5,521		)	101,000		(7,050		)	164,185
Commercial	(1,040		)	57,850		(1,139		)	34,368		(2,179		)	92,218		(940		)	43,156		(1,390		)	43,017		(2,330		)	86,173
Corporate debt securities	(152		)	8,766		(829		)	12,765		(981		)	21,531		(176		)	8,683		(953		)	12,566		(1,129		)	21,249
U.S. Treasury securities	(3		)	997		(411		)	9,492		(414		)	10,489		(2		)	998		(467		)	9,440		(469		)	10,438
Agency debentures	(415		)	9,450		—			—		(415		)	9,450		(506		)	9,363		—			—		(506		)	9,363
	$	(6,905	)	$	359,253	$	(17,975	)	$	401,381	$	(24,880	)	$	760,634	$	(8,043	)	$	339,426	$	(19,834	)	$	399,614	$	(27,877	)	$	739,040

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	(73	)	$	5,347	$	(186	)	$	4,338	$	(259	)	$	9,685	$	(96	)	$	4,686	$	(205	)	$	4,131	$	(301	)	$	8,817
Commercial	(495		)	18,385		—			—		(495		)	18,385		(649		)	21,124		—			—		(649		)	21,124
Collateralized mortgage obligations	(49		)	9,351		—			—		(49		)	9,351		(72		)	13,850		—			—		(72		)	13,850
Municipal bonds	(192		)	10,500		(263		)	9,237		(455		)	19,737		(171		)	10,506		(274		)	9,168		(445		)	19,674
	$	(809	)	$	43,583	$	(449	)	$	13,575	$	(1,258	)	$	57,158	$	(988	)	$	50,166	$	(479	)	$	13,299	$	(1,467	)	$	63,465



	At December 31, 2017
	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	$	(182	)	$	18,020	$	(3,386	)	$	110,878	$	(3,568	)	$	128,898
Commercial	(113		)	15,265		(225		)	6,748		(338		)	22,013
Municipal bonds	(760		)	105,415		(2,883		)	134,103		(3,643		)	239,518
Collateralized mortgage obligations:
Residential	(612		)	53,721		(3,469		)	104,555		(4,081		)	158,276
Commercial	(538		)	57,236		(903		)	35,225		(1,441		)	92,461
Corporate debt securities	(15		)	5,272		(461		)	13,365		(476		)	18,637
U.S. Treasury securities	(3		)	997		(244		)	9,655		(247		)	10,652
Agency debentures	(211		)	9,650		$	—		—		(211		)	9,650
	$	(2,434	)	$	265,576	$	(11,571	)	$	414,529	$	(14,005	)	$	680,105

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	(13	)	$	2,662	$	(86	)	$	4,452	$	(99	)	$	7,114
Commercial	(161		)	15,900		—			—		(161		)	15,900
Collateralized mortgage obligations	—			3,439		—			—		—			3,439
Municipal bonds	(3		)	2,185		(94		)	9,465		(97		)	11,650
	$	(177	)	$	24,186	$	(180	)	$	13,917	$	(357	)	$	38,103

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 ~~March 31,~~June 30, 2018 and December 31, 2017. In addition, as of ~~March 31,~~June 30, 2018 and December 31, 2017, 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, 2018																				At June 30, 2018
	Within one year				After one year through five years				After five years through ten years				After ten years				Total				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		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	$	—	—	%	$	—	—	%	$	8,420	1.62	%	$	112,936	2.03	%	$	121,356	2.00	%	$	—	—	%	$	—	—	%	$	8,022	1.62	%	$	107,826	2.04	%	$	115,848	2.02	%
Commercial	—		—		14,158		2.08		13,569		2.69		3,679		2.92		31,406		2.44		—		—		13,412		2.10		13,337		2.66		3,605		2.87		30,354		2.44
Municipal bonds	635		2.29		15,948		2.25		34,883		2.71		323,174		3.25		374,640		3.15		1,263		2.20		15,989		2.28		32,279		2.71		312,268		3.23		361,799		3.14
Collateralized mortgage obligations:
Residential	—		—		—		—		—		—		169,371		2.23		169,371		2.23		—		—		—		—		—		—		168,519		2.28		168,519		2.28
Commercial	—		—		12,303		2.18		20,549		2.46		64,875		2.18		97,727		2.24		—		—		10,149		2.27		25,398		2.76		76,076		2.25		111,623		2.37
Agency debentures	—		—		—		—		9,450		2.21		—		—		9,450		2.21		—		—		—		—		9,362		2.19		—		—		9,362		2.19
Corporate debt securities	1,032		2.10		4,189		3.02		11,738		3.36		4,802		3.52		21,761		3.28		1,018		2.10		4,153		3.01		11,557		3.33		4,751		3.50		21,479		3.25
U.S. Treasury securities	997		1.22		—		—		9,492		1.73		—		—		10,489		1.69		998		1.22		—		—		9,440		1.72		—		—		10,438		1.68
Total available for sale	$	2,664	1.82	%	$	46,598	2.25	%	$	108,101	2.52	%	$	678,837	2.68	%	$	836,200	2.64	%	$	3,279	1.87	%	$	43,703	2.29	%	$	109,395	2.57	%	$	673,045	2.69	%	$	829,422	2.65	%

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	—	—	%	$	11,754	2.96	%	$	11,754	2.96	%	$	—	—	%	$	—	—	%	$	—	—	%	$	11,129	2.87	%	$	11,129	2.87	%
Commercial	—		—		11,612		2.21		9,782		2.82		—		—		21,394		2.49		—		—		14,469		2.41		6,655		2.58		—		—		21,124		2.46
Collateralized mortgage obligations	—		—		9,351		3.30		—		—		8,455		2.53		17,806		2.93		—		—		8,893		3.46		—		—		8,421		2.73		17,314		3.11
Municipal bonds	—		—		1,812		2.84		4,493		2.16		20,914		3.19		27,219		3.00		—		—		1,807		2.85		4,474		2.16		20,839		3.20		27,120		3.00
Corporate debt securities	—		—		—		—		—		—		96		6.00		96		6.00		—		—		—		—		—		—		95		6.00		95		6.00
Total held to maturity	$	—	—	%	$	22,775	2.70	%	$	14,275	2.61	%	$	41,219	3.00	%	$	78,269	2.84	%	$	—	—	%	$	25,169	2.81	%	$	11,129	2.41	%	$	40,484	3.02	%	$	76,782	2.86	%



	At December 31, 2017
	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	$	—	—	%	$	—	—	%	$	8,914	1.63	%	$	121,176	1.97	%	$	130,090	1.94	%
Commercial	—		—		15,356		2.07		4,558		2.03		3,780		2.98		23,694		2.21
Municipal bonds	641		2.64		24,456		3.10		39,883		3.25		323,472		3.81		388,452		3.71
Collateralized mortgage obligations:
Residential	—		—		—		—		—		—		160,424		2.10		160,424		2.10
Commercial	—		—		12,550		2.09		21,837		2.38		64,182		2.13		98,569		2.18
Agency debentures	—		—		—		—		9,650		2.26		—		—		9,650		2.26
Corporate debt securities	1,048		2.11		6,527		2.80		11,033		3.49		6,129		3.57		24,737		3.27
U.S. Treasury securities	997		1.22		—		—		9,655		1.76		—		—		10,652		1.71
Total available for sale	$	2,686	1.90	%	$	58,889	2.58	%	$	105,530	2.67	%	$	679,163	2.90	%	$	846,268	2.85	%

HELD TO MATURITY
Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	—	—	%	$	11,998	2.93	%	$	11,998	2.93	%
Commercial	—		—		6,577		2.15		14,352		2.71		—		—		20,929		2.53
Collateralized mortgage obligations	—		—		—		—		—		—		3,439		1.90		3,439		1.90
Municipal bonds	—		—		1,846		3.35		4,630		2.57		15,189		3.50		21,665		3.28
Corporate debt securities	—		—		—		—		—		—		97		6.00		97		6.00
Total held to maturity	$	—	—	%	$	8,423	2.41	%	$	18,982	2.68	%	$	30,723	3.10	%	$	58,128	2.86	%

Sales of investment securities available for sale were as follows.


	Three Months Ended March 31,						Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017		2018			2017

Proceeds	$	16,875		$	2,386		$	5,357		$	312,247	$	22,232		$	314,633
Gross gains	223			25			38			551		261			576
Gross losses	(1		)	(19		)	(22		)	—		(23		)	(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, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017

Federal Home Loan Bank to secure borrowings	$	62,282	$	425,866	$	85,339	$	425,866
Washington and California State to secure public deposits	115,739		118,828		134,420		118,828
Securities pledged to secure derivatives in a liability position	9,455		7,308		10,615		7,308
Other securities pledged	5,679		6,089		5,403		6,089
Total securities pledged as collateral	$	193,155	$	558,091	$	235,777	$	558,091

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,~~June 30, 2018 and December 31, ~~2017.~~2017.

Tax-exempt interest income on securities ~~totaling $2.3~~totaled $2.2 million and $2.4 million for the three months ended ~~March 31,~~June 30, 2018 and 2017, respectively, and $4.5 million and $4.9 million for the six months ended June 30, 2018 and 2017, respectively,

was recorded in the Company's consolidated statements of operations.

NOTE 3–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 2017 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 and owner occupied commercial real estate and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following:


(in thousands)	At March 31, 2018			At December 31, 2017			At June 30, 2018			At December 31, 2017

Consumer loans
Single family⁽¹⁾	$	1,444,193		$	1,381,366		$	1,416,072		$	1,381,366
Home equity and other	470,273			453,489			513,016			453,489
Total consumer loans	1,914,466			1,834,855			1,929,088			1,834,855
Commercial real estate loans
Non-owner occupied commercial real estate	633,719			622,782			640,984			622,782
Multifamily	811,892			728,037			836,260			728,037
Construction/land development	739,248			687,631			778,094			687,631
Total commercial real estate loans	2,184,859			2,038,450			2,255,338			2,038,450
Commercial and industrial loans
Owner occupied commercial real estate	393,845			391,613			400,149			391,613
Commercial business	287,367			264,709			319,038			264,709
Total commercial and industrial loans	681,212			656,322			719,187			656,322
Loans held for investment before deferred fees, costs and allowance	4,780,537			4,529,627			4,903,613			4,529,627
Net deferred loan fees and costs	16,814			14,686			19,177			14,686
	4,797,351			4,544,313			4,922,790			4,544,313
Allowance for loan losses	(39,090		)	(37,847		)	(39,480		)	(37,847		)
Total loans held for investment	$	4,758,261		$	4,506,466		$	4,883,310		$	4,506,466


(1)	Includes ~~$5.3~~$4.2 million and $5.5 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

Loans in the amount of ~~$1.74~~$2.01 billion and $1.81 billion at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively, were pledged to secure borrowings from the ~~FHLB~~Federal Home Loan Bank ("FHLB") as part of our liquidity management strategy. Additionally, loans totaling ~~$672.8~~$556.3 million and $663.8 million at ~~March 31,~~June 30, 2018 and December 31, 2017, 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.

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 ~~March 31,~~June 30, 2018, we had concentrations representing 10% or more of the total portfolio by state and property type for the single family loan class within the states of Washington and California, which represented ~~14.7%~~13.9% and ~~11.1%~~10.6% of the total portfolio, respectively. At December 31, 2017, we had concentrations representing 10% or more of the total portfolio by state and property type for the single family loan class within the states of Washington and California, which represented 15.0% and 10.9% 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 ~~March 31,~~June 30, 2018. 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 our consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses. The allowance for unfunded commitments was $1.5 million at June 30, 2018, compared to $1.3 million at June 30, 2017.

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, within our 2017 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.


	Three Months Ended March 31,				Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2018		2017		2018			2017		2018		2017

Allowance for credit losses (roll-forward):
Beginning balance	$	39,116	$	35,264	$	40,446		$	36,042	$	39,116	$	35,264
Provision for credit losses	750		—		1,000			500		1,750		500
Recoveries, net of charge-offs	580		778
(Charge-offs) recoveries, net					(464		)	928		116		1,706
Ending balance	$	40,446	$	36,042	$	40,982		$	37,470	$	40,982	$	37,470
Components:
Allowance for loan losses	$	39,090	$	34,735
Allowance for unfunded commitments	1,356		1,307
Allowance for credit losses	$	40,446	$	36,042

Activity in the allowance for credit losses by loan portfolio and loan class was as follows.


	Three Months Ended March 31, 2018												Three Months Ended June 30, 2018
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance		Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	9,412	$	—		$	280	$	(484	)	$	9,208	$	9,208	$	—		$	2	$	(616	)	$	8,594
Home equity and other	7,081		(97		)	76		(73		)	6,987		6,987		(145		)	147		357			7,346
Total consumer loans	16,493		(97		)	356		(557		)	16,195		16,195		(145		)	149		(259		)	15,940
Commercial real estate loans
Non-owner occupied commercial real estate	4,755		—			—		(128		)	4,627		4,627		—			—		137			4,764
Multifamily	3,895		—			—		756			4,651		4,651		—			—		366			5,017
Construction/land development	8,677		—			171		311			9,159		9,159		—			172		(126		)	9,205
Total commercial real estate loans	17,327		—			171		939			18,437		18,437		—			172		377			18,986
Commercial and industrial loans
Owner occupied commercial real estate	2,960		—			—		6			2,966		2,966		—			—		66			3,032
Commercial business	2,336		(1		)	151		362			2,848		2,848		(652		)	12		816			3,024
Total commercial and industrial loans	5,296		(1		)	151		368			5,814		5,814		(652		)	12		882			6,056
Total allowance for credit losses	$	39,116	$	(98	)	$	678	$	750		$	40,446	$	40,446	$	(797	)	$	333	$	1,000		$	40,982


	Three Months Ended March 31, 2017												Three Months Ended June 30, 2017
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance		Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	8,196	$	—		$	333	$	(575	)	$	7,954	$	7,954	$	(2	)	$	683	$	(347	)	$	8,288
Home equity and other	6,153		(325		)	286		432			6,546		6,546		(186		)	67		429			6,856
Total consumer loans	14,349		(325		)	619		(143		)	14,500		14,500		(188		)	750		82			15,144
Commercial real estate loans
Non-owner occupied commercial real estate	4,481		—			—		218			4,699		4,699		—			—		217			4,916
Multifamily	3,086		—			—		707			3,793		3,793		—			—		266			4,059
Construction/land development	8,553		—			220		(704		)	8,069		8,069		—			214		(57		)	8,226
Total commercial real estate loans	16,120		—			220		221			16,561		16,561		—			214		426			17,201
Commercial and industrial loans
Owner occupied commercial real estate	2,199		—			—		138			2,337		2,337		—			—		202			2,539
Commercial business	2,596		—			264		(216		)	2,644		2,644		(16		)	168		(210		)	2,586
Total commercial and industrial loans	4,795		—			264		(78		)	4,981		4,981		(16		)	168		(8		)	5,125
Total allowance for credit losses	$	35,264	$	(325	)	$	1,103	$	—		$	36,042	$	36,042	$	(204	)	$	1,132	$	500		$	37,470



	Six Months Ended June 30, 2018
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	9,412	$	—		$	282	$	(1,100	)	$	8,594
Home equity and other	7,081		(242		)	223		284			7,346
	16,493		(242		)	505		(816		)	15,940
Commercial real estate loans
Non-owner occupied commercial real estate	4,755		—			—		9			4,764
Multifamily	3,895		—			—		1,122			5,017
Construction/land development	8,677		—			343		185			9,205
Total commercial real estate loans	17,327		—			343		1,316			18,986
Commercial and industrial loans
Owner occupied commercial real estate	2,960		—			—		72			3,032
Commercial business	2,336		(653		)	163		1,178			3,024
Total commercial and industrial loans	5,296		(653		)	163		1,250			6,056
Total allowance for credit losses	$	39,116	$	(895	)	$	1,011	$	1,750		$	40,982



	Six Months Ended June 30, 2017
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance
Consumer loans
Single family	$	8,196	$	(2	)	$	1,016	$	(922	)	$	8,288
Home equity and other	6,153		(511		)	353		861			6,856
	14,349		(513		)	1,369		(61		)	15,144
Commercial real estate loans
Non-owner occupied commercial real estate	4,481		—			—		435			4,916
Multifamily	3,086		—			—		973			4,059
Construction/land development	8,553		—			434		(761		)	8,226
Total commercial real estate loans	16,120		—			434		647			17,201
Commercial and industrial loans
Owner occupied commercial real estate	2,199		—			—		340			2,539
Commercial business	2,596		(16		)	432		(426		)	2,586
	4,795		(16		)	432		(86		)	5,125
Total allowance for credit losses	$	35,264	$	(529	)	$	2,235	$	500		$	37,470

The following tables disaggregate our allowance for credit losses and recorded investment in loans by impairment methodology.


	At March 31, 2018													At June 30, 2018
(in thousands)	Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total			Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total

Consumer loans
Single family	$	9,083	$	125	$	9,208	$	1,370,077	$	68,828	$	1,438,905		$	8,478	$	116	$	8,594	$	1,344,362	$	67,548	$	1,411,910
Home equity and other	6,941		46		6,987		468,990		1,267		470,257			7,302		44		7,346		511,740		1,260		513,000
Total consumer loans	16,024		171		16,195		1,839,067		70,095		1,909,162			15,780		160		15,940		1,856,102		68,808		1,924,910
Commercial loans
Non-owner occupied commercial real estate	4,627		—		4,627		633,719		—		633,719			4,764		—		4,764		640,984		—		640,984
Multifamily	4,651		—		4,651		811,093		799		811,892			5,017		—		5,017		835,476		784		836,260
Construction/land development	9,159		—		9,159		738,658		590		739,248			9,205		—		9,205		777,428		666		778,094
Total commercial real estate loans	18,437		—		18,437		2,183,470		1,389		2,184,859			18,986		—		18,986		2,253,888		1,450		2,255,338
Commercial and industrial loans
Owner occupied commercial real estate	2,966		—		2,966		390,991		2,854		393,845			3,032		—		3,032		398,889		1,260		400,149
Commercial business	2,710		138		2,848		284,582		2,785		287,367			2,902		122		3,024		317,012		2,026		319,038
Total commercial and industrial loans	5,676		138		5,814		675,573		5,639		681,212			5,934		122		6,056		715,901		3,286		719,187
Total loans evaluated for impairment	40,137		309		40,446		4,698,110		77,123		4,775,233			40,700		282		40,982		4,825,891		73,544		4,899,435
Loans held for investment carried at fair value	—		—		—		—		—		5,304		⁽¹⁾	—		—		—		—		—		4,187		⁽¹⁾
Total loans held for investment	$	40,137	$	309	$	40,446	$	4,698,110	$	77,123	$	4,780,537		$	40,700	$	282	$	40,982	$	4,825,891	$	73,544	$	4,903,622



	At December 31, 2017
(in thousands)	Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total

Consumer loans
Single family	$	9,188	$	224	$	9,412	$	1,300,939	$	74,967	$	1,375,906
Home equity and other	7,036		45		7,081		452,182		1,290		453,472
Total consumer loans	16,224		269		16,493		1,753,121		76,257		1,829,378
Commercial real estate loans
Non-owner occupied commercial real estate	4,755		—		4,755		622,782		—		622,782
Multifamily	3,895		—		3,895		727,228		809		728,037
Construction/land development	8,677		—		8,677		687,177		454		687,631
Total commercial real estate loans	17,327		—		17,327		2,037,187		1,263		2,038,450
Commercial and industrial loans
Owner occupied commercial real estate	2,960		—		2,960		388,624		2,989		391,613
Commercial business	2,316		20		2,336		261,603		3,106		264,709
Total commercial and industrial loans	5,276		20		5,296		650,227		6,095		656,322
Total loans evaluated for impairment	38,827		289		39,116		4,440,535		83,615		4,524,150
Loans held for investment carried at fair value	—		—		—		5,246		231		5,477		⁽¹⁾
Total loans held for investment	$	38,827	$	289	$	39,116	$	4,445,781	$	83,846	$	4,529,627


(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.

Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.


	At March 31, 2018						At June 30, 2018
(in thousands)	Recorded investment⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance		Recorded investment⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	66,257	$	67,085	$	—	$	65,585	$	66,378	$	—
Home equity and other	763		788		—		759		784		—
Total consumer loans	67,020		67,873		—		66,344		67,162		—
Commercial real estate loans
Multifamily	799		831		—		784		822		—
Construction/land development	590		590		—		666		666		—
Total commercial real estate loans	1,389		1,421		—		1,450		1,488		—
Commercial and industrial loans
Owner occupied commercial real estate	2,854		3,165		—		1,260		1,569		—
Commercial business	1,875		2,560		—		1,589		2,262		—
Total commercial and industrial loans	4,729		5,725		—		2,849		3,831		—
	$	73,138	$	75,019	$	—	$	70,643	$	72,481	$	—
With an allowance recorded:
Consumer loans
Single family	$	2,571	$	2,629	$	125	$	1,963	$	2,021	$	116
Home equity and other	504		504		46		501		500		44
Total consumer loans	3,075		3,133		171		2,464		2,521		160
Commercial and industrial loans
Commercial business	910		1,332		138		437		857		122
Total commercial and industrial loans	910		1,332		138		437		857		122
	$	3,985	$	4,465	$	309	$	2,901	$	3,378	$	282
Total:
Consumer loans
Single family⁽³⁾	$	68,828	$	69,714	$	125	$	67,548	$	68,399	$	116
Home equity and other	1,267		1,292		46		1,260		1,284		44
Total consumer loans	70,095		71,006		171		68,808		69,683		160
Commercial real estate loans
Multifamily	799		831		—		784		822		—
Construction/land development	590		590		—		666		666		—
Total commercial and industrial loans	1,389		1,421		—		1,450		1,488		—
Commercial and industrial loans
Owner occupied commercial real estate	2,854		3,165		—		1,260		1,569		—
Commercial business	2,785		3,892		138		2,026		3,119		122
Total commercial and industrial loans	5,639		7,057		138		3,286		4,688		122
Total impaired loans	$	77,123	$	79,484	$	309	$	73,544	$	75,859	$	282


(1)	Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.


(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.


(3)	Includes ~~$66.3~~$65.5 million in single family performing trouble debt restructurings ("TDRs").


	At December 31, 2017								At December 31, 2017
(in thousands)	Recorded investment ⁽¹⁾				Unpaid principal balance ⁽²⁾		Related allowance		Recorded investment ⁽¹⁾			Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	71,264	(4	)	$	72,424	$	—	$	71,264	⁽⁴⁾	$	72,424	$	—
Home equity and other	782				807		—		782			807		—
Total consumer loans	72,046				73,231		—		72,046			73,231		—
Commercial real estate loans
Multifamily	809				837		—		809			837		—
Construction/land development	454				454		—		454			454		—
Total commercial real estate loans	1,263				1,291		—		1,263			1,291		—
Commercial and industrial loans
Owner occupied commercial real estate	2,989				3,288		—		2,989			3,288		—
Commercial business	2,398				3,094		—		2,398			3,094		—
Total commercial and industrial loans	5,387				6,382		—		5,387			6,382		—
	$	78,696			$	80,904	$	—	$	78,696		$	80,904	$	—
With an allowance recorded:
Consumer loans
Single family	$	3,934			$	4,025	$	224	$	3,934		$	4,025	$	224
Home equity and other	508				508		45		508			508		45
Total consumer loans	4,442				4,533		269		4,442			4,533		269
Commercial and industrial loans
Commercial business	708				755		20		708			755		20
Total commercial and industrial loans	708				755		20		708			755		20
	$	5,150			$	5,288	$	289	$	5,150		$	5,288	$	289
Total:
Consumer loans
Single family⁽³⁾	$	75,198			$	76,449	$	224	$	75,198		$	76,449	$	224
Home equity and other	1,290				1,315		45		1,290			1,315		45
Total consumer loans	76,488				77,764		269		76,488			77,764		269
Commercial real estate loans
Multifamily	809				837		—		809			837		—
Construction/land development	454				454		—		454			454		—
Total commercial real estate loans	1,263				1,291		—		1,263			1,291		—
Commercial and industrial loans
Owner occupied commercial real estate	2,989				3,288		—		2,989			3,288		—
Commercial business	3,106				3,849		20		3,106			3,849		20
Total commercial and industrial loans	6,095				7,137		20		6,095			7,137		20
Total impaired loans	$	83,846			$	86,192	$	289	$	83,846		$	86,192	$	289


(1)	Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.


(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.


(3)	Includes $69.6 million in single family performing TDRs.


(4)	Includes $231 thousand of fair value option loans.

The following tables provide the average recorded investment and interest income recognized on impaired loans by portfolio segment and class.


	Three Months Ended March 31, 2018				Three Months Ended March 31, 2017				Three Months Ended June 30, 2018				Three Months Ended June 30, 2017

(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Consumer loans
Single family	$	72,013	$	653	$	82,007	$	750	$	68,188	$	657	$	83,653	$	790
Home equity and other	1,279		19		1,449		19		1,263		19		1,568		24
Total consumer loans	73,292		672		83,456		769		69,451		676		85,221		814
Commercial real estate loans
Non-owner occupied commercial real estate	—		—		1,225		—		—		—		1,161		—
Multifamily	804		6		841		6		792		6		832		6
Construction/land development	522		5		1,540		26		628		6		1,105		21
Total commercial real estate loans	1,326		11		3,606		32		1,420		12		3,098		27
Commercial and industrial loans
Owner occupied commercial real estate	2,921		36		2,707		59		2,057		19		3,280		37
Commercial business	2,945		37		3,113		47		2,405		29		2,380		36
Total commercial and industrial loans	5,866		73		5,820		106		4,462		48		5,660		73
	$	80,484	$	756	$	92,882	$	907	$	75,333	$	736	$	93,979	$	914



	Six Months Ended June 30, 2018				Six Months Ended June 30, 2017

(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Consumer loans
Single family	$	70,525	$	1,310	$	82,661	$	1,540
Home equity and other	1,272		38		1,533		43
Total consumer loans	71,797		1,348		84,194		1,583
Commercial real estate loans
Non-owner occupied commercial real estate	—		—		1,065		—
Multifamily	797		12		836		12
Construction/land development	570		11		1,367		47
Total commercial real estate loans	1,367		23		3,268		59
Commercial and industrial loans
Owner occupied commercial real estate	2,367		55		2,676		96
Commercial business	2,639		66		2,684		83
Total commercial and industrial loans	5,006		121		5,360		179
	$	78,170	$	1,492	$	92,822	$	1,821

Credit Quality Indicators

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.

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 financial 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~~The borrower 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~~it faces industry issues that, when combined with performance factors create uncertainty in ~~their~~its future ability to perform.

Delinquent payments, increasing and material overdraft activity, request for bulge and/or ~~out- of-formula~~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~~institution's credit position at some future date. ~~They~~Loans in this category contain unfavorable characteristics and are generally undesirable. ~~Loans in this category~~They 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.

This rating may be assigned when a loan officer is unable to supervise the credit properly, or when there is 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 through 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~~uncollateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual.

Loss. Loans classified as loss, risk rated 10-Loss, are considered ~~un-collectible~~uncollectible and of such little value that the continuance as an active Company asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged-off now, even though partial or full recovery may be possible in the future.

Impaired. Loans are classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This ~~generally~~ includes all loans classified as nonaccrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification.

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 commercial real estate homogeneous loans:

Watch. A homogeneous watch loan, risk rated 6, is 30-59 days past due from the required payment date at month-end.

Special Mention. A homogeneous special mention loan, risk rated 7, is 60-89 days past due from the required payment date at month-end.

Substandard. A homogeneous substandard loan, risk rated 8, is 90 days or more past due from the required payment date at month-end.

Loss. A homogeneous loss loan is risk rated 10 when the loss has been confirmed and charged off through the Bank’s commercial special assets collection process.

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 90-179 days past due from the required payment date at month-end.

Loss. A homogeneous retail loss loan is risk rated 10 when it 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.

The following tables summarize designated loan grades by loan portfolio segment and loan class.


	At March 31, 2018											At June 30, 2018
(in thousands)	Pass			Watch		Special mention		Substandard		Total		Pass			Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	1,422,002	⁽¹⁾	$	2,812	$	12,187	$	7,192	$	1,444,193	$	1,395,212	⁽¹⁾	$	3,360	$	11,041	$	6,459	$	1,416,072
Home equity and other	467,900			147		825		1,401		470,273		510,922			132		695		1,267		513,016
	1,889,902			2,959		13,012		8,593		1,914,466		1,906,134			3,492		11,736		7,726		1,929,088
Commercial real estate loans
Non-owner occupied commercial real estate	622,453			10,068		405		793		633,719		629,257			3,182		7,756		789		640,984
Multifamily	777,176			33,917		503		296		811,892		790,836			45,139		—		285		836,260
Construction/land development	715,642			21,927		1,603		76		739,248		757,359			8,951		6,966		4,818		778,094
	2,115,271			65,912		2,511		1,165		2,184,859		2,177,452			57,272		14,722		5,892		2,255,338
Commercial and industrial loans
Owner occupied commercial real estate	358,034			21,292		12,277		2,242		393,845		356,391			29,172		13,724		862		400,149
Commercial business	230,732			37,457		16,688		2,490		287,367		268,488			32,887		16,495		1,168		319,038
	588,766			58,749		28,965		4,732		681,212		624,879			62,059		30,219		2,030		719,187
	$	4,593,939		$	127,620	$	44,488	$	14,490	$	4,780,537	$	4,708,465		$	122,823	$	56,677	$	15,648	$	4,903,613


(1)	Includes ~~$5.3~~$4.2 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.



	At December 31, 2017
(in thousands)	Pass			Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	1,355,965	⁽¹⁾	$	2,982	$	11,328	$	11,091	$	1,381,366
Home equity and other	451,194			143		751		1,401		453,489
	1,807,159			3,125		12,079		12,492		1,834,855
Commercial real estate loans
Non-owner occupied commercial real estate	613,181			8,801		—		800		622,782
Multifamily	693,190			34,038		507		302		728,037
Construction/land development	664,025			22,062		1,466		78		687,631
	1,970,396			64,901		1,973		1,180		2,038,450
Commercial and industrial loans
Owner occupied commercial real estate	361,429			20,949		6,399		2,836		391,613
Commercial business	220,461			39,588		1,959		2,701		264,709
	581,890			60,537		8,358		5,537		656,322
	$	4,359,445		$	128,563	$	22,410	$	19,209	$	4,529,627


(1)	Includes $5.5 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.

As of ~~March 31,~~June 30, 2018 and December 31, 2017, none of the Company's loans were rated Doubtful or Loss. For a detailed discussion on credit quality, see Note 5, Loans and Credit Quality, within our 2017 Annual Report on Form 10-K.

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 Federal Housing Administration ("FHA") or guaranteed by the Veterans Administration ("VA") are generally maintained on accrual status even if 90 days or more past due.

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


	At March 31, 2018																At June 30, 2018
(in thousands)	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			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

Consumer loans
Single family	$	12,636	$	7,750	$	45,926	$	66,312	$	1,377,881	⁽¹⁾	$	1,444,193	$	38,734	⁽²⁾	$	9,857	$	4,322	$	47,426	$	61,605	$	1,354,467	⁽¹⁾	$	1,416,072	$	40,967	⁽²⁾
Home equity and other	186		28		1,400		1,614		468,659			470,273		—			477		19		1,267		1,763		511,253			513,016		—
	12,822		7,778		47,326		67,926		1,846,540			1,914,466		38,734			10,334		4,341		48,693		63,368		1,865,720			1,929,088		40,967
Commercial real estate loans
Non-owner occupied commercial real estate	—		—		—		—		633,719			633,719		—			—		—		—		—		640,984			640,984		—
Multifamily	—		—		296		296		811,596			811,892		—			—		—		285		285		835,975			836,260		—
Construction/land development	—		—		76		76		739,172			739,248		—			—		—		75		75		778,019			778,094		—
	—		—		372		372		2,184,487			2,184,859		—			—		—		360		360		2,254,978			2,255,338		—
Commercial and industrial loans
Owner occupied commercial real estate	—		—		626		626		393,219			393,845		—			—		—		394		394		399,755			400,149		—
Commercial business	378		—		1,288		1,666		285,701			287,367		—			—		—		1,150		1,150		317,888			319,038		—
	378		—		1,914		2,292		678,920			681,212		—			—		—		1,544		1,544		717,643			719,187		—
	$	13,200	$	7,778	$	49,612	$	70,590	$	4,709,947		$	4,780,537	$	38,734		$	10,334	$	4,341	$	50,597	$	65,272	$	4,838,341		$	4,903,613	$	40,967



	At December 31, 2017
(in thousands)	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

Consumer loans
Single family	$	10,493	$	4,437	$	48,262	$	63,192	$	1,318,174	⁽¹⁾	$	1,381,366	$	37,171	⁽²⁾
Home equity and other	750		20		1,404		2,174		451,315			453,489		—
	11,243		4,457		49,666		65,366		1,769,489			1,834,855		37,171
Commercial real estate loans
Non-owner occupied commercial real estate	—		—		—		—		622,782			622,782		—
Multifamily	—		—		302		302		727,735			728,037		—
Construction/land development	641		—		78		719		686,912			687,631		—
	641		—		380		1,021		2,037,429			2,038,450		—
Commercial and industrial loans
Owner occupied commercial real estate	—		—		640		640		390,973			391,613		—
Commercial business	377		—		1,526		1,903		262,806			264,709		—
	377		—		2,166		2,543		653,779			656,322		—
	$	12,261	$	4,457	$	52,212	$	68,930	$	4,460,697		$	4,529,627	$	37,171


(1)	Includes ~~$5.3~~$4.2 million and $5.5 million of loans at ~~March 31,~~June 30, 2018 and December 31, 2017, 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 our consolidated statements of operations.


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

The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.


	At March 31, 2018							At June 30, 2018
(in thousands)	Accrual			Nonaccrual		Total		Accrual			Nonaccrual		Total

Consumer loans
Single family	$	1,437,001	⁽¹⁾	$	7,192	$	1,444,193	$	1,409,613	⁽¹⁾	$	6,459	$	1,416,072
Home equity and other	468,872			1,401		470,273		511,749			1,267		513,016
	1,905,873			8,593		1,914,466		1,921,362			7,726		1,929,088
Commercial real estate loans
Non-owner occupied commercial real estate	633,719			—		633,719		640,984			—		640,984
Multifamily	811,596			296		811,892		835,975			285		836,260
Construction/land development	739,172			76		739,248		778,019			75		778,094
	2,184,487			372		2,184,859		2,254,978			360		2,255,338
Commercial and industrial loans
Owner occupied commercial real estate	393,219			626		393,845		399,755			394		400,149
Commercial business	286,079			1,288		287,367		317,888			1,150		319,038
	679,298			1,914		681,212		717,643			1,544		719,187
	$	4,769,658		$	10,879	$	4,780,537	$	4,893,983		$	9,630	$	4,903,613



	At December 31, 2017
(in thousands)	Accrual			Nonaccrual		Total

Consumer loans
Single family	$	1,370,275	⁽¹⁾	$	11,091	$	1,381,366
Home equity and other	452,085			1,404		453,489
	1,822,360			12,495		1,834,855
Commercial real estate loans
Non-owner occupied commercial real estate	622,782			—		622,782
Multifamily	727,735			302		728,037
Construction/land development	687,553			78		687,631
	2,038,070			380		2,038,450
Commercial and industrial loans
Owner occupied commercial real estate	390,973			640		391,613
Commercial business	263,183			1,526		264,709
	654,156			2,166		656,322
	$	4,514,586		$	15,041	$	4,529,627


(1)	Includes ~~$5.3~~$4.2 million and $5.5 million of loans at ~~March 31,~~June 30, 2018 and December 31, 2017, 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.

The following tables present information about TDR activity during the periods presented.


	Three Months Ended March 31, 2018						Three Months Ended June 30, 2018
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs		Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	8	$	1,685	$	—	Interest rate reduction	5	$	777	$	—
	Payment restructure	25	5,189		—		Payment restructure	39	8,741		—
Total consumer
	Interest rate reduction	8	1,685		—		Interest rate reduction	5	777		—
	Payment restructure	25	5,189		—		Payment restructure	39	8,741		—
		33	6,874		—			44	9,518		—
Commercial and industrial loans
Commercial business
	Payment restructure	2	267		—
Total commercial real estate		2	267		—
Total loans
	Interest rate reduction	8	1,685		—		Interest rate reduction	5	777		—
	Payment restructure	27	5,456		—		Payment restructure	39	8,741		—
		35	$	7,141	$	—		44	$	9,518	$	—


	Three Months Ended March 31, 2017						Three Months Ended June 30, 2017
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs		Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	26	$	4,823	$	—	Interest rate reduction	13	$	2,097	$	—
	Payment restructure	12	2,877		—		Payment restructure	30	6,015		—
Home equity and other
	Payment restructure	1	74		—		Payment restructure	1	277		—
Total consumer
	Interest rate reduction	26	4,823		—		Interest rate reduction	13	2,097		—
	Payment restructure	13	2,951		—		Payment restructure	31	6,292		—
		39	7,774		—			44	8,389		—
Commercial real estate loans
Construction/land development
							Payment restructure	1	436		—
Commercial and industrial loans
Commercial business
	Payment restructure	1	18		—
Total commercial and industrial
	Payment restructure	1	18		—
		1	18		—
Total commercial real estate								1	436		—
Total loans
	Interest rate reduction	26	4,823		—		Interest rate reduction	13	2,097		—
	Payment restructure	14	2,969		—		Payment restructure	32	6,728		—
		40	$	7,792	$	—		45	$	8,825	$	—



	Six Months Ended June 30, 2018
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	13	$	2,462	$	—
	Payment restructure	64	13,930		—
Total consumer
	Interest rate reduction	13	2,462		—
	Payment restructure	64	13,930		—
		77	16,392		—
Commercial and industrial loans
Commercial business
	Payment restructure	2	267		—
Total commercial and industrial
	Payment restructure	2	267		—
		2	267		—
Total loans
	Interest rate reduction	13	2,462		—
	Payment restructure	66	14,197		—
		79	$	16,659	$	—



	Six Months Ended June 30, 2017
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	39	$	6,920	$	—
	Payment restructure	42	8,892		—
Home equity and other
	Payment restructure	2	351		—
Total consumer
	Interest rate reduction	39	6,920		—
	Payment restructure	44	9,243		—
		83	16,163		—
Commercial real estate loans
Construction/land development
	Payment restructure	1	436		—
Total commercial real estate		1	436
Commercial and industrial loans
Commercial business
	Payment restructure	1	18		—
Total commercial and industrial
	Payment restructure	1	18		—
Total loans
	Interest rate reduction	39	6,920		—
	Payment restructure	46	9,697		—
		85	$	16,617	$	—

The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three and six months ended ~~March 31,~~June 30, 2018 and 2017, 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.


	Three Months Ended March 31,						Three Months Ended June 30,
	2018			2017			2018			2017
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	6	$	884	1	$	270	6	$	1,395	7	$	1,382
	6	$	884	1	$	270	6	$	1,395	7	$	1,382



	Six Months Ended June 30,
	2018			2017
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	12	$	2,279	8	$	1,652
	12	$	2,279	8	$	1,652

NOTE 4–DEPOSITS:

Deposit balances, including stated rates, were as follows.

(in thousands) At March 31,
2018 At December 31,
2017

Noninterest-bearing accounts $ 1,027,285
$ 980,902
NOW accounts, 0.00% to 1.00% at March 31, 2018 and 0.00% to 1.98% at December 31, 2017 480,620
461,349
Statement savings accounts, due on demand, 0.05% to 1.13% at March 31, 2018 and December 31, 2017 295,096
293,858
Money market accounts, due on demand, 0.00% to 1.62% and at March 31, 2018 and 0.00% to 1.80% at December 31, 2017 1,926,153
1,834,154
Certificates of deposit, 0.05% to 3.80% at March 31, 2018 and December 31, 2017 1,319,842
1,190,689
$ 5,048,996
$ 4,760,952



(in thousands)	At June 30, 2018		At December 31, 2017

Noninterest-bearing accounts	$	1,021,790	$	980,902
NOW accounts, 0.00% to 1.00% at June 30, 2018 and 0.00% to 1.98% at December 31, 2017	486,104		461,349
Statement savings accounts, due on demand, 0.05% to 1.13% at June 30, 2018 and December 31, 2017	283,969		293,858
Money market accounts, due on demand, 0.00% to 1.92% at June 30, 2018 and 0.00% to 1.80% at December 31, 2017	1,932,340		1,834,154
Certificates of deposit, 0.10% to 3.80% at June 30, 2018 and 0.05% to 3.80% at December 31, 2017	1,396,082		1,190,689
	$	5,120,285	$	4,760,952

Interest expense on deposits was as follows.


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017		2018		2017

NOW accounts	$	440	$	477	$	430	$	503	$	870	$	980
Statement savings accounts	229		252		217		253		446		505
Money market accounts	3,459		2,230		4,064		1,935		7,523		4,165
Certificates of deposit	3,660		2,664		4,851		3,176		8,511		5,840
	$	7,788	$	5,623	$	9,562	$	5,867	$	17,350	$	11,490

The weighted-average interest rates on certificates of deposit were ~~1.28%~~1.50% and 1.12% at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

Certificates of deposit outstanding mature as follows.


(in thousands)	At March 31, 2018		At June 30, 2018

Within one year	$	1,068,216	$	1,114,257
One to two years	187,776		207,361
Two to three years	35,116		45,187
Three to four years	7,980		10,340
Four to five years	20,437		18,660
Thereafter	317		277
	$	1,319,842	$	1,396,082

The aggregate amount of time deposits in denominations of more than $250 thousand at ~~March 31,~~June 30, 2018 and December 31, 2017 were ~~$86.6~~$86.3 million and $88.8 million, respectively. There were ~~$489.7~~$607.8 million and $345.5 million of brokered deposits at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

NOTE 5–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as certain mortgage loans held for sale or Mortgage Servicing Rights ("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~~consolidate

d statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments.

We held no derivatives designated as a fair value, cash flow or foreign currency hedge instrument at ~~March 31,~~June 30, 2018 or December 31, 2017. 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.

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 statements of financial condition. Refer to Note 2, Investment Securities, for further information on securities collateral pledged. At ~~March 31,~~June 30, 2018 and December 31, 2017, the Company did not hold any collateral received from counterparties under derivative transactions.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of Significant Accounting Policies, and Note 11, Derivatives and Hedging Activities, within our 2017 Annual Report on Form 10-K.

The notional amounts and fair values for derivatives consist of the following.


	At March 31, 2018								At June 30, 2018
	Notional amount		Fair value derivatives						Notional amount		Fair value derivatives
(in thousands)			Asset			Liability					Asset			Liability

Forward sale commitments	$	1,912,574	$	3,615		$	(4,150	)	$	1,609,872	$	2,224		$	(3,134	)
Interest rate swaptions	475,000		217			—			30,000		79			—
Interest rate lock and purchase loan commitments	622,565		16,734			(58		)	594,753		16,972			(106		)
Interest rate swaps	1,692,550		15,550			(36,027		)	1,311,000		9,609			(35,063		)
Eurodollar futures	3,643,000		—			—			4,483,000		78			—
Total derivatives before netting	$	8,345,689	36,116			(40,235		)	$	8,028,625	28,962			(38,303		)
Netting adjustment/Cash collateral ⁽¹⁾			(12,723		)	36,732					(8,771		)	33,928
Carrying value on consolidated statements of financial condition			$	23,393		$	(3,503	)			$	20,191		$	(4,375	)


(1)	Includes cash collateral of ~~$24.0~~$25.2 million at ~~March 31,~~June 30, 2018 as part of netting adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security.



	At December 31, 2017
	Notional amount		Fair value derivatives
(in thousands)			Asset			Liability

Forward sale commitments	$	1,687,658	$	1,311		$	(1,445	)
Interest rate swaptions	120,000		—			—
Interest rate lock and purchase loan commitments	472,733		12,950			(25		)
Interest rate swaps	1,869,000		12,171			(23,654		)
Eurodollar futures	3,287,000		—			(101		)
Total derivatives before netting	$	7,436,391	26,432			(25,225		)
Netting adjustment/Cash collateral ⁽¹⁾			(6,646		)	23,505
Carrying value on consolidated statements of financial condition			$	19,786		$	(1,720	)


(1)	Includes cash collateral of $16.9 million at December 31, 2017 as part of netting adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security.

The following tables present gross and net information about derivative instruments.


	At March 31, 2018														At June 30, 2018
(in thousands)	Gross fair value			Netting adjustments/ Cash collateral⁽¹⁾			Carrying value			Securities not offset in consolidated balance sheet (disclosure-only netting)		Net amount			Gross fair value			Netting adjustments/ Cash collateral⁽¹⁾			Carrying value			Securities not offset in consolidated balance sheet (disclosure-only netting)		Net amount

Derivative assets	$	36,116		$	(12,723	)	$	23,393		$	—	$	23,393		$	28,962		$	(8,771	)	$	20,191		$	—	$	20,191
Derivative liabilities	(40,235		)	36,732			(3,503		)	2,517		(986		)	(38,303		)	33,928			(4,375		)	3,766		(609		)



	At December 31, 2017
(in thousands)	Gross fair value			Netting adjustments/ Cash collateral⁽¹⁾			Carrying value			Securities not offset in consolidated balance sheet (disclosure-only netting)		Net amount

Derivative assets	$	26,432		$	(6,646	)	$	19,786		$	—	$	19,786
Derivative liabilities	(25,225		)	23,505			(1,720		)	1,213		(507		)


(1)	Includes cash collateral of ~~$24.0~~$25.2 million and $16.9 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively, as part of the netting adjustments which primarily consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security.

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.


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2018			2017

Recognized in noninterest income:
Net gain (loss) on loan origination and sale activities ⁽¹⁾	$	14,125		$	(1,499	)	$	2,957		$	(10,109	)	$	17,082		$	(11,608	)
Loan servicing income ⁽²⁾	(30,977		)	379
Loan servicing (loss) income ⁽²⁾							(12,188		)	8,874			(43,165		)	9,253
	$	(16,852	)	$	(1,120	)	$	(9,231	)	$	(1,235	)	$	(26,083	)	$	(2,355	)


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


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

NOTE 6–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.


(in thousands)	At March 31, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017

Single family	$	451,665	$	577,313	$	527,088	$	577,313
Multifamily DUS^{® (1)}	18,566		29,651		35,656		29,651
Small Business Administration ("SBA")	2,301		3,938		4,253		3,938
CRE-Non-DUS^{® (1)(2)}	28,001		—		1,517		—
Total loans held for sale	$	500,533	$	610,902	$	568,514	$	610,902


(1)	Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS"^®) is a registered trademark of Fannie Mae.


(2)	Loans originated as Held for Investment.

Loans sold proceeds consisted of the following.


	Three Months Ended March 31,					Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018		2017			2018				2017		2018				2017

Single family	$	1,550,724	$	1,739,737		$	1,768,348	(1	)	$	1,808,500	$	3,319,072	(1	)	$	3,548,237
Multifamily DUS^{® (1)(2)}	32,976		76,849			54,621				35,312		87,597				112,161
SBA	3,692		7,635			3,622				3,532		7,314				11,167
CRE-Non-DUS^® ⁽²⁾⁽³⁾	—		5,551		⁽³⁾	114,650				21,163		114,650				26,714
Total loans sold	$	1,587,392	$	1,829,772		$	1,941,241			$	1,868,507	$	3,528,633			$	3,698,279


(1)	Includes proceeds of $138.6 million in single family loans originated as held for investment.


(2)	Fannie Mae Multifamily DUS^®is a registered trademark of Fannie Mae.


~~(2)~~(3)	Loans originated as Held for Investment.


~~(3)~~	~~Balance represents termination of participation agreement.~~

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


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017		2018		2017

Single family:
Servicing value and secondary market gains⁽¹⁾	$	41,427	$	50,538	$	48,093	$	57,353	$	89,520	$	107,891
Loan origination and funding fees	5,445		5,781		6,158		6,823		11,603		12,604
Total single family	46,872		56,319		54,251		64,176		101,123		120,495
Multifamily DUS^®	1,146		3,360		1,613		1,273		2,759		4,633
SBA	301		602		385		316		686		918
CRE-Non-DUS^® ⁽²⁾					800		143		800		143
Total gain on loan origination and sale activities	$	48,319	$	60,281	$	57,049	$	65,908	$	105,368	$	126,189


(1)	Comprised of gains and losses on interest rate lock and purchase loan commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.


(2)	Loan 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)	At March 31, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017

Single family
U.S. government and agency	$	22,715,153	$	22,123,710	$	18,493,704	$	22,123,710
Other	504,423		507,437		579,472		507,437
	23,219,576		22,631,147		19,073,176		22,631,147
Commercial
Multifamily DUS^®	1,323,937		1,311,399		1,357,929		1,311,399
Other	81,436		79,797		82,083		79,797
	1,405,373		1,391,196		1,440,012		1,391,196
Total loans serviced for others	$	24,624,949	$	24,022,343	$	20,513,188	$	24,022,343

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 7, Commitments, Guarantees and Contingencies, of this Quarterly Report on Form 10-Q.

The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2018			2017

Balance, beginning of period	$	3,015		$	3,382		$	2,665		$	2,863		$	3,015		$	3,382
Additions (reductions), net of adjustments⁽¹⁾	610			(360		)	(5		)	328			605			(32		)
Realized losses ⁽²⁾	(960		)	(159		)	(156		)	(201		)	(1,116		)	(360		)
Balance, end of period	$	2,665		$	2,863		$	2,504		$	2,990		$	2,504		$	2,990


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


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

The Company has agreements with certain investors to advance scheduled principal and interest amounts on delinquent loans. Advances are also made to fund the foreclosure and collection costs of delinquent loans prior to the recovery of reimbursable amounts from investors or borrowers. Advances of $~~4.9~~2.6 million and $5.3 million were recorded in other assets as of ~~March 31,~~June 30, 2018 and December 31, 2017, 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 ~~both~~ ~~March 31,~~June 30, 2018 and December 31, 2017, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $~~47.9~~41.3 million and $39.3 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.


	Three Months Ended March 31,						Three Months Ended June 30,							Six Months Ended June 30,
(in thousands)	2018			2017			2018				2017			2018				2017

Servicing income, net:
Servicing fees and other	$	18,451		$	16,179		$	18,385			$	15,977		$	36,836			$	32,156
Changes in fair value of single family MSRs due to modeled amortization ⁽¹⁾	(8,870		)	(8,520		)	(9,400		)		(8,909		)	(18,270		)		(17,429		)
Amortization of multifamily and SBA MSRs	(1,049		)	(931		)	(1,064		)		(761		)	(2,113		)		(1,692		)
	8,532			6,728			7,921				6,307			16,453				13,035
Risk management, single family MSRs:
Changes in fair value of MSRs due to changes in market inputs and/or model updates ⁽²⁾	30,019			2,132			11,299			⁽³⁾	(6,417		)	41,318			⁽³⁾	(4,285		)
Net (loss) gain from derivatives economically hedging MSR	(30,977		)	379			(12,188		)		8,874			(43,165		)		9,253
	(958		)	2,511			(889		)		2,457			(1,847		)		4,968
Loan servicing income	$	7,574		$	9,239		$	7,032			$	8,764		$	14,606			$	18,003


(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.


(3)	Includes pre-tax income of $573 thousand, net of brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during the three and six months ended June 30, 2018.

All MSRs are initially measured and recorded at fair value at the time loans are sold. Single family MSRs are subsequently carried at fair value with changes in fair value reflected in earnings in the periods in which the changes occur, while multifamily and SBA MSRs are subsequently carried at the lower of amortized cost or fair value.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. The Company determines fair value using a valuation model that calculates the net present value of estimated future cash 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.

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.


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(rates per annum)⁽¹⁾	2018		2017		2018		2017		2018		2017

Constant prepayment rate ("CPR")⁽²⁾	13.61	%	11.91	%	15.69	%	14.75	%	14.72	%	13.39	%
Discount rate⁽³⁾	10.23	%	10.28	%	10.29	%	10.30	%	10.26	%	10.29	%


(1)	Weighted average rates for sales during the period for sales of loans with similar characteristics.


(2)	Represents the expected lifetime average.


(3)	Discount rate is a rate based on market observations.

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)	At March 31, 2018			At June 30, 2018

Fair value of single family MSR	$	294,062		$	245,744
Expected weighted-average life (in years)	6.79			6.58
Constant prepayment rate ⁽¹⁾	10.61		%	11.18		%
Impact on fair value of 25 basis points adverse change in interest rates	$	(19,363	)	$	(13,929	)
Impact on fair value of 50 basis points adverse change in interest rates	$	(40,689	)	$	(29,665	)
Discount rate	10.30		%	10.40		%
Impact on fair value of 100 basis points increase	$	(11,028	)	$	(8,988	)
Impact on fair value of 200 basis points increase	$	(21,277	)	$	(17,353	)


(1)	Represents the expected lifetime average.

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.

On June 29, 2018, the Company successfully closed the sale of the rights to service $4.90 billionin total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, representing 21.1% of HomeStreet’s total single family mortgage loans serviced for others portfolio as of March 31, 2018. The sale resulted in a $573 thousand pre-tax increase in mortgage servicing income during the quarter. The Company expects to finalize the servicing transfer for these loans by August 16, 2018, and is subservicing these loans until the transfer date. These loans are excluded from the Company's MSR portfolio at June 30, 2018.

The changes in single family MSRs measured at fair value are as follows.


	Three Months Ended March 31,						Three Months Ended June 30,								Six Months Ended June 30,
(in thousands)	2018			2017			2018					2017			2018					2017

Beginning balance	$	258,560		$	226,113		$	294,062				$	235,997		$	258,560				$	226,113
Additions and amortization:
Originations	14,353			15,918			16,673					15,748			31,026					31,666
Purchases	—			354			—					211			—					565
Sale of single family MSRs							(66,890		)			—			(66,890		)			—
Changes due to modeled amortization⁽¹⁾	(8,870		)	(8,520		)	(9,400		)			(8,909		)	(18,270		)			(17,429		)
Net additions and amortization	5,483			7,752			(59,617		)			7,050			(54,134		)			14,802
Changes in fair value of MSRs due to changes in market inputs and/or model updates ⁽²⁾	30,019			2,132			11,299			(3	)	(6,426		)	41,318			(3	)	(4,294		)
Ending balance	$	294,062		$	235,997		$	245,744				$	236,621		$	245,744				$	236,621


(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.


(3)	Includes pre-tax income of $573 thousand, net of brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during the three and six months ended June 30, 2018.

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.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017

Beginning balance	$	26,042		$	21,424		$	26,093		$	19,747
Origination	1,409			937			2,343			3,545
Amortization	(991		)	(761		)	(1,976		)	(1,692		)
Ending balance	$	26,460		$	21,600		$	26,460		$	21,600

Three Months Ended March 31,
(in thousands) 2018 2017

Beginning balance $ 26,093
$ 19,747
Origination 934
2,608
Amortization (985 ) (931 )
Ending balance $ 26,042
$ 21,424

At ~~March 31,~~June 30, 2018, the expected weighted-average life of the Company’s multifamily MSRs was 10.32 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.


(in thousands)	At March 31, 2018		At June 30, 2018

Remainder of 2018	$	2,707	$	1,845
2019	3,514		3,626
2020	3,441		3,557
2021	3,232		3,357
2022	2,913		3,046
2023 and thereafter	10,235		11,029
Carrying value of multifamily MSR	$	26,042	$	26,460

NOTE 7–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 dodoes 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 ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~$52.3~~$56.1 million and $56.9 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. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $~~737.7~~745.5 million and $706.7 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively. Unused home equity and commercial banking funding lines totaled $~~483.8~~524.6 million and $456.1 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively. The Company has recorded an allowance for credit losses on loan commitments, included in accounts payable and other liabilities on the consolidated statements of financial condition, of ~~$1.4~~$1.5 million and $1.3 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

Guarantees

In the ordinary course of business, the Company sells and services loans through the Fannie Mae Multifamily DUS^® ~~that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae~~program and shares in the risk of loss with Fannie Mae under the terms of the DUS^® ~~contracts.~~contracts (pari passu loss sharing agreement). Under such agreements, the ~~program,~~Company and Fannie Mae share losses on a pro rata basis, where the ~~DUS~~^® ~~lender~~Company is ~~contractually~~ responsible for ~~the first 5%~~losses incurred up to one-third of ~~losses~~principal balance on each loan and ~~then shares in the remainder of losses~~ with ~~Fannie Mae with a maximum lender loss of 20%~~two-thirds of the ~~original principal balance of each DUS~~^® ~~loan.~~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 ~~March 31,~~June 30, 2018 and December 31, 2017, the total unpaid principal balance of loans sold under this program was ~~$1.32~~$1.36 billion and ~~$1.31~~$1.31 billion,, respectively. The Company’s reserve liability related to this arrangement totaled ~~$2.0~~$2.1 million and $2.0 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively. There were no actual losses incurred under this arrangement during the three and six months ended ~~March 31,~~June 30, 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 guaranteed mortgage-backed securities and pools conventional loans into 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, or FHA or VA due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud.

These obligations expose the Company to mark-to-market and credit losses on the repurchased mortgage loans after accounting for any mortgage insurance that we may receive. Generally, the maximum amount of future payments the Company would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain circumstances, accrued and unpaid interest on such loans and certain expenses.

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 the FHA or the guarantee with the VA. If loans are later found not to meet the requirements of the FHA or VA, through required internal quality control reviews or through agency audits, the Company may be required to indemnify the 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 a 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 ~~$23.30~~$19.16 billion and $22.71 billion as of ~~March 31,~~June 30, 2018 and December 31, 2017, respectively. At ~~March 31,~~June 30, 2018 and December 31, 2017, 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 ~~$2.7~~$2.5 million and $3.0 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 ~~March 31,~~June 30, 2018, 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 ~~March 31,~~June 30, 2018.

NOTE 8–FAIR VALUE MEASUREMENT:

For a further discussion of fair value measurements, including information regarding the Company’s valuation methodologies and the fair value hierarchy, see Note 17, Fair Value Measurement within our 2017 Annual Report on Form 10-K.

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 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. 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.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Cash and cash equivalents	Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments.	Estimated fair value classified as Level 1.
Investment securities
Investment securities available for sale	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 2 recurring fair value measurement.
Investment securities held to maturity	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Carried at amortized cost. Estimated fair value classified as Level 2.
Loans held for sale
Single family loans, excluding loans transferred from held for investment	Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments	Level 2 recurring fair value measurement.
	When not derived from observable market inputs, fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Estimated fair value classified as Level 3.
Loans originated as held for investment and transferred to held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 3.
Multifamily loans (DUS^®) and other	The sale price is set at the time the loan commitment is made, and as such, subsequent changes in market conditions have a very limited effect, if any, on the value of these loans carried on the consolidated statements of financial condition, which are typically sold within 30 days of origination.	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 2.



Asset/Liability class		Valuation methodology, inputs and assumptions	Classification
Loans held for investment
Loans held for investment, excluding collateral dependent loans and loans transferred from held for sale		Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	For the carrying value of loans see Note 1–Summary of Significant Accounting Policies of the 2017 Annual Report on Form 10-K. Estimated fair value classified as Level 3.
Loans held for investment, collateral dependent		Fair value is based on appraised value of collateral, which considers sales comparison and income approach methodologies. Adjustments are made for various factors, which may include: • Adjustments for variations in specific property qualities such as location, physical dissimilarities, market conditions at the time of sale, income producing characteristics and other factors • Adjustments to obtain “upon completion” and “upon stabilization” values (e.g., property hold discounts where the highest and best use would require development of a property over time) • Bulk discounts applied for sales costs, holding costs and profit for tract development and certain other properties	Carried at lower of amortized cost or fair value of collateral, less the estimated cost to sell. Classified as a Level 3 nonrecurring fair value measurement in periods where carrying value is adjusted to reflect the fair value of collateral.
Loans held for investment transferred from loans held for sale		Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 3 recurring fair value measurement.
Mortgage servicing rights
Single family MSRs	��	For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 6, Mortgage Banking Operations.	Level 3 recurring fair value measurement.
Multifamily ~~MSRs~~ and SBA MSRs		Fair value is based on discounted estimated future servicing fees and other revenue, less estimated costs to service the loans.	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 3.
Derivatives
Eurodollar futures		Fair value is based on closing exchange prices.	Level 1 recurring fair value measurement.



Interest rate swaps Interest rate swaptions Forward sale commitments	Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities	Level 2 recurring fair value measurement.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Interest rate lock and purchase loan commitments	The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor	Level 3 recurring fair value measurement.
Other real estate owned (“OREO”)	Fair value is based on appraised value of collateral, less the estimated cost to sell. See discussion of "loans held for investment, collateral dependent" above for further information on appraisals.	Carried at lower of amortized cost or fair value of collateral (Level 3), less the estimated cost to sell.
Federal Home Loan Bank stock	Carrying value approximates fair value as FHLB stock can only be purchased or redeemed at par value.	Carried at par value. Estimated fair value classified as Level 2.
Deposits
~~Demand~~Time deposits	Fair value is estimated as the amount payable on demand at the reporting date.	Carried at historical cost. ~~Par~~Fair value classified as Level 2.
Fixed-maturity certificates of deposit	Fair value is estimated using discounted cash flows based on market rates currently offered for deposits of similar remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Federal Home Loan Bank advances	Fair value is estimated using discounted cash flows based on rates currently available for advances with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Federal funds purchased and securities sold under agreements to repurchase	Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments.	Estimated fair value classified as Level 1.
Other borrowings (Line of Credit)	Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments.	Estimated fair value classified as Level 1.
Long-term debt	Fair value is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.

The following table presents the levels of the fair value hierarchy for the Company’s assets and liabilities measured at fair value on a recurring basis.


(in thousands)	Fair Value at March 31, 2018		Level 1		Level 2		Level 3		Fair Value at June 30, 2018		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	121,356	$	—	$	121,356	$	—	$	115,848	$	—	$	115,848	$	—
Commercial	31,406		—		31,406		—		30,354		—		30,354		—
Municipal bonds	374,640		—		374,640		—		361,799		—		361,799		—
Collateralized mortgage obligations:
Residential	169,371		—		169,371		—		168,519		—		168,519		—
Commercial	97,727		—		97,727		—		111,623		—		111,623		—
Corporate debt securities	21,761		—		21,761		—		21,478		—		21,478		—
U.S. Treasury securities	10,489		—		10,489		—		10,438		—		10,438		—
Agency debentures	9,450		—		9,450		—		9,362		—		9,362		—
Single family mortgage servicing rights	294,062		—		—		294,062		245,744		—		—		245,744
Single family loans held for sale	451,669		—		448,343		3,326		527,088		—		525,265		1,823
Single family loans held for investment	5,304		—		—		5,304		4,187		—		—		4,187
Derivatives
Eurodollar futures									78		78		—		—
Forward sale commitments	3,615		—		3,615		—		2,224		—		2,224		—
Interest rate swaptions	217		—		217		—		79		—		79		—
Interest rate lock and purchase loan commitments	16,734		—		—		16,734		16,972		—		—		16,972
Interest rate swaps	15,550		—		15,550		—		9,609		—		9,609		—
Total assets	$	1,623,351	$	—	$	1,303,925	$	319,426	$	1,635,402	$	78	$	1,366,598	$	268,726
Liabilities:
Derivatives
Forward sale commitments	$	4,150	$	—	$	4,150	$	—	$	3,134	$	—	$	3,134	$	—
Interest rate lock and purchase loan commitments	58		—		—		58		106		—		—		106
Interest rate swaps	36,027		—		36,027		—		35,063		—		35,063		—
Total liabilities	$	40,235	$	—	$	40,177	$	58	$	38,303	$	—	$	38,197	$	106



(in thousands)	Fair Value at December 31, 2017		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	130,090	$	—	$	130,090	$	—
Commercial	23,694		—		23,694		—
Municipal bonds	388,452		—		388,452		—
Collateralized mortgage obligations:
Residential	160,424		—		160,424		—
Commercial	98,569		—		98,569		—
Corporate debt securities	24,737		—		24,737		—
U.S. Treasury securities	10,652		—		10,652		—
Agency debentures	9,650				9,650		—
Single family mortgage servicing rights	258,560		—		—		258,560
Single family loans held for sale	577,313		—		575,977		1,336
Single family loans held for investment	5,477		—		—		5,477
Derivatives
Forward sale commitments	1,311		—		1,311		—
Interest rate lock and purchase loan commitments	12,950		—		—		12,950
Interest rate swaps	12,172		—		12,172		—
Total assets	$	1,714,051	$	—	$	1,435,728	$	278,323
Liabilities:
Derivatives
Eurodollar futures	$	101	$	101	$	—	$	—
Forward sale commitments	1,445		—		1,445		—
Interest rate lock and purchase loan commitments	25		—		—		25
Interest rate swaps	23,654		—		23,654		—
Total liabilities	$	25,225	$	101	$	25,099	$	25

There were no transfers between levels of the fair value hierarchy during the three and six months ended ~~March 31,~~June 30, 2018 and 2017.

Level 3 Recurring Fair Value Measurements

The Company's Level 3 recurring fair value measurements consist of single family MSRs, single family loans held for investment where fair value option was elected, certain single family loans held for sale, and interest rate lock and purchase loan commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three and six months ended ~~March 31,~~June 30, 2018 and 2017, see Note 6, Mortgage Banking Operations of this Form 10-Q.

The Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company had elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was ~~$5.3~~$4.2 million at ~~March 31,~~June 30, 2018.

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)

At March 31, 2018

At June 30, 2018

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for investment, fair value option

5,304

Income approach

Implied spread to benchmark interest rate curve

3.31%

5.09%

3.95%

4,187

Income approach

Implied spread to benchmark interest rate curve

3.43%

5.21%

3.98%

(dollars in thousands)

At December 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for investment, fair value option

5,477

Income approach

Implied spread to benchmark interest rate curve

3.61%

4.96%

4.10%

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.


(dollars in thousands)	At March 31, 2018							At June 30, 2018
(dollars in thousands)	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average

Loans held for sale, fair value option	$	3,326	Income approach	Implied spread to benchmark interest rate curve	3.68%	5.00%	4.00%	$	1,823	Income approach	Implied spread to benchmark interest rate curve	—%	5.33%	4.73%
				Market price movement from comparable bond	0.14%	0.33%	0.23%				Market price movement from comparable bond	(0.37)%	(0.24)%	(0.30)%

(dollars in thousands)

At December 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for sale, fair value option

1,336

Income approach

Implied spread to benchmark interest rate curve

3.93%

Market price movement from comparable bond

(0.38)%

(0.10)%

(0.24)%

The following table presents fair value changes and activity for Level 3 interest rate lock and purchase loan commitments.


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2018			2017

Beginning balance, net	$	12,925		$	19,219		$	16,676		$	27,136		$	12,925		$	19,219
Total realized/unrealized gains	22,514			35,459			28,566			34,127			51,080			69,586
Settlements	(18,763		)	(27,542		)	(28,376		)	(38,980		)	(47,139		)	(66,522		)
Ending balance, net	$	16,676		$	27,136		$	16,866		$	22,283		$	16,866		$	22,283

The following tables present fair value changes and activity for Level 3 loans held for sale and loans held for investment.


	Three Months Ended March 31, 2018													Three Months Ended June 30, 2018
	Beginning balance		Additions		Transfers		Payoffs/Sales		Change in mark to market			Ending balance		Beginning balance		Additions		Transfers		Payoffs/Sales			Change in mark to market			Ending balance
(in thousands)

Loans held for sale	$	1,336	$	2,045	$	—	$	—	$	(55	)	$	3,326	$	3,326	$	556	$	—	$	(1,997	)	$	(62	)	$	1,823
Loans held for investment	5,477		—		—		—		(173		)	5,304		5,304		—		—		(1,114		)	(3		)	4,187


	Three Months Ended March 31, 2017															Three Months Ended June 30, 2017
	Beginning balance		Additions		Transfers			Payoffs/Sales			Change in mark to market			Ending balance		Beginning balance		Additions		Transfers			Payoffs/Sales			Change in mark to market		Ending balance
(in thousands)

Loans held for sale	$	41,810	$	2,799	$	(690	)	$	(3,226	)	$	(363	)	$	40,330	$	40,331	$	197	$	13,755		$	(25,884	)	$	860	$	29,259
Loans held for investment	17,988		—		1,206			—			(152		)	19,042		19,042		—		(13,575		)	(479		)	146		5,134



	Six Months Ended June 30, 2018
	Beginning balance	Additions	Transfers	Payoffs/Sales		Change in mark to market		Ending balance
(in thousands)

Loans held for sale	1,336	2,601	—	(1,997	)	(117	)	1,823
Loans held for investment	5,477	—	—	(1,114	)	(176	)	4,187



	Six Months Ended June 30, 2017
	Beginning balance	Additions	Transfers		Payoffs/Sales		Change in mark to market		Ending balance
(in thousands)

Loans held for sale	41,810	2,996	13,066		(29,110	)	497		29,259
Loans held for investment	17,988	—	(12,369	)	(479	)	(6	)	5,134

The following information presents significant Level 3 unobservable inputs used to measure fair value of interest rate lock and purchase loan commitments.


(dollars in thousands)	At March 31, 2018							At June 30, 2018
(dollars in thousands)	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average	Fair Value		Valuation Technique	Significant Unobservable Input	Low	High	Weighted Average

Interest rate lock and purchase loan commitments, net	$	16,676	Income approach	Fall-out factor	0.40%	60.72%	14.79%	$	16,866	Income approach	Fall-out factor	0.40%	61.01%	17.01%
				Value of servicing	0.68%	1.73%	1.09%				Value of servicing	0.68%	1.64%	1.05%

(dollars in thousands)

At December 31, 2017

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock and purchase loan commitments, net

12,925

Income approach

Fall-out factor

0.00%

58.38%

12.05%

Value of servicing

0.69%

1.73%

1.09%

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a nonrecurring basis. These assets include certain loans held for investment and other real estate owned that are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. All impaired loans are subject to an internal evaluation completed quarterly by management as part of the allowance process.

The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to 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. During the ~~three~~six months ended ~~March 31,~~June 30, 2018,, the Company recorded ~~adjustments ranging from 0.00% to 35.0% with a weighted average~~an adjustment of ~~10.6%~~8.0% to the appraisal values of certain commercial loans held for investment

that are collateralized by real ~~estate. During~~estate and recorded no adjustments during the three months ended ~~March 31,~~June 30, 2018. During the three and six months ended June 30, 2017, the Company recorded noan adjustment of 7.10% to the appraisal values of certain commercial loans held for investment that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial loans held for investment that are not collateralized by real estate. During the three and six months ended ~~March 31,~~June 30, 2018, the Company applied a range of stated value adjustments of ~~35.0%~~25.0% to 100.0%, with a weighted average of ~~66.6%~~60.0%. During the three months ended ~~March 31,~~June 30, 2017, the Company applied a range of stated value adjustments of ~~9.4%~~0.0% to 42.6%, with a weighted average of 42.3%. During the six months ended June 30, 2017, the Company applied a range of stated value adjustments of 0.0% to 100.0%, with a weighted average of ~~40.9%~~41.3%. During the three and six months ended ~~March 31,~~June 30, 2018 and 2017, the Company did not apply any adjustment to the appraisal value of OREO.

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

These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary 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 three and six months ended ~~March 31,~~June 30, 2018 and 2017 and assets held at the end of the respective reporting period.


	At or for the Three Months Ended March 31, 2018											At or for the Three Months Ended June 30, 2018
(in thousands)	Fair Value of Assets Held at March 31, 2018		Level 1		Level 2		Level 3		Total Gains (Losses)			Fair Value of Assets Held at June 30, 2018		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	607	$	—	$	—	$	607	$	(122	)	$	1,341	$	—	$	—	$	1,341	$	(7	)
Total	$	607	$	—	$	—	$	607	$	(122	)



	At or for the Three Months Ended June 30, 2017
(in thousands)	Fair Value of Assets Held at June 30, 2017		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	2,003	$	—	$	—	$	2,003	$	162


	At or for the Three Months Ended March 31, 2017											At or for the Six Months Ended June 30, 2018
(in thousands)	Fair Value of Assets Held at March 31, 2017		Level 1		Level 2		Level 3		Total Gains (Losses)			Fair Value of Assets Held at June 30, 2018		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	2,090	$	—	$	—	$	2,090	$	(41	)	$	1,341	$	—	$	—	$	1,341	$	(144	)
Other real estate owned⁽²⁾	5,989		—		—		5,989		—
Total	$	8,079	$	—	$	—	$	8,079	$	(41	)



	At or for the Six Months Ended June 30, 2017
(in thousands)	Fair Value of Assets Held at June 30, 2017		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	2,003	$	—	$	—	$	2,003	$	140


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


~~(2)~~	~~Represents other real estate owned where an updated fair value of collateral is used to adjust the carrying amount subsequent to the initial classification as other real estate owned.~~

Fair Value of Financial Instruments

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


	At March 31, 2018										At June 30, 2018
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	66,289	$	66,289	$	66,289	$	—	$	—	$	176,218	$	176,218	$	176,218	$	—	$	—
Investment securities held to maturity	79,283		78,269		—		78,269		—		78,035		76,783		—		76,783		—
Loans held for investment	4,752,957		4,699,159		—		—		4,699,159		4,879,123		4,855,496		—		—		4,855,496
Loans held for sale – transferred from held for investment	28,002		28,002		—		—		28,002		1,517		1,517		—		—		1,517
Loans held for sale – multifamily and other	20,867		20,867		—		20,867		—		39,909		39,909		—		39,909		—
Mortgage servicing rights – multifamily	26,042		28,415		—		—		28,415		26,461		29,006		—		—		29,006
Federal Home Loan Bank stock	41,923		41,923		—		41,923		—		48,157		48,157		—		48,157		—
Liabilities:
Deposits	$	5,048,996	$	5,048,996	$	—	$	5,048,996	$	—
Time deposits											$	1,396,082	$	1,388,422	$	—	$	1,388,422	$	—
Federal Home Loan Bank advances	851,657		853,562		—		853,562		—		1,008,613		1,010,460		—		1,010,460		—
Federal funds purchased and securities sold under agreements to repurchase	25,000		25,020		25,020		—		—
Other borrowings											30,007		30,007		30,007		—		—
Long-term debt	125,321		107,668		—		107,668		—		125,368		107,418		—		107,418		—


	At December 31, 2017										At December 31, 2017
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	72,718	$	72,718	$	72,718	$	—	$	—	$	72,718	$	72,718	$	72,718	$	—	$	—
Investment securities held to maturity	58,036		58,128		—		58,128		—		58,036		58,128		—		58,128		—
Loans held for investment	4,500,989		4,497,884		—		—		4,497,884		4,500,989		4,497,884		—		—		4,497,884
Loans held for sale – multifamily and other	33,589		33,589		—		33,589		—		33,589		33,589		—		33,589		—
Mortgage servicing rights – multifamily	26,093		28,362		—		—		28,362		26,093		28,362		—		—		28,362
Federal Home Loan Bank stock	46,639		46,639		—		46,639		—		46,639		46,639		—		46,639		—
Liabilities:
Deposits	$	4,760,952	$	4,760,952	$	—	$	4,760,952	$	—
Time deposits ⁽¹⁾											$	1,190,689	$	1,186,126	$	—	$	1,186,126	$	—
Federal Home Loan Bank advances	979,201		981,441		—		981,441		—		979,201		981,441		—		981,441		—
Long-term debt	125,274		108,530		—		108,530		—		125,274		108,530		—		108,530		—

(1) Prior year presentation has changed due to the January 1, 2018 adoption of ASU 2016-01.

NOTE 9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands, except share and per share data)	2018		2017		2018		2017		2018		2017

Net income	$	5,866	$	8,983	$	7,099	$	11,209	$	12,965	$	20,192
Weighted average shares:
Basic weighted-average number of common shares outstanding	26,927,464		26,821,396		26,976,892		26,866,230		26,952,178		26,843,813
Dilutive effect of outstanding common stock equivalents ⁽¹⁾	231,536		236,053		179,437		218,378		205,486		227,215
Diluted weighted-average number of common stock outstanding	27,159,000		27,057,449		27,156,329		27,084,608		27,157,664		27,071,028
Earnings per share:
Basic earnings per share	$	0.22	$	0.33	$	0.26	$	0.42	$	0.48	$	0.75
Diluted earnings per share	$	0.22	$	0.33	$	0.26	$	0.41	$	0.48	$	0.75

(1)

Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three and six months ended ~~March 31,~~June 30, 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 ~~53,448~~9,259 at ~~March 31,~~June 30, 2018 and ~~141,618~~6,417 at ~~March 31,~~June 30, 2017.

NOTE 10–BUSINESS SEGMENTS:

The Company's business segments are determined based on the products and services provided, as well as the nature of the related business activities and reflect the manner in which financial information is currently evaluated by management. The Company organizes the segments into two lines of business: Commercial and Consumer Banking segment and Mortgage Banking segment.

A description of the Company's business segments and the products and services that they provide is as follows.

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through bank branches, ATMs, and online, mobile and telephone banking. These products and services include deposit products; residential, consumer, business and agricultural portfolio loans; non-deposit investment products; insurance products, and cash management services. We originate construction loans, bridge loans and permanent loans for our portfolio primarily on single family residences, and on 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, while the Company generally retains the servicing rights. In addition, through the HomeStreet Commercial Capital division of HomeStreet Bank, we originate permanent commercial real estate loans primarily up to ~~$10~~$15 million in size, a portion of which we intend to pool and sell into the secondary market. As a part of the ~~HomeStreet~~ Commercial ~~Capital~~Lending division, we also have a team that specializes in ~~U.S. Small Business Administration ("SBA")~~SBA lending. This segment also reflects the results for the management of the Company's portfolio of investment securities.

Mortgage Banking originates single family residential mortgage loans for sale in the secondary markets and performs mortgage servicing on a substantial portion of such loans. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. We have become a rated originator and servicer of jumbo loans, allowing us to sell these loans to other securitizers. Additionally, we purchase loans from WMS Series LLC through a correspondent arrangement with that company. We also sell loans on a servicing-released and servicing-retained basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders. On occasion, we may sell a portion of our MSR portfolio. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained single family mortgage servicing rights within this business segment.

Financial highlights by operating segment were as follows.


	Three Months Ended March 31, 2018							At or for the Three Months Ended June 30, 2018
(in thousands)	Mortgage Banking			Commercial and Consumer Banking		Total		Mortgage Banking			Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	3,012		$	45,448	$	48,460	$	3,258		$	47,745	$	51,003
Provision for credit losses	—			750		750		—			1,000		1,000
Noninterest income	53,735			7,096		60,831		60,984			8,405		69,389
Noninterest expense	62,497			38,272		100,769		71,279			39,286		110,565
(Loss) income before income taxes	(5,750		)	13,522		7,772		(7,037		)	15,864		8,827
Income tax (benefit) expense	(1,410		)	3,316		1,906		(2,236		)	3,964		1,728
Net (loss) income	$	(4,340	)	$	10,206	$	5,866	$	(4,801	)	$	11,900	$	7,099
Total assets	$	783,244		$	6,140,812	$	6,924,056	$	805,777		$	6,358,100	$	7,163,877


	Three Months Ended March 31, 2017							At or for the Three Months Ended June 30, 2017
(in thousands)	Mortgage Banking			Commercial and Consumer Banking		Total		Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	4,747		$	40,904	$	45,651	$	4,420	$	42,448	$	46,868
Provision for credit losses								—		500		500
Noninterest income	65,036			9,425		74,461		72,732		8,276		81,008
Noninterest expense	70,404			36,470		106,874		74,613		36,631		111,244
Loss (income) before income taxes	(621		)	13,859		13,238
Income tax (benefit) expense	(312		)	4,567		4,255
Net (loss) income	$	(309	)	$	9,292	$	8,983
Income before income taxes								2,539		13,593		16,132
Income tax expense								776		4,147		4,923
Net income								$	1,763	$	9,446	$	11,209
Total assets	$	817,972		$	5,583,171	$	6,401,143	$	992,668	$	5,593,889	$	6,586,557



	At or for the Six Months Ended June 30, 2018
(in thousands)	Mortgage Banking			Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	6,270		$	93,193	$	99,463
Provision for credit losses	—			1,750		1,750
Noninterest income	114,719			15,501		130,220
Noninterest expense	133,776			77,558		211,334
(Loss) income before income taxes	(12,787		)	29,386		16,599
Income tax (benefit) expense	(3,646		)	7,280		3,634
Net (loss) income	$	(9,141	)	$	22,106	$	12,965
Total assets	$	805,777		$	6,358,100	$	7,163,877



	At or for the Six Months Ended June 30, 2017
(in thousands)	Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	9,167	$	83,352	$	92,519
Provision for credit losses	—		500		500
Noninterest income	137,768		17,701		155,469
Noninterest expense	145,017		73,101		218,118
Income before income taxes	1,918		27,452		29,370
Income tax expense	464		8,714		9,178
Net income	$	1,454	$	18,738	$	20,192
Total assets	$	992,668	$	5,593,889	$	6,586,557

(1)

Net interest income is the ~~difference between~~aggregation of interest earned on assets, ~~and the cost of liabilities~~interest expense charged by treasury to fund ~~those assets. Interest earned includes actual~~the assets, interest ~~earned~~paid on ~~segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment~~ liabilities, and ifinterest income provided by treasury for investing the ~~segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment.~~liabilities.

NOTE 11–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.


	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017			2018			2017

Beginning balance	$	(7,122	)	$	(10,412	)	$	(17,298	)	$	(8,486	)	$	(7,122	)	$	(10,412	)
Other comprehensive (loss) income before reclassifications	(10,000		)	1,930			(2,412		)	3,431			(12,412		)	5,361
Amounts reclassified from accumulated other comprehensive loss	(176		)	(4		)
Amounts reclassified from accumulated other comprehensive income (loss)							(12		)	(358		)	(188		)	(362		)
Net current-period other comprehensive (loss) income	(10,176		)	1,926			(2,424		)	3,073			(12,600		)	4,999
Ending balance	$	(17,298	)	$	(8,486	)	$	(19,722	)	$	(5,413	)	$	(19,722	)	$	(5,413	)

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	Amount Reclassified from Accumulated Other Comprehensive Income (Loss)				Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2018		2017		2018		2017		2018		2017

Gain on sale of investment securities available for sale	$	222	$	6	$	16	$	551	$	238	$	557
Income tax expense	46		2		4		193		50		195
Total, net of tax	$	176	$	4	$	12	$	358	$	188	$	362

NOTE 12–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 31, 2018. Due to immateriality, we had no cumulative effect to record. Since net

interest income on financial assets and liabilities ~~are~~is excluded from this guidance, a significant majority of our revenues are not subject to the new guidance.

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-termed 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 ~~three~~six months ended ~~March 31,~~June 30, 2018, in scope revenue streams were approximately ~~2.8%~~2.7% 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. In-scope noninterest revenue streams 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 13–RESTRUCTURING:

In 2017, we i~~mplemented a~~ completed restructuring plans in the Company's Mortgage Banking segment to reduce operating costs and improve efficiency.

In June 2018, the Company implemented another restructuring plan in ~~our mortgage banking~~the Mortgage Banking segment to further reduce ~~our~~ operating ~~cost structure~~costs and improve ~~efficiency.~~profitability. In ~~2017,~~the second quarter of 2018, we recorded a total restructuring charge of ~~$3.7~~$6.9 million. We estimate we will record an additional $1.7 million ~~consisting~~in restructuring charges related to this event in the third quarter of 2018.

Restructuring charges consist of facility-related costs ~~of $3.1 million~~ and severance costs ~~of $648 thousand.~~ ~~The charges~~and are included in the occupancy and the salaries and related costs line items on our consolidated statement of operations for ~~that~~the applicable period.

The following ~~table summarizes~~tables summarize the restructuring charges, the restructuring costs paid or settled during the first ~~quarter~~three and six months of 2018 and the Company's net remaining liability balance at ~~March 31, 2018.~~June 30, 2018 and 2017.

(in thousands) Facility related costs Personnel related costs Total
Balance at December 31, 2017 $ 1,386
$ —
$ 1,386
Restructuring charges (recoveries) (291 ) —
(291 )
Costs paid or otherwise settled (375 ) —
(375 )
Balance at March 31, 2018 $ 720
$ —
$ 720



	2018								2017
At and for the three months ended June 30	Facilities-related costs			Personnel-related costs		Total			Facilities-related costs		Personnel-related costs			Total
(in thousands)
Beginning balance	$	720		$	—	$	720		$	—	$	—		$	—
Restructuring costs	6,454			439		6,893			—		104			104
Costs paid or otherwise settled	(2,965		)	—		(2,965		)	—		(33		)	(33		)
Ending balance	$	4,209		$	439	$	4,648		$	—	$	71		$	71



	2018								2017
At and for the six months ended June 30	Facilities-related costs			Personnel-related costs		Total			Facilities-related costs		Personnel-related costs			Total
(in thousands)
Beginning balance	$	1,386		$	—	$	1,386		$	—	$	—		$	—
Restructuring costs	6,163			439		6,602			—		104			104
Costs paid or otherwise settled	(3,340		)	—		(3,340		)	—		(33		)	(33		)
Ending balance	$	4,209		$	439	$	4,648		$	—	$	71		$	71

NOTE 14–SUBSEQUENT EVENTS:

The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q and has concluded that there are no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements.


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

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2017 Annual Report on Form 10-K.

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 Quarterly Report on Form 10-Q, particularly in Item 1A of Part II, “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 Quarterly Report on Form 10-Q to reflect changed assumptions, the occurrence of anticipated or unanticipated events, new information or changes to future results over time 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-Q.

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

You may review a copy of this Quarterly Report on Form 10-Q, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission's Public Reference Room at, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.

Summary Financial Data


	At or for the Three Months Ended											At or for the Three Months Ended											At or for the Six Months Ended
(dollars in thousands, except share data)	Mar. 31, 2018		Dec. 31, 2017			Sept. 30, 2017		June 30, 2017		Mar. 31, 2017		June 30, 2018		Mar. 31, 2018		Dec. 31, 2017			Sept. 30, 2017		June 30, 2017		June 30, 2018		June 30, 2017

Income statement data (for the period ended):
Net interest income	$	48,460	$	51,079		$	50,840	$	46,868	$	45,651	$	51,003	$	48,460	$	51,079		$	50,840	$	46,868	$	99,463	$	92,519
Provision for credit losses	750		—			250		500		—		1,000		750		—			250		500		1,750		500
Noninterest income	60,831		72,801			83,884		81,008		74,461		69,389		60,831		72,801			83,884		81,008		130,220		155,469
Noninterest expense	100,769		106,838			114,697		111,244		106,874		110,565		100,769		106,838			114,697		111,244		211,334		218,118
Income before income taxes	7,772		17,042			19,777		16,132		13,238		8,827		7,772		17,042			19,777		16,132		16,599		29,370
Income tax expense (benefit)	1,906		(17,873		)	5,938		4,923		4,255		1,728		1,906		(17,873		)	5,938		4,923		3,634		9,178
Net income	$	5,866	$	34,915		$	13,839	$	11,209	$	8,983	$	7,099	$	5,866	$	34,915		$	13,839	$	11,209	$	12,965	$	20,192
Basic income per share	$	0.22	$	1.30		$	0.51	$	0.42	$	0.33	$	0.26	$	0.22	$	1.30		$	0.51	$	0.42	$	0.48	$	0.75
Diluted income per share	$	0.22	$	1.29		$	0.51	$	0.41	$	0.33	$	0.26	$	0.22	$	1.29		$	0.51	$	0.41	$	0.48	$	0.75
Common shares outstanding	26,972,074		26,888,288			26,884,402		26,874,871		26,862,744		26,978,229		26,972,074		26,888,288			26,884,402		26,874,871		26,978,229		26,874,871
Weighted average number of shares outstanding:
Basic	26,927,464		26,887,611			26,883,392		26,866,230		26,821,396		26,976,892		26,927,464		26,887,611			26,883,392		26,866,230		26,952,178		26,843,813
Diluted	27,159,000		27,136,977			27,089,040		27,084,608		27,057,449		27,156,329		27,159,000		27,136,977			27,089,040		27,084,608		27,157,664		27,071,028
Shareholders' equity per share	$	25.99	$	26.20		$	24.98	$	24.40	$	23.86	$	26.19	$	25.99	$	26.20		$	24.98	$	24.40	$	26.19	$	24.40
Financial position (at period end):
Cash and cash equivalents	$	66,289	$	72,718		$	55,050	$	54,447	$	61,492	$	176,218	$	66,289	$	72,718		$	55,050	$	54,447	$	176,218	$	54,447
Investment securities	915,483		904,304			919,459		936,522		1,185,654		907,457		915,483		904,304			919,459		936,522		907,457		936,522
Loans held for sale	500,533		610,902			851,126		784,556		537,959		568,514		500,533		610,902			851,126		784,556		568,514		784,556
Loans held for investment, net	4,758,261		4,506,466			4,313,225		4,156,424		3,957,959		4,883,310		4,758,261		4,506,466			4,313,225		4,156,424		4,883,310		4,156,424
Loan servicing rights	320,105		284,653			268,072		258,222		257,421		272,205		320,105		284,653			268,072		258,222		272,205		258,222
Other real estate owned	297		664			3,704		4,597		5,646		752		297		664			3,704		4,597		752		4,597
Total assets	6,924,056		6,742,041			6,796,346		6,586,557		6,401,143		7,163,877		6,924,056		6,742,041			6,796,346		6,586,557		7,163,877		6,586,557
Deposits	5,048,996		4,760,952			4,670,486		4,747,771		4,595,809		5,120,285		5,048,996		4,760,952			4,670,486		4,747,771		5,120,285		4,747,771
Federal Home Loan Bank advances	851,657		979,201			1,135,245		867,290		862,335		1,008,613		851,657		979,201			1,135,245		867,290		1,008,613		867,290
Federal funds purchased and securities sold under agreements to repurchase	25,000		—			—		—		—		—		25,000		—			—		—		—		—
Shareholders' equity	$	700,963	$	704,380		$	671,469	$	655,841	$	640,919	$	706,459	$	700,963	$	704,380		$	671,469	$	655,841	$	706,459	$	655,841
Financial position (averages):
Investment securities	$	915,562	$	929,995		$	925,545	$	1,089,552	$	1,153,248	$	911,678	$	915,562	$	929,995		$	925,545	$	1,089,552	$	913,609	$	1,121,224
Loans held for investment	4,641,980		4,429,777			4,242,795		4,119,825		3,914,537		4,836,644		4,641,980		4,429,777			4,242,795		4,119,825		4,739,850		4,017,748
Total interest-earning assets	6,093,430		6,269,600			6,098,054		5,837,917		5,782,061		6,369,673		6,093,430		6,269,600			6,098,054		5,837,917		6,232,315		5,810,143
Total interest-bearing deposits	3,834,191		3,581,911			3,622,606		3,652,036		3,496,190		4,046,297		3,834,191		3,581,911			3,622,606		3,652,036		3,940,829		3,574,543
Federal Home Loan Bank advances	858,451		1,264,893			1,034,634		872,019		975,914		943,539		858,451		1,264,893			1,034,634		872,019		901,230		923,679
Federal funds purchased and securities sold under agreements to repurchase	7,333		8,828			272		4,804		978		5,253		7,333		8,828			272		4,804		6,287		2,901
Total interest-bearing liabilities	4,825,265		4,980,926			4,783,142		4,654,064		4,598,243		5,121,085		4,825,265		4,980,926			4,783,142		4,654,064		4,973,992		4,626,306
Shareholders’ equity	$	717,742	$	701,849		$	683,186	$	668,377	$	649,439	$	751,593	$	717,742	$	701,849		$	683,186	$	668,377	$	734,761	$	658,961

Summary Financial Data (continued)


	At or for the Three Months Ended															At or for the Three Months Ended															At or for the Six Months Ended
(dollars in thousands, except share data)	Mar. 31, 2018			Dec. 31, 2017			Sept. 30, 2017			June 30, 2017			Mar. 31, 2017			June 30, 2018			Mar. 31, 2018			Dec. 31, 2017			Sept. 30, 2017			June 30, 2017			June 30, 2018			June 30, 2017

Financial performance:
Return on average shareholders' equity⁽¹⁾	3.27		%	19.90		%	8.10		%	6.71		%	5.53		%	3.78		%	3.27		%	19.90		%	8.10		%	6.71		%	3.53		%	6.13		%
Return on average assets	0.35		%	2.03		%	0.83		%	0.70		%	0.57		%	0.40		%	0.35		%	2.03		%	0.83		%	0.70		%	0.37		%	0.63		%
Net interest margin ⁽²⁾	3.25		%	3.33		%	3.40		%	3.29		%	3.23		%	3.25		%	3.25		%	3.33		%	3.40		%	3.29		%	3.25		%	3.26		%
Efficiency ratio ⁽³⁾	92.20		%	86.24		%	85.13		%	86.99		%	88.98		%	91.84		%	92.20		%	86.24		%	85.13		%	86.99		%	92.01		%	87.96		%
Asset quality:
Allowance for credit losses	$	40,446		$	39,116		$	38,195		$	37,470		$	36,042		$	40,982		$	40,446		$	39,116		$	38,195		$	37,470		$	40,982		$	37,470
Allowance for loan losses/total loans ⁽⁴⁾	0.81		%	0.83		%	0.85		%	0.86		%	0.87		%	0.80		%	0.81		%	0.83		%	0.85		%	0.86		%	0.80		%	0.86		%
Allowance for loan losses/nonaccrual loans	359.32		%	251.63		%	245.02		%	233.50		%	185.99		%	409.97		%	359.32		%	251.63		%	245.02		%	233.50		%	409.97		%	233.50		%
Total nonaccrual loans⁽⁵⁾⁽⁶⁾	$	10,879		$	15,041		$	15,123		$	15,476		$	18,676		$	9,630		$	10,879		$	15,041		$	15,123		$	15,476		$	9,630		$	15,476
Nonaccrual loans/total loans	0.23		%	0.33		%	0.35		%	0.37		%	0.47		%	0.20		%	0.23		%	0.33		%	0.35		%	0.37		%	0.20		%	0.37		%
Other real estate owned	$	297		$	664		$	3,704		$	4,597		$	5,646		$	751		$	297		$	664		$	3,704		$	4,597		$	751		$	4,597
Total nonperforming assets ⁽⁶⁾	$	11,176		$	15,705		$	18,827		$	20,073		$	24,322		$	10,381		$	11,176		$	15,705		$	18,827		$	20,073		$	10,381		$	20,073
Nonperforming assets/total assets	0.16		%	0.23		%	0.28		%	0.30		%	0.38		%	0.14		%	0.16		%	0.23		%	0.28		%	0.30		%	0.14		%	0.30		%
Net (recoveries) charge-offs	$	(580	)	$	(921	)	$	(475	)	$	(928	)	$	(778	)	$	464		$	(580	)	$	(921	)	$	(475	)	$	(928	)	$	(116	)	$	(1,706	)
Regulatory capital ratios for the Bank:
Tier 1 leverage capital (to average assets)	9.58		%	9.67		%	9.86		%	10.13		%	9.98		%	9.72		%	9.58		%	9.67		%	9.86		%	10.13		%	9.72		%	10.13		%
Common equity tier 1 risk-based capital (to risk-weighted assets)	12.30		%	13.22		%	12.88		%	13.23		%	13.25		%	12.69		%	12.30		%	13.22		%	12.88		%	13.23		%	12.69		%	13.23		%
Tier 1 risk-based capital (to risk-weighted assets)	12.30		%	13.22		%	12.88		%	13.23		%	13.25		%	12.69		%	12.30		%	13.22		%	12.88		%	13.23		%	12.69		%	13.23		%
Total risk-based capital (to risk-weighted assets)	13.09		%	14.02		%	13.65		%	14.01		%	14.02		%	13.52		%	13.09		%	14.02		%	13.65		%	14.01		%	13.52		%	14.01		%
Regulatory capital ratios for the Company:
Tier 1 leverage capital (to average assets)	9.08		%	9.12		%	9.33		%	9.55		%	9.45		%	9.18		%	9.08		%	9.12		%	9.33		%	9.55		%	9.18		%	9.55		%
Tier 1 common equity risk-based capital (to risk-weighted assets)	9.26		%	9.86		%	9.77		%	10.01		%	9.96		%	10.48		%	9.26		%	9.86		%	9.77		%	10.01		%	10.48		%	10.01		%
Tier 1 risk-based capital (to risk-weighted assets)	10.28		%	10.92		%	10.81		%	11.10		%	11.07		%	11.56		%	10.28		%	10.92		%	10.81		%	11.10		%	11.56		%	11.10		%
Total risk-based capital (to risk-weighted assets)	10.97		%	11.61		%	11.48		%	11.79		%	11.74		%	12.38		%	10.97		%	11.61		%	11.48		%	11.79		%	12.38		%	11.79		%


(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 0.85%, 0.87%, 0.90%, 0.93%, and 0.95% ~~and 0.97%~~ at June 30, 2018, March 31, 2018,December 31, 2017, September 30, 2017, and June 30, ~~2017 and March 31,~~ 2017, respectively.


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


(6)	Includes $1.4 million, $1.7 million, $1.9 million, $1.4 million ~~$732 thousand~~ and ~~$750~~$732 thousand of nonperforming loans guaranteed by the SBA at June 30, 2018, March 31, 2018, December 31, 2017, September 30, 2017 and June 30, ~~2017 and March 31,~~ 2017, respectively.


	At or for the Three Months Ended										At or for the Three Months Ended
(in thousands)	Mar. 31, 2018		Dec. 31, 2017		Sept. 30, 2017		June 30, 2017		Mar. 31, 2017		June 30, 2018		Mar. 31, 2018		Dec. 31, 2017		Sept. 30, 2017		June 30, 2017

SUPPLEMENTAL DATA:
Loans serviced for others:
Single family	$	23,219,576	$	22,631,147	$	21,892,253	$	21,104,608	$	20,303,169	$	19,073,176	$	23,219,576	$	22,631,147	$	21,892,253	$	21,104,608
Multifamily DUS^®⁽¹⁾	1,323,937		1,311,399		1,213,459		1,135,722		1,140,414		1,357,929		1,323,937		1,311,399		1,213,459		1,135,722
Other	81,436		79,797		78,674		75,336		73,832		82,083		81,436		79,797		78,674		75,336
Total loans serviced for others	$	24,624,949	$	24,022,343	$	23,184,386	$	22,315,666	$	21,517,415	$	20,513,188	$	24,624,949	$	24,022,343	$	23,184,386	$	22,315,666

(1) Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS"^®) is a registered trademark of Fannie Mae.

About Us

HomeStreet is a diversified financial services company founded in 1921, headquartered in Seattle, Washington, serving customers primarily inon the ~~western~~West Coast of the United States, including Hawaii. We are principally engaged in commercial and consumer banking and real estate lending, including commercial real estate and single family mortgage banking operations.

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

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

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

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

At ~~March 31,~~June 30, 2018, we had total assets of ~~$6.92~~$7.16 billion, net loans held for investment of ~~$4.76~~$4.88 billion, deposits of ~~$5.05~~$5.12 billion and shareholders’ equity of ~~$701.0~~$706.5 million.

During the ~~first~~second quarter of 2018, we ~~focused~~continued our focus on measured growth in our Commercial and Consumer Banking segment and increased efficiency in our overall operations. In our Commercial and Consumer Banking segment, we continued our strategy of diversifying HomeStreet's aggregate earnings by expanding the business, improving the quality of our deposits, and bolstering our processing, compliance and risk management capabilities. ~~We continued to expand our retail branch network during the quarter by adding three de novo branches in the high-growth Puget Sound area.~~ As of ~~March 31,~~June 30, 2018, we had 30 retail branches in the Puget Sound area, ~~and~~ 16 retail branches in Southern ~~California. These~~California and four retail branches in both Hawaii and Oregon. We believe our continued branch expansions ~~promote~~promotes convenience for our customers, and along with the ~~intentional~~ growth of commercial and consumer account deposits at our existing branches, help build our market share. Meanwhile, in our Mortgage Banking segment, we ~~faced~~have been facing a continued reduction in single family loan origination volume due to the current interest rate environment and ~~more importantly,~~ a lack of housing inventory in our primary markets. ~~While we~~

We have been able to maintain a significant market share in mortgage banking in our ~~primary~~Pacific Northwest markets, and expect mortgage banking to remain an important part of our overall ~~strategy,~~strategy. However, the contraction in the total number of mortgage loans being originated in our markets has led us to focus on building aan even more efficient operation, while retaining the ability to meet the origination and servicing needs of our mortgage lending customers.

~~We continue to monitor market conditions~~ In June 2018, we announced the closure and ~~assess our mortgage banking office locations~~consolidation of 20 single family home lending centers, primarily in California and ~~staffing levels to maximize~~Arizona, with associated headcount reductions of 110 full-time equivalents, or approximately 8% of the segment's ~~profitability given current market conditions.~~total headcount at March 31, 2018. We anticipate annualized pre-tax savings from this streamlining to be $11.4 million. Total estimated pre-tax restructuring costs of $9.7 million, of which $6.9 million was incurred in the second quarter of 2018, with an additional $1.7 million estimated to be incurred in the third quarter of 2018.

Although our business historically ~~was centered~~focused heavily ~~around~~on single family mortgage banking, we have invested significantly in the growth of our commercial and consumer banking business since our initial public offering in 2012, in part to offset the volatility of earnings typically experienced in residential mortgage banking operations. This has been important in reducing the impact of the downturn in single family mortgage originations in our principal markets in the past year. The downturn has been primarily driven by the scarcity of homes available for sale in our ~~key~~primary markets, creating challenges for customers looking for suitable housing at an affordable price, which, in turn has reduced the volume of purchase mortgages transacted in those markets. In addition, ~~recent~~ increases in mortgage interest rates have reduced the market for originating refinance mortgage loans. The lower volume of loans overall originated in the market has also created significant price competition as the number of our competitors has not been meaningfully reduced, which in turn creates negative pressure on our mortgage banking profit margins.

The increased importance of our Commercial and Consumer Banking segment, along with the restructuring of our Mortgage Banking segment to reduce its cost structure to better align with market conditions, has helped to ease ~~that volatility.~~the volatility of our earnings.



¹ DUS® is a registered trademark of Fannie Mae	65

While HomeStreet has grown at a significant rate in the five years since our initial public offering, management anticipates that our growth rate as a percentage of our assets and income going forward ~~may~~will be lower than prior ~~quarters,~~periods, due in part to the increased scale of our business and the competitive state of our markets.



¹ ~~DUS® is a registered trademark of Fannie Mae~~	60

~~Recent Developments~~

As part of our ongoing balance sheet and capital management, HomeStreet executed a definitive agreement to sell a portion of our single family mortgage servicing rights. The transaction provides for the sale of the rights to service approximately $4.90 billion in total unpaid principal balance of single family mortgage loans serviced for both Fannie Mae and Freddie Mac, which represents approximately 21% of HomeStreet’s total single family mortgage loans serviced for others as of March 31, 2018. We also modified our loss sharing agreement with Fannie Mae related to our DUS® servicing that significantly lowered our consolidated risk-weighted assets. In ~~response~~addition to increasing regulatory capital ratios, these actions will provide additional regulatory capital to support the ~~ongoing challenges in~~continued growth of our Mortgage Banking segment and reduced expectations for growth, in April 2018 we took additional steps to improve our cost structure and efficiency. These steps included a reduction in headcount and other non-personnel costs in the Commercial and Consumer Banking business and accelerate the ~~Mortgage Banking segments, as well as corporate support functions. These actions resulted in a headcount reduction~~diversification of ~~86 full time employees ("FTE") and a decrease in non-personnel related expenses, which we expect will result in an annualized $12.4 million reduction of pre-tax expense.~~the Company's net income.

Management’s Overview of ~~First~~Second Quarter of 2018 Financial Performance

Results of Operations

Results for the ~~first~~second quarter of 2018 reflect the benefit of our investments in growth and diversification. We have continued to execute on our strategy of becoming a leading West Coast regional commercial bank through steady organic growth in our Commercial and Consumer Banking segment which resulted in an increase of loans held for investment of ~~6.0%~~2.6% in the quarter. At the same time, however, our mortgage business has continued to be impacted by both the low supply of houses in our primary markets and by higher interest ~~rates, resulting in lower rate locks.~~rates.

For the three and six months ended ~~March 31,~~June 30, 2018, net income was ~~$5.9~~$7.1 million and $13.0 million, respectively, a decrease of ~~$3.1~~$4.1 million or ~~34.7%~~36.7% and $7.2 million or 35.8% from ~~$9.0~~$11.2 million and $20.2 million, respectively, for the three and six months ended ~~March 31,~~June 30, 2017. The ~~decrease was~~decreases were primarily due to ~~lower gain on loan origination and sale activities~~a decrease in mortgage production in our Mortgage Banking segment driven by a lack of housing inventory and increased competition in our core ~~markets.~~markets and $6.9 million in restructuring expenses related to the streamlining of this segment in the second quarter of 2018.

As of ~~March 31,~~June 30, 2018, we had 4535 primary stand-alone home loan centers, six primary commercial loan centers and 62 retail deposit branches. We also have one stand-alone insurance office.

Consolidated Financial Performance


	At or for the Three Months Ended March 31,						Percent Change		At or for the Three Months Ended June 30,						Percent Change			At or for the Six Months Ended June 30,							Percent Change
(in thousands, except per share data and ratios)	2018			2017			Percent Change		2018			2017					2018				2017				Percent Change
															Percent Change
Selected statement of operations data
Total net revenue ⁽¹⁾	$	109,291		$	120,112		(9	)%	$	120,392		$	127,876		(6	)%		$	229,683			$	247,988		(7	)%
Total noninterest expense	100,769			106,874			(6	)%	110,565			111,244			(1	)%		211,334				218,118			(3	)%
Provision for credit losses	750			—			NM		1,000			500			100	%		1,750				500			250	%
Income tax expense	1,906			4,255			(55	)%	1,728			4,923			(65	)%		3,634				9,178			(60	)%
Net income	$	5,866		$	8,983		(35	)%	$	7,099		$	11,209		(37	)%		$	12,965			$	20,192		(36	)%

Financial performance
Diluted income per share	$	0.22		$	0.33				$	0.26		$	0.41					$	0.48			$	0.75
Return on average common shareholders’ equity	3.27		%	5.53		%			3.78		%	6.71		%				3.53		%		6.13		%
Return on average assets	0.35		%	0.57		%			0.40		%	0.70		%				0.37		%		0.63		%
Net interest margin	3.25		%	3.23		%			3.25		%	3.29		%				3.25		%		3.26		%

NM = not meaningful


(1)	Total net revenue is net interest income and noninterest income.

Commercial and Consumer Banking Segment Results

Commercial and Consumer Banking segment net income for the three and six months ended ~~March 31,~~June 30, 2018 was ~~$10.2~~$11.9 million and $22.1 million, respectively, compared to ~~$9.3~~$9.4 million and $18.7 million, respectively, for the three and six months ended ~~March 31,~~June 30, 2017. The ~~increase was~~increases were primarily due to ~~the~~an increase in net interest income from higher average balances and yields on interest-earning assets and a reduction in our effective tax rate, ~~and an increase in net interest income, mainly resulting from higher average balances of interest-earning assets. This was~~ partially offset by ~~a decrease in net gain on loan origination and sale activities on commercial real estate loans, and an increase in noninterest expense.~~

higher cost of funds.

Commercial and Consumer Banking segment net interest income for the three and six months ended June 30, 2018 was ~~$45.4~~$47.7 million and $93.2 million, compared to $42.4 million and $83.4 million for the ~~first quarter of 2018, an increase of $4.5 million, or 11.1%, from $40.9 million for the first quarter of 2017, reflecting~~three and six months ended June 30, 2017. The increases reflect higher average balances ~~of loans held for investment, primarily as a result of organic growth.~~and yields on interest earning assets.

Our provision for credit losses ~~was $750 thousand~~were $1.0 million and $1.8 million in the three and six months ended ~~March 31, 2018.~~June 30, 2018, respectively. The ~~company did not record a~~ provision for credit losses ~~for~~were $500 thousand in both the three and six months ended ~~March 31,~~June 30, 2017. Net recoveries were ~~$580~~$116 thousand in the first ~~three~~six months of 2018 compared to net recoveries of ~~$778 thousand~~$1.7 million in the first ~~three~~six months of 2017. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was ~~0.81%~~0.80% and ~~0.87%~~0.86% of loans held for investment at ~~March 31,~~June 30, 2018 and ~~March 31,~~June 30, 2017, respectively. Excluding loans acquired through business combinations, the allowance for loan losses was ~~0.87%~~0.85% of loans held for investment at ~~March 31,~~June 30, 2018 compared to ~~0.97%~~0.95% at ~~March 31,~~June 30, 2017. Nonperforming assets were ~~$11.2~~$10.4 million, or ~~0.16%~~0.14% of total assets at ~~March 31,~~June 30, 2018, compared to ~~$24.3~~$20.1 million, or ~~0.38%~~0.30% of total assets at ~~March 31,~~June 30, 2017.

Commercial and Consumer Banking segment noninterest expense was ~~$38.3~~$39.3 million for the ~~first~~second quarter of 2018, an increase of ~~$1.8~~$2.7 million, or ~~4.9%~~7.2%, from ~~$36.5~~$36.6 million for the ~~first~~second quarter of 2017. For the six months ended June 30, 2018 segment noninterest expense was $77.6 million, an increase of 6.1% from $73.1 million for the six months ended June 30, 2017. The ~~increase was~~increases were primarily ~~attributable~~due to ~~increased~~higher costs ~~related to~~from the ~~organic~~continued growth of our commercial real estate and commercial business lending units, ~~and the expansion of~~ our expanding branch banking ~~network.~~network, and increased information system costs and FDIC assessments. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, we added ~~three~~four de novo retail deposit branches. From ~~March 31,~~June 30, 2017, we ~~increased~~decreased the segment's headcount by ~~5.4%.~~3.5%, generally related to efficiencies derived in corporate support functions.

Mortgage Banking Segment Results

Mortgage Banking segment net loss for the three and six months ended ~~March 31,~~June 30, 2018 was ~~$4.3~~$4.8 million and $9.1 million, respectively, compared to ~~$309 thousand~~net income of $1.8 million and $1.5 million, respectively, for the three and six months ended ~~March 31,~~June 30, 2017. The ~~increase~~decreases in ~~net loss was~~earnings were primarily due to $6.9 million in restructuring charges in the second quarter of 2018, lower ~~gain on~~mortgage production and lower mortgage loan ~~origination and sale activities,~~servicing income, partially offset by lower salary and related costs associated with headcount reductions from our ~~second~~2017 and ~~third quarter 2017~~2018 restructuring events, as well as decreased commissions and related costs on lower closed loan volume.

Mortgage Banking noninterest income for the three and six months ended ~~March 31,~~June 30, 2018 was ~~$53.7~~$61.0 million and $114.7 million, respectively, compared to ~~$65.0~~$72.7 million and $137.8 million, respectively, for the three and six months ended ~~March 31,~~June 30, 2017, primarily due to ~~lower gain on loan origination~~a 13.9% and ~~sale activities driven by increased industry-wide competition reducing our composite profit margin, and to a lesser extent a 3.1%~~9.0% decrease in single family mortgage interest rate lock ~~commitments.~~commitments, respectively. Decreased interest rate lock commitments were the result of both higher mortgage interest rates, which reduced the volume of refinance activity in the period and to a lesser extent the limited supply of housing in our markets, which reduced the volume of purchase mortgage activity in the period. We decreased our mortgage production personnel by ~~11.7%~~14.6% at ~~March 31,~~June 30, 2018 compared to ~~March 31,~~June 30, 2017, primarily due to our 2017 and 2018 restructurings in our Mortgage Banking segment.

Mortgage Banking noninterest expense for the three and six months ended ~~March 31,~~June 30, 2018 was ~~$62.5~~$71.3 million and $133.8 million, respectively, compared to ~~$70.4~~$74.6 million and $145.0 million, respectively, for the three and six months ended ~~March 31,~~June 30, 2017, primarily due to decreased commissions, salary, and related costs on lower closed loan volume, as well as lower salary and related costs associated with headcount reductions from our ~~second~~2017 and ~~third quarter 2017~~2018 restructuring activities. These decreases were partially offset by $6.9 million in restructuring charges in the second quarter of 2018.

Regulatory Matters

Under the Basel III standards, the Company and Bank's Tier 1 leverage, common equity risk-based capital, Tier 1 risk-based capital and total risk-based capital ratios are as follows.

At March 31, 2018
HomeStreet, Inc. HomeStreet Bank
(in thousands) Ratio Ratio

Tier 1 leverage capital (to average assets) 9.08 % 9.58 %
Common equity Tier 1 risk-based capital (to risk-weighted assets) 9.26 % 12.30 %
Tier 1 risk-based capital (to risk-weighted assets) 10.28 % 12.30 %
Total risk-based capital (to risk-weighted assets) 10.97 % 13.09 %



	At June 30, 2018
	HomeStreet, Inc.		HomeStreet Bank
(in thousands)	Ratio		Ratio


Tier 1 leverage capital (to average assets)	9.18	%	9.72	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	10.48	%	12.69	%
Tier 1 risk-based capital (to risk-weighted assets)	11.56	%	12.69	%
Total risk-based capital (to risk-weighted assets)	12.38	%	13.52	%



	At December 31, 2017
	HomeStreet, Inc.		HomeStreet Bank
(in thousands)	Ratio		Ratio


Tier 1 leverage capital (to average assets)	9.12	%	9.67	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	9.86	%	13.22	%
Tier 1 risk-based capital (to risk-weighted assets)	10.92	%	13.22	%
Total risk-based capital (to risk-weighted assets)	11.61	%	14.02	%

The Company and the Bank remain above current “well-capitalized” regulatory minimums.

In ~~September 2017, federal banking regulators issued a proposed rule intended to simplify~~the second quarter of 2018, we modified our loss sharing agreement between our subsidiary HomeStreet Capital Corporation and limit the impact of the Basel III regulatory capital requirements for certain banks. We believe that these proposed changes, if implemented, would significantly benefit our Mortgage Banking business model by reducing the amount of regulatory capital that we would be required to maintain in relation to our mortgage servicing assets. Other proposed changes to the Basel III capital requirements would require a small increase in capital related to commercial and residential acquisition, development, and construction lending activity which would partially offset some portion of the benefit we would expect to receive with respect to our mortgage servicing assets. The final rules have yet to be published following the comment period, but if they are adopted without any material changes to the current proposal, we would expect to benefit from a significant reduction in the regulatory capital requirementsFannie Mae related to our ~~mortgage servicing rights. Although we cannot predict what~~DUS portfolio to move from a standard loss share method to a pari passu loss share method. Under the ~~final regulations will be when adopted, certain alternatives we believe to be~~new agreement, the calculated off-balance sheet risk weighted assets are reduced by two-thirds of the amount under ~~consideration would potentially allow us to allocate that~~the previous agreement, which in turn improved the common equity tier 1 risk based capital ~~to other aspects of our operations, including as~~ratio, the tier 1 risk based capital ~~to support our commercial lending operations.~~

~~For more~~ratio, and the total risk based capital ratio for HomeStreet on ~~the Basel III requirements as they apply to us, please see “Liquidity and Capital Resources - Capital Management~~" within Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission on March 6, 2018 and "~~Capital Management" within Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.~~a consolidated basis.

Critical Accounting Policies and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Certain of these policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:

Allowance for Loan and Lease Losses

Fair Value of Financial Instruments

Single Family Mortgage Servicing Rights ("MSRs")

Other Real Estate Owned ("OREO")

Income Taxes

Business Combinations

These policies and estimates are described in further detail in Part II, Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies, within our 2017 Annual Report on 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.

Three Months Ended March 31,
2018 2017
(in thousands)
Average
Balance
Interest
Average
Yield/Cost

Average
Balance
Interest
Average
Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾

Cash and cash equivalents $ 79,026
$ 179
0.92 % $ 91,220
$ 136
0.60 %
Investment securities 915,562
6,086
2.65 % 1,153,248
6,598
2.29 %
Loans held for sale 456,862
4,653
4.10 % 623,056
6,087
3.91 %
Loans held for investment 4,641,980
51,458
4.47 % 3,914,537
43,486
4.45 %
Total interest-earning assets 6,093,430
62,376
4.12 % 5,782,061
56,307
3.90 %
Noninterest-earning assets ⁽²⁾
656,823
561,957

Total assets $ 6,750,253
$ 6,344,018

Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts $ 441,363
$ 440
0.40 % $ 450,598
$ 477
0.43 %
Savings accounts 293,108
230
0.31 % 304,315
252
0.33 %
Money market accounts 1,860,678
3,448
0.74 % 1,589,696
2,211
0.56 %
Certificate accounts 1,239,042
3,844
1.24 % 1,151,581
2,801
0.98 %
Total interest-bearing deposits 3,834,191
7,962
0.83 % 3,496,190
5,741
0.66 %
Federal Home Loan Bank advances 858,451
3,636
1.70 % 975,914
2,401
0.99 %
Federal funds purchased and securities sold under agreements to repurchase 7,333
32
1.76 % 978
2
0.85 %
Long-term debt 125,290
1,584
5.07 % 125,161
1,479
4.75 %
Total interest-bearing liabilities 4,825,265
13,214
1.10 % 4,598,243
9,623
0.84 %
Noninterest-bearing liabilities 1,207,246
1,096,336

Total liabilities 6,032,511
5,694,579

Shareholders’ equity 717,742
649,439

Total liabilities and shareholders’ equity $ 6,750,253
$ 6,344,018

Net interest income⁽³⁾
$ 49,162
$ 46,684

Net interest spread 3.02 % 3.06 %
Impact of noninterest-bearing sources 0.23 % 0.17 %
Net interest margin 3.25 % 3.23 %



	Three Months Ended June 30,
	2018						2017
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash and cash equivalents	$	87,898	$	252	1.15	%	$	87,249	$	125	0.57	%
Investment securities	911,678		6,029		2.64	%	1,089,552		6,466		2.38	%
Loans held for sale	533,453		6,081		4.56	%	541,291		5,586		4.13	%
Loans held for investment	4,836,644		55,537		4.59	%	4,119,825		45,701		4.43	%
Total interest-earning assets	6,369,673		67,899		4.26	%	5,837,917		57,878		3.96	%
Noninterest-earning assets ⁽²⁾	711,206						587,211
Total assets	$	7,080,879					$	6,425,128
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	445,128	$	430	0.39	%	$	494,997	$	502	0.41	%
Savings accounts	292,156		217		0.30	%	309,844		256		0.33	%
Money market accounts	1,926,662		4,064		0.85	%	1,551,328		1,917		0.50	%
Certificate accounts	1,382,351		4,999		1.45	%	1,295,867		3,303		1.03	%
Total interest-bearing deposits	4,046,297		9,710		0.96	%	3,652,036		5,978		0.66	%
Federal Home Loan Bank advances	943,539		4,782		2.03	%	872,019		2,368		1.09	%
Federal funds purchased and securities sold under agreements to repurchase	5,253		24		1.84	%	4,804		14		1.20	%
Other borrowings	659		7		4.40	%	—		—		—	%
Long-term debt	125,337		1,662		5.32	%	125,205		1,514		4.86	%
Total interest-bearing liabilities	5,121,085		16,185		1.27	%	4,654,064		9,874		0.85	%
Noninterest-bearing liabilities	1,208,201						1,102,687
Total liabilities	6,329,286						5,756,751
Shareholders’ equity	751,593						668,377
Total liabilities and shareholders’ equity	$	7,080,879					$	6,425,128
Net interest income⁽³⁾			$	51,714					$	48,004
Net interest spread					2.99	%					3.11	%
Impact of noninterest-bearing sources					0.26	%					0.18	%
Net interest margin					3.25	%					3.29	%


(1)	The average balances of nonaccrual assets and related income, if any, are included in their respective categories.


(2)	Includes loan balances that have been foreclosed and are now reclassified to OREO.


(3)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of ~~$702~~$711 thousand and ~~$1.0~~$1.1 million for the quarter ended ~~March 31,~~June 30, 2018 and 2017, respectively. The estimated federal statutory tax rate was 21% and 35%, respectively, for the periods presented.



	Six Months Ended June 30,
	2018						2017
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash and cash equivalents	$	83,487	$	432	1.04	%	$	89,224	$	261	0.59	%
Investment securities	913,609		12,115		2.65	%	1,121,224		13,065		2.33	%
Loans held for sale	495,369		10,734		4.33	%	581,947		11,673		4.02	%
Loans held for investment	4,739,850		106,995		4.53	%	4,017,748		89,187		4.44	%
Total interest-earning assets	6,232,315		130,276		4.19	%	5,810,143		114,186		3.93	%
Noninterest-earning assets ⁽²⁾	684,164						574,654
Total assets	$	6,916,479					$	6,384,797
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	443,256	$	870	0.39	%	$	472,920	$	980	0.42	%
Savings accounts	292,629		448		0.31	%	307,095		508		0.33	%
Money market accounts	1,893,852		7,511		0.79	%	1,570,406		4,128		0.53	%
Certificate accounts	1,311,092		8,843		1.35	%	1,224,122		6,104		1.00	%
Total interest-bearing deposits	3,940,829		17,672		0.90	%	3,574,543		11,720		0.66	%
Federal Home Loan Bank advances	901,230		8,418		1.87	%	923,679		4,770		1.04	%
Federal funds purchased and securities sold under agreements to repurchase	6,287		56		1.80	%	2,901		16		1.03	%
Other borrowings	332		8		2.21	%	—		—		—	%
Long-term debt	125,314		3,246		5.20	%	125,183		2,992		4.81	%
Total interest-bearing liabilities	4,973,992		29,400		1.18	%	4,626,306		19,498		0.85	%
Noninterest-bearing liabilities	1,207,726						1,099,530
Total liabilities	6,181,718						5,725,836
Shareholders’ equity	734,761						658,961
Total liabilities and shareholders’ equity	$	6,916,479					$	6,384,797
Net interest income⁽³⁾			$	100,876					$	94,688
Net interest spread					3.01	%					3.08	%
Impact of noninterest-bearing sources					0.24	%					0.18	%
Net interest margin					3.25	%					3.26	%


(1)	The average balances of nonaccrual assets and related income, if any, are included in their respective categories.


(2)	Includes loan balances that have been foreclosed and are now reclassified to OREO.


(3)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.4 million and $2.2 million for the six months ended June 30, 2018 and 2017 respectively. The estimated federal statutory tax rate was 21% and 35%, respectively, for the periods presented.

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, which reduces interest income for the period in which the reversal occurs and we stop amortizing any net deferred fees (which are normally amortized over the life of the loan). 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 ~~$332~~$338 thousand and ~~$446~~$636 thousand for the three and six months ended ~~March 31,~~June 30, 2018, respectively, and $352 thousand and $797 thousand for the three and six months ended June 30, 2017, respectively.

Net Income

For the three months ended ~~March 31,~~June 30, 2018, net income was ~~$5.9~~$7.1 million, a decrease of ~~$3.1~~$4.1 million or ~~34.7%~~36.7% from ~~$9.0~~$11.2 million for the ~~three~~same period in 2017. For the six months ended ~~March 31,~~June 30, 2018, net income was $13.0 million, a decrease of $7.2 million, or 35.8% from net income of $20.2 million for the same period in 2017. The ~~decrease was~~decreases were primarily due to ~~lower gain on loan origination~~a decrease in mortgage production and ~~sale activities and servicing income in our~~the expenses related to the restructuring of the Mortgage Banking ~~segment driven by a lack of housing inventory and increased competition in our core markets.~~segment.

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").

Net interest income on a tax equivalent basis for the ~~first~~second quarter of 2018 was ~~$49.2~~$51.7 million, an increase of ~~$2.5~~$3.7 million, or ~~5.3%~~7.7%, from the ~~first~~second quarter of 2017. For the six months ended June 30, 2018 net interest income on a tax equivalent basis was $100.9 million, an increase of $6.2 million, or 6.5% from $94.7 million for the same period in 2017. The ~~increase~~increases from 2017 ~~was~~were primarily due to growth inof loans held for investment and higher yields on average interest-earning assets, ~~and~~partially offset by higher ~~net interest margin in our Commercial and Consumer Banking segment.~~cost of funds. The net interest margin for the ~~first~~second quarter of 2018 ~~increased~~decreased to 3.25% from ~~3.23%~~3.29% for the ~~first quarter of~~same period in 2017. For the six months ended June 30, 2018 net interest margin decreased to 3.25% from 3.26% for the same period in 2017. The ~~increase~~decreases from ~~the first quarter of~~ 2017 ~~was~~were primarily due to ~~the yield on interest-earning assets,~~our cost of interest-bearing liabilities, which increased more rapidly than our yield on interest-earning assets. The flatness of the yield curve is adversely affecting our net interest margin as the cost of ~~interest and non-interest bearing liabilities.~~interest-bearing liabilities are increasing more quickly than the yield on our interest-earning assets.

~~Total~~For the three and six months ended June 30, 2018, total average interest-earning assets increased ~~$311.4~~$531.8 million, or ~~5.4%~~9.1% from the three months ended ~~March 31,~~June 30, 2017 and increased $422.2 million, or 7.3% from the six months ended June 30, 2017, primarily as a result of overall organic loan growth.

Total interest income of ~~$62.4~~$67.9 million on a tax equivalent basis in the ~~first~~second quarter of 2018 increased ~~$6.1~~$10.0 million, or ~~10.8%~~17.3%, from ~~$56.3~~$57.9 million in the ~~first~~second quarter of 2017. ~~This~~For the six months ended June 30, 2018 total interest income on a tax equivalent basis was $130.3 million, an increase of $16.1 million, or 14.1% from the six months ended June 30, 2017. These increases were primarily ~~resulted from~~the result of higher average balances of loans held for investment, which increased ~~$727.4~~$716.8 million, or ~~18.6%~~17.4% and $722.1 million or 18.0% from the three and six months ended ~~March 31, 2017.~~June 30, 2017, respectively.

Total interest expense in the ~~first~~second quarter of 2018 increased ~~$3.6~~$6.3 million, or ~~37.3%~~63.9% from ~~$9.6~~$9.9 million in the ~~first~~second quarter of 2017. For the six months ended June 30, 2018 total interest expense increased $9.9 million, or 50.8% from $19.5 million for the six months ended June 30, 2017. The ~~increase~~increases resulted from higher rates on interest-bearing deposits and FHLB advances.

Provision for Credit Losses

We recorded a provision for credit loss of ~~$750~~$1.0 million in the second quarter of 2018 compared to $500 thousand in the ~~first quarter of 2018. We did not record a provision for credit loss in the first~~second quarter of 2017. The increase was primarily due to ~~higher loan growth and lower~~net charge-offs in the quarter compared to net recoveries in the ~~quarter.~~comparable period. For the six months ended June 30, 2018 we recorded a provision for credit loss of $1.8 million compared to $500 thousand for the six months ended June 30, 2017, primarily due to higher net recoveries in the six months ended June 30, 2017 as compared to the same period in 2018.

Nonaccrual loans were ~~$10.9~~$9.6 million at ~~March 31,~~June 30, 2018, a decrease of ~~$4.2~~$5.4 million, or ~~27.7%~~36.0%, from $15.0 million at December 31, 2017. Nonaccrual loans as a percentage of total loans decreased to ~~0.23%~~0.20% at ~~March 31,~~June 30, 2018 from 0.33% at December 31, 2017.

Net ~~recoveries~~charge-offs were ~~$580~~$464 thousand in the ~~first~~second quarter of 2018 compared to net recoveries of ~~$778~~$928 thousand in the second quarter of 2017. For the first ~~quarter~~half of 2018 net recoveries were $116 thousand compared to net recoveries of $1.7 million in the first half of 2017. For a more detailed discussion on our allowance for loan losses and related provision for loan losses, see Credit Risk Management within Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.

Noninterest Income

Noninterest income consisted of the following.


	Three Months Ended March 31,					Dollar Change				Percent Change		Three Months Ended June 30,					Dollar Change			Percent Change			Six Months Ended June 30,				Dollar Change			Percent Change
(in thousands)	2018			2017					2018				2017			2018				Percent Change		2017					Dollar Change			Percent Change
						Dollar Change				Percent Change
Noninterest income																	Dollar Change
Gain on loan origination and sale activities ⁽¹⁾	$	48,319		$	60,281	$	(11,962	)		(20	)%	$	57,049	$	65,908		$	(8,859	)	(13	)%		$	105,368	$	126,189	$	(20,821	)	(16	)%
Loan servicing income	7,574			9,239		(1,665		)		(18	)	7,032		8,764			(1,732		)	(20	)		14,606		18,003		(3,397		)	(19	)
(Loss) income from WMS Series LLC	(11		)	185		(196		)		(106	)
Income from WMS Series LLC												322		406			(84		)	(21	)		311		591		(280		)	(47	)
Depositor and other retail banking fees	1,945			1,656		289				17		1,953		1,811			142			8			3,898		3,467		431			12
Insurance agency commissions	543			396		147				37		527		501			26			5			1,070		897		173			19
Gain on sale of investment securities available for sale	222			6		216				3,600		16		551			(535		)	(97	)		238		557		(319		)	(57	)
Other	2,239			2,698		(459		)		(17	)	2,490		3,067			(577		)	(19	)		4,729		5,765		(1,036		)	(18	)
Total noninterest income	$	60,831		$	74,461	$	(13,630	)		(18	)%	$	69,389	$	81,008		$	(11,619	)	(14	)%		$	130,220	$	155,469	$	(25,249	)	(16	)%


(1)	Single family, multifamily and other commercial loan banking activities.

Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale as well as mortgage servicing activities. The level of our mortgage banking activity fluctuates and is highly sensitive to changes in mortgage interest rates, as well as to general economic conditions such as employment trends and housing supply and affordability. The ~~decrease~~decreases in noninterest income in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 ~~was~~were primarily due to a decrease in mortgage production resulting in a decrease in gain on loan origination and sale activities in our Mortgage Banking segment. To a lesser extent, these decreases were also attributable to reduced gain on loan origination and sale activities in our Commercial and Consumer Banking segment, as the volume of primarily commercial real estate loan sales in this segment was lower than in the three months ended March 31, 2017.

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.



	Three Months Ended June 30,					Dollar Change			Percent Change		Six Months Ended June 30,					Dollar Change			Percent Change
(in thousands)	2018			2017		Dollar Change			Percent Change		2018			2017		Dollar Change			Percent Change

Single family held for sale:
Servicing value and secondary market gains⁽¹⁾	$	48,182		$	57,353	$	(9,171	)	(16	)%	$	89,609		$	107,891	$	(18,282	)	(17	)%
Loan origination and administrative fees	6,158			6,823		(665		)	(10	)	11,603			12,604		(1,001		)	(8	)
Total gain on single family held for sale	54,340			64,176		(9,836		)	(15	)	101,212			120,495		(19,283		)	(16	)
Multifamily DUS^®	1,613			1,273		340			27		2,759			4,633		(1,874		)	(40	)
SBA	385			316		69			22		686			918		(232		)	(25	)
CRE Non-DUS^®	800			143		657			459		800			143		657			459
Single Family	(89		)	—		(89		)	NM		(89		)	—		(89		)	NM
Gain on loan origination and sale activities	$	57,049		$	65,908	$	(8,859	)	(13	)%	$	105,368		$	126,189	$	(20,821	)	(16	)%
NM = not meaningful

Three Months Ended March 31, Dollar
Change Percent
Change
(in thousands) 2018 2017

Single family held for sale:
Servicing value and secondary market gains⁽¹⁾
$ 41,427
$ 50,538
$ (9,111 ) (18 )%
Loan origination and administrative fees 5,445
5,781
(336 ) (6 )
Total single family held for sale 46,872
56,319
(9,447 ) (17 )
Multifamily DUS^®
1,146
3,360
(2,214 ) (66 )
SBA 301
602
(301 ) (50 )
Gain on loan origination and sale activities $ 48,319
$ 60,281
$ (11,962 ) (20 )%


(1)	Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.

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


	Three Months Ended March 31,				Dollar Change				Percent Change		Three Months Ended June 30,					Dollar Change			Percent Change			Six Months Ended June 30,						Dollar Change			Percent Change
(in thousands)	2018		2017					2018				2017			2018						2017

Single family mortgage interest rate lock commitments	$	1,571,975	$	1,622,622	$	(50,647	)		(3	)%	$	1,679,748	$	1,950,427			$	(270,679	)		(14	)%	$	3,251,723		$	3,573,049		$	(321,326	)		(9	)%
Single family mortgage closed loan volume ⁽¹⁾	1,452,398		1,621,053		(168,655		)		(10	)%	1,739,887		2,011,127			(271,240	)		(13	)%		3,192,285			3,632,180			(439,895	)		(12	)%


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

The ~~decrease~~decreases in gain on loan origination and sale activities in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 ~~predominately reflected increased industry wide competition reducing our composite profit margin and~~were primarily due to ~~a lesser extent~~ lower single family mortgage interest rate lock commitments as a result of the higher market interest rates in the period and a limited supply of available housing in our primary markets. We reduced the number of employees in the mortgage segment by ~~16.1%~~16.9% at ~~March 31,~~June 30, 2018 compared to ~~March 31,~~June 30, 2017, primarily due to our Mortgage Banking segment restructuring events in ~~the second~~2017 and ~~third quarters of 2017.~~2018. At ~~March 31,~~June 30, 2018, mortgage production personnel was ~~467~~450 employees compared to ~~529~~527 employees at ~~March 31,~~June 30, 2017.

Management records a liability for estimated mortgage repurchase losses, which has the effect of reducing gain on 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 loan origination and sale activities. For further information on our mortgage repurchase liability, see Note 7, Commitments, Guarantees and Contingencies, to the financial statements in this Quarterly Report on Form 10-Q.


	Three Months Ended March 31,					Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018		2017			2018			2017			2018		2017

Effect of changes to the mortgage repurchase liability recorded in gain on loan origination and sale activities:
New loan sales⁽¹⁾	$	247	$	(767	)	$	308		$	592		$	555	$	1,359
Other changes in estimated repurchase losses⁽²⁾	363		1,127			(313		)	(264		)	50		(1,391		)
	$	610	$	360		$	(5	)	$	328		$	605	$	(32	)


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


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

Loan servicing income consisted of the following.


	Three Months Ended March 31,						Dollar Change				Percent Change		Three Months Ended June 30,								Dollar Change			Percent Change			Six Months Ended June 30,							Dollar Change			Percent Change
(in thousands)	2018			2017						2018				2017						2018				Percent Change		2017								Dollar Change			Percent Change
							Dollar Change				Percent Change
Servicing income, net:																					Dollar Change
Servicing fees and other	$	18,451		$	16,179		$	2,272			14	%	$	18,385			$	15,977			$	2,408		15	%		$	36,836			$	32,156		$	4,680		15	%
Changes in fair value of single family MSRs due to amortization⁽¹⁾	(8,870		)	(8,520		)	(350		)		4		(9,400		)		(8,909		)		(491		)	6			(18,270		)		(17,429		)	(841		)	5
Amortization of multifamily and SBA MSRs	(1,049		)	(931		)	(118		)		13		(1,064		)		(761		)		(303		)	40			(2,113		)		(1,692		)	(421		)	25
	8,532			6,728			1,804				27		7,921				6,307				1,614			26			16,453				13,035			3,418			26
Risk management:
Changes in fair value of MSRs due to changes in model inputs and/or assumptions ⁽²⁾	30,019			2,132			27,887				1,308		11,299			⁽³⁾	(6,417		)		17,716			276			41,318			⁽³⁾	(4,285		)	45,603			NM
Net (loss) gain from derivatives economically hedging MSRs	(30,977		)	379			(31,356		)		(8,273	)	(12,188		)		8,874				(21,062		)	(237	)		(43,165		)		9,253			(52,418		)	(566	)
	(958		)	2,511			(3,469		)		(138	)	(889		)		2,457				(3,346		)	(136	)		(1,847		)		4,968			(6,815		)	(137	)
Loan servicing income	$	7,574		$	9,239		$	(1,665	)		(18	)%	$	7,032			$	8,764			$	(1,732	)	(20	)%		$	14,606			$	18,003		$	(3,397	)	(19	)%
NM = not meaningful


(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.


(3)	Includes pre-tax income of $573 thousand, net of transaction costs and prepayment reserves, resulting from the sale of single family MSRs during the three and six months ended June 30, 2018.

The ~~decrease~~decreases in ~~mortgage~~loan servicing income infor the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 ~~was~~were primarily due to lower risk management results, partially offset by higher servicing fees. ~~Risk management results fluctuate as market conditions change, including changes in interest rates.~~ The flattening yield curve and increased negative convexity in our mortgage servicing portfolio have substantially reduced risk management results. Risk management results fluctuate as market conditions change, including changes in interest rates. Mortgage servicing fees collected in the three and six months ended ~~March 31,~~June 30, 2018 increased compared to the ~~three months ended March 31,~~same periods in 2017 primarily as a result of higher average balances of loans serviced for others during the period. Our loans serviced for others portfolio was ~~$24.62~~$20.51 billion at ~~March 31,~~June 30, 2018 compared to $24.02 billion at December 31, 2017 and ~~$21.52~~$22.32 billion at ~~March 31,~~June 30, 2017. Loans serviced for others decreased at June 30, 2018 due to the sale of approximately $4.9 billion of unpaid principal balance of our single family mortgage servicing rights on June 29, 2018.

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 on prepayment speeds. 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.

Income from WMS Series LLC decreased in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 primarily due to lower ~~gain on loan origination and sale activities~~mortgage production driven by a lack of housing inventory and increased competition in the markets served by WMS.

Depositor and other retail banking fees for the three and six months ended ~~March 31,~~June 30, 2018 increased from the three and six months ended ~~March 31,~~June 30, 2017 primarily due to an increase in the number of transaction accounts from which we generate fee income.

The following table presents the composition of depositor and other retail banking fees for the periods indicated.


	Three Months Ended March 31,				Dollar Change			Percent Change		Three Months Ended June 30,					Dollar Change		Percent Change			Six Months Ended June 30,				Dollar Change		Percent Change
(in thousands)	2018		2017				2018				2017			2018			Percent Change		2017					Dollar Change		Percent Change
					Dollar Change			Percent Change
Fees:															Dollar Change
Monthly maintenance and deposit-related fees	$	811	$	702	$	109		16	%	$	787	$	758		$	29	4	%		$	1,598	$	1,460	$	138	9	%
Debit Card/ATM fees	1,068		897		171			19		1,098		1,014			84		8			2,166		1,911		255		13
Other fees	66		57		9			16		68		39			29		74			134		96		38		40
Total depositor and other retail banking fees	$	1,945	$	1,656	$	289		17	%	$	1,953	$	1,811		$	142	8	%		$	3,898	$	3,467	$	431	12	%

Noninterest Expense

Noninterest expense consisted of the following.


	Three Months Ended March 31,					Dollar Change				Percent Change		Three Months Ended June 30,									Dollar Change			Percent Change			Six Months Ended June 30,								Dollar Change				Percent Change
(in thousands)	2018			2017					2018					2017						2018						2017

Noninterest expense
Salaries and related costs	$	66,691		$	71,308	$	(4,617	)		(6	)%	$	69,127				$	76,390			$	(7,263	)		(10	)%		$	135,818				$	147,698		$	(11,880	)		(8	)%
General and administrative	14,584			17,128		(2,544		)		(15	)	14,707					15,872				(1,165		)	(7	)		29,291					33,000			(3,709		)		(11	)
Amortization of core deposit intangibles	406			514		(108		)		(21	)	407					493				(86		)	(17	)		813					1,007			(194		)		(19	)
Legal	730			160		570				356		839					150				689			459			1,569					310			1,259				406
Consulting	877			1,058		(181		)		(17	)	758					771				(13		)	(2	)		1,635					1,829			(194		)		(11	)
Federal Deposit Insurance Corporation assessments	929			824		105				13		1,079					697				382			55			2,008					1,521			487				32
Occupancy	8,180			8,209		(29		)		—		14,953			(1	)	8,880				6,073			68			23,133			(1	)	17,089			6,044				35
Information services	8,465			7,648		817				11		8,693					8,172				521			6			17,158					15,820			1,338				8
Net (benefit) cost of operation and sale of other real estate owned	(93		)	25		(118		)		(472	)
Net cost (benefit) of operation and sale of other real estate owned												2					(181		)		183			(101	)		(91		)			(156		)	65				(42	)
Total noninterest expense	$	100,769		$	106,874	$	(6,105	)		(6	)%	$	110,565				$	111,244			$	(679	)	(1	)%		$	211,334				$	218,118		$	(6,784	)		(3	)%


(1)	Includes approximately $6.4 million of pre-tax charges related to the Mortgage Banking restructuring activity that occurred in the second quarter of 2018.

The ~~decrease~~decreases in noninterest expense in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 ~~was~~were primarily duedue to decreased commissions, salary and related costs on lower closed loan volume and cost savings associated with headcount and non-personnel reductions in our Mortgage Banking segment, partially offset by the restructuring ~~plans implemented~~charges in the second ~~and third quarters~~quarter of ~~2017.~~2018.

Income Tax Expense

For the ~~first~~second quarter of 2018, income tax expense was ~~$1.9~~$1.7 million compared to income tax expense of ~~$4.3~~$4.9 million for the ~~first~~second quarter of 2017. For the six months ended June 30, 2018, income tax expense was $3.6 million compared with an expense of $9.2 million for the six months ended June 30, 2017.

Our effective income tax rate of ~~24.5%~~19.6% for the first quarter of 2018 was lower than our effective income tax rate of 32.1% for the first quarter of 2017. The reduction in our effective tax rate is primarily a result of the 2017 Tax Act passed in December 2017, which lowered the Federal statutory rate to 21%.

~~Our effective income tax rate for the first~~second quarter of 2018 differs from the Federal statutory tax rate of 21% primarily due to the impact of tax-exempt interest income. This is lower than our effective tax rate of 21.9% for the six months ended June 30, 2018, due to the impact from aour Q1 2018 discrete item related to prior period state net operating losses.

Our effective income tax rate for the second quarter of 2017 was 30.5%, as compared to 19.6% for the second quarter of 2018. The reduction in our effective tax rate is primarily the result of the 2017 Tax Cuts and Jobs Act (“Tax Act”) passed in December 2017, which lowered the Federal statutory tax rate to 21%.

Review of Financial Condition – Comparison of ~~March 31,~~June 30, 2018 to December 31, 2017

Total assets were ~~$6.92~~$7.16 billion at ~~March 31,~~June 30, 2018 compared to $6.74 billion at December 31, 2017, an increase of ~~$182.0~~$421.8 million, or ~~2.7%~~6%.

Cash and cash equivalents were ~~$66.3~~$176.2 million at ~~March 31,~~June 30, 2018 compared to $72.7 million at December 31, 2017, ~~a decrease~~an increase of ~~$6.4~~$103.5 million, or ~~8.8%~~142%.

Investment securities were ~~$915.5~~$907.5 million at ~~March 31,~~June 30, 2018 compared to $904.3 million at December 31, 2017, an increase of ~~$11.2~~$3.2 million.

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 designated securities having a carrying value of ~~$79.3~~$78.0 million at ~~March 31,~~June 30, 2018 as held to maturity.

The following table details the composition of our investment securities available for sale by dollar amount and as a percentage of the total available for sale securities portfolio.


	At March 31, 2018				At December 31, 2017				At June 30, 2018				At December 31, 2017
(in thousands)	Fair Value		Percent		Fair Value		Percent		Fair Value		Percent		Fair Value		Percent

Investment securities available for sale:
Mortgage-backed securities:
Residential	$	121,356	15	%	$	130,090	15	%	$	115,848	14	%	$	130,090	15	%
Commercial	31,406		4		23,694		3		30,354		4		23,694		3
Municipal bonds	374,640		45		388,452		46		361,799		44		388,452		46
Collateralized mortgage obligations:
Residential	169,371		20		160,424		19		168,519		20		160,424		19
Commercial	97,727		12		98,569		12		111,623		13		98,569		12
Corporate debt securities	21,761		3		24,737		3		21,478		3		24,737		3
U.S. Treasury securities	10,489		1		10,652		1		10,438		1		10,652		1
Agency debentures	9,450		1		9,650		1		9,363		1		9,650		1
Total investment securities available for sale	$	836,200	100	%	$	846,268	100	%	$	829,422	100	%	$	846,268	100	%

Loans held for sale were ~~$500.5~~$568.5 million at ~~March 31,~~June 30, 2018 compared to $610.9 million at December 31, 2017, a decrease of ~~$110.4~~$42.4 million, or ~~18.1%~~7%. Loans held for sale primarily include single family residential loans, typically sold within 30 days of closing the loan. The decrease in the loans held for sale balance was primarily due to a ~~seasonal~~ decline in mortgage volume.

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


	At March 31, 2018					At December 31, 2017					At June 30, 2018					At December 31, 2017
(in thousands)	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent

Consumer loans:
Single family ⁽¹⁾	$	1,444,193		30	%	$	1,381,366		30	%	$	1,416,072		29	%	$	1,381,366		30	%
Home equity and other	470,273			10		453,489			10		513,016			10		453,489			10
	1,914,466			40		1,834,855			40		1,929,088			39		1,834,855			40
Commercial real estate loans:
Non-owner occupied commercial real estate	633,719			13		622,782			14		640,984			13		622,782			14
Multifamily	811,892			17		728,037			16		836,260			17		728,037			16
Construction/ land development	739,248			15		687,631			15		778,094			16		687,631			15
	2,184,859			45		2,038,450			45		2,255,338			46		2,038,450			45
Commercial and industrial loans:
Owner occupied commercial real estate	393,845			9		391,613			9		400,149			8		391,613			9
Commercial business	287,367			6		264,709			6		319,038			7		264,709			6
	681,212			15		656,322			15		719,187			15		656,322			15
Total loans before allowance, net deferred loan fees and costs	4,780,537			100	%	4,529,627			100	%	4,903,613			100	%	4,529,627			100	%
Net deferred loan fees and costs	16,814					14,686					19,177					14,686
	4,797,351					4,544,313					4,922,790					4,544,313
Allowance for loan losses	(39,090		)			(37,847		)			(39,480		)			(37,847		)
	$	4,758,261				$	4,506,466				$	4,883,310				$	4,506,466


(1)	Includes ~~$5.3~~$4.2 million and $5.5 million at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively, of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

Loans held for investment, net increased ~~$251.8~~$376.8 million, or ~~5.6%~~8.4%, from December 31, 2017. During the quarter, new commitments totaled $838.8 million and included ~~$216.4~~$327.8 million of consumer loans, ~~$35.7~~$23.6 million of non-owner occupied commercial real estate loans, ~~$88.7~~$89.1 million of multifamily permanent loans, ~~$47.8~~$52.0 million of commercial ~~business~~and industrial loans and ~~$302.4~~$346.2 million of construction loans. New commitments for construction loans include ~~$185.6~~$180.9 million in residential construction, ~~$58.8~~$86.5 million in single family custom home construction and ~~$58.1~~$78.8 million in multifamily construction.

Mortgage servicing rights were ~~$320.1~~$272.2 million at ~~March 31,~~June 30, 2018 compared to $284.7 million at December 31, 2017, ~~an increase~~a decrease of ~~$35.5~~$12.4 million, or ~~12.5%~~4.4%, primarily due to the ~~fair value change related to the change in interest rates and to a lesser extent growth in the loans serviced for others portfolio.~~sale of approximately $4.90 billion of unpaid principal balance of our single family mortgage servicing rights on June 29, 2018.

Federal Home Loan Bank stock was ~~$41.9~~$48.2 million at ~~March 31,~~June 30, 2018 compared to $46.6 million at December 31, 2017, ~~a decrease~~an increase of ~~$4.7~~$1.5 million, or ~~10.1%~~3.3%. 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 earnings.

Other assets were ~~$194.1~~$185.5 million at ~~March 31,~~June 30, 2018, compared to $188.5 million at December 31, 2017, ~~an increase~~a decrease of ~~$5.6~~$2.9 million, or ~~3.0%~~1.6%.

Deposit balances were as follows for the periods indicated:


(in thousands)	At March 31, 2018				At December 31, 2017				At June 30, 2018				At December 31, 2017
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent

Noninterest-bearing accounts - checking and savings	$	595,549	12	%	$	579,504	12	%	$	627,893	12	%	$	579,504	12	%
Interest-bearing transaction and savings deposits:
NOW accounts	480,620		10		461,349		10		486,104		9		461,349		10
Statement savings accounts due on demand	295,096		6		293,858		6		283,969		6		293,858		6
Money market accounts due on demand	1,926,153		38		1,834,154		39		1,932,340		38		1,834,154		39
Total interest-bearing transaction and savings deposits	2,701,869		54		2,589,361		54		2,702,413		53		2,589,361		55
Total transaction and savings deposits	3,297,418		65		3,168,865		67		3,330,306		65		3,168,865		67
Certificates of deposit	1,319,842		26		1,190,689		25		1,396,082		27		1,190,689		25
Noninterest-bearing accounts - other	431,736		9		401,398		9		393,897		8		401,398		8
Total deposits	$	5,048,996	100	%	$	4,760,952	100	%	$	5,120,285	100	%	$	4,760,952	100	%

Deposits at ~~March 31,~~June 30, 2018 increased ~~$288.0~~$359.3 million, or ~~6.1%~~7.5%, from December 31, 2017. During the first ~~three~~six months of 2018, transaction and savings deposits increased by ~~$128.6~~$161.4 million, or ~~4.1%~~5.1%, primarily from increases in business money market deposits. The ~~$129.2~~$205.4 million, or ~~10.8%~~17.2%, increase in certificates of deposit since December 31, 2017 was due primarily to a ~~$144.2~~$262.2 million increase in brokered ~~deposits.~~deposits relating primarily to favorable issuance costs for brokered CDs relative to other wholesale sources of funds, and business checking accounts. The ~~$30.3~~$7.5 million, or ~~7.6%~~1.9%, ~~increase~~decrease in deposits in other noninterest-bearing accounts was primarily associated with seasonal mortgage servicing activity. At ~~March 31,~~June 30, 2018, brokered deposits represented ~~9.7%~~11.9% of total deposits, as compared to 7.3% of total deposits at December 31, 2017.

The aggregate amount of time deposits in denominations of more than $250 thousand at ~~March 31,~~June 30, 2018 and December 31, 2017 was ~~$86.6~~$86.3 million and $88.8 million, respectively. There were ~~$489.7~~$607.8 million and $345.5 million of brokered deposits at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

Federal Home Loan Bank advances were ~~$851.7 million~~$1.01 billion at ~~March 31,~~June 30, 2018 compared to $979.2 million at December 31, 2017. We use these borrowings primarily to fund our mortgage banking and secondarily to fund our securities investment activities. We effectively used ~~short term funding~~FHLB advances to ~~lower~~fund single family loans held for sale and to match the ~~cost~~duration on variable rate loans, such as residential construction loans and the line of ~~funds and manage the sensitivity of our net portfolio value and net interest income,~~credit, which mitigated the impact of changes in interest rates.

Shareholders’ Equity

Shareholders' equity was ~~$701.0~~$706.5 million at ~~March 31,~~June 30, 2018 compared to $704.4 million at December 31, 2017. This ~~decrease~~increase was primarily related to net income of $13.0 million and share-based compensation of $1.5 million recognized during the six months ended June 30, 2018, partially offset by other comprehensive loss of ~~$10.2 million, partially offset by net income of $5.9 million recognized during the three months ended March 31, 2018.~~$12.6 million. Other comprehensive income (loss) represents unrealized gains and losses, net of tax in the valuation of our available for sale investment securities portfolio at ~~March 31,~~June 30, 2018.

Shareholders’ equity, on a per share basis, was ~~$25.99~~$26.19 per share at ~~March 31,~~June 30, 2018, compared to $26.20 per share at December 31, 2017.

Return on Equity and Assets

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


	At or For the Three Months Ended March 31,				At or For the Three Months Ended June 30,				At or For the Six Months Ended June 30,
	2018		2017		2018		2017		2018		2017

Return on assets ⁽¹⁾	0.35	%	0.57	%	0.40	%	0.70	%	0.37	%	0.63	%
Return on equity ⁽²⁾	3.27	%	5.53	%	3.78	%	6.71	%	3.53	%	6.13	%
Equity to assets ratio ⁽³⁾	10.63	%	10.24	%	10.61	%	10.40	%	10.62	%	10.32	%


(1)	Net income divided by average total assets.


(2)	Net earnings available to common shareholders divided by average common shareholders’ equity.


(3)	Average equity divided by average total assets.

Business Segments

Our business segments are determined based on the products and services provided, as well as the nature of the related business activities and reflect the manner in which financial information is currently evaluated by management.

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

Commercial and Consumer Banking Segment

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through bank branches, ATMs, and online, mobile and telephone banking. These products and services include deposit products; residential, consumer, business and agricultural portfolio loans; non-deposit investment products; insurance ~~products,~~products; and cash management services. We originate construction loans, bridge loans and permanent loans for our portfolio primarily 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. In addition, through the HomeStreet Commercial Capital division of HomeStreet Bank, we originate permanent commercial real estate loans primarily up to ~~$10~~$15 million in size, a portion of which we intend to pool and sell into the secondary market. As a part of the ~~HomeStreet~~ Commercial ~~Capital~~Lending division, we also have a team that specializes in U.S. Small Business Administration ("SBA") lending. At ~~March 31,~~June 30, 2018, our retail deposit branch network consists of 62 branches in the Pacific Northwest, California and Hawaii. At ~~March 31,~~June 30, 2018 and December 31, 2017, our transaction and savings deposits totaled ~~$3.30~~$3.33 billion and $3.17 billion, respectively, and our loan portfolio totaled ~~$4.76~~$4.88 billion and $4.51 billion, respectively. This segment also reflects the results for the management of the Company's portfolio of investment securities.

Commercial and Consumer Banking segment results are detailed below.


	Three Months Ended March 31,							Dollar Change				Percent Change		Three Months Ended June 30,							Dollar Change				Percent Change			Six Months Ended June 30,								Dollar Change				Percent Change
(in thousands)	2018			2017							2018				2017					2018					Percent Change		2017									Dollar Change				Percent Change
								Dollar Change				Percent Change
Net interest income	$	45,448		$	40,904			$	4,544			11	%	$	47,745		$	42,448			Dollar Change		$	5,297			12	%		$	93,193			$	83,352			$	9,841			12	%
Provision for credit losses	750			—				750				NM		1,000			500				500				100			1,750				500				1,250				250
Noninterest income	7,096			9,425				(2,329		)		(25	)	8,405			8,276				129				2			15,501				17,701				(2,200		)		(12	)
Noninterest expense	38,272			36,470				1,802				5		39,286			36,631				2,655				7			77,558				73,101				4,457				6
Income before income tax expense	13,522			13,859				(337		)		(2	)	15,864			13,593				2,271				17			29,386				27,452				1,934				7
Income tax expense	3,316			4,567				(1,251		)		(27	)	3,964			4,147				(183		)		(4	)		7,280				8,714				(1,434		)		(16	)
Net income	$	10,206		$	9,292			$	914			10	%	$	11,900		$	9,446			$	2,454			26	%		$	22,106			$	18,738			$	3,368			18	%

Total assets	$	6,140,812		$	5,583,171			$	557,641			10	%	$	6,358,100		$	5,593,889			$	764,211			14	%		$	6,358,100			$	5,593,889			$	764,211			14	%
Efficiency ratio ⁽¹⁾	72.84		%	72.46		%								69.97		%	72.22		%									71.35		%		72.34		%
Full-time equivalent employees (ending)	1,077			1,022										1,018			1,055											1,018				1055
Production volumes for sale to the secondary market:	Production volumes for sale to the secondary market:													Production volumes for sale to the secondary market:
Loan originations
Multifamily DUS^{® (2)}	$	21,744		$	57,552			$	(35,808	)		(62	)%	$	71,759		$	58,343			$	13,416			23	%		$	93,503			$	115,895			$	(22,392	)		(19	)%
SBA	3,230			6,798				(3,568		)		(52	)%	5,713			6,126				(413		)		(7	)%		8,943				12,924				(3,981		)		(31	)%
Loans sold
Multifamily DUS^{® (2)}	$	32,976		$	76,849			$	(43,873	)		(57	)%	$	54,621		$	35,312			$	19,309			55	%		$	87,597			$	112,161			$	(24,564	)		(22	)%
SBA	3,692			7,635				(3,943		)		(52	)%	3,622			3,532				90				3	%		7,314				11,167				(3,853		)		(35	)%
CRE Non-DUS ⁽³⁾	—			5,551			⁽⁴⁾	(5,551		)		(100	)%	114,650			21,163				93,487				442	%		114,650				26,714				87,936				329	%
Single Family ⁽³⁾														138,603			—				138,603				NM			138,603				—				138,603				NM
Net gain on loan origination and sale activities:
Multifamily DUS^®(2)	1,146			3,360				(2,214		)		(66	)%	1,613			1,273				340				27	%		2,759				4,633				(1,874		)		(40	)%
SBA	301			602				(301		)		(50	)%	385			316				69				22	%		686				918				(232		)		(25	)%
CRE Non-DUS ⁽³⁾														800			143				657				459	%		800				143				657				459	%
Single Family ⁽³⁾														(89		)	—				(89		)		NM			(89		)		—				(89		)		NM
	$	1,447		$	3,962			$	(2,515	)		(63	)%	$	2,709		$	1,732			$	977			56	%		$	4,156			$	5,694			$	(1,538	)		(27	)%
NM = not meaningful

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

(2) Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS"®) is a registered trademark of Fannie Mae.

(3) Loans originated as ~~Held~~held for ~~Investment.~~investment.

~~(4)~~ ~~Balance represents termination of participation agreement.~~

Commercial and Consumer Banking net income increased for the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 primarily due to ~~the reduction in our effective tax rate and~~ an increase in net interest income from higher average balances ofand yields on interest-earning assets and a reduction in our effective tax rate, partially offset by ~~a decrease in net gain on loan origination and sale activities and increases in noninterest expense.~~higher cost of funds.

The segment recorded a ~~$750 thousand~~$1.0 million and $1.8 million provision for credit losses in the three and six months ended ~~March 31,~~June 30, 2018, respectively, compared to noa $500 thousand provision ~~for~~in both the three and six months ended ~~March 31,~~June 30, 2017. The increase from the three months ended ~~March 31,~~June 30, 2017 was primarily due to ~~higher loan growth and~~net charge-offs in the quarter compared to net recoveries in the same period in 2017. The increase from six months ended June 30, 2017 was primarily due to lower net recoveries in the ~~three~~six months ended ~~March 31, 2018.~~June 30, 2018 compared to the six months ended June 30, 2017.

Noninterest income ~~decreased~~increased for the three months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same period in 2017 primarily due to ~~a reduction~~an increase in gain on sale income driven by ~~lower~~higher commercial real estate loan sales volume. Noninterest income decreased for the six months ended June 30, 2018 compared to the same period in 2017 primarily due to increases in mark to market adjustments on certain loans and prepayment fees in the first six months of 2017, as well as a decline in gain on sale income primarily due to lower Fannie Mae DUS sales.

Noninterest expense increased in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 primarily due to ~~increased noninterest expense related to~~higher costs from the continued growth of our commercial real estate and commercial business lending units and ~~the expansion of~~ our ~~retail deposit~~expanding branch banking ~~network.~~network, including increased information system expenses and FDIC assessments. In the first ~~three~~six months of 2018, we added ~~three~~four de novo retail deposit branches. The segment's headcount ~~increased~~decreased by ~~5.4%~~3.5% from ~~March 31, 2017.~~

June 30, 2017 in part due to our continued effort to improve the efficiency of our corporate support functions.

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


	At March 31, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017
(in thousands)	At March 31, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017

Commercial
Multifamily DUS^®	$	1,323,937	$	1,311,399	$	1,357,929	$	1,311,399
Other	81,436		79,797		82,083		79,797
Total commercial loans serviced for others	$	1,405,373	$	1,391,196	$	1,440,012	$	1,391,196

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


	Three Months Ended March 31,						Dollar Change				Percent Change		Three Months Ended June 30,							Dollar Change			Percent Change			Six Months Ended June 30,						Dollar Change			Percent Change
(in thousands)	2018			2017						2018				2017					2018				Percent Change		2017							Dollar Change			Percent Change
							Dollar Change				Percent Change
Servicing income, net:																				Dollar Change
Servicing fees and other	$	1,957		$	1,840		$	117			6	%	$	2,001		$	1,652			$	349		21	%		$	3,958		$	3,492		$	466		13	%
Amortization of multifamily and SBA MSRs	(1,049		)	(931		)	(118		)		13		(1,064		)	(761		)		(303		)	(40	)		(2,113		)	(1,692		)	(421		)	(25	)
Commercial mortgage servicing income	$	908		$	909		$	(1	)		—	%	$	937		$	891			$	46		5	%		$	1,845		$	1,800		$	45		3	%

Mortgage Banking Segment

Mortgage Banking originates single family residential mortgage loans primarily for sale in the secondary markets and performs mortgage servicing on a substantial portion of such loans. Additionally, we purchase loans from WMS Series LLC through a correspondent arrangement with that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. We have become a rated originator and servicer of jumbo loans, allowing us to sell these loans to other securitizers. ~~Additionally, we purchase loans from WMS Series LLC through a correspondent arrangement with that company.~~ We also sell loans on a servicing-released and servicing-retained basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders. On occasion, we may sell a portion of our MSR portfolio. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained single family ~~mortgage servicing rights~~MSRs within this business segment.

Mortgage Banking segment results are detailed below.


	Three Months Ended March 31,						Dollar Change				Percent Change		Three Months Ended June 30,							Dollar Change				Percent Change			Six Months Ended June 30,								Dollar Change				Percent Change
(in thousands)	2018			2017						2018				2017					2018					Percent Change		2017									Dollar Change				Percent Change
							Dollar Change				Percent Change
Net interest income	$	3,012		$	4,747		$	(1,735	)		(37	)%	$	3,258		$	4,420			Dollar Change		$	(1,162	)		(26	)%		$	6,270			$	9,167			$	(2,897	)		(32	)%
Noninterest income	53,735			65,036			(11,301		)		(17	)	60,984			72,732				(11,748		)		(16	)		114,719				137,768				(23,049		)		(17	)
Noninterest expense	62,497			70,404			(7,907		)		(11	)	71,279			74,613				(3,334		)		(4	)		133,776				145,017				(11,241		)		(8	)
Loss before income taxes	(5,750		)	(621		)	(5,129		)		826
Income tax benefit	(1,410		)	(312		)	(1,098		)		352
Net loss	$	(4,340	)	$	(309	)	$	(4,031	)		1,305	%
(Loss) income before income taxes													(7,037		)	2,539				(9,576		)		(377	)		(12,787		)		1,918				(14,705		)		(767	)
Income tax (benefit) expense													(2,236		)	776				(3,012		)		(388	)		(3,646		)		464				(4,110		)		(886	)
Net (loss) income													$	(4,801	)	$	1,763			$	(6,564	)		(372	)%		$	(9,141	)		$	1,454			$	(10,595	)		(729	)%

Total assets	$	783,244		$	817,972		$	(34,728	)		(4	)%	$	805,777		$	992,668			$	(186,891	)		(19	)%		$	805,777			$	992,668			$	(186,891	)		(19	)%
Efficiency ratio ⁽¹⁾	110.13		%	100.89		%							110.95		%	96.71		%									110.57		%		98.69		%
Full-time equivalent employees (ending)	1,307			1,558									1,235			1,487											1,235				1,487
Production volumes for sale to the secondary market:	Production volumes for sale to the secondary market:												Production volumes for sale to the secondary market:
Single family mortgage interest rate lock commitments	$	1,571,975		$	1,622,622		$	(50,647	)		(3	)%	$	1,679,748		$	1,950,427			$	(270,679	)		(14	)%		$	3,251,723			$	3,573,049			$	(321,326	)		(9	)%
Single family mortgage closed loan volume⁽²⁾⁽³⁾	$	1,452,398		$	1,621,053		$	(168,655	)		(10	)%	$	1,739,887		$	2,011,127			$	(271,240	)		(13	)%		$	3,192,285			$	3,632,180			$	(439,895	)		(12	)%
Single family mortgage loans sold⁽³⁾	$	1,550,724		$	1,739,737		$	(189,013	)		(11	)%	$	1,629,745		$	1,808,500			$	(178,755	)		(10	)%		$	3,180,469			$	3,548,237			$	(367,768	)		(10	)%


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


(2)	Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank and brokered loans where HomeStreet receives fee income but does not fund the loan on its balance sheet or sell it into the secondary market.


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

Mortgage Banking ~~net loss increased~~earnings decreased for the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 primarily due tothe $6.9 million in restructuring charges in the second quarter of 2018, lower ~~gain on~~mortgage production and lower mortgage loan ~~origination and sale activities ,~~servicing income. These decreases were partially offset by decreased commission costs on lower closed loan volume and lower salary and related costs associated with headcount reductions from our ~~second~~2017 and ~~third quarter 2017~~2018 restructuring ~~events and decreased commissions, salary and related costs on lower closed loan volumes.~~events.

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


	Three Months Ended March 31,				Dollar Change				Percent Change		Three Months Ended June 30,					Dollar Change			Percent Change			Six Months Ended June 30,				Dollar Change			Percent Change
(in thousands)	2018		2017					2018				2017			2018				Percent Change		2017					Dollar Change			Percent Change
					Dollar Change				Percent Change
Single family:⁽¹⁾																Dollar Change
Servicing value and secondary market gains⁽²⁾	$	41,427	$	50,538	$	(9,111	)		(18	)%	$	48,182	$	57,353		$	(9,171	)	(16	)%		$	89,609	$	107,891	$	(18,282	)	(17	)%
Loan origination and funding fees	5,445		5,781		(336		)		(6	)	6,158		6,823			(665		)	(10	)		11,603		12,604		(1,001		)	(8	)
Total mortgage banking gain on loan origination and sale activities⁽¹⁾	$	46,872	$	56,319	$	(9,447	)		(17	)%	$	54,340	$	64,176		$	(9,836	)	(15	)%		$	101,212	$	120,495	$	(19,283	)	(16	)%


(1)	Excludes inter-segment activities.


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

The ~~decrease~~decreases in gain on loan origination and sale activities for the three and six months ended ~~March 31,~~June 30, 2018 compared to the three and six months ended ~~March 31,~~June 30, 2017 ~~was~~were primarily the result of ~~increased industry-wide competition reducing our composite profit margin~~a 13.9% and ~~to a lesser extent a 3.1%~~9.0%, respectively, decrease in interest rate lock commitments, reflecting the limited supply of housing in our markets, which reduced the volume of purchase loan activity in the periods presented, and the impact of higher interest rates, which reduced the volume of refinance activity in the periods presented. The decrease from the six months ended June 30, 2018 also relates to increased industry-wide competition which reduce our composite margin.

Mortgage Banking servicing income consisted of the following.


	Three Months Ended March 31,						Dollar Change				Percent Change		Three Months Ended June 30,									Dollar Change			Percent Change			Six Months Ended June 30,								Dollar Change			Percent Change
(in thousands)	2018			2017						2018					2017						2018						2017

Servicing income, net:
Servicing fees and other	$	16,494		$	14,339		$	2,155			15	%	$	16,384				$	14,325			$	2,059			14	%		$	32,878				$	28,664		$	4,214		15	%
Changes in fair value of MSRs due to amortization ⁽¹⁾	(8,870		)	(8,520		)	(350		)		4		(9,400		)			(8,909		)		(491		)	(6	)		(18,270		)			(17,429		)	(841		)	(5	)
	7,624			5,819			1,805				31		6,984					5,416				1,568			29			14,608					11,235			3,373			30
Risk management:
Changes in fair value of MSRs due to changes in market inputs and/or model updates ⁽²⁾	30,019			2,132			27,887				1,308		11,299			⁽³	⁾	(6,417		)		17,716			276			41,318			⁽³	⁾	(4,285		)	45,603			NM
Net (loss) gain from derivatives economically hedging MSRs	(30,977		)	379			(31,356		)		(8,273	)	(12,188		)			8,874				(21,062		)	(237	)		(43,165		)			9,253			(52,418		)	(566	)
	(958		)	2,511			(3,469		)		(138	)	(889		)			2,457				(3,346		)	(136	)		(1,847		)			4,968			(6,815		)	(137	)
Mortgage Banking servicing income	$	6,666		$	8,330		$	(1,664	)		(20	)%	$	6,095				$	7,873			$	(1,778	)	(23	)%		$	12,761				$	16,203		$	(3,442	)	(21	)%
NM = not meaningful


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


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


(3)	Included pre-tax income of $573 thousand, net of transaction costs and prepayment reserves, resulting from the sale of single family MSRs during the three and six months ended June 30, 2018.

The ~~decrease~~decreases in Mortgage Banking servicing income in the three and six months ended ~~March 31,~~June 30, 2018 compared to the ~~three months ended March 31,~~same periods in 2017 ~~was~~were primarily attributable to lower risk management results, partially offset by higher servicing fees. Risk management results fluctuate as market conditions change, including changes in interest rates. The flattening yield curve and increased negative convexity in our mortgage servicing portfolio have substantially reduced risk management results. ~~The higher servicing fees relate to higher average balances of loans serviced for others.~~ Single family mortgage servicing fees collected increased for the three and six months ended ~~March 31,~~June 30, 2018 compared to ~~three months ended March 31,~~the same periods in 2017, primarily due to higher average balances in our loans serviced for others portfolio.

Single family loans serviced for others consisted of the following.


(in thousands)	At March 31, 2018		At December 31, 2017		At June 30, 2018		At December 31, 2017
Single family
U.S. government and agency	$	22,715,153	$	22,123,710	$	18,493,704	$	22,123,710
Other	504,423		507,437		579,472		507,437
Total single family loans serviced for others	$	23,219,576	$	22,631,147	$	19,073,176	$	22,631,147

Mortgage Banking noninterest expense for the three and six months ended ~~March 31,~~June 30, 2018 decreased compared to the ~~three months ended March 31,~~same periods in 2017, primarily due to decreased commissions, salary and related costs on lower closed loan volumes. The ~~decrease~~ decreases also ~~relates to~~ reflect lower salary and related costs associated with our headcount reductions from our ~~second~~2017 and ~~third quarter 2017~~2018 restructuring activities. The decreases were partially offset by $6.9 million in restructuring charges in the second quarter of 2018.

Off-Balance Sheet Arrangements

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

For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the Off-Balance Sheet Arrangements and Commitments, Guarantees and Contingencies discussions within Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K, as well as Note 13, Commitments, Guarantees and Contingencies in our 2017 Annual Report on Form 10-K and Note 7, Commitments, Guarantees and Contingencies in this Quarterly Report on Form 10-Q.

Enterprise Risk Management

Like many financial institutions, we manage and control a variety of business and financial risks that can significantly affect our 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.

For more information on how we manage these business, financial and other risks, see the discussion in "Enterprise Risk Management" within Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.

Credit Risk Management

The following discussion highlights developments since December 31, 2017 and should be read in conjunction with the "Credit Risk Management" within Part II, Item 7-7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.

Asset Quality and Nonperforming Assets

~~Nonperforming~~

As credit quality continued to improve, nonperforming assets ~~("NPAs") were $11.2~~decreased to $10.4 million, or ~~0.16%~~0.14% of total assets at ~~March 31,~~June 30, 2018, compared to $15.7 million, or 0.23% of total assets at December 31, ~~2017.~~2017 and now represents the lowest absolute level of problem assets since 2006. Nonaccrual loans of ~~$10.9~~$9.6 million, or ~~0.23%~~0.20% of total loans at ~~March 31,~~June 30, 2018,, decreased ~~$4.2~~$5.4 million, or ~~28%~~36%, from $15.0 million, or 0.33% of total loans at December 31, 2017. Delinquency rates (both including FHA/VA insured and guaranteed portion of SBA loans) also improved in part as a result of the decrease in nonperforming loans compared to prior periods. Net ~~recoveries~~charge-offs for the three months ended ~~March 31,~~June 30, 2018 were ~~$580~~$464 thousand and net recoveries for the six months ended June 30, 2018 were $116 thousand, compared to net recoveries of ~~$778~~$928 thousand and $1.7 million for the three and six months ended ~~March 31, 2017.~~June 30, 2017, respectively.

At ~~March 31,~~June 30, 2018, our loans held for investment portfolio, net of the allowance for loan losses, was ~~$4.76~~$4.88 billion, an increase of ~~$251.8~~$376.8 million from December 31, 2017. The allowance for loan losses was ~~$39.1~~$39.5 million, or ~~0.81%~~0.80% of loans held for investment, compared to $37.8 million, or 0.83% of loans held for investment at December 31, 2017.

We recorded a provision of credit ~~loss~~losses of ~~$750 thousand~~$1.0 million and $1.8 million for the three and six months ended ~~March 31, 2018. We did not record~~June 30, 2018, respectively, compared to a provision for credit ~~losses~~loss of $500 thousand in both the three and six months ended ~~March 31,~~June 30, 2017. Management considers the current level of the allowance for loan losses to be appropriate to cover estimated 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 Part I, Item 1 Notes to Interim Consolidated Financial Statements—Note 3, Loans and Credit Quality, ~~to the financial statements~~ of this Quarterly Report on Form 10-Q.

The allowance for credit losses represents management’s estimate of the incurred credit losses inherent within our loan portfolio. For further discussion related to credit policies and estimates see "Critical Accounting Policies and Estimates — Allowance for Loan Losses" within Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.

The following tables present the recorded investment, unpaid principal balance and related allowance for impaired loans, broken down by those with and those without a specific reserve.


	At March 31, 2018							At June 30, 2018
(in thousands)	Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance		Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	73,138		$	75,019	$	—	$	70,643		$	72,481	$	—
Loans with an allowance recorded	3,985			4,465		309		2,901			3,378		282
Total	$	77,123	⁽¹⁾	$	79,484	$	309	$	73,544	⁽¹⁾	$	75,859	$	282

	At December 31, 2017							At December 31, 2017
(in thousands)	Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance		Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	78,696	⁽³⁾	$	80,904	$	—	$	78,696	⁽³⁾	$	80,904	$	—
Loans with an allowance recorded	5,150			5,288		289		5,150			5,288		289
Total	$	83,846	⁽¹⁾	$	86,192	$	289	$	83,846	⁽¹⁾	$	86,192	$	289


(1)	Includes ~~$66.3~~$65.5 million and $69.6 million in single family performing troubled debt restructurings ("TDRs") at ~~March 31,~~June 30, 2018 and December 31, 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.


(3)	Includes $231 thousand of fair value option loans.

The Company had ~~330~~329 impaired ~~loans~~loan relationships totaling ~~$77.1~~$73.5 million at ~~March 31,~~June 30, 2018 and 335 impaired loan relationships totaling $83.8 million at December 31, 2017. Included in the total impaired loan amounts were ~~294~~298 single family TDR loan relationships totaling ~~$66.8~~$67.5 million at ~~March 31,~~June 30, 2018 and 297 single family TDR loan relationships totaling $72.0 million at December 31, 2017. At ~~March 31,~~June 30, 2018, there were ~~284~~291 single family impaired loan relationships totaling ~~$66.3~~$65.5 million that were performing per their current contractual terms. Additionally, the impaired loan balance, at ~~March 31,~~June 30, 2018, included ~~$47.6~~$48.7 million of loans insured by the FHA or guaranteed by the VA. The average recorded investment in these loans for the three and six months ended ~~March 31,~~June 30, 2018 was ~~$80.5~~$75.3 million and $78.2 million, respectively, compared to ~~$92.9~~$94.0 million and $92.8 million for the three and six months ended ~~March 31, 2017.~~June 30, 2017, respectively. Impaired loans of ~~$4.0~~$2.9 million and $5.2 million had a valuation allowance of ~~$309~~$282 thousand and $289 thousand at ~~March 31,~~June 30, 2018 and December 31, 2017, respectively.

The allowance for credit losses represents management’s estimate of the incurred credit losses inherent within our loan

portfolio. For further discussion related to credit policies and estimates see "Critical Accounting Policies and Estimates —

Allowance for Loan Losses" within Part II, Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Annual Report on Form 10-K.

The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.

At March 31, 2018 At December 31, 2017
(in thousands) Amount
Percent of
Allowance
to Total
Allowance

Loan
Category
as a % of
Total Loans ⁽¹⁾
Amount
Percent of
Allowance
to Total
Allowance

Loan
Category
as a % of
Total Loans ⁽¹⁾

Consumer loans
Single family $ 9,208
22.8 % 30.1 % $ 9,412
24.1 % 30.4 %
Home equity and other 6,987
17.3
9.8
7,081
18.1
10.0
16,195
40.1
39.9
16,493
42.2
40.4
Commercial real estate loans
Non-owner occupied commercial real estate 4,627
11.4
13.3
4,755
12.1
13.8
Multifamily 4,651
11.6
17.0
3,895
10.0
16.1
Construction/land development 9,159
22.6
15.5
8,677
22.2
15.2
18,437
45.6
45.8
17,327
44.3
45.1
Commercial and industrial loans
Owner occupied commercial real estate 2,966
7.3
8.3
2,960
7.5
8.7
Commercial business 2,848
7.0
6.0
2,336
6.0
5.9
5,814
14.3
14.3
5,296
13.5
14.5
Total allowance for credit losses $ 40,446
100.0 % 100.0 % $ 39,116
100.0 % 100.0 %



	At June 30, 2018						At December 31, 2017
(in thousands)	Amount		Percent of Allowance to Total Allowance		Loan Category as a % of Total Loans ⁽¹⁾		Amount		Percent of Allowance to Total Allowance		Loan Category as a % of Total Loans ⁽¹⁾

Consumer loans
Single family	$	8,594	21.0	%	28.8	%	$	9,412	24.1	%	30.4	%
Home equity and other	7,346		17.9		10.5		7,081		18.1		10.0
	15,940		38.9		39.3		16,493		42.2		40.4
Commercial real estate loans
Non-owner occupied commercial real estate	4,764		11.6		13.1		4,755		12.1		13.8
Multifamily	5,017		12.2		17.0		3,895		10.0		16.1
Construction/land development	9,205		22.5		15.9		8,677		22.2		15.2
	18,986		46.3		46.0		17,327		44.3		45.1
Commercial and industrial loans
Owner occupied commercial real estate	3,032		7.4		8.2		2,960		7.5		8.7
Commercial business	3,024		7.4		6.5		2,336		6.0		5.9
	6,056		14.8		14.7		5,296		13.5		14.5
Total allowance for credit losses	$	40,982	100.0	%	100.0	%	$	39,116	100.0	%	100.0	%


(1)	Excludes loans held for investment balances that are carried at fair value.

The following tables present the composition of TDRs by accrual and nonaccrual status.


	At March 31, 2018						At June 30, 2018
(in thousands)	Accrual		Nonaccrual		Total		Accrual		Nonaccrual		Total

Consumer
Single family ⁽¹⁾	$	66,347	$	2,481	$	68,828	$	65,525	$	2,023	$	67,548
Home equity and other	1,246		21		1,267		1,238		21		1,259
	67,593		2,502		70,095		66,763		2,044		68,807
Commercial real estate loans
Multifamily	503		—		503		499		—		499
Construction/land development	590		—		590		665		—		665
	1,093		—		1,093		1,164		—		1,164
Commercial and industrial loans
Owner occupied commercial real estate	874		—		874		866		—		866
Commercial business	367		309		676		388		252		640
	1,241		309		1,550		1,254		252		1,506
	$	69,927	$	2,811	$	72,738	$	69,181	$	2,296	$	71,477


(1)	Includes loan balances insured by the FHA or guaranteed by the VA of ~~$47.6~~$48.7 million at ~~March 31,~~June 30, 2018.



	At December 31, 2017
(in thousands)	Accrual		Nonaccrual		Total

Consumer
Single family ⁽¹⁾	$	69,555	$	2,451	$	72,006
Home equity and other	1,254		36		1,290
	70,809		2,487		73,296
Commercial real estate loans
Multifamily	507		—		507
Construction/land development	454		—		454
	961		—		961
Commercial and industrial loans
Owner occupied commercial real estate	876		—		876
Commercial business	377		62		439
	1,253		62		1,315
	$	73,023	$	2,549	$	75,572


(1)	Includes loan balances insured by the FHA or guaranteed by the VA of $46.7 million at December 31, 2017.

The Company had ~~319~~315 loan relationships classified as TDRs totaling ~~$72.7~~$71.5 million at ~~March 31,~~June 30, 2018 with no related unfunded commitments. The Company had 316 loan relationships classified as TDRs totaling $75.6 million at December 31, 2017 with no related unfunded commitments. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above.

Delinquent loans and other real estate owned by loan type consisted of the following.



	At June 30, 2018
(in thousands)	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

Consumer loans
Single family	$	9,857	$	4,322	$	6,459	$	40,967	⁽¹⁾	$	61,605	$	751
Home equity and other	477		19		1,267		—			1,763		—
	10,334		4,341		7,726		40,967			63,368		751
Commercial real estate loans
Multifamily	—		—		285		—			285		—
Construction/land development	—		—		75		—			75		—
	—		—		360		—			360		—
Commercial and industrial loans
Owner-occupied commercial real estate	—		—		394		—			394		—
Commercial business	—		—		1,150		—			1,150		—
	—		—		1,544		—			1,544		—
Total	$	10,334	$	4,341	$	9,630	$	40,967		$	65,272	$	751

At March 31, 2018
(in thousands)
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

Consumer loans
Single family $ 12,636
$ 7,750
$ 7,192
$ 38,734
⁽¹⁾
$ 66,312
$ 297
Home equity and other 186
28
1,401
—
1,615
—
12,822
7,778
8,593
38,734
67,927
297
Commercial real estate loans
Multifamily —
—
296
—
296
—
Construction/land development —
—
76
—
76
—
—
—
372
—
372
—
Commercial and industrial loans
Owner-occupied commercial real estate —
—
626
—
626
—
Commercial business 378
—
1,288
—
1,666
—
378
—
1,914
—
2,292
—
Total $ 13,200
$ 7,778
$ 10,879
$ 38,734
$ 70,591
$ 297


(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 ~~March 31,~~June 30, 2018, these past due loans totaled ~~$38.7~~$41.0 million.



	At December 31, 2017
(in thousands)	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

Consumer loans
Single family	$	10,493	$	4,437	$	11,091	$	37,171	⁽¹⁾	$	63,192	$	664
Home equity and other	750		20		1,404		—			2,174		—
	11,243		4,457		12,495		37,171			65,366		664
Commercial real estate loans
Multifamily	—		—		302		—			302		—
Construction/land development	641		—		78		—			719		—
	641		—		380		—			1,021		—
Commercial and industrial loans
Owner occupied commercial real estate	—		—		640		—			640		—
Commercial business	377		—		1,526		—			1,903		—
	377		—		2,166		—			2,543		—
Total	$	12,261	$	4,457	$	15,041	$	37,171		$	68,930	$	664


(1)	FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss. At December 31, 2017, these past due loans totaled $37.2 million.

Loan Underwriting Standards

Our underwriting standards for single family and home equity loans require evaluating and understanding a borrower’s credit, collateral and ability to repay the loan. Credit is determined based on how well a borrower manages their current and prior debts, documented by a credit report that provides credit scores and the borrower’s current and past information about their credit history. Collateral is based on the type and use of property, occupancy and market value, largely determined by property appraisals or evaluations in accordance with our appraisal policy. A borrower's ability to repay the loan is based on several factors, including employment, income, current debt, assets and level of equity in the property. We also consider loan-to-property value and debt-to-income ratios, amount of liquid 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, an analysis of cash expected to flow through the borrower (including the outflow to other lenders) and prior experience 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.

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 Corporation ("HSC")~~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 ~~March 31,~~June 30, 2018, ~~no advances were~~we had $30.0 million outstanding against this ~~line.~~line related to our annual test draw down on this line of credit. This balance was subsequently paid off in July 2018.

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 do not currently pay a dividend, and our most recent special dividend to shareholders was declared during the first quarter of 2014. We are generally deploying our capital toward strategic growth, and at this time our Board of Directors has not authorized the payment of a dividend.

HomeStreet Capital Corporation

~~HomeStreet Capital Corporation~~HSC generates cash flow from its servicing fee income on the DUS^® portfolio, net of its costs to service the DUS^® portfolio. HSC also uses cash from these sources to pay costs related to purchases of servicing rights on new production from the Bank. Minimum liquidity and reporting requirements for DUS^® lenders such as HSC are set by Fannie Mae. HSC'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 FHLBs, 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 ~~March 31,~~June 30, 2018, our primary liquidity ratio was ~~21.5%~~23.6% compared to 18.1% at December 31, 2017.

At ~~March 31,~~June 30, 2018 and December 31, 2017, the Bank had available borrowing capacity of ~~$308.8~~$335.8 million and $579.2 million, respectively, from the FHLB, and ~~$344.3~~$322.9 million and $331.5 million, respectively, from the Federal Reserve Bank of San Francisco.

Cash Flows

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, cash, cash equivalents and restricted cash ~~decreased~~increased by ~~$6.4~~$102.9 million compared to an increase of ~~$7.6 million~~$524 thousand for the ~~three~~six months ended ~~March 31,~~June 30, 2017. 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 ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash of ~~$107.3~~$35.8 million was provided by operating activities, primarily from proceeds from the sale of loans held for sale. 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 ~~three~~six months ended ~~March 31,~~June 30, 2017, net cash of ~~$148.0~~$9.4 million was ~~provided by~~used in operating activities, as ~~cash~~our net income was less than the net fair value adjustment and gain on sale of loans held for sale partially offset by the change in fair value of motgage servicing rights and proceeds from the sale of loans ~~exceeded cash used to fund loans~~ held for ~~sale production.~~sale.

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 ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash of ~~$303.9~~$350.1 million was used in investing activities, primarily due to ~~$275.1~~$617.7 million of cash used for the origination of portfolio loans net of principal repayments, ~~$70.0~~$97.8 million of cash used for the purchase of investment securities, and ~~$3.6~~$5.9 million used for the purchase of property and equipment, partially offset by ~~$27.4~~$230.5 million from proceeds of loans originated as held for investment, $65.3 million in proceeds from the sale of mortgage servicing rights, $52.9 million from principal repayments and maturities of investment securities and ~~$16.9~~$22.2 million proceeds from the sale of investment securities. For the ~~three~~six months ended ~~March 31,~~June 30, 2017, net cash of ~~$299.2~~$305.8 million was used in investing activities, primarily due to ~~$170.4~~$420.5 million of cash used for the origination of portfolio loans and principal repayments, $246.4 million of cash used for the purchase of investment securities, ~~$137.3 million of cash used for the origination of portfolio loans net of principal repayments~~ and ~~$22.4~~$28.8 million used for the purchase of property and equipment, partially offset by ~~$26.6~~$314.6 million proceeds from the sale of investment securities and $50.0 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.~~FHLB advances. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash of ~~$190.3~~$417.2 million was provided by financing activities, primarily due to ~~$288.0~~$359.3 million of organic growth in deposits and $30.0 million in proceeds from our line of credit, partially offset by ~~$127.5~~$29.5 million net ~~repayments of~~proceeds from FHLB advances. For the ~~three~~six months ended ~~March 31,~~June 30, 2017, net cash of ~~$158.8~~$315.7 million was provided by financing activities, primarily due to a ~~$166.2~~$318.1 million organic growth in ~~deposits partially offset by $6.0 million from net repayments of FHLB advances.~~deposits.

Capital Management

In July 2013, federal banking regulators (including the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve Board ("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~~enacted by the Dodd-Frank ~~Act.~~Wall Street Reform and Consumer Protection Act (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 leverage ratio is the ratio of the institution’s Tier 1 capital to its average total consolidated assets. 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 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 and given a percentage weight based on the relative risk of that category. The percentage weights range from 0% to 1,250%. An asset’s risk-weighted value will generally be its percentage weight multiplied by the asset’s value as determined under generally accepted accounting principles. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the risk categories. An institution’s federal regulator may require the institution to hold more capital than would otherwise be required under the Rules if the regulator determines that the institution’s capital requirements under the Rules are not commensurate with the institution’s credit, market, operational or other risks.

To be classified as "well capitalized," both the Company and the Bank are required to have a common equity Tier 1 capital ratio of at least 6.5%, a Tier 1 risk-based ratio of at least 8.0%, a total risk-based ratio of at least 10.0% and a Tier 1 leverage ratio of at least 5.0%. In addition to the preceding requirements, all financial institutions subject to the Rules, including both the Company and the Bank, are required to establish a “conservation buffer” of common equity Tier 1 capital subject to a three year phase-in period that began on January 1, 2016 and would have been fully phased in on January 1, 2019 at 2.5% above the required minimum common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. However, in 2017, the FDIC issued a final rule to extend the 2017 transition provision on a go-forward basis, halting certain parts of the full phase in. The required phase-in capital conservation buffer during 2017 was 1.25% and is 1.25% during 2018. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. At ~~March 31,~~June 30, 2018, our capital conservation buffers for the Company and the Bank were ~~2.97%~~4.38% and ~~5.09%~~5.52%, respectively.

The Rules set forth the manner in which certain capital elements are determined, including but not limited to requiring certain deductions related to mortgage servicing rights and deferred tax assets. Holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) are permitted under the rules to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital. Because our trust preferred securities were issued prior to May 19, 2010, we include those in our Tier 1 capital calculations.

In September 2017, federal banking regulators issued a proposed rule intended to simplify and limit the impact of the Basel III regulatory capital requirements for certain banks. We believe that these proposed changes, if implemented, would significantly benefit our Mortgage Banking business model by reducing the amount of regulatory capital that we would be required to maintain in relation to our mortgage servicing assets. Other proposed changes to the Basel III capital requirements would require a small increase in capital related to commercial and residential acquisition, development, and construction lending activity which would partially offset some portion of the benefit we would expect to receive with respect to our mortgage servicing assets. The final rules have yet to be published following the comment period, but if they are adopted without any material changes to the current proposal, we would expect to benefit from a significant reduction in the regulatory capital requirements related to our mortgage servicing rights upon adoption. Although we cannot predict what final regulations will be when adopted, certain alternatives we believe to be under consideration would potentially allow us to allocate that capital to other aspects of our operations, including as capital to support our commercial lending operations.

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~~MSRs and deferred tax assets.

Certain calculations under the rules related to deductions from capital have phase-in periods through 2018.

Specifically, the capital treatment of MSRs is 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 the Company must deduct a much larger portion of the value of MSRs from Tier 1 capital.

MSRs (net of deferred tax) in excess of 10% of Tier 1 capital before threshold based deductions must be deducted from common equity. The disallowable portion of MSRs will be 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 is 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 will take full effect on January 1, 2019. Certain calculations under the Rules will also have phase-in periods.

On November 21, 2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the Rule for certain banks including HomeStreet. The final rules had provided for a number of adjustments to ~~and~~ deductions from Tier 1 capital. Deductions included, for example, the requirement that MSRs, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from Tier 1 Capital to the extent

that any one such category exceeds 10% of Tier 1 capital or all such categories in the aggregate exceed 15% of Tier 1 capital. Effective on January 1, 2018, the 2017 rule pauses the full transition to the Basel III treatment.

As part of our ongoing balance sheet and capital management during the quarter, HomeStreet Bank executed a definitive agreement to sell a portion of its single family MSRs. The transaction provides for the sale of the rights to service approximately $4.90 billion in total unpaid principal balance of single family mortgage loans serviced for both Fannie Mae and Freddie Mac, which represents approximately 21% of HomeStreet’s total single family mortgage loans serviced for others as of March 31, 2018. The Company also modified our loss sharing agreement with Fannie Mae related to our DUS® servicing that significantly lowered our consolidated risk-weighted assets, which in turn improved the common equity tier 1 risk based capital ratio, the tier 1 risk based capital ratio and the total risk based capital ratios for HomeStreet on a consolidated basis. In addition to increasing certain regulatory capital ratios, these actions will provide additional regulatory capital to support the continued growth of our Commercial and Consumer Banking business and accelerate the diversification of the Company's net income.

We believe that the capital levels of the Company and the Bank at ~~March 31,~~June 30, 2018 were in compliance with the standards under the Rules, including the conservation ~~buffer.~~buffer requirement.

At ~~March 31,~~June 30, 2018, 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.

The following tables present regulatory capital information for HomeStreet, Inc. and HomeStreet Bank.


	At March 31, 2018												At June 30, 2018
HomeStreet Bank	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions				Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio


Tier 1 leverage capital (to average assets)	$	629,565	9.58	%	$	262,735	4.0	%	$	328,419	5.0	%	$	671,630	9.72	%	$	276,378	4.0	%	$	345,472	5.0	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	629,565		12.30	%	230,253		4.5	%	332,587		6.5	%	671,630		12.69	%	238,102		4.5	%	343,926		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	629,565		12.30	%	307,004		6.0	%	409,338		8.0	%	671,630		12.69	%	317,470		6.0	%	423,293		8.0	%
Total risk-based capital (to risk-weighted assets)	$	670,012	13.09	%	$	409,338	8.0	%	$	511,673	10.0	%	$	715,117	13.52	%	$	423,293	8.0	%	$	529,116	10.0	%


	At March 31, 2018												At June 30, 2018
HomeStreet, Inc.	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions				Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio


Tier 1 leverage capital (to average assets)	$	599,700	9.08	%	$	264,330	4.0	%	$	330,412	5.0	%	$	638,529	9.18	%	$	278,118	4.0	%	$	347,647	5.0	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	540,422		9.26	%	262,496		4.5	%	379,161		6.5	%	579,102		10.48	%	248,585		4.5	%	359,067		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	599,700		10.28	%	349,995		6.0	%	466,659		8.0	%	638,529		11.56	%	331,447		6.0	%	441,929		8.0	%
Total risk-based capital (to risk-weighted assets)	$	640,147	10.97	%	$	466,659	8.0	%	$	583,324	10.0	%	$	684,120	12.38	%	$	441,929	8.0	%	$	552,411	10.0	%



	At December 31, 2017
HomeStreet Bank	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio


Tier 1 leverage capital (to average assets)	$	649,864	9.67	%	$	268,708	4.0	%	$	335,885	5.0	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	649,864		13.22	%	221,201		4.5	%	319,512		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	649,864		13.22	%	294,935		6.0	%	393,246		8.0	%
Total risk-based capital (to risk-weighted assets)	$	688,981	14.02	%	$	393,246	8.0	%	$	491,558	10.0	%



	At December 31, 2017
HomeStreet, Inc.	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio


Tier 1 leverage capital (to average assets)	$	614,624	9.12	%	$	269,534	4.0	%	$	336,918	5.0	%
Common equity Tier 1 risk-based capital (to risk-weighted assets)	555,120		9.86	%	253,293		4.5	%	365,868		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	614,624		10.92	%	337,724		6.0	%	450,299		8.0	%
Total risk-based capital (to risk-weighted assets)	$	653,741	11.61	%	$	450,299	8.0	%	$	562,873	10.0	%

Accounting Developments

See the Notes to Interim Consolidated Financial Statements—Note 1, Summary of Significant Accounting Policies, for a discussion of Accounting Developments.



ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

The following discussion highlights developments since December 31, 2017 and should be read in conjunction with the Market Risk Management discussion within Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk in our 2017 Annual Report on Form 10-K. Since December 31, 2017, there have been no material changes in the types of risk management instruments we use or in our hedging strategies.

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

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

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, the 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.

The following table presents sensitivity gaps for these different intervals.


	March 31, 2018																						June 30, 2018
(dollars in thousands)	3 Mos. or Less			More Than 3 Mos. to 6 Mos.			More Than 6 Mos. to 12 Mos.			More Than 12 Mos. to 3 Yrs.			More Than 3 Yrs. to 5 Yrs.			More Than 5 Yrs.			Non-Rate- Sensitive		Total		3 Mos. or Less			More Than 3 Mos. to 6 Mos.			More Than 6 Mos. to 12 Mos.			More Than 12 Mos. to 3 Yrs.			More Than 3 Yrs. to 5 Yrs.			More Than 5 Yrs.			Non-Rate- Sensitive		Total

Interest-earning assets:
Cash & cash equivalents	$	66,289		$	—		$	—		$	—		$	—		$	—		$	—	$	66,289	$	176,218		$	—		$	—		$	—		$	—		$	—		$	—	$	176,218
FHLB Stock	—			—			—			—			—			41,923			—		41,923		—			—			—			—			—			48,157			—		48,157
Investment securities⁽¹⁾	82,096			31,952			40,878			193,610			121,332			445,615			—		915,483		61,382			38,616			34,975			200,893			131,875			439,716			—		907,457
Mortgage loans held for sale ⁽³⁾	481,853			266			1,125			3,576			3,090			10,623			—		500,533		562,956			155			362			1,543			1,343			2,155			—		568,514
Loans held for investment⁽¹⁾	1,476,622			284,313			455,956			984,999			696,966			859,405			—		4,758,261		1,472,336			280,576			458,110			1,045,889			838,726			787,673			—		4,883,310
Total interest-earning assets	2,106,860			316,531			497,959			1,182,185			821,388			1,357,566			—		6,282,489		2,272,892			319,347			493,447			1,248,325			971,944			1,277,701			—		6,583,656
Non-interest-earning assets	—			—			—			—			—			—			641,567		641,567		—			—			—			—			—			—			580,221		580,221
Total assets	$	2,106,860		$	316,531		$	497,959		$	1,182,185		$	821,388		$	1,357,566		$	641,567	$	6,924,056	$	2,272,892		$	319,347		$	493,447		$	1,248,325		$	971,944		$	1,277,701		$	580,221	$	7,163,877
Interest-bearing liabilities:
NOW accounts⁽²⁾	$	480,620		$	—		$	—		$	—		$	—		$	—		$	—	$	480,620	$	486,104		$	—		$	—		$	—		$	—		$	—		$	—	$	486,104
Statement savings accounts⁽²⁾	295,096			—			—			—			—			—			—		295,096		283,969			—			—			—			—			—			—		283,969
Money market accounts⁽²⁾	1,926,153			—			—			—			—			—			—		1,926,153		1,932,340			—			—			—			—			—			—		1,932,340
Certificates of deposit	549,754			211,740			333,488			197,542			27,313			5			—		1,319,842		509,808			250,970			377,585			228,662			29,057			—			—		1,396,082
Federal funds purchased and securities sold under agreements to repurchase	25,000			—			—			—			—			—			—		25,000		—			—			—			—			—			—			—		—
FHLB advances	806,067			20,000			10,000			10,000			—			5,590			—		851,657		983,023			10,000			—			10,000			—			5,590			—		1,008,613
Other borrowings																							30,007																				30,007
Long-term debt	60,321			—			—			—			—			65,000			—		125,321		60,368			—			—			—			—			65,000			—		125,368
Total interest-bearing liabilities	4,143,011			231,740			343,488			207,542			27,313			70,595			—		5,023,689		4,285,619			260,970			377,585			238,662			29,057			70,590			—		5,262,483
Non-interest bearing liabilities	—			—			—			—			—			—			1,199,404		1,199,404		—			—			—			—			—			—			1,194,935		1,194,935
Equity	—			—			—			—			—			—			700,963		700,963		—			—			—			—			—			—			706,459		706,459
Total liabilities and shareholders’ equity	$	4,143,011		$	231,740		$	343,488		$	207,542		$	27,313		$	70,595		$	1,900,367	$	6,924,056	$	4,285,619		$	260,970		$	377,585		$	238,662		$	29,057		$	70,590		$	1,901,394	$	7,163,877
Interest sensitivity gap	(2,036,151		)	84,791			154,471			974,643			794,075			1,286,971							(2,012,727		)	58,377			115,862			1,009,663			942,887			1,207,111
Cumulative interest sensitivity gap	$	(2,036,151	)	$	(1,951,360	)	$	(1,796,889	)	$	(822,246	)	$	(28,171	)	$	1,258,800						$	(2,012,727	)	$	(1,954,350	)	$	(1,838,488	)	$	(828,825	)	$	114,062		$	1,321,173
Cumulative interest sensitivity gap as a percentage of total assets	(29		)%	(28		)%	(26		)%	(12		)%	—		%	18		%					(28		)%	(27		)%	(26		)%	(12		)%	2		%	18		%
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities	51		%	55		%	62		%	83		%	99		%	125		%					53		%	57		%	63		%	84		%	102		%	125		%


(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 our intent to sell.

Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.

The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of ~~March 31,~~June 30, 2018 and December 31, 2017 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.



	June 30, 2018				December 31, 2017
Change in Interest Rates (basis points) ⁽¹⁾	Percentage Change
Change in Interest Rates (basis points) ⁽¹⁾	Net Interest Income ⁽²⁾		Net Portfolio Value ⁽³⁾		Net Interest Income ⁽²⁾		Net Portfolio Value ⁽³⁾
+200	(3.1	)%	(12.2	)%	(0.5	)%	(8.2	)%
+100	(1.5	)	(6.3	)	(0.2	)	(4.2	)
-100	2.9		(0.5	)	1.9		(0.9	)
-200	6.2	%	(5.4	)%	2.3	%	(4.8	)%

March 31, 2018 December 31, 2017
Change in Interest Rates
(basis points) ⁽¹⁾
Percentage Change

Net Interest Income ⁽²⁾

Net Portfolio Value ⁽³⁾

Net Interest Income ⁽²⁾

Net Portfolio Value ⁽³⁾
+200 (0.8 )% (12.0 )% (0.5 )% (8.2 )%
+100 (0.4 ) (6.0 ) (0.2 ) (4.2 )
-100 1.9
1.6
1.9
(0.9 )
-200 4.5 % (0.3 )% 2.3 % (4.8 )%


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


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


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

At ~~March 31,~~June 30, 2018, we believe our net interest income sensitivity ~~did not exhibit~~exhibited a ~~strong~~ bias to ~~either an increase in interest rates or~~ a decline in interest rates. The interest rate sensitivity of the Company ~~remained stable~~increased modestly between December 31, 2017 and ~~March 31, 2018.~~June 30, 2018. It is expected that, as interest rates change, net interest income will only be slightly impacted regardless of the direction of interest rate movement. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. Modeling results in extreme interest rate decline scenarios may encounter negative rate assumptions which may cause the results to be inherently unreliable. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.


ITEM 4	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, with the participation of our management and under the supervision of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2018.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter ended ~~March 31,~~June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There were no changes to our internal control over financial reporting that occurred during the quarter ended ~~March 31,~~June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION


ITEM 1	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 1A	RISK FACTORS

This Quarterly Report on Form 10-Q 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 continue to grow at our recent pace.

Since our initial public offering (“IPO”) in February 2012, we have included targeted and opportunistic growth as a key component of our business strategy for both our ~~Mortgage~~Commercial and Consumer Banking segment and our ~~Commercial and Consumer~~Mortgage Banking segment and have expanded our operations at a relatively accelerated pace. We have grown our retail branch presence from 20 branches in 2012 to 62 as of ~~March 31,~~June 30, 2018, including expansion into new geographic regions. Simultaneously, we have added substantially to our mortgage operations in both existing and new markets and continued to expand our commercial lending operations, resulting in substantial growth overall in total assets, total deposits, total loans and employees.

While we expect to continue both strategic and opportunistic growth in the Commercial and Consumer Banking segment, in 2017 and the first half of 2018 we undertook a series of steps designed to restructuring of our Mortgage Banking segment, where production has been negatively impacted by increasing interest rates and a reduced supply of homes for sale nationwide and profit margins have been negatively impacted by a shift in ~~April 2018~~product mix to a higher number of non-conforming loans. In addition, we implemented other company-wide cost saving measures in the second quarter of 2018, including a reduction in ~~force.~~force in our corporate operations. For the near term, we expect to focus primarily on measured and efficient growth in commercial and consumer banking and optimization of our existing mortgage banking operations, which may lead to a substantially slower growth rate than we have experienced in recent years.

We may not recognize the full benefits of our recent restructuring.

In 2017 and the ~~second and third quarter~~first half of ~~2017,~~2018, we implemented acertain restructuring ~~plan~~plans within our Mortgage Banking segment to ~~bring~~reduce our costs and ~~the size of~~resize our mortgage banking operations to be in line with ~~our~~ decreased expectations for origination opportunities for mortgage loans ~~given both the~~resulting from changes in interest ~~rate environment~~rates and the lack of housing inventory in our primary markets. ~~In April 2018, we~~We also implemented additional cost savings measures, including an additional reduction in force, on a Company-wide ~~basis.~~basis in the second quarter of 2018. We recorded restructuring expenses totaling $3.7 million in 2017 and ~~anticipate additional charges for severance will be recorded~~$6.9 million in the second quarter of 2018, and anticipate additional restructuring charges of approximately $1.7 million will be recorded in the third quarter of 2018 related to the ~~April 2018 reduction in force, which~~Mortgage Banking segment restructuring. While we expect this expense will be offset by a significant reduction in our annual costs going forward. These expenses are associated primarily with a reduction in staffing in the Mortgage Banking segment, the closure or consolidation of several of our stand-alone home loan centers and other efficiency measures. However,forward, there is no guarantee that we will recognize all or a substantial portion of the anticipated cost savings from ~~either~~any of these cost-cutting measures. Further, if the demand for mortgage loans continues to decline in our markets or we are unable to achieve our expected product mix in our home loan centers, we may not recognize the expected income benefit and may have to take additional steps to streamline our mortgage operations further. Conversely, if the demand for mortgage loans increases precipitously in our markets, we may not be able to meet the full amount of the demand with our leaner operations and may find it necessary to increase costs to provide for the necessary staffing and resources.

Volatility in mortgage markets, changes in interest rates, competition in the mortgage industry, operational costs and other factors beyond our control may adversely impact our profitability.

We have sustained significant losses in the past, and we cannot guarantee that we will remain profitable or be able to maintain profitability at a given level. Changes in the mortgage market, including an increase in interest rates and a disparity between the supply and demand of houses available for sale nationwide that has become acute in our primary markets, have caused a decline in mortgage originations throughout our markets, which adversely impacted our profitability in 2017 and the first ~~quarter~~half of 2018. This decline in profitability occurred even as our relative market share for mortgage originations remained high. While we ~~implemented~~have been implementing a restructuring of our Mortgage Banking segment ~~in 2017~~over the past year and also implemented other company-wide cost saving measures in ~~April 2018,~~the second quarter, continued volatility in the market could have additional negative effects on our financial results. The scarcity of mortgage originations is also increasing competition for business, as loan officers nationwide compete to originate fewer loans, which has put negative pressure on pricing for mortgage products and, in turn, decreased our profit margins on those products. Unless there is a resurgence of mortgage origination activity or a substantial reduction in the size of the mortgage origination industry overall, we anticipate that this pricing pressure will continue for the near term.

These and many other factors affect our profitability, and our ability to remain profitable is threatened by a myriad of issues, including:

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

Competition in the mortgage market industry may drive down the interest rates we are able to offer on our mortgages and reduce our profit margins on mortgage loan products, which would negatively impact our net interest income;

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

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

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

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

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

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

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

These and other factors may limit our ability to generate revenue in excess of our costs, decrease our profit margins, negatively impact our net interest margin and in some circumstances may affect the carrying value of our mortgage servicing, any of which in turn may result in a lower rate of profitability or even substantial losses for the Company.

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

In ~~November~~late 2017 through our annual meeting in May 2018, an activist investor, Roaring Blue Lion Capital Management, L.P., and its managing member, Charles W. Griege, Jr., and certain affiliates (the "Blue Lion Parties") ~~filed~~engaged in a ~~Schedule 13D with the SEC~~lengthy proxy fight with respect to the Company. ~~In December 2017,~~Mr. Griege first sought a board seat for himself, which the ~~Company’s~~Company's Board of Directors met with Mr. Griege, and, at Mr. Griege’s request, in January 2018, the Company’s Human Resources and Corporate Governance Committee, which acts as our nominating committee, interviewed Mr. Griege to consider him for a position on our Board of Directors. On January 11, 2018, we announced that wedetermined would not be ~~offering Mr. Griege a seat on our Board~~in the best interests of Directors. Beginning on February 23, 2018, the Blue Lion Parties have attempted to pursue a proxy contest in relation to our 2018 Annual Meeting of Shareholders. On that date, an affiliate of the Blue Lion Parties sent a purported notice to the Company attemptingall shareholders, and then sought to nominate two other individuals as director candidates for ~~director and submit certain proposals to~~ the ~~Company's shareholders at the Annual Meeting.~~annual meeting. The ~~Board of Directors deemed~~Company determined that the notice ~~to be deficient and rejected it, and~~provided was insufficient, following which the Blue Lion Parties subsequently sued the Company in the Superior Court of Washington for King County seeking a preliminary injunction to require the Company to honor their purported notice. ~~On March 30, 2018,~~While the court ruled against the Blue Lion Parties affiliate and affirmed the Company's determination that the notice was deficient and could be ~~rejected. The~~rejected, the Blue Lion Parties ~~subsequently launched~~nevertheless filed a definitive proxy statement and solicited proxies in a campaign against two of our director ~~nominees, and on April 25, 2018 the~~nominees. While Blue Lion ~~Parties filed a definitive proxy statement related to their solicitation~~was not ultimately successful in preventing the election of ~~proxies in connection therewith.~~

the Company's nominees, the protracted campaign against the Company was both time-consuming and costly.

A proxy contest or other activist campaign and related actions, such as the one discussed above, 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. In particular, the above mentioned activist investor has

suggested changes to our business that conflict with our strategic direction and could cause uncertainty among employees, customers, investors and other constituencies about the strategic direction of our business.

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

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.

We depend on our executive officers and key personnel to continue the implementation of our business strategy and could be harmed by the loss of their services. We believe that our growth and future success will depend in large part upon the skills of our management team. Additionally, our future success and growth will depend upon our ability to recruit and retain highly skilled employees with strong community relationships and specialized knowledge in the financial services industry. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional qualified personnel.

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 with fluctuations in interest rates, among other things, reflecting the changing expectations of mortgage prepayment activity. To mitigate potential losses of fair value of single family loans held for sale and MSRs related to changes in interest rates, we actively hedge this risk with financial derivative instruments. Hedging is a complex process, requiring sophisticated models, experienced and skilled personnel and continual monitoring. Changes in the value of our hedging instruments may not correlate with changes in the value of our single family loans held for sale and MSRs, as occurred in the fourth quarter of 2016, and we could incur a net valuation loss as a result of our hedging activities. In addition, our hedging activities may be impacted by unforeseen or unexpected changes. For example, in the first ~~quarter~~half of 2018, the volatility in mortgage rates required us to rebalance our hedging positions at a time when the yield curve on interest rates has been flattening, which both drives up the costs of hedging because of increased transaction costs on rebalancing the portfolio and decreases the total earnings on derivatives used for hedging, leading to less efficient and lower earning hedges, which reduced our risk management results and impacted our earnings for that quarter. We cannot predict whether this combination of volatile rates and flattened yield curve will continue or that this environment or other asymmetries in the Company's hedge position as compared to its mortgage servicing rights portfolio will not arise again in the future. Moreover, as the volume of single family loans held for sale and MSRs increases, our exposure to the risks associated with the impact of interest rate fluctuations on single family loans held for sale and MSRs also increases. Further, in times of significant financial disruption, as in 2008, hedging counterparties have been known to default on their obligations. Any such events or conditions may harm our results of operations.

Natural disasters in our geographic markets may impact our financial results.

~~In the fourth quarter of 2017, certain~~Certain communities in ~~California~~our markets have suffered significant losses from natural disasters, including devastating wildfires in Northern California in October 2017 that destroyed many homes and forced a short closure of four of our stand-alone home loan centers in those ~~areas.~~areas, ongoing volcanic eruptions on the island of Hawai'i and catastrophic wildfires currently burning in California, Washington and Oregon. While the impact of these recent natural disasters on our business do not appear to be material at this time, our mortgage banking operations in areas impacted by these and future disasters could experience an adverse financial impact due to office closures, customers who as a result of their losses may not be able to meet their loan commitments in a timely manner, a reduction in housing inventory due to loss caused by natural disaster and negative impacts to the local economy as it seeks to recover from these disasters.

Each of our primary markets are located in geographic regions that are at a risk for earthquakes, wildfires, volcanic eruptions, floods, mudslides and other natural disasters. In the event future catastrophic events impact our major markets, our operations and financial results may be adversely impacted.

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 operations in eight states, a substantial majority of our revenues are derived from operations in the Puget Sound region of Washington, the Portland, Oregon metropolitan area, the San Francisco Bay Area, and the Los Angeles and San Diego metropolitan areas in Southern California. All of our markets are located in the Western United States. Each of our primary markets is subject to various types of natural disasters, and each has experienced disproportionately significant economic volatility compared to the rest of the United States in the past decade. In addition, many of these areas are currently experiencing a constriction in the availability of houses for sale as new home construction has not kept pace with population growth in our primary markets, in part due to limitations on permitting and land availability. Economic events or natural disasters that affect the Western United States and our primary markets in that region in particular, or more significantly, may have an unusually pronounced impact on our business and, 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, a characteristic we expect to continue indefinitely. 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 degeneration 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, as they did in the last recession, the collateral for our loans may provide less security and our ability to recover the principal, interest and costs due on defaulted loans by selling the underlying real estate will be diminished, leaving us more likely to suffer additional losses 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.

Worsening conditions 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.

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, following passage by Congress of bill S.2551 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. As a result, we will have to find a different way to sell these loans and may not be able to do so on the terms or in the time frame that we expected. Such changes are difficult to predict, and can have a negative impact on our cash flow and results of operations.

We have previously had deficiencies in our internal controls over financial reporting, and those deficiencies or others that we have not discovered may result in our inability to maintain control over our assets or to identify and accurately report our financial condition, results of operations, or cash flows.

Our internal controls over financial reporting are intended to assure 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 and effectively prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results may be harmed.

As part of our ongoing monitoring of internal control from time to time we have discovered 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, and “significant deficiencies,” defined as a deficiency or combination of deficiencies in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the Company's financial reporting.

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

If our internal controls over financial reporting are subject to additional defects we have not identified, we may be unable to maintain adequate control over our assets, or we may experience material errors in recording our assets, liabilities and results of operations. Repeated or continuing deficiencies may cause investors to question the reliability of our internal controls or our financial statements, and may result in an erosion of confidence in our management or result in penalties or other potential enforcement action by the Securities and Exchange Commission (the “SEC”). On January 19, 2017, we finalized a settlement agreement with the SEC and paid a fine of $500,000 related to an SEC investigation into errors disclosed in 2014 in our fair value hedge accounting for certain commercial real estate loans and swaps. Neither the errors nor the amount of the settlement was ultimately material to our financial statements in any period. However, inquiries by the SEC took the time and attention of management for significant periods of time and may have had an adverse impact on investor confidence in us and, in turn, the market value of our common stock in the near term. If we were to have future failures of a similar nature, such failures may have a more significant impact than might generally be expected, both because of a potential for enhanced regulatory scrutiny and the potential for further reputational harm.

Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures. Future additions to our allowance for loan 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 loan 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. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our nonperforming loans and OREO 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.

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

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 as 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. As we grow the expectation for the sophistication of our models will increase and we may need to hire additional personnel with sufficient expertise.

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. As we continue to grow, we are likely to become more dependent on these sources, which may include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased, 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. As rates increase, the cost of our funding often increases faster than we can increase our interest income. For example, in recent periods the FHLB has increased rates on their advances in a quick response to increases in rates by the Federal Reserve and implemented those increased costs earlier than we have been able to increase our own interest income. This asymmetry of the speed at which interests rates rise on our liabilities as opposed to our assets may have a negative impact on our net interest income and, in turn, our 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.

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

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

We ~~have~~ completed four whole-bank acquisitions and acquired eight stand-alone branches between September 2013 and ~~March 31,~~June 30, 2018, all of which ~~have~~ 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. Any future acquisition we may undertake may involve numerous risks related to the investigation and consideration of the potential acquisition and the costs of undertaking such a transaction, as well as integrating acquired businesses into 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.

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

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

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

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

If we breach any representations or warranties or fail to follow guidelines when originating an FHA/HUD-insured loan or a VA-guaranteed loan, we may lose the insurance or guarantee on the loan and 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. As a result of the housing crisis that began in 2008, the FHA/HUD stepped up enforcement initiatives. In addition to regular FHA/HUD audits, HUD's Inspector General has become active in enforcing FHA regulations with respect to individual loans and has partnered with the Department of Justice ("DOJ") in filing lawsuits against lenders for systemic violations. The penalties resulting from such lawsuits can be much more severe, since systemic violations can be applied to groups of loans and penalties may be subject to treble damages. The DOJ has used the Federal False Claims Act and other federal laws and regulations in prosecuting these lawsuits. Because of our 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.

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

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

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

Changes in the fee structures by Fannie Mae, Freddie Mac or other third party loan purchasers, such as an increase in guarantee fees and other required fees and payments, may increase the costs of doing business with them and, in turn, increase the cost of mortgages to consumers and the cost of selling conforming loans to third party loan purchasers. Increases in those costs could in turn decrease our margin and negatively impact our profitability. Additionally, increased costs for premiums from mortgage insurers, extensions of the period for which private mortgage insurance is required on a loan purchased by third party purchasers and other changes to mortgage insurance requirements could also increase our costs of completing a mortgage and our margins for home loan origination. Were any of our third party loan purchasers to make such changes in the future, it may have a negative impact on our ability to originate loans to be sold because of the increased costs of such loans and may decrease our 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 consumers. Occasionally, third party loan purchasers may go out of business, elect to exit the market or choose to cease doing business with us for a myriad of reasons, including but not limited to the increased burdens on purchasers related to compliance, adverse market conditions or other pressures on the industry. In the event that one or more third party purchasers goes out of business, exits the market or otherwise ceases to do business with us at a time when we have loans that have been placed with such purchaser but not yet sold, we may incur additional costs to sell those loans to other purchasers or may have to retain such loans, which could negatively impact our results of operations and our capital position.

Our real estate lending may expose us to environmental liabilities.

In the course of our business, it is necessary to foreclose and take title to real estate, which could subject us to environmental liabilities with respect to these properties. Hazardous substances or waste, contaminants, pollutants or sources thereof may be

discovered on properties during our ownership or after a sale to a third party. We could be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances or chemical releases at such properties. The costs associated with investigation or remediation activities could be substantial and could substantially exceed the value of the real property. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. We may be unable to recover costs from any third party. These occurrences may materially reduce the value of the 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

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

While a desire to purchase single family real estate remains strong in our primary markets, as is evidenced by a continued demand from customers for mortgage loan applications and pre-approvals, new and resale home availability in those markets has not kept pace with demand. Driven by sustained job and population growth, Redfin.com reported the median days on market in the Seattle metropolitan area for a home was seven as compared to the national average of ~~43.~~36. Similarly, the Portland and San Francisco metropolitan area markets reported a median of 11 and 14 days on the ~~market.~~market, respectively. Moreover, Redfin.com reported the inventory levels of homes was also constrained as measured by Months of Supply with the Seattle metropolitan area having ~~0.8~~1.2 months of supply as compared to the national average of ~~2.8~~2.5 months of supply, and Portland and San Francisco having ~~1.4~~2.0 and ~~1.1~~1.3 months, respectively. There has been no indication that there will be any near-term meaningful change in this imbalance.

While this limit of supply has not had a significant negative impact on our relative market share to date, it has negatively impacted our loan volume. Moreover, despite the restructuring of our Mortgage Banking segment and recent additional

measures to scale our operations to demand, if this trend continues to increase, the lack of inventory may continue to impair both our volume and earnings in the Mortgage Banking segment.

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

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

Fluctuations in interest rates could adversely 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 an increased percentage of rate lock customer closing loans, which would in turn increase our costs relative to income. In addition, increases in interest rates in recent periods has reduced our mortgage revenues by reducing the market for refinancings, which has negatively impacted demand for certain of our residential loan products and the revenue realized on the sale of loans which, in turn, may negatively impact our noninterest income and, to a lesser extent, our net interest income. Market volatility in interest rates can be 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 which typically carry a rate based on 30-day LIBOR and interest payable on our deposits, tend to be more sensitive to short term rates while our assets 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 readjustment. As a result, a flattening of the yield curve is likely to have a negative impact on our net interest income.

Our securities portfolio also includes securities that are insured or guaranteed by U.S. government agencies or government-sponsored enterprises and other securities that are sensitive to interest rate 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.

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

Market forces have caused a significant decrease in the overall number of mortgage originations, which has increased competition for providers of mortgage products, put pressure on pricing for those products and negatively impacted our profit margins.

Due primarily to a combination of 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, the overall number of mortgage products being purchased in the market is significantly reduced from prior periods. Because the number of mortgage originators in the marketplace has not declined in a meaningful way, competition in the marketplace is more intense at the present time, which has resulted in significant pressure on pricing in the secondary market for single family mortgages that in turn negatively impact our profit margins in the Mortgage Banking segment and reduce our overall net income. We cannot predict when or if these competitive pressures will ease, and unless or until they do, we expect that we will experience negative impacts to our financial position and results of operations, which may include net losses in our Mortgage Banking segment.

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

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

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

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:

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;

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;

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; or

Trends relating to the economic markets generally.

The stock markets in general experience substantial price and trading fluctuations, and such changes may create volatility in the market as a whole or in the stock prices of securities related to particular industries or companies that 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.

Current 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, and a substantial amount of our revenue and earnings comes from the net interest and noninterest income that we earn from our mortgage banking and commercial lending businesses. Our operations have been, and will continue to be, materially 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. If the economy worsens and unemployment rises, which also would likely result in a decrease in consumer and business confidence and spending, the demand for our credit products, including our mortgages, may fall, reducing our net interest and noninterest income and our earnings. Significant and unexpected market developments may also make it more challenging for us to properly forecast our expected financial results.

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

The Federal Reserve is responsible for regulating the supply of money in the United States, and as a result its monetary policies strongly 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, and asymmetrical changes in short term and ~~long term~~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, mortgage servicing rights, or MSRs and derivative instruments used to hedge against changes in the value of our MSRs. These monetary policies can also negatively impact our borrowers, which in turn may increase the risk that they will be unable to pay their loans according to the terms or be unable to pay their loans at all. We have no control over the Federal Reserve Board’s policies and cannot predict when changes are expected or what the magnitude of such changes may be.

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

While we have simultaneously grown our Commercial and Consumer Banking segment revenue and downsized our mortgage lending operations, a substantial portion of our consolidated net revenues (net interest income plus noninterest income) are still derived from originating and selling residential mortgages. Residential mortgage lending in general has experienced substantial volatility in recent periods due to changes in interest rates, a significant lack of housing inventory caused by an increase in demand for housing at a time of decreased supply, and other market forces beyond our control. Lack of housing inventory limits our ability to originate purchase mortgages as it may take longer for loan applicants to 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 mortgage 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 residential mortgage loans may be influenced by changing national and regional economic trends, such as recessions or stagnating real estate markets, as well as the difference between interest rates on existing residential mortgage loans relative to prevailing residential mortgage rates. During periods of declining interest rates, many residential borrowers refinance their mortgage loans. Changes in prepayment rates are therefore difficult for us to predict. The loan administration fee income (related to the residential mortgage loan servicing rights corresponding to a mortgage loan) decreases as mortgage loans are prepaid. Consequently, in the event of an increase in prepayment rates, we would expect the fair value of portfolios of residential mortgage loan servicing rights to decrease along with the amount of loan administration income received.

Regulatory-Related Risks

We are subject to extensive regulation that may restrict our activities, including declaring cash dividends or capital distributions or pursuing growth initiatives and acquisition activities, and imposes 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 premiums assessed, require us to increase our allowance for loan losses, require customer restitution and impose fines or other penalties. The level of discretion, and the extent of potential penalties and other remedies, have increased substantially during recent years. We have, in the past, been subject to 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 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. Dodd-Frank’s level of oversight and compliance obligations increase significantly for banks with total assets in excess of $10 billion, which may limit our ability to grow beyond that level or may significantly increase the cost and regulatory burden of doing so. While the Trump administration and Republicans controlling Congress have announced that they intend to repeal or revise significant portions of Dodd-Frank and other regulation impacting financial institutions, the nature and extent of such repeals or revisions are not presently known and readers should not rely on the assumption that these changes will come to pass. These circumstances lead to additional uncertainty regarding our regulatory environment and the cost and requirements for compliance. We are unable to predict whether federal or state authorities, or other pertinent bodies, will enact legislation, laws, rules or regulations that will impact our business or operations. Further, an increasing amount of the regulatory authority that pertains to financial institutions comes in the form of informal “guidance”, such as handbooks, guidelines, 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 has the potential to create higher costs of compliance, including short-term costs to meet new compliance standards, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the potential litigation.

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

Our consumer business, including our mortgage, credit card, and other consumer lending and non-lending businesses, may be adversely 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 new 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. The 2014 regulations also require changes to certain loan servicing procedures and practices, which has resulted in increased foreclosure costs and longer foreclosure timelines in the event of loan default, and failure to comply with the new servicing rules may result in additional litigation and compliance risk.

The CFPB was also given authority over the Real Estate Settlement Procedures Act, or RESPA, under the Dodd-Frank Act and has, in some cases, interpreted RESPA requirements 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, which could negatively impact our ability to pursue our growth plans, branch expansion and limit our acquisition activity.

In addition to RESPA compliance, the Bank is also subject to the CFPB's Final Integrated Disclosure Rule, commonly known as TRID, which became 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 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 with a significant mortgage banking operation, we also, inherently, have a significant amount of risk of noncompliance with fair lending laws and regulations. These laws and regulations are complex and require vigilance to ensure that policies and practices do not create disparate impact on our customers or that our employees do not engage in overt discriminatory practices. Noncompliance can result in 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. These risks are enhanced because of our growth activities as we integrate operations from our acquisitions and expand our geographic markets. As 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.

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

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

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

As of January 1, 2015, we became subject to new rules relating to capital standards requirements, including requirements contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. Many of these rules apply to both the Company and the Bank, including increased common equity Tier 1 capital ratios, Tier 1 leverage ratios, Tier 1 risk-based ratios and total risk-based ratios. In addition, beginning in 2016, all institutions subject to Basel III, including the Company and the Bank are required to establish a “conservation buffer” that is being phased in and will take full effect on January 1, 2019. This conservation buffer consists of common equity Tier 1 capital and will ultimately be required to be 2.5% above existing minimum capital ratio requirements. This means that once the conservation buffer is fully phased in, in order to prevent certain regulatory restrictions, the common equity Tier 1 capital ratio requirement will be 7.0%, the Tier 1 risk-based ratio requirement will be 8.5% and the total risk-based capital ratio requirement will be 10.5%. Any institution that does not meet the conservation 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 ~~mortgage servicing rights~~MSRs and deferred tax assets. While federal banking regulators have proposed a rule change that would increase the amount of ~~mortgage servicing rights~~MSRs that could be included in ratio calculations, there can be no assurance that the proposed rule will be adopted in its current form or at all. For more on these regulatory requirements and how they apply to the Company and the Bank, see “Regulation and Supervision of HomeStreet Bank - Capital and Prompt Corrective Action Requirements - Capital Requirements” in our Annual Report on Form 10-K. The application of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such requirements. In addition, if we need to raise additional equity capital in order to meet these more stringent requirements, our shareholders may be diluted.

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

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

We cannot be certain whether or how Fannie Mae and Freddie Mac ultimately will be restructured or replaced, if or when additional reform of the housing finance market will be implemented or what the future role of the U.S. government will be in the mortgage market, and, accordingly, we will not be able to determine the impact that any such reform may have on us until a definitive reform plan is adopted. However, any restructuring or replacement of Fannie Mae and Freddie Mac that restricts the current loan purchase programs of those entities may have a material adverse effect on our business and results of operations. Moreover, we have recorded on our balance sheet an intangible asset (mortgage servicing rights, or MSRs) relating to our right to service single family loans sold to Fannie Mae and Freddie Mac. We valued these single family MSRs at ~~$294.1~~$245.7 million at ~~March 31,~~June 30, 2018. Changes in the policies and operations of Fannie Mae and Freddie Mac or any replacement for or successor to those entities that adversely affect our single family residential loan and DUS^® mortgage servicing assets may require us to record impairment charges to the value of these assets, and significant impairment charges could be material and adversely affect our business.

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

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

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

For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, an allowance for expected credit losses will be recorded as an adjustment to the cost basis of the asset. Subsequent changes in estimated cash flows would be recorded as an adjustment to the allowance and through the statement of income. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security's cost basis. The amendments in this ASU will be effective for us beginning on January 1, 2020. For most debt securities, the transition approach requires a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period the guidance is effective. For ~~other-than-temporarily~~other-than-

temporarily impaired debt securities and PCD assets, the guidance will be applied prospectively. We are currently evaluating the provisions of this ASU to determine the impact and developing appropriate systems to prepare for compliance with this new standard, however, we expect the new standard could have a material impact on the Company's consolidated financial statements.

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

HomeStreet, Inc. is a separate legal entity from the Bank, and although we may receive some dividends from HomeStreet Capital Corporation, the primary source of our funds from which we service our debt, pay any dividends that we may declare to

our shareholders and otherwise satisfy our obligations is dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations, capital rules regarding requirements to maintain a “well capitalized” ratio at the bank, as well as by our policy of retaining a 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 our Annual Report on Form 10-K. If the Bank cannot pay dividends to us, we may be limited in our ability to service our debts, fund the Company's operations and acquisition plans and pay dividends to the Company's shareholders. While the Company has paid special dividends in some prior quarters, we have not adopted a policy to pay dividends and in recent years our Board of Directors has elected to retain capital for growth rather than to declare a dividend. While management has recently discussed the possibility of paying dividends in the near future, we have not declared dividends in any recent quarters, and the potential of future dividends is subject to board approval, cash flow limitations, capital requirements, capital and strategic needs and other factors.

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 on technology to provide financial services. 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 will be subject to heightened regulatory requirements if we exceed $10 billion in assets.

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

To ensure compliance with these heightened requirements when effective, our regulators may require us to fully comply with these requirements or take actions to prepare for compliance even before our or the Bank’s total assets equal or exceed $10 billion. In fact, we have already begun implementing measures to allow us to prepare for the heightened compliance that we expect will be required if we exceed $10 billion in assets, including hiring additional compliance personnel and designing and implementing additional compliance systems and internal controls. We may incur significant expenses in connection with these

activities, any of which could have a material adverse effect on our business, financial condition or results of operations. We expect to incur these compliance-related costs even if they are not yet fully required, and may incur them even if we do not ultimately reach $10 billion in asset at the rate we expect or at all. We may also face heightened scrutiny by our regulators as we begin to implement these new compliance measures and grow toward the $10 billion asset threshold, and our regulators may consider our preparation for compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters. In addition, compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our customers and, as a result, may adversely affect our stock price or our ability to retain our customers or effectively compete for new business opportunities.

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.

To date we are not aware of any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not 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 implement 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 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, 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 or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems, capacity constraints or failures of their own internal controls. 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. To date none of our third party vendors or service providers has notified us of any security breach in their systems that has resulted in an increased vulnerability to us or breached the integrity of our confidential customer data. Such third parties may also be target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers 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 be materially increased.

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 payment of monetary penalties.

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.

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

Elimination of cumulative voting in the election of directors;

Procedures for advance 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 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.


ITEM 3	DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4	MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5	OTHER INFORMATION

Not applicable.


ITEM 6	EXHIBITS

EXHIBIT INDEX



Exhibit Number		Description

10.1†		Agreement for the Bulk Purchase and Sale of Mortgage Servicing Rights dated June 29, 2018, between HomeStreet Bank and Matrix Financial Services Corporation, filed herewith

12.1		Ratio of Earnings to Fixed Charges

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32⁽¹⁾		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.

101.INS⁽²⁾		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Label Linkbase Document

101.LAB		XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE		XBRL Taxonomy Extension Definitions Linkbase Document

† Portions of this document have been redacted pending a determination by the Commission as to whether such portions shall be subject to confidential treatment.



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

(2)	Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Operations (unaudited) for the three and six months ended ~~March 31,~~June 30, 2018 and 2017, (ii) the Consolidated Statements of Financial Condition (unaudited) as of ~~March 31,~~June 30, 2018 and December 31, 2017, (iii) the Consolidated Statements of Shareholders' Equity for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017, and Statements of Comprehensive Income (unaudited) for the three and six months ended ~~March 31,~~June 30, 2018 and 2017, (iv) the Consolidated Statements of Cash Flows (unaudited) for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017, and (v) the Notes to Consolidated Financial Statements (unaudited).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on ~~May 4,~~August 3, 2018.



	HomeStreet, Inc.

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



	HomeStreet, Inc.

	By:	/s/ Mark R. Ruh
		Mark R. Ruh
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

~~115~~120



Liquidity and Capital Resources		89
Accounting Developments		8994

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	9095
ITEM 4	CONTROLS AND PROCEDURES	9398
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	9398
ITEM 1A	RISK FACTORS	9499
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	118
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	118
ITEM 4	MINE SAFETY DISCLOSURES	118
ITEM 5	OTHER INFORMATION	118
ITEM 6	EXHIBITS	~~114~~119
SIGNATURES		~~115~~120



(in thousands)	Facility related costs			Personnel related costs		Total
Balance at December 31, 2017	$	1,386		$	—	$	1,386
Restructuring charges (recoveries)	(291		)	—		(291		)
Costs paid or otherwise settled	(375		)	—		(375		)
Balance at March 31, 2018	$	720		$	—	$	720