HMST-2012.6.30-10Q

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: June 30, 2012
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  ¨
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  ¨
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
 
¨
Accelerated Filer
 
¨
 
 
 
 
 
 
Non-accelerated Filer
 
x  
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On July 31, 2012 there were 7,163,753 shares of no par value Common Stock outstanding.
 




Table of Contents

PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
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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 (“HomeStreet Capital”) and other direct and indirect subsidiaries of HomeStreet, Inc.

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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
(in thousands, except share data)
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $53,041 and $246,113)
$
75,063

 
$
263,302

Investment securities available for sale
415,610

 
329,047

Loans held for sale (includes $400,019 and $130,546 carried at fair value)
412,933

 
150,409

Loans held for investment (net of allowance for loan losses of $26,910 and $42,689)
1,235,253

 
1,300,873

Mortgage servicing rights (includes $70,585 and $70,169 carried at fair value)
78,240

 
77,281

Other real estate owned
40,618

 
38,572

Federal Home Loan Bank stock, at cost
37,027

 
37,027

Premises and equipment, net
10,226

 
6,569

Accounts receivable and other assets
119,977

 
61,877

 
$
2,424,947

 
$
2,264,957

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
1,904,749

 
$
2,009,755

Federal Home Loan Bank advances
65,590

 
57,919

Securities sold under agreements to repurchase
100,000

 
—

Accounts payable and accrued expenses
78,728

 
49,019

Long-term debt
61,857

 
61,857

 
2,210,924

 
2,178,550

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 80,000,000, Issued and outstanding, 7,162,607 shares and 2,701,749 shares
511

 
511

Additional paid-in capital
88,637

 
31

Retained earnings
118,793

 
81,746

Accumulated other comprehensive income
6,082

 
4,119

 
214,023

 
86,407

 
$
2,424,947

 
$
2,264,957


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

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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)
2012
 
2011
 
2012
 
2011
Interest income:
 
 
 
 
 
 
 
Loans
$
17,250

 
$
17,947

 
$
33,803

 
$
36,615

Investment securities available for sale
2,449

 
1,848

 
4,688

 
3,706

Other
56

 
73

 
192

 
157

 
19,755

 
19,868

 
38,683

 
40,478

Interest expense:
 
 
 
 
 
 
 
Deposits
4,198

 
6,538

 
9,077

 
13,579

Federal Home Loan Bank advances
535

 
959

 
1,209

 
2,267

Securities sold under agreements to repurchase
50

 
—

 
50

 
—

Long-term debt
271

 
457

 
736

 
1,128

Other
3

 
—

 
9

 
—

 
5,057

 
7,954

 
11,081

 
16,974

Net interest income
14,698

 
11,914

 
27,602

 
23,504

Provision for credit losses
2,000

 
2,300

 
2,000

 
2,300

Net interest income after provision for credit losses
12,698

 
9,614

 
25,602

 
21,204

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
45,486

 
9,151

 
73,997

 
13,936

Mortgage servicing income
7,091

 
7,713

 
14,964

 
13,561

Income from Windermere Mortgage Services Series LLC
1,394

 
503

 
2,560

 
478

Gain (loss) on debt extinguishment
(939
)
 
—

 
(939
)
 
2,000

Depositor and other retail banking fees
771

 
795

 
1,506

 
1,535

Insurance commissions
177

 
258

 
359

 
621

Gain on sale of investment securities available for sale
911

 
1

 
952

 
1

Other
611

 
191

 
1,214

 
786

 
55,502

 
18,612

 
94,613

 
32,918

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
28,224

 
11,700

 
49,575

 
23,839

General and administrative
6,725

 
4,555

 
11,997

 
7,997

Legal
724

 
399

 
1,159

 
1,303

Consulting
322

 
197

 
677

 
363

Federal Deposit Insurance Corporation assessments
717

 
1,265

 
1,957

 
3,014

Occupancy
2,092

 
1,700

 
3,881

 
3,368

Information services
1,994

 
1,477

 
3,717

 
2,957

Other real estate owned expense
6,049

 
5,666

 
8,569

 
17,420

 
46,847

 
26,959

 
81,532

 
60,261

Income (loss) before income taxes
21,353

 
1,267

 
38,683

 
(6,139
)
Income tax (benefit) expense
3,357

 
(17
)
 
1,636

 
26

NET INCOME (LOSS)
$
17,996

 
$
1,284

 
$
37,047

 
$
(6,165
)
Basic income (loss) per share
$
2.53

 
$
0.48

 
$
6.04

 
$
(2.28
)
Diluted income (loss) per share
$
2.43

 
$
0.45

 
$
5.80

 
$
(2.23
)
Basic weighted average number of shares outstanding
7,126,060

 
2,701,749

 
6,136,171

 
2,701,749

Diluted weighted average number of shares outstanding
7,412,032

 
2,837,691

 
6,386,099

 
2,769,720


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

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HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Net income (loss)
$
17,996

 
$
1,284

 
$
37,047

 
$
(6,165
)
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Unrealized holding gain arising during the period (net of tax expense of $1,571 and $1,237 for the three and six months ended June 30, 2012 and $0 and $0 for the three and six months ended June 30, 2011)
3,492

 
5,810

 
2,582

 
5,680

Reclassification adjustment for net gain included in net income (net of tax expense of $333 for the three and six months ended June 30, 2012 and $0 for the three and six months ended June 30, 2011)
(578
)
 
(1
)
 
(619
)
 
(1
)
Other comprehensive income
2,914

 
5,809

 
1,963

 
5,679

Comprehensive income (loss)
$
20,910

 
$
7,093

 
$
39,010

 
$
(486
)

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

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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, 2011
2,701,749

 
$
511

 
$
16

 
$
65,627

 
$
(7,365
)
 
$
58,789

Net loss
—

 
—

 
—

 
(6,165
)
 
—

 
(6,165
)
Share-based compensation expense
—

 
—

 
8

 
—

 
—

 
8

Other comprehensive income
—

 
—

 
—

 
—

 
5,679

 
5,679

Balance, June 30, 2011
2,701,749

 
$
511

 
$
24

 
$
59,462

 
$
(1,686
)
 
$
58,311

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2012
2,701,749

 
$
511

 
$
31

 
$
81,746

 
$
4,119

 
$
86,407

Net income
—

 
—

 
—

 
37,047

 
—

 
37,047

Share-based compensation expense
—

 
—

 
2,216

 
—

 
—

 
2,216

Common stock issued
4,460,858

 
—

 
86,390

 
—

 
—

 
86,390

Other comprehensive income
—

 
—

 
—

 
—

 
1,963

 
1,963

Balance, June 30, 2012
7,162,607

 
$
511

 
$
88,637

 
$
118,793

 
$
6,082

 
$
214,023


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

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HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
(in thousands)
Six Months Ended June 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income (loss)
$
37,047

 
$
(6,165
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Amortization of loans held for investment, net of additions
(554
)
 
(540
)
Amortization of investment securities
2,576

 
1,243

Amortization of intangibles
52

 
65

Amortization of mortgage servicing rights
953

 
666

Provision for credit losses
2,000

 
2,300

Provision for losses on other real estate owned
8,332

 
15,298

Depreciation and amortization on premises and equipment
1,121

 
967

Originations of loans held for sale
(1,835,017
)
 
(694,146
)
Proceeds from sale of loans held for sale
1,584,367

 
788,585

Fair value adjustment of loans held for sale
(11,874
)
 
(3,053
)
Fair value adjustment of foreclosed loans transferred to other real estate owned
(490
)
 
—

Addition of originated mortgage servicing rights
(18,817
)
 
(13,494
)
Change in fair value of mortgage servicing rights
16,964

 
5,773

Net gain on sale of investment securities
(952
)
 
(1
)
Gain on sale of other real estate owned
(237
)
 
(363
)
Gain on early retirement of long-term debt
—

 
(2,000
)
Net deferred income tax benefit
(13,222
)
 
—

Share-based compensation expense
2,216

 
8

Cash used by changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable and other assets
(50,710
)
 
(9,897
)
(Increase) decrease in accrued interest receivable
(243
)
 
945

Increase in income taxes payable
10,096

 
—

Decrease in income taxes receivable
1,309

 
148

Increase (decrease) in accounts payable and other liabilities
18,187

 
(23,892
)
Net cash (used in) provided by operating activities
(246,896
)
 
62,447

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(223,483
)
 
(12,557
)
Proceeds from sale of investment securities
119,539

 
9,214

Principal repayments and maturities of investment securities
19,290

 
5,578

Proceeds from sale of other real estate owned
18,919

 
84,966

Mortgage servicing rights purchased from others
(59
)
 
(33
)
Capital expenditures related to other real estate owned
(63
)
 
(859
)
Origination of loans held for investment and principal repayments, net
38,883

 
114,454

Net property and equipment purchased
(4,778
)
 
(637
)
Net cash (used in) provided by investing activities
(31,752
)
 
200,126


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(in thousands)
Six Months Ended June 30,
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net decrease in deposits
$
(105,006
)
 
$
(136,087
)
Proceeds from Federal Home Loan Bank advances
525,521

 
35,796

Repayment of Federal Home Loan Bank advances
(517,850
)
 
(123,746
)
Proceeds from securities sold under agreements to repurchase
293,500

 
—

Repayment of securities sold under agreements to repurchase
(193,500
)
 
—

Repayment of long-term debt
—

 
(3,000
)
Proceeds from stock issuance, net
87,744

 
—

Net cash provided by (used in) financing activities
90,409

 
(227,037
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(188,239
)
 
35,536

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
263,302

 
72,639

End of period
$
75,063

 
$
108,175

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for -
 
 
 
Interest
$
11,081

 
$
17,456

Federal and state income taxes
$
3,450

 
$
8

Noncash activities -
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
$
27,807

 
$
31,284

Ginnie Mae loans recognized with the right to repurchase, net
$
2,516

 
$
1,215


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

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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 that serves consumers and businesses in the Pacific Northwest and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities and retail and business banking operations. 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 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 period 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. Actual results could differ from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

The information furnished in these unaudited interim statements reflects 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 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“2011 Annual Report on Form 10-K”).

Accounting Developments in 2012

ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, amends requirements for measuring fair value and for disclosing information about fair value. The Company adopted the amendments in this ASU effective January 1, 2012, which did not have a material effect on our consolidated financial statements.


NOTE 2–SIGNIFICANT RISKS AND UNCERTAINTIES:

Regulatory Agreements

On May 18, 2009, the Company entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist (the “Company Order”) with the Office of Thrift Supervision (the “OTS”). The Company Order most significantly provides that the Company shall not pay dividends and shall not incur, issue, renew, repurchase, make payments on (including interest), or rollover any debt, increase any current lines of credit, or guarantee the debt of any entity without prior approval of the Federal Reserve, which subsequently replaced the OTS as the primary regulator. The Company Order will remain in effect until terminated, modified, or suspended, by written notice of such action by the Federal Reserve. The Company Order, however, does not prohibit the Holding Company from transacting its normal business.

On May 8, 2009, HomeStreet Bank (the "Bank") entered into an agreement with its primary banking regulators, the Federal Deposit Insurance Corporation (“FDIC”), and the Washington State Department of Financial Institutions (“DFI”), pursuant to which we consented to the entry of an Order to Cease & Desist from certain allegedly unsafe and unsound banking practices (the “Bank Order”).

As a result of improvement in the Bank’s capital position, including the successful completion of our initial public offering and the subsequent contribution of $65.0 million of net proceeds to the Bank, and improvement in the Bank’s asset quality, management, earnings, liquidity and sensitivity to interest rates since the imposition of the Bank Order, on March 26, 2012, the FDIC and DFI terminated the Bank Order. In connection with this termination, we and those regulators have entered into a

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memorandum of understanding, which requires, among other things, that the Bank maintain a minimum Tier 1 leverage capital ratio of 9.0% and continue to reduce the level of adversely classified assets. The memorandum of understanding continues to prohibit the Bank from paying dividends without the regulators’ prior written consent.


NOTE 3–INVESTMENT SECURITIES AVAILABLE FOR SALE:

The amortized cost and fair value of investment securities available for sale at June 30, 2012 and December 31, 2011, are summarized as follows.
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
(in thousands)
 
 
 
 
 
 
 
June 30, 2012:
 
 
 
 
 
 
 
Mortgage backed:
 
 
 
 
 
 
 
Residential
$
47,963

 
$
312

 
$
(139
)
 
$
48,136

Commercial
13,872

 
730

 
—

 
14,602

Municipal bonds
124,900

 
2,385

 
(666
)
 
126,619

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
181,011

 
5,054

 
(33
)
 
186,032

Commercial
9,128

 
37

 
—

 
9,165

US Treasury
31,084

 
—

 
(28
)
 
31,056

 
$
407,958

 
$
8,518

 
$
(866
)
 
$
415,610

December 31, 2011:
 
 
 
 
 
 
 
Commercial mortgage backed
$
13,941

 
$
542

 
$
—

 
$
14,483

Municipal bonds
48,948

 
728

 
(92
)
 
49,584

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
220,418

 
3,119

 
(147
)
 
223,390

Commercial
10,081

 
—

 
(11
)
 
10,070

US Treasury
31,540

 
3

 
(23
)
 
31,520

 
$
324,928

 
$
4,392

 
$
(273
)
 
$
329,047


Mortgage-backed and collateralized mortgage obligations represent securities issued by Government Sponsored Enterprises (“GSEs”). Substantially all securities held are rated and considered at least investment grade, according to their credit rating by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”).


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Investment securities that were in an unrealized loss position at June 30, 2012 and December 31, 2011 are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.
 
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
June 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
Mortgage backed:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(139
)
 
$
4,498

 
$
—

 
$
—

 
$
(139
)
 
$
4,498

Municipal bonds
(635
)
 
45,513

 
(31
)
 
1,155

 
(666
)
 
46,668

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(33
)
 
9,705

 
—

 
—

 
(33
)
 
9,705

US Treasury
(28
)
 
29,551

 
—

 
—

 
(28
)
 
29,551

 
$
(835
)
 
$
89,267

 
$
(31
)
 
$
1,155

 
$
(866
)
 
$
90,422

December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
—

 
$
—

 
$
(92
)
 
$
1,095

 
$
(92
)
 
$
1,095

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
Residential
(147
)
 
37,807

 
—

 
—

 
(147
)
 
37,807

Commercial
(11
)
 
10,070

 
—

 
—

 
(11
)
 
10,070

US Treasury
(23
)
 
27,510

 
—

 
—

 
(23
)
 
27,510

 
$
(181
)
 
$
75,387

 
$
(92
)
 
$
1,095

 
$
(273
)
 
$
76,482


The Company has evaluated securities that have been 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 company- or industry-specific credit event. The Company anticipates full recovery of the amortized cost with respect to these securities at maturity or sooner in the event of a more favorable market interest rate environment and does not have the intent to sell these securities, nor is it more likely than not that the Company will be required to sell such securities.


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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 were determined assuming no 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 include adjustments to a tax equivalent basis.
 
At June 30,2012
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
4,498

 
1.42
%
 
$
43,638

 
1.90
%
 
$
48,136

 
1.86
%
Commercial
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
14,602

 
4.72
%
 
14,602

 
4.72
%
Municipal bonds
—

 
—
%
 
—

 
—
%
 
15,561

 
3.59
%
 
111,058

 
4.57
%
 
126,619

 
4.45
%
Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
186,032

 
2.80
%
 
186,032

 
2.80
%
Commercial
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
9,165

 
2.06
%
 
9,165

 
2.06
%
US Treasury Securities
4,060

 
0.21
%
 
26,996

 
0.24
%
 
—

 
—
%
 
—

 
—
%
 
31,056

 
0.24
%
Total available for sale
$
4,060

 
0.21
%
 
$
26,996

 
0.24
%
 
$
20,059

 
3.10
%
 
$
364,495

 
3.29
%
 
$
415,610

 
3.05
%
 
 
At December 31, 2012
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage backed
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
14,483

 
3.23
%
 
$
14,483

 
3.23
%
Municipal bonds
—

 
—
%
 
—

 
—
%
 
2,450

 
2.95
%
 
47,134

 
4.65
%
 
49,584

 
4.56
%
Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
223,390

 
2.70
%
 
223,390

 
2.70
%
Commercial
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
10,070

 
2.06
%
 
10,070

 
2.06
%
US Treasury
4,010

 
0.23
%
 
27,510

 
0.24
%
 
—

 
—
%
 
—

 
—
%
 
31,520

 
0.24
%
Total available for sale
$
4,010

 
0.23
%
 
$
27,510

 
0.24
%
 
$
2,450

 
2.95
%
 
$
295,077

 
3.02
%
 
$
329,047

 
2.75
%


13
Table of Contents

Sales of investment securities available for sale were as follows.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Proceeds
$
85,492

 
$
2,415

 
$
119,539

 
$
9,214

Gross gains
1,233

 
1

 
1,346

 
1

Gross losses
(322
)
 
—

 
(394
)
 
—


There were no securities pledged to secure advances from the Federal Home Loan Bank ("FHLB") at June 30, 2012 and December 31, 2011. At June 30, 2012 and December 31, 2011 there were $159.2 million and $22.5 million, respectively, of securities pledged to secure derivatives in a liability position and $115.3 million and $0, respectively, of securities pledged under repurchase agreements.

Tax-exempt interest income on securities available for sale totaling $1.0 million and $64 thousand for the three months ended June 30, 2012 and 2011, respectively, and $1.7 million and $131 thousand, for the six months ended June 30, 2012 and 2011, respectively, were recorded in the Company’s consolidated statements of operations.


NOTE 4–LOANS AND CREDIT QUALITY:

Loans held for investment consist of the following.
 
(in thousands)
At June 30,
2012
 
At December 31,
2012
Consumer loans
 
 
 
Single family residential
$
537,174

 
$
496,934

Home equity
147,587

 
158,936

 
684,761

 
655,870

Commercial loans
 
 
 
Commercial real estate
370,064

 
402,139

Multifamily residential
47,069

 
56,379

Construction/land development
83,797

 
173,405

Commercial business
79,980

 
59,831

 
580,910

 
691,754

 
1,265,671

 
1,347,624

Net deferred loan fees and costs
(3,508
)
 
(4,062
)
 
1,262,163

 
1,343,562

Allowance for loan losses
(26,910
)
 
(42,689
)
 
$
1,235,253

 
$
1,300,873



Loans are pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or repledge these loans, which totaled $443.8 million and $490.4 million at June 30, 2012 and December 31, 2011, respectively.

Loans held for investment are primarily secured by real estate located in the states of Washington, Oregon, Idaho and Hawaii.
Loan concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or similar types of loans extended to a diverse group of borrowers that would cause them to be similarly impacted by economic or other conditions. At June 30, 2012 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 31.0% and 22.3% respectively. At December 31, 2011 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 28.4%, 23.8% and 11.1% respectively. These loans were mostly located within the Puget Sound area, particularly within King County.

14
Table of Contents


Credit Quality

Management considers the level of allowance for credit losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of June 30, 2012. The allowance for credit losses is comprised of the allowance for loan losses as well as the allowance for unfunded credit commitments, which is reported as an other liability.

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected in the allowance for credit losses. Allowance levels are influenced by loan volumes, loan asset quality ratings (AQR) or delinquency status, historic loss experience and other conditions influencing loss expectations, such as economic conditions. The methodology for evaluating the adequacy of the allowance for loan losses has two basic elements: first, the identification of impaired loans and the measurement of impairment for each individual loan identified; and second, a method for estimating an allowance for all other loans.

For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 5, Loans and Credit Quality to the Consolidated Financial Statements within the 2011 Annual Report on Form 10-K.

For the three and six months ended June 30, 2012 and 2011, activity in the allowance for credit losses by loan portfolio segment and loan class is as follows.
 
 
Three Months Ended June 30, 2012
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
11,667

 
$
(1,251
)
 
$
433

 
$
2,016

 
$
12,865

Home equity
4,531

 
(1,150
)
 
212

 
1,258

 
4,851

 
16,198

 
(2,401
)
 
645

 
3,274

 
17,716

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,898

 
(1,691
)
 
128

 
1,008

 
4,343

Multifamily residential
346

 
—

 
—

 
577

 
923

Construction/land development
12,716

 
(7,223
)
 
514

 
(2,985
)
 
3,022

Commercial business
1,244

 
(323
)
 
74

 
126

 
1,121

 
19,204

 
(9,237
)
 
716

 
(1,274
)
 
9,409

Total allowance for credit losses
$
35,402

 
$
(11,638
)
 
$
1,361

 
$
2,000

 
$
27,125

 
 
Three Months Ended June 30, 2011
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
11,445

 
$
(2,708
)
 
$
—

 
$
1,681

 
$
10,418

Home equity
4,597

 
(1,468
)
 
18

 
1,523

 
4,670

 
16,042

 
(4,176
)
 
18

 
3,204

 
15,088

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
6,051

 
—

 
—

 
(1,976
)
 
4,075

Multifamily residential
842

 
—

 
—

 
(492
)
 
350

Construction/land development
36,751

 
(2,060
)
 
1,827

 
2,572

 
39,090

Commercial business
2,780

 
(319
)
 
3

 
(1,008
)
 
1,456

 
46,424

 
(2,379
)
 
1,830

 
(904
)
 
44,971

Total allowance for credit losses
$
62,466

 
$
(6,555
)
 
$
1,848

 
$
2,300

 
$
60,059



15
Table of Contents

 
Six Months Ended June 30, 2012
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
10,671

 
$
(2,526
)
 
$
433

 
$
4,287

 
$
12,865

Home equity
4,623

 
(2,499
)
 
277

 
2,450

 
4,851

 
15,294

 
(5,025
)
 
710

 
6,737

 
17,716

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,321

 
(1,717
)
 
128

 
1,611

 
4,343

Multifamily residential
335

 
—

 
—

 
588

 
923

Construction/land development
21,237

 
(12,035
)
 
642

 
(6,822
)
 
3,022

Commercial business
1,613

 
(464
)
 
86

 
(114
)
 
1,121

 
27,506

 
(14,216
)
 
856

 
(4,737
)
 
9,409

Total allowance for credit losses
$
42,800

 
$
(19,241
)
 
$
1,566

 
$
2,000

 
$
27,125


 
Six Months Ended June 30, 2011
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
11,977

 
$
(4,421
)
 
$
—

 
$
2,862

 
$
10,418

Home equity
4,495

 
(2,373
)
 
26

 
2,522

 
4,670

 
16,472

 
(6,794
)
 
26

 
5,384

 
15,088

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
10,060

 
(69
)
 
—

 
(5,916
)
 
4,075

Multifamily residential
1,795

 
—

 
—

 
(1,445
)
 
350

Construction/land development
33,478

 
(5,528
)
 
6,121

 
5,019

 
39,090

Commercial business
2,761

 
(736
)
 
173

 
(742
)
 
1,456

 
48,094

 
(6,333
)
 
6,294

 
(3,084
)
 
44,971

Total allowance for credit losses
$
64,566

 
$
(13,127
)
 
$
6,320

 
$
2,300

 
$
60,059


The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 
Total
 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 
Total
June 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family residential
$
9,875

 
$
2,990

 
$
12,865

 
$
466,600

 
$
70,574

 
$
537,174

Home equity
4,620

 
231

 
4,851

 
144,638

 
2,949

 
147,587

 
14,495

 
3,221

 
17,716

 
611,238

 
73,523

 
684,761

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,717

 
626

 
4,343

 
339,259

 
30,805

 
370,064

Multifamily residential
270

 
653

 
923

 
41,540

 
5,529

 
47,069

Construction/land development
2,439

 
583

 
3,022

 
66,549

 
17,248

 
83,797

Commercial business
832

 
289

 
1,121

 
78,839

 
1,141

 
79,980

 
7,258

 
2,151

 
9,409

 
526,187

 
54,723

 
580,910

Total
$
21,753

 
$
5,372

 
$
27,125

 
$
1,137,425

 
$
128,246

 
$
1,265,671

 

16
Table of Contents

(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 
Total
 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 
Total
December 31, 2011
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family residential
$
9,756

 
$
915

 
$
10,671

 
$
437,264

 
$
59,670

 
$
496,934

Home equity
4,111

 
512

 
4,623

 
155,997

 
2,939

 
158,936

 
13,867

 
1,427

 
15,294

 
593,261

 
62,609

 
655,870

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,051

 
270

 
4,321

 
366,914

 
35,225

 
402,139

Multifamily residential
320

 
15

 
335

 
47,933

 
8,446

 
56,379

Construction/land development
4,668

 
16,569

 
21,237

 
103,462

 
69,943

 
173,405

Commercial business
1,177

 
436

 
1,613

 
58,689

 
1,142

 
59,831

 
10,216

 
17,290

 
27,506

 
576,998

 
114,756

 
691,754

Total
$
24,083

 
$
18,717

 
$
42,800

 
$
1,170,259

 
$
177,365

 
$
1,347,624


The Company had 158 impaired relationships totaling $128.2 million at June 30, 2012 and 145 impaired relationships totaling $177.4 million at December 31, 2011. Impaired loans totaling $62.7 million and $82.5 million had a valuation allowance of $5.4 million and $18.7 million at June 30, 2012 and December 31, 2011, respectively. Interest on impaired loans, applied against loan principal or recognized as interest income, of $1.6 million and $1.1 million was recorded for cash payments received during the three months ended June 30, 2012 and 2011 respectively, and $3.0 million and $2.1 million was recorded for cash payments received during the six months ended June 30, 2012 and 2011 respectively.


17
Table of Contents

The following table presents impaired loans by loan portfolio segment and loan class as of June 30, 2012 and December 31, 2011.
 
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
June 30, 2012
 
 
 
 
 
With no related allowance recorded
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family residential
$
23,592

 
$
23,750

 
$
—

Home equity
1,806

 
1,846

 
—

 
25,398

 
25,596

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
21,269

 
24,103

 
—

Multifamily residential
2,776

 
3,000

 
—

Construction/land development
15,879

 
26,039

 
—

Commercial business
191

 
634

 
—

 
40,115

 
53,776

 
—

 
$
65,513

 
$
79,372

 
$
—

With an allowance recorded
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family residential
$
46,982

 
$
47,440

 
$
2,990

Home equity
1,143

 
1,293

 
231

 
48,125

 
48,733

 
3,221

Commercial loans
 
 
 
 
 
Commercial real estate
9,536

 
10,565

 
626