HMST-2012.9.30-10Q

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, 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  S    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  £    No  S
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
 
S
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  S
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. After giving effect to a two-for-one forward stock split of our common stock implemented on November 5, 2012, on October 31, 2012, there would have been 14,369,638 shares of no par value Common Stock outstanding.
 



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
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
(in thousands, except share data)
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $11,497 and $246,113)
$
22,051

 
$
263,302

Investment securities available for sale
414,050

 
329,047

Loans held for sale (includes $525,926 and $130,546 carried at fair value)
532,580

 
150,409

Loans held for investment (net of allowance for loan losses of $27,461 and $42,689)
1,268,703

 
1,300,873

Mortgage servicing rights (includes $73,787 and $70,169 carried at fair value)
81,512

 
77,281

Other real estate owned
17,003

 
38,572

Federal Home Loan Bank stock, at cost
36,697

 
37,027

Premises and equipment, net
13,060

 
6,569

Accounts receivable and other assets
122,285

 
61,877

 
$
2,507,941

 
$
2,264,957

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
1,981,814

 
$
2,009,755

Federal Home Loan Bank advances
131,597

 
57,919

Accounts payable and accrued expenses
93,413

 
49,019

Long-term debt
61,857

 
61,857

 
2,268,681

 
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 160,000,000, Issued and outstanding, 14,354,972 shares and 5,403,498 shares
511

 
511

Additional paid-in capital
89,264

 
31

Retained earnings
140,136

 
81,746

Accumulated other comprehensive income
9,349

 
4,119

 
239,260

 
86,407

 
$
2,507,941

 
$
2,264,957


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)
2012
 
2011
 
2012
 
2011
Interest income:
 
 
 
 
 
 
 
Loans
$
18,283

 
$
17,593

 
$
52,086

 
$
54,208

Investment securities available for sale
2,517

 
1,422

 
7,205

 
5,128

Other
24

 
117

 
216

 
274

 
20,824

 
19,132

 
59,507

 
59,610

Interest expense:
 
 
 
 
 
 
 
Deposits
3,908

 
5,848

 
12,985

 
19,427

Federal Home Loan Bank advances
297

 
855

 
1,506

 
3,122

Securities sold under agreements to repurchase
19

 
—

 
69

 
—

Long-term debt
305

 
458

 
1,041

 
1,586

Other
4

 
1

 
12

 
1

 
4,533

 
7,162

 
15,613

 
24,136

Net interest income
16,291

 
11,970

 
43,894

 
35,474

Provision for credit losses
5,500

 
1,000

 
7,500

 
3,300

Net interest income after provision for credit losses
10,791

 
10,970

 
36,394

 
32,174

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
64,390

 
15,766

 
138,386

 
29,702

Mortgage servicing income
506

 
18,532

 
15,470

 
32,093

Income from Windermere Mortgage Services Series LLC
1,188

 
902

 
3,748

 
1,380

(Loss) gain on debt extinguishment
—

 
—

 
(939
)
 
2,000

Depositor and other retail banking fees
756

 
778

 
2,262

 
2,313

Insurance commissions
192

 
103

 
550

 
724

Gain on sale of investment securities available for sale
397

 
642

 
1,349

 
643

Other
704

 
256

 
1,919

 
1,042

 
68,133

 
36,979

 
162,745

 
69,897

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
31,573

 
13,217

 
81,149

 
37,056

General and administrative
7,033

 
4,310

 
19,030

 
12,307

Legal
312

 
983

 
1,471

 
2,286

Consulting
1,069

 
270

 
1,746

 
633

Federal Deposit Insurance Corporation assessments
794

 
1,264

 
2,751

 
4,278

Occupancy
2,279

 
1,663

 
6,160

 
5,031

Information services
2,411

 
1,509

 
6,129

 
4,466

Other real estate owned expense
348

 
9,113

 
8,916

 
26,533

 
45,819

 
32,329

 
127,352

 
92,590

Income before income taxes
33,105

 
15,620

 
71,787

 
9,481

Income tax expense
11,762

 
362

 
13,397

 
388

NET INCOME
$
21,343

 
$
15,258

 
$
58,390

 
$
9,093

Basic income per share
$
1.49

 
$
2.82

 
$
4.51

 
$
1.68

Diluted income per share
$
1.45

 
$
2.66

 
$
4.35

 
$
1.62

Basic weighted average number of shares outstanding
14,335,950

 
5,403,498

 
12,960,212

 
5,403,498

Diluted weighted average number of shares outstanding
14,699,032

 
5,745,432

 
13,414,476

 
5,608,104


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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Net income
$
21,343

 
$
15,258

 
$
58,390

 
$
9,093

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on securities:
 
 
 
 
 
 
 
Unrealized holding gain arising during the period (net of tax expense of $1,564 and $3,135 for the three and nine months ended September 30, 2012 and $0 for the three and nine months ended September 30, 2011)
3,525

 
7,405

 
6,107

 
13,085

Reclassification adjustment for net gain included in net income (net of tax expense of $139 and $472 for the three and nine months ended September 30, 2012 and $0 for the three and nine months ended September 30, 2011)
(258
)
 
(642
)
 
(877
)
 
(643
)
Other comprehensive income
3,267

 
6,763

 
5,230

 
12,442

Comprehensive income
$
24,610

 
$
22,021

 
$
63,620

 
$
21,535


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, 2011
5,403,498

 
$
511

 
$
16

 
$
65,627

 
$
(7,365
)
 
$
58,789

Net income
—

 
—

 
—

 
9,093

 
—

 
9,093

Share-based compensation expense
—

 
—

 
12

 
—

 
—

 
12

Other comprehensive income
—

 
—

 
—

 
—

 
12,442

 
12,442

Balance, September 30, 2011
5,403,498

 
$
511

 
$
28

 
$
74,720

 
$
5,077

 
$
80,336

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2012
5,403,498

 
$
511

 
$
31

 
$
81,746

 
$
4,119

 
$
86,407

Net income
—

 
—

 
—

 
58,390

 
—

 
58,390

Share-based compensation expense
—

 
—

 
2,415

 
—

 
—

 
2,415

Common stock issued
8,951,474

 
—

 
86,818

 
—

 
—

 
86,818

Other comprehensive income
—

 
—

 
—

 
—

 
5,230

 
5,230

Balance, September 30, 2012
14,354,972

 
$
511

 
$
89,264

 
$
140,136

 
$
9,349

 
$
239,260


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
(in thousands)
Nine Months Ended September 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
58,390

 
$
9,093

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Amortization/accretion of discount/premium on loans held for investment, net of additions
(919
)
 
(536
)
Amortization of investment securities
3,877

 
1,988

Amortization of intangibles
77

 
99

Amortization of mortgage servicing rights
1,551

 
1,121

Provision for credit losses
7,500

 
3,300

Provision for losses on other real estate owned
10,955

 
23,515

Depreciation and amortization on premises and equipment
1,864

 
1,469

Originations of loans held for sale
(3,433,925
)
 
(1,201,835
)
Proceeds from sale of loans held for sale
3,075,401

 
1,196,931

Fair value adjustment of loans held for sale
(23,647
)
 
(9,085
)
Fair value adjustment of foreclosed loans transferred to other real estate owned
(489
)
 
—

Addition of originated mortgage servicing rights
(33,606
)
 
(19,825
)
Change in fair value of mortgage servicing rights
27,889

 
31,914

Net gain on sale of investment securities
(1,349
)
 
(643
)
Gain on sale of other real estate owned
(2,764
)
 
(326
)
Gain on early retirement of long-term debt
—

 
(2,000
)
Net deferred income tax benefit
(11,494
)
 
(16
)
Share-based compensation expense
2,415

 
12

Cash used by changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable and other assets
(55,462
)
 
(23,232
)
Increase (decrease) in accounts payable and other liabilities
37,601

 
(15,067
)
Net cash used in operating activities
(336,135
)
 
(3,123
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(260,566
)
 
(204,502
)
Proceeds from sale of investment securities
159,174

 
155,924

Principal repayments and maturities of investment securities
28,150

 
33,738

Proceeds from sale of other real estate owned
47,392

 
118,744

Mortgage servicing rights purchased from others
(65
)
 
(60
)
Capital expenditures related to other real estate owned
(4,643
)
 
(841
)
Origination of loans held for investment and principal repayments, net
(62
)
 
140,922

Property and equipment purchased, net
(8,355
)
 
(1,297
)
Net cash (used in) provided by investing activities
(38,975
)
 
242,628


8


(in thousands)
Nine Months Ended September 30,
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Decrease in deposits, net
$
(27,941
)
 
$
(72,765
)
Proceeds from Federal Home Loan Bank advances
4,975,490

 
36,398

Repayment of Federal Home Loan Bank advances
(4,901,811
)
 
(134,348
)
Proceeds from securities sold under agreements to repurchase
393,500

 
—

Repayment of securities sold under agreements to repurchase
(393,500
)
 
—

Repurchase of Federal Home Loan Bank stock
330

 
—

Repayment of long-term debt
—

 
(3,000
)
Proceeds from stock issuance, net
87,791

 
—

Net cash provided by (used in) financing activities
133,859

 
(173,715
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(241,251
)
 
65,790

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
263,302

 
72,639

End of period
$
22,051

 
$
138,429

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for -
 
 
 
Interest
$
16,642

 
$
24,857

Federal and state income taxes
11,746

 
11

Noncash activities -
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
37,305

 
35,005

Loans originated to finance the sales of other real estate owned
—

 
750

Loans transferred from held for investment to held for sale
9,966

 
—

Ginnie Mae loans recognized with the right to repurchase, net
3,330

 
390


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 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”).

Shares outstanding and per share information presented in this Form 10-Q have been adjusted to reflect the 2-for-1 forward stock splits effective on November 5, 2012 and on March 6, 2012, as well as the 1-for-2.5 reverse stock split effective on July 19, 2011.

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”).


10


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 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 September 30, 2012 and December 31, 2011, are summarized as follows.
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
(in thousands)
 
 
 
 
 
 
 
September 30, 2012:
 
 
 
 
 
 
 
Mortgage backed securities:
 
 
 
 
 
 
 
Residential
$
62,782

 
$
704

 
$
(120
)
 
$
63,366

Commercial
13,813

 
719

 
—

 
14,532

Municipal bonds (1)
122,845

 
5,780

 
(30
)
 
128,595

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
161,950

 
5,806

 
(243
)
 
167,513

Commercial
9,055

 
54

 
—

 
9,109

US Treasury securities
30,927

 
12

 
(4
)
 
30,935

 
$
401,372

 
$
13,075

 
$
(397
)
 
$
414,050

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

 
$
542

 
$
—

 
$
14,483

Municipal bonds (1)
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 securities
31,540

 
3

 
(23
)
 
31,520

 
$
324,928

 
$
4,392

 
$
(273
)
 
$
329,047


(1)
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, 2012 and December 31, 2011, of the bonds that were rated, no bonds were rated below “A.”

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”).


11


Investment securities that were in an unrealized loss position at September 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
September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
Mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(120
)
 
$
11,516

 
$
—

 
$
—

 
$
(120
)
 
$
11,516

Municipal bonds
(30
)
 
3,634

 
—

 
—

 
(30
)
 
3,634

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(243
)
 
20,208

 
—

 
—

 
(243
)
 
20,208

US Treasury securities
(1
)
 
1,603

 
(3
)
 
10,338

 
(4
)
 
11,941

 
$
(394
)
 
$
36,961

 
$
(3
)
 
$
10,338

 
$
(397
)
 
$
47,299

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 securities
(23
)
 
27,510

 
—

 
—

 
(23
)
 
27,510

 
$
(181
)
 
$
75,387

 
$
(92
)
 
$
1,095

 
$
(273
)
 
$
76,482


The Company has evaluated securities 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 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.


12


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 September 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
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
63,366

 
1.97
%
 
$
63,366

 
1.97
%
Commercial
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
14,532

 
3.54
%
 
14,532

 
3.54
%
Municipal bonds
—

 
—
%
 
—

 
—
%
 
15,783

 
3.58
%
 
112,812

 
4.59
%
 
128,595

 
4.46
%
Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
167,513

 
2.81
%
 
167,513

 
2.81
%
Commercial
—

 
—
%
 
—

 
—
%
 
—

 
—
%
 
9,109

 
2.06
%
 
9,109

 
2.06
%
U.S. Treasury securities
4,160

 
0.18
%
 
26,775

 
0.24
%
 
—

 
—
%
 
—

 
—
%
 
30,935

 
0.23
%
Total available for sale
$
4,160

 
0.18
%
 
$
26,775

 
0.24
%
 
$
15,783

 
3.58
%
 
$
367,332

 
3.22
%
 
$
414,050

 
3.01
%
 
 
At December 31, 2011
 
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 securities
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
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
%
U.S. 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


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Proceeds
$
39,635

 
$
146,710

 
$
159,174

 
$
155,924

Gross gains
434

 
642

 
1,780

 
643

Gross losses
(37
)
 
—

 
(431
)
 
—


There were no securities pledged to secure advances from the Federal Home Loan Bank ("FHLB") at September 30, 2012 and December 31, 2011. At September 30, 2012 and December 31, 2011 there were $19.3 million and $22.5 million, respectively, of securities pledged to secure derivatives in a liability position.

Tax-exempt interest income on securities available for sale totaling $1.3 million and $41 thousand for the three months ended September 30, 2012 and 2011, respectively, and $3.0 million and $172 thousand, for the nine months ended September 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 September 30,
2012
 
At December 31,
2011
Consumer loans
 
 
 
Single family residential
$
602,164

 
$
496,934

Home equity
141,343

 
158,936

 
743,507

 
655,870

Commercial loans
 
 
 
Commercial real estate
360,919

 
402,139

Multifamily residential
36,912

 
56,379

Construction/land development
77,912

 
173,405

Commercial business
80,056

 
59,831

 
555,799

 
691,754

 
1,299,306

 
1,347,624

Net deferred loan fees and costs
(3,142
)
 
(4,062
)
 
1,296,164

 
1,343,562

Allowance for loan losses
(27,461
)
 
(42,689
)
 
$
1,268,703

 
$
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 $428.5 million and $490.4 million at September 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 September 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 34.5% and 20.9% 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


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 September 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 in accounts payable and accrued expenses on the consolidated statement of financial condition.

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 nine months ended September 30, 2012 and 2011, activity in the allowance for credit losses by loan portfolio segment and loan class is as follows.
 
 
Three Months Ended September 30, 2012
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
12,865

 
$
(1,363
)
 
$
22

 
$
2,028

 
$
13,552

Home equity
4,851

 
(1,078
)
 
121

 
1,139

 
5,033

 
17,716

 
(2,441
)
 
143

 
3,167

 
18,585

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,343

 
(1,757
)
 
130

 
1,020

 
3,736

Multifamily residential
923

 
—

 
—

 
(151
)
 
772

Construction/land development
3,022

 
(1,823
)
 
193

 
1,472

 
2,864

Commercial business
1,121

 
(74
)
 
631

 
(8
)
 
1,670

 
9,409

 
(3,654
)
 
954

 
2,333

 
9,042

Total allowance for credit losses
$
27,125

 
$
(6,095
)
 
$
1,097

 
$
5,500

 
$
27,627

 
 
Three Months Ended September 30, 2011
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
Consumer loans
 
 
 
 
 
 
 
 
 
Single family residential
$
10,418

 
$
(2,160
)
 
$
163

 
$
2,805

 
$
11,226

Home equity
4,670

 
(1,199
)
 
84

 
1,687

 
5,242

 
15,088

 
(3,359
)
 
247

 
4,492

 
16,468

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,075

 
(509
)
 
—

 
156

 
3,722

Multifamily residential
350

 
—

 
—

 
7

 
357

Construction/land development
39,090

 
(3,979
)
 
5

 
(3,773
)
 
31,343

Commercial business
1,456

 
(113
)
 
35

 
118

 
1,496

 
44,971

 
(4,601
)
 
40

 
(3,492
)
 
36,918

Total allowance for credit losses
$
60,059

 
$
(7,960
)
 
$
287

 
$
1,000

 
$
53,386



15


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

 
$
(3,889
)
 
$
455

 
$
6,315

 
$
13,552

Home equity
4,623

 
(3,577
)
 
398

 
3,589

 
5,033

 
15,294

 
(7,466
)
 
853

 
9,904

 
18,585

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,321

 
(3,474
)
 
258

 
2,631

 
3,736

Multifamily residential
335

 
—

 
—

 
437

 
772

Construction/land development
21,237

 
(13,858
)
 
835

 
(5,350
)
 
2,864

Commercial business
1,613

 
(538
)
 
717

 
(122
)
 
1,670

 
27,506

 
(17,870
)
 
1,810

 
(2,404
)
 
9,042

Total allowance for credit losses
$
42,800

 
$
(25,336
)
 
$
2,663

 
$
7,500

 
$
27,627


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

 
$
(6,329
)
 
$
163

 
$
5,415

 
$
11,226

Home equity
4,495

 
(3,572
)
 
110

 
4,209

 
5,242

 
16,472

 
(9,901
)
 
273

 
9,624

 
16,468

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
10,060

 
(578
)
 
—

 
(5,760
)
 
3,722

Multifamily residential
1,795

 
—

 
—

 
(1,438
)
 
357

Construction/land development
33,478

 
(9,759
)
 
6,126

 
1,498

 
31,343

Commercial business
2,761

 
(849
)
 
208

 
(624
)
 
1,496

 
48,094

 
(11,186
)
 
6,334

 
(6,324
)
 
36,918

Total allowance for credit losses
$
64,566

 
$
(21,087
)
 
$
6,607

 
$
3,300

 
$
53,386


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
September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family residential
$
11,134

 
$
2,418

 
$
13,552

 
$
533,901

 
$
68,263

 
$
602,164

Home equity
4,989

 
44

 
5,033

 
138,574

 
2,769

 
141,343

 
16,123

 
2,462

 
18,585

 
672,475

 
71,032

 
743,507

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,320

 
416

 
3,736

 
328,194

 
32,725

 
360,919

Multifamily residential
224

 
548

 
772

 
30,882

 
6,030

 
36,912

Construction/land development
1,373

 
1,491

 
2,864

 
56,766

 
21,146

 
77,912

Commercial business
632

 
1,038

 
1,670

 
77,612

 
2,444

 
80,056

 
5,549

 
3,493

 
9,042

 
493,454

 
62,345

 
555,799

Total
$
21,672

 
$
5,955

 
$
27,627

 
$
1,165,929

 
$
133,377

 
$
1,299,306

 

16


(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 163 impaired relationships totaling $133.4 million at September 30, 2012 and 145 impaired relationships totaling $177.4 million at December 31, 2011. Impaired loans totaling $72.2 million and $82.5 million had a valuation allowance of $6.0 million and $18.7 million at September 30, 2012 and December 31, 2011, respectively. Interest on impaired loans, applied against loan principal or recognized as interest income, of $1.3 million and $1.1 million was recorded for cash payments received during the three months ended September 30, 2012 and 2011 respectively, and $4.3 million and $2.1 million was recorded for cash payments received during the nine months ended September 30, 2012 and 2011 respectively.


17


The following table presents impaired loans by loan portfolio segment and loan class as of September 30, 2012 and December 31, 2011.
 
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
September 30, 2012
 
 
 
 
 
With no related allowance recorded
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family residential
$
18,513

 
$
19,273

 
$
—

Home equity
1,766

 
1,811

 
—

 
20,279

 
21,084

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
24,115

 
25,282

 
—

Multifamily residential
3,284

 
3,508

 
—

Construction/land development
13,026

 
22,901

 
—

Commercial business
459

 
984

 
—

 
40,884

 
52,675

 
—

 
$
61,163

 
$
73,759

 
$
—

With an allowance recorded
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family residential
$
49,750

 
$
50,241

 
$
2,418

Home equity
1,003

 
1,153

 
44

 
50,753

 
51,394

 
2,462

Commercial loans
 
 
 
 
 
Commercial real estate
8,610

 
10,740

 
416

Multifamily residential
2,746

 
2,923

 
548

Construction/land development
8,120

 
8,204

 
1,491

Commercial business
1,985