HMST-2014.9.30-10Q

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: September 30, 2014
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated Filer
 
o
Accelerated Filer
 
x
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
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 October 31, 2014 was 14,856,611.
 




PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



 
 
 
ITEM 3
 
 
 
ITEM 4
 
 
 
 
 
 
 
ITEM 1
 
 
 
ITEM 1A
 
 
 
ITEM 6
 
 

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

3



PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
(in thousands, except share data)
 
September 30,
2014
 
December 31,
2013
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $16,044 and $9,436)
 
$
34,687

 
$
33,908

Investment securities (includes $432,096 and $481,683 carried at fair value)
 
449,948

 
498,816

Loans held for sale (includes $614,876 and $279,385 carried at fair value)
 
698,111

 
279,941

Loans held for investment (net of allowance for loan losses of $21,847 and $23,908)
 
1,964,762

 
1,871,813

Mortgage servicing rights (includes $115,477 and $153,128 carried at fair value)
 
124,593

 
162,463

Other real estate owned
 
10,478

 
12,911

Federal Home Loan Bank stock, at cost
 
34,271

 
35,288

Premises and equipment, net
 
44,476

 
36,612

Goodwill
 
11,945

 
12,063

Other assets
 
101,385

 
122,239

Total assets
 
$
3,474,656

 
$
3,066,054

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
2,425,458

 
$
2,210,821

Federal Home Loan Bank advances
 
598,590

 
446,590

Securities sold under agreements to repurchase
 
14,225

 

Accounts payable and other liabilities
 
79,958

 
77,906

Long-term debt
 
61,857

 
64,811

Total liabilities
 
3,180,088

 
2,800,128

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, issued and outstanding, 14,852,971 shares and 14,799,991 shares
 
511

 
511

Additional paid-in capital
 
96,650

 
94,474

Retained earnings
 
197,945

 
182,935

Accumulated other comprehensive income
 
(538
)
 
(11,994
)
Total shareholders' equity
 
294,568

 
265,926

Total liabilities and shareholders' equity
 
$
3,474,656

 
$
3,066,054


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

4



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
25,763

 
$
19,425

 
$
71,865

 
$
54,920

Investment securities
2,565

 
3,895

 
8,199

 
9,552

Other
150

 
28

 
449

 
82

 
28,478

 
23,348

 
80,513

 
64,554

Interest expense:
 
 
 
 
 
 
 
Deposits
2,364

 
2,222

 
7,080

 
8,078

Federal Home Loan Bank advances
509

 
434

 
1,366

 
1,113

Securities sold under agreements to repurchase
6

 

 
7

 
11

Long-term debt
271

 
274

 
851

 
2,274

Other
20

 
6

 
42

 
16

 
3,170

 
2,936

 
9,346

 
11,492

Net interest income
25,308

 
20,412

 
71,167

 
53,062

Provision (reversal of provision) for credit losses

 
(1,500
)
 
(1,500
)
 
900

Net interest income after provision for credit losses
25,308

 
21,912

 
72,667

 
52,162

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
37,642

 
33,491

 
104,946

 
139,870

Mortgage servicing income
6,155

 
4,011

 
24,284

 
9,265

(Loss) income from WMS Series LLC
(122
)
 
(550
)
 
(69
)
 
1,063

Gain (loss) on debt extinguishment
2

 

 
(573
)
 

Depositor and other retail banking fees
944

 
791

 
2,676

 
2,273

Insurance agency commissions
256

 
242

 
892

 
612

Gain (loss) on sale of investment securities available for sale (includes unrealized gain (loss) reclassified from accumulated other comprehensive income of $480 and $(184) for the three months ended September 30, 2014 and 2013, and $1,173 and $6 for the nine months ended September 30, 2014 and 2013, respectively)
480

 
(184
)
 
1,173

 
6

Other
456

 
373

 
841

 
1,584

 
45,813

 
38,174

 
134,170

 
154,673

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
42,604

 
39,689

 
118,681

 
113,330

General and administrative
10,326

 
9,234

 
31,593

 
30,434

Legal
630

 
844

 
1,571

 
2,054

Consulting
628

 
884

 
2,182

 
2,343

Federal Deposit Insurance Corporation assessments
682

 
227

 
1,874

 
937

Occupancy
4,935

 
3,484

 
14,042

 
9,667

Information services
4,220

 
3,552

 
13,597

 
10,122

Net cost of operation and sale of other real estate owned
133

 
202

 
(320
)
 
1,740

 
64,158

 
58,116

 
183,220

 
170,627

Income before income taxes
6,963

 
1,970

 
23,617

 
36,208

Income tax expense (includes reclassification adjustments of $168 and $(64) for the three months ended September 30, 2014 and 2013, and $411 and $2 for the nine months ended September 30, 2014 and 2013, respectively)
1,988

 
308

 
6,979

 
11,538

NET INCOME
$
4,975

 
$
1,662

 
$
16,638

 
$
24,670

Basic income per share
$
0.34

 
$
0.12

 
$
1.12

 
$
1.72

Diluted income per share
$
0.33

 
$
0.11

 
$
1.11

 
$
1.67

Basic weighted average number of shares outstanding
14,805,780

 
14,388,559

 
14,797,019

 
14,374,943

Diluted weighted average number of shares outstanding
14,968,238

 
14,790,671

 
14,957,034

 
14,793,427

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

5



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
4,975

 
$
1,662

 
$
16,638

 
$
24,670

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period, net of tax expense (benefit) of $501 and $(362) for the three months ended September 30, 2014 and 2013, and $6,579 and $(9,845) for the nine months ended September 30, 2014 and 2013, respectively
930

 
(673
)
 
12,218

 
(18,283
)
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $168 and $(64) for the three months ended September 30, 2014 and 2013, and $411 and $2 for the nine months ended September 30, 2014 and 2013, respectively
(312
)
 
120

 
(762
)
 
(4
)
Other comprehensive income (loss)
618

 
(553
)
 
11,456

 
(18,287
)
Comprehensive income (loss)
$
5,593

 
$
1,109

 
$
28,094

 
$
6,383


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

6



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
(in thousands, except share data)
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
14,382,638

 
$
511

 
$
90,189

 
$
163,872

 
$
9,190

 
$
263,762

Net income

 

 

 
24,670

 

 
24,670

Dividends ($0.11 per share)

 

 

 
(3,163
)
 

 
(3,163
)
Share-based compensation expense

 

 
1,098

 

 

 
1,098

Common stock issued
39,716

 

 
128

 

 

 
128

Other comprehensive loss

 

 

 

 
(18,287
)
 
(18,287
)
Balance, September 30, 2013
14,422,354

 
$
511

 
$
91,415

 
$
185,379

 
$
(9,097
)
 
$
268,208

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
14,799,991

 
$
511

 
$
94,474

 
$
182,935

 
$
(11,994
)
 
$
265,926

Net income

 

 

 
16,638

 

 
16,638

Dividends ($0.11 per share)

 

 

 
(1,628
)
 

 
(1,628
)
Share-based compensation expense

 

 
1,867

 

 

 
1,867

Common stock issued
52,980

 

 
309

 

 

 
309

Other comprehensive income

 

 

 

 
11,456

 
11,456

Balance, September 30, 2014
14,852,971

 
$
511

 
$
96,650

 
$
197,945

 
$
(538
)
 
$
294,568


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

7



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
(in thousands)
2014
 
2013
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
16,638

 
$
24,670

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
13,293

 
10,285

(Reversal of) provision for credit losses
(1,500
)
 
900

Provision for losses on other real estate owned
73

 
547

Fair value adjustment of loans held for sale
(11,320
)
 
15,602

Origination of mortgage servicing rights
(32,726
)
 
(53,627
)
Change in fair value of mortgage servicing rights
26,075

 
1,493

Net gain on sale of investment securities
(1,173
)
 
(6
)
Net gain on sale of loans originated as held for investment
(4,586
)
 

Net fair value adjustment and gain on sale of other real estate owned
(714
)
 
(744
)
Loss on early retirement of long-term debt
573

 

Net deferred income tax (benefit) expense
(13,502
)
 
18,650

Share-based compensation expense
1,100

 
932

Origination of loans held for sale
(2,840,050
)
 
(4,151,302
)
Proceeds from sale of loans originated as held for sale
2,459,748

 
4,425,792

Cash used by changes in operating assets and liabilities:
 
 
 
Decrease (increase) in other assets
25,486

 
(36,680
)
Increase (decrease) in accounts payable and other liabilities
9,959

 
4,867

Net cash (used in) provided by operating activities
(352,626
)
 
261,379

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(45,179
)
 
(286,741
)
Proceeds from sale of investment securities
75,599

 
54,166

Principal repayments and maturities of investment securities
32,040

 
41,556

Proceeds from sale of other real estate owned
6,019

 
17,396

Proceeds from sale of loans originated as held for investment
271,409

 

Proceeds from sale of mortgage servicing rights
39,004

 

Mortgage servicing rights purchased from others
(8
)
 
(20
)
Capital expenditures related to other real estate owned

 
(22
)
Origination of loans held for investment and principal repayments, net
(389,196
)
 
(261,379
)
Purchase of property and equipment
(13,904
)
 
(12,683
)
Net cash used in investing activities
(24,216
)
 
(447,727
)

8



 
Nine Months Ended September 30,
(in thousands)
2014
 
2013
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
214,637

 
$
121,241

Proceeds from Federal Home Loan Bank advances
4,619,927

 
4,477,102

Repayment of Federal Home Loan Bank advances
(4,467,927
)
 
(4,397,502
)
Proceeds from securities sold under agreements to repurchase
58,308

 
159,790

Repayment of securities sold under agreements to repurchase
(44,083
)
 
(159,790
)
Proceeds from Federal Home Loan Bank stock repurchase
1,017

 
997

Repayment of long-term debt
(3,527
)
 

Dividends paid
(1,628
)
 
(3,163
)
Proceeds from stock issuance, net
130

 
128

Excess tax benefits related to the exercise of stock options
767

 
166

Net cash provided by financing activities
377,621

 
198,969

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
779

 
12,621

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
33,908

 
25,285

End of period
$
34,687

 
$
37,906

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
10,785

 
$
24,969

Federal and state income taxes (paid), net of refunds
10,642

 
6,796

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
3,647

 
10,831

Loans transferred from held for investment to held for sale
310,455

 
54,403

Loans transferred from held for sale to held for investment
17,095

 

Ginnie Mae loans recognized with the right to repurchase, net
$
649

 
$
3,775


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

9



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

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the Pacific Northwest, California and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. The consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation and HomeStreet Bank (the “Bank”), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, Union Street Holdings LLC, YNB Real Estate LLC, BSBC Properties LLC, HS Cascadia Holdings LLC and Lacey Gateway LLC. HomeStreet Bank was formed in 1986 and is a state-chartered savings bank.

The Company’s accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP). Inter-company balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. Although these estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect the Company’s results of operations and financial condition. Management has made significant estimates in several areas, and actual results could differ materially from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this 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, 2013, filed with the Securities and Exchange Commission (“2013 Annual Report on Form 10-K”).

Purchase Accounting Adjustments

On November 1, 2013, the Company completed its acquisition of Fortune Bank and YNB Financial Services Corp. ("YNB"), the parent of Yakima National Bank. The assets acquired and liabilities assumed in the acquisitions were accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. On December 6, 2013, the Company acquired two retail deposit branches and some related assets from AmericanWest Bank, a Washington state-chartered bank. During the second quarter of 2014, the Company completed a more detailed fair value analysis of premises and equipment assumed in the acquisition of YNB and determined that adjustments to the acquisition-date fair value were required. The Company also determined that adjustments were required to the provisional estimates for core deposit intangibles that were assumed in all three acquisitions. As a result of these adjustments, core deposit intangibles increased by $1.1 million, premises and equipment decreased by $740 thousand, and deferred tax liabilities increased by $280 thousand, resulting in a net decrease to goodwill of $118 thousand. These immaterial measurement period adjustments and corrections of accounting errors were made in the second quarter of 2014 as they were not material to the prior periods.

Recent Accounting Developments

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The ASU applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The amendments in this ASU should be applied retrospectively to all periods presented and are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, although early adoption is permitted. The Company elected to adopt this new accounting guidance as of January 1, 2014. It is being

10



adopted prospectively, as the retrospective adjustments were not material. The Company's income tax expense for the nine months ended September 30, 2014 includes discrete tax benefit items of $406 thousand related to the recognition of the cumulative effect for prior years of adoption of this new accounting guidance. 

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017. The adoption of ASU 2014-09 is not expected to have a material impact on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures. The ASU applies to all entities that enter into repurchase-to-maturity transactions or repurchase financings. The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The amendments in this ASU are effective for public business entities for the first interim or annual period beginning after December 15, 2014. Early adoption is not permitted. The application of this guidance may require enhanced disclosures of the Company's repurchase agreements, but will have no impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The ASU clarifies the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU 2014-14 is not expected to have a material impact on the Company's consolidated financial statements.


11



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.
 
 
At September 30, 2014
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
112,131

 
$
374

 
$
(1,668
)
 
$
110,837

Commercial
13,119

 
452

 

 
13,571

Municipal bonds
120,799

 
2,713

 
(470
)
 
123,042

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
56,359

 
130

 
(1,601
)
 
54,888

Commercial
16,047

 

 
(415
)
 
15,632

Corporate debt securities
74,166

 
50

 
(2,104
)
 
72,112

U.S. Treasury securities
41,971

 
43

 

 
42,014

 
$
434,592

 
$
3,762

 
$
(6,258
)
 
$
432,096


 
At December 31, 2013
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
137,602

 
$
187

 
$
(3,879
)
 
$
133,910

Commercial
13,391

 
45

 
(3
)
 
13,433

Municipal bonds
136,937

 
185

 
(6,272
)
 
130,850

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
93,112

 
85

 
(2,870
)
 
90,327

Commercial
17,333

 

 
(488
)
 
16,845

Corporate debt securities
75,542

 

 
(6,676
)
 
68,866

U.S. Treasury securities
27,478

 
1

 
(27
)
 
27,452

 
$
501,395

 
$
503

 
$
(20,215
)
 
$
481,683


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored entities ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013, substantially all securities held had ratings available by external ratings agencies.


12



Investment securities available for sale 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 September 30, 2014
 
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

 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(40
)
 
$
11,758

 
$
(1,628
)
 
$
69,570

 
$
(1,668
)
 
$
81,328

Municipal bonds
(13
)
 
3,612

 
(457
)
 
29,295

 
(470
)
 
32,907

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(249
)
 
8,802

 
(1,352
)
 
31,346

 
(1,601
)
 
40,148

Commercial

 

 
(415
)
 
15,633

 
(415
)
 
15,633

Corporate debt securities
(281
)
 
17,145

 
(1,823
)
 
45,573

 
(2,104
)
 
62,718

 
$
(583
)
 
$
41,317

 
$
(5,675
)
 
$
191,417

 
$
(6,258
)
 
$
232,734


 
At December 31, 2013
 
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
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(3,767
)
 
$
98,717

 
$
(112
)
 
$
6,728

 
$
(3,879
)
 
$
105,445

Commercial
(3
)
 
7,661

 

 

 
(3
)
 
7,661

Municipal bonds
(5,991
)
 
106,985

 
(281
)
 
3,490

 
(6,272
)
 
110,475

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 


 


Residential
(2,120
)
 
63,738

 
(750
)
 
15,081

 
(2,870
)
 
78,819

Commercial
(488
)
 
16,845

 

 

 
(488
)
 
16,845

Corporate debt securities
(6,676
)
 
68,844

 

 

 
(6,676
)
 
68,844

U.S. Treasury securities
(27
)
 
25,452

 

 

 
(27
)
 
25,452

 
$
(19,072
)
 
$
388,242

 
$
(1,143
)
 
$
25,299

 
$
(20,215
)
 
$
413,541


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. As of September 30, 2014 and December 31, 2013, the Company does not expect any credit losses on its debt securities. In addition, as of September 30, 2014 and December 31, 2013, 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 Company did not hold any marketable equity securities as of September 30, 2014 and December 31, 2013.



13



The following tables present the fair value of investment securities available for sale 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 September 30, 2014
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$
7,466

 
1.73
%
 
$
103,371

 
1.81
%
 
$
110,837

 
1.80
%
Commercial

 

 

 

 

 

 
13,571

 
4.63

 
13,571

 
4.63

Municipal bonds

 

 
45

 
3.43

 
22,642

 
3.54

 
100,355

 
4.25

 
123,042

 
4.12

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

 
54,887

 
2.07

 
54,887

 
2.07

Commercial

 

 

 

 
9,692

 
1.93

 
5,940

 
1.37

 
15,632

 
1.72

Corporate debt securities

 

 

 

 
40,854

 
3.25

 
31,259

 
3.64

 
72,113

 
3.42

U.S. Treasury securities
2,002

 
0.25

 
40,012

 
0.35

 

 

 

 

 
42,014

 
0.34

Total available for sale
$
2,002

 
0.25
%
 
$
40,057

 
0.35
%
 
$
80,654

 
3.03
%
 
$
309,383

 
2.93
%
 
$
432,096

 
2.70
%
 
 
At December 31, 2013
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$
10,581

 
1.63
%
 
$
123,329

 
1.82
%
 
$
133,910

 
1.81
%
Commercial

 

 

 

 

 

 
13,433

 
4.51

 
13,433

 
4.51

Municipal bonds

 

 

 

 
19,598

 
3.51

 
111,252

 
4.29

 
130,850

 
4.17

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 
19,987

 
2.31

 
70,340

 
2.17

 
90,327

 
2.20

Commercial

 

 

 

 
5,270

 
1.90

 
11,575

 
1.42

 
16,845

 
1.57

Corporate debt securities

 

 

 

 
32,848

 
3.31

 
36,018

 
3.75

 
68,866

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
26,451

 
0.30

 

 

 

 

 
27,452

 
0.29

Total available for sale
$
1,001

 
0.18
%
 
$
26,451

 
0.30
%
 
$
88,284

 
2.84
%
 
$
365,947

 
2.92
%
 
$
481,683

 
2.75
%


14



Sales of investment securities available for sale were as follows.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Proceeds
$
9,753

 
$
1,972

 
$
75,599

 
$
52,566

Gross gains
480

 

 
1,375

 
322

Gross losses

 
(184
)
 
(201
)
 
(316
)

There were $39.9 million and $47.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at September 30, 2014 and December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, there were $49.7 million and $37.7 million, respectively, of securities pledged to secure derivatives in a liability position. At September 30, 2014, there were $15.0 million of securities pledged under repurchase agreements and none at December 31, 2013.

Tax-exempt interest income on securities available for sale totaling $856 thousand and $1.5 million for the three months ended September 30, 2014 and 2013, respectively, and $2.6 million and $4.2 million for the nine months ended September 30, 2014 and 2013, 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 6, Loans and Credit Quality within our 2013 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 loans within the consumer loan portfolio segment and commercial real estate, multifamily, construction/land development and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following:
 
(in thousands)
At September 30,
2014
 
At December 31,
2013
 
 
 
 
Consumer loans
 
 
 
Single family
$
788,232

 
$
904,913

Home equity
138,276

 
135,650

 
926,508

 
1,040,563

Commercial loans
 
 
 
Commercial real estate
530,335

 
477,642

Multifamily
62,498

 
79,216

Construction/land development
297,790

 
130,465

Commercial business
173,226

 
171,054

 
1,063,849

 
858,377

 
1,990,357

 
1,898,940

Net deferred loan fees and discounts
(3,748
)
 
(3,219
)
 
1,986,609

 
1,895,721

Allowance for loan losses
(21,847
)
 
(23,908
)
 
$
1,964,762

 
$
1,871,813



15



Loans in the amount of $850.2 million and $800.5 million at September 30, 2014 and December 31, 2013, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.

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 states of Washington, Oregon, California, Idaho and Hawaii. At September 30, 2014, we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family, commercial real estate and construction/land development within the state of Washington, which represented 26.2%, 22.2% and 11.8% of the total portfolio, respectively. At December 31, 2013 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 37.3% and 21.2% of the total portfolio, respectively. These loans were mostly located within the metropolitan area of Puget Sound, particularly within King County.

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 September 30, 2014. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.

For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 1, Summary of Significant Accounting Policies within our 2013 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
 
 
 
Beginning balance
 
$
22,168

 
$
27,858

 
$
24,089

 
$
27,751

Provision (reversal of provision) for credit losses
 

 
(1,500
)
 
(1,500
)
 
900

(Charge-offs), net of recoveries
 
(57
)
 
(1,464
)
 
(478
)
 
(3,757
)
Ending balance
 
$
22,111

 
$
24,894

 
$
22,111

 
$
24,894

Components:
 
 
 
 
 
 
 
 
Allowance for loan losses
 
$
21,847

 
$
24,694

 
$
21,847

 
$
24,694

Allowance for unfunded commitments
 
264

 
200

 
264

 
200

Allowance for credit losses
 
$
22,111

 
$
24,894

 
$
22,111

 
$
24,894




16



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

 
Three Months Ended September 30, 2014
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
9,111

 
$
(226
)
 
$
65

 
$
(72
)
 
$
8,878

Home equity
3,517

 
(135
)
 
94

 
87

 
3,563

 
12,628

 
(361
)
 
159

 
15

 
12,441

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,063

 

 
275

 
(357
)
 
3,981

Multifamily
887

 

 

 
(174
)
 
713

Construction/land development
2,418

 

 
123

 
146

 
2,687

Commercial business
2,172

 
(304
)
 
51

 
370

 
2,289

 
9,540

 
(304
)
 
449

 
(15
)
 
9,670

Total allowance for credit losses
$
22,168

 
$
(665
)
 
$
608

 
$

 
$
22,111

 
 
Three Months Ended September 30, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
13,810

 
$
(606
)
 
$
179

 
$
(1,251
)
 
$
12,132

Home equity
4,879

 
(377
)
 
273

 
(139
)
 
4,636

 
18,689

 
(983
)
 
452

 
(1,390
)
 
16,768

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,723

 
(1,306
)
 

 
51

 
4,468

Multifamily
690

 

 

 
80

 
770

Construction/land development
1,185

 

 
348

 
(141
)
 
1,392

Commercial business
1,571

 

 
25

 
(100
)
 
1,496

 
9,169

 
(1,306
)
 
373

 
(110
)
 
8,126

Total allowance for credit losses
$
27,858

 
$
(2,289
)
 
$
825

 
$
(1,500
)
 
$
24,894


17





 
Nine Months Ended September 30, 2014
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
11,990

 
$
(509
)
 
$
106

 
$
(2,709
)
 
$
8,878

Home equity
3,987

 
(694
)
 
420

 
(150
)
 
3,563

 
15,977

 
(1,203
)
 
526

 
(2,859
)
 
12,441

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
(23
)
 
431

 
(439
)
 
3,981

Multifamily
942

 

 

 
(229
)
 
713

Construction/land development
1,414

 

 
185

 
1,088

 
2,687

Commercial business
1,744

 
(592
)
 
198

 
939

 
2,289

 
8,112

 
(615
)
 
814

 
1,359

 
9,670

Total allowance for credit losses
$
24,089

 
$
(1,818
)
 
$
1,340

 
$
(1,500
)
 
$
22,111



 
Nine Months Ended September 30, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
13,388

 
$
(2,468
)
 
$
425

 
$
787

 
$
12,132

Home equity
4,648

 
(1,515
)
 
526

 
977

 
4,636

 
18,036

 
(3,983
)
 
951

 
1,764

 
16,768

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,312

 
(1,449
)
 

 
605

 
4,468

Multifamily
622

 

 

 
148

 
770

Construction/land development
1,580

 
(148
)
 
699

 
(739
)
 
1,392

Commercial business
2,201

 

 
173

 
(878
)
 
1,496

 
9,715

 
(1,597
)
 
872

 
(864
)
 
8,126

Total allowance for credit losses
$
27,751

 
$
(5,580
)
 
$
1,823

 
$
900

 
$
24,894



18



The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
 
At September 30, 2014
(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
$
8,042

 
$
836

 
$
8,878

 
$
713,339

 
$
74,893

 
$
788,232