HMST-2013.3.31-10Q

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: March 31, 2013
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
The number of outstanding shares of the registrant's common stock as of April 30, 2013 was 14,399,992.
 



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)
March 31,
2013
 
December 31,
2012
 
 
 
 
ASSETS
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $7,183 and $12,414)
$
18,709

 
$
25,285

Investment securities available for sale
415,238

 
416,329

Loans held for sale (includes $419,106 and $600,305 carried at fair value)
430,857

 
620,799

Loans held for investment (net of allowance for loan losses of $28,405 and $27,561)
1,358,982

 
1,308,974

Mortgage servicing rights (includes $102,678 and $87,396 carried at fair value)
111,828

 
95,493

Other real estate owned
21,664

 
23,941

Federal Home Loan Bank stock, at cost
36,037

 
36,367

Premises and equipment, net
16,893

 
15,232

Accounts receivable and other assets
98,043

 
88,810

Total assets
$
2,508,251

 
$
2,631,230

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
1,934,704

 
$
1,976,835

Federal Home Loan Bank advances
183,590

 
259,090

Accounts payable and other liabilities
57,695

 
69,686

Long-term debt
61,857

 
61,857

Total liabilities
2,237,846

 
2,367,468

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, 14,400,206 shares and 14,382,638 shares
511

 
511

Additional paid-in capital
90,687

 
90,189

Retained earnings
173,229

 
163,872

Accumulated other comprehensive income
5,978

 
9,190

Total shareholders' equity
270,405

 
263,762

Total liabilities and shareholders' equity
$
2,508,251

 
$
2,631,230


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

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands, except share data)
 
2013
 
2012
 
 
 
 
 
Interest income:
 
 
 
 
Loans
 
$
18,049

 
$
16,481

Investment securities available for sale
 
2,659

 
2,238

Other
 
30

 
137

 
 
20,738

 
18,856

Interest expense:
 
 
 
 
Deposits
 
3,489

 
4,879

Federal Home Loan Bank advances
 
292

 
675

Long-term debt
 
1,717

 
465

Other
 
5

 
4

 
 
5,503

 
6,023

Net interest income
 
15,235

 
12,833

Provision for credit losses
 
2,000

 
—

Net interest income after provision for credit losses
 
13,235

 
12,833

Noninterest income:
 
 
 
 
Net gain on mortgage loan origination and sale activities
 
53,913

 
29,496

Mortgage servicing income
 
3,072

 
7,873

Income from Windermere Mortgage Services Series LLC
 
620

 
1,166

Depositor and other retail banking fees
 
721

 
735

Insurance commissions
 
180

 
182

(Loss) gain on sale of investment securities available for sale (includes $(31) and $41 of unrealized (loss) gain reclassified from accumulated other comprehensive income)
 
(48
)
 
41

Other
 
443

 
604

 
 
58,901

 
40,097

Noninterest expense:
 
 
 
 
Salaries and related costs
 
35,062

 
21,351

General and administrative
 
10,888

 
5,273

Legal
 
611

 
435

Consulting
 
696

 
355

Federal Deposit Insurance Corporation assessments
 
567

 
1,240

Occupancy
 
2,802

 
1,790

Information services
 
2,996

 
1,723

Other real estate owned expense
 
2,135

 
2,520

 
 
55,757

 
34,687

Income before income taxes
 
16,379

 
18,243

Income tax expense (benefit) (includes $(17) and $0 from reclassification items)
 
5,439

 
(1,716
)
NET INCOME
 
$
10,940

 
$
19,959

Basic income per share
 
$
0.76

 
$
1.94

Diluted income per share
 
$
0.74

 
$
1.86

Basic weighted average number of shares outstanding
 
14,359,691

 
10,292,566

Diluted weighted average number of shares outstanding
 
14,804,129

 
10,720,330


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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Net income
$
10,940

 
$
19,959

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized (loss) gain on securities:
 
 
 
Unrealized holding loss arising during the period (net of tax benefit of $1,746 and $0 for the three months ended March 31, 2013 and 2012)
(3,243
)
 
(910
)
Reclassification adjustment included in net income (net of tax (benefit) expense of $(17) and $0 for the three months ended March 31, 2013 and 2012)
31

 
(41
)
Other comprehensive loss
(3,212
)
 
(951
)
Comprehensive income
$
7,728

 
$
19,008


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, 2012
5,403,498

 
$
511

 
$
31

 
$
81,746

 
$
4,119

 
$
86,407

Net income
—

 
—

 
—

 
19,959

 
—

 
19,959

Share-based compensation
—

 
—

 
334

 
—

 
—

 
334

Common stock issued
8,921,716

 
—

 
86,390

 
—

 
—

 
86,390

Other comprehensive loss
—

 
—

 
—

 
—

 
(951
)
 
(951
)
Balance, March 31, 2012
14,325,214

 
$
511

 
$
86,755

 
$
101,705

 
$
3,168

 
$
192,139

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2013
14,382,638

 
$
511

 
$
90,189

 
$
163,872

 
$
9,190

 
$
263,762

Net income
—

 
—

 
—

 
10,940

 
—

 
10,940

Dividends declared
—

 
—

 
—

 
(1,583
)
 
—

 
(1,583
)
Share-based compensation
—

 
—

 
456

 
—

 
—

 
456

Common stock issued
17,568

 
—

 
42

 
—

 
—

 
42

Other comprehensive loss
—

 
—

 
—

 
—

 
(3,212
)
 
(3,212
)
Balance, March 31, 2013
14,400,206

 
$
511

 
$
90,687

 
$
173,229

 
$
5,978

 
$
270,405


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
10,940

 
$
19,959

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
(344
)
 
(172
)
Amortization/accretion of discount/premium on investment securities
1,331

 
1,192

Amortization of intangibles
10

 
27

Amortization of mortgage servicing rights
490

 
491

Provision for credit losses
2,000

 
—

Provision for losses on other real estate owned
638

 
2,754

Depreciation and amortization on premises and equipment
1,014

 
529

Fair value adjustment of loans held for sale
13,034

 
(3,804
)
Fair value adjustment of foreclosed loans transferred to other real estate owned
—

 
(490
)
Origination of mortgage servicing rights
(18,349
)
 
(7,522
)
Change in fair value of mortgage servicing rights
1,528

 
(2,441
)
Net loss (gain) on sale of investment securities
48

 
(41
)
Gain on sale of other real estate owned
(108
)
 
(100
)
Net deferred income tax expense (benefit)
1,374

 
(3,972
)
Share-based compensation expense
343

 
334

Origination of loans held for sale
(1,431,625
)
 
(698,851
)
Proceeds from sale of loans held for sale
1,608,533

 
561,196

Cash used by changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable and other assets
(3,405
)
 
(16,737
)
(Decrease) increase in accounts payable and other liabilities
(19,652
)
 
4,838

Net cash provided by (used in) operating activities
167,800

 
(142,810
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(29,013
)
 
(158,143
)
Proceeds from sale of investment securities
15,754

 
34,047

Principal repayments and maturities of investment securities
8,029

 
4,843

Proceeds from sale of other real estate owned
2,225

 
8,978

Mortgage servicing rights purchased from others
(4
)
 
(48
)
Capital expenditures related to other real estate owned
(22
)
 
(52
)
Origination of loans held for investment and principal repayments, net
(51,524
)
 
5,208

Property and equipment purchased
(2,675
)
 
(994
)
Net cash used in investing activities
(57,230
)
 
(106,161
)

8


 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Decrease in deposits, net
$
(42,131
)
 
$
(9,122
)
Proceeds from Federal Home Loan Bank advances
1,569,042

 
—

Repayment of Federal Home Loan Bank advances
(1,644,542
)
 
—

Proceeds from Federal Home Loan Bank stock repurchase
330

 
—

Proceeds from stock issuance, net
42

 
87,744

Excess tax benefits related to stock options
113

 
—

Net cash (used in) provided by financing activities
(117,146
)
 
78,622

NET DECREASE IN CASH AND CASH EQUIVALENTS
(6,576
)
 
(170,349
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
25,285

 
263,302

End of period
$
18,709

 
$
92,953

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
17,880

 
$
6,024

Federal and state income taxes
5,442

 
—

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
3,303

 
3,458

Ginnie Mae loans recognized with the right to repurchase, net
$
3,132

 
$
3,092


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 primarily in the Pacific Northwest and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and consumer and commercial 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 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.

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, 2012, filed with the Securities and Exchange Commission (“2012 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.

NOTE 2–SIGNIFICANT RISKS AND UNCERTAINTIES:

Regulatory Agreements

Homestreet, Inc. received notification from the Federal Reserve Bank of San Francisco that the Cease and Desist Order, dated May 18, 2009 issued by the Office of Thrift Supervision, had been terminated effective March 26, 2013.

On December 27, 2012, the Bank had been notified by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“WDFI”) that the Bank had taken appropriate corrective actions to address the memorandum of understanding ("MOU") in place since March 26, 2012, and consequently the Bank's MOU was terminated effective December 27, 2012. The Bank is no longer considered a “troubled institution” and is considered “well-capitalized” within the meaning of the FDIC's prompt corrective action rules.



10


NOTE 3–INVESTMENT SECURITIES AVAILABLE FOR SALE:

The following tables set forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At March 31, 2013
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
69,707

 
$
223

 
$
(482
)
 
$
69,448

Commercial
13,653

 
754

 
—

 
14,407

Municipal bonds (1)
126,841

 
4,405

 
(199
)
 
131,047

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
147,296

 
3,922

 
(1,105
)
 
150,113

Commercial
19,777

 
81

 
(63
)
 
19,795

U.S. Treasury securities
30,416

 
12

 
—

 
30,428

 
$
407,690

 
$
9,397

 
$
(1,849
)
 
$
415,238


 
At December 31, 2012
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
62,847

 
$
223

 
$
(217
)
 
$
62,853

Commercial
13,720

 
660

 
—

 
14,380

Municipal bonds (1)
123,695

 
5,574

 
(94
)
 
129,175

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
163,981

 
6,333

 
(115
)
 
170,199

Commercial
8,983

 
60

 
—

 
9,043

U.S. Treasury securities
30,670

 
11

 
(2
)
 
30,679

 
$
403,896

 
$
12,861

 
$
(428
)
 
$
416,329


(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 March 31, 2013 and December 31, 2012, substantially all bonds were rated; no bonds were rated below “A.”

Mortgage-backed securities and collateralized mortgage obligations represent securities issued by government sponsored entities ("GSEs"). Each of the mortgage-backed securities ("MBS") and the collateralized mortgage obligations ("CMOs") in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. 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”).

Investment securities 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.


11


 
At March 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
$
(482
)
 
$
37,896

 
$
—

 
$
—

 
$
(482
)
 
$
37,896

Municipal bonds
(199
)
 
20,667

 
—

 
—

 
(199
)
 
20,667

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(1,105
)
 
55,494

 
—

 
—

 
(1,105
)
 
55,494

Commercial
(63
)
 
12,176

 
—

 
—

 
(63
)
 
12,176

 
$
(1,849
)
 
$
126,233

 
$
—

 
$
—

 
$
(1,849
)
 
$
126,233


 
At December 31, 2012
 
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
$
(217
)
 
$
18,121

 
$
—

 
$
—

 
$
(217
)
 
$
18,121

Municipal bonds
(94
)
 
4,212

 
—

 
—

 
(94
)
 
4,212

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 

 

Residential
(115
)
 
13,883

 
—

 
—

 
(115
)
 
13,883

U.S. Treasury securities
—

 
—

 
(2
)
 
10,238

 
(2
)
 
10,238

 
$
(426
)
 
$
36,216

 
$
(2
)
 
$
10,238

 
$
(428
)
 
$
46,454



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 of these securities at maturity or sooner in the event of a more favorable market interest rate environment and does not intend to sell nor expect that it will be required to sell such securities before recovery of their amortized cost basis.


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 as presented exclude the effect of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis.

 
At March 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
69,448

 
2.44
%
 
$
69,448

 
2.44
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
14,407

 
3.86

 
14,407

 
3.86

Municipal bonds
—

 
—

 
—

 
—

 
17,575

 
3.56

 
113,472

 
4.60

 
131,047

 
4.46

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
—

 
—

 
150,113

 
2.61

 
150,113

 
2.61

Commercial
—

 
—

 
—

 
—

 
5,615

 
1.88

 
14,180

 
2.35

 
19,795

 
2.22

U.S. Treasury securities
30,428

 
0.23

 
—

 
—

 
—

 
—

 
—

 
—

 
30,428

 
0.23

Total available for sale
$
30,428

 
0.23
%
 
$
—

 
—
%
 
$
23,190

 
3.16
%
 
$
361,620

 
3.24
%
 
$
415,238

 
3.01
%
 
 
At December 31, 2012
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
62,853

 
2.81
%
 
$
62,853

 
2.81
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
14,380

 
4.03

 
14,380

 
4.03

Municipal bonds
—

 
—

 
—

 
—

 
15,673

 
3.64

 
113,502

 
4.66

 
129,175

 
4.53

Collateralized mortgage obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
—

 
—

 
170,199

 
2.64

 
170,199

 
2.64

Commercial
—

 
—

 
—

 
—

 
—

 
—

 
9,043

 
2.06

 
9,043

 
2.06

U.S. Treasury
30,679

 
0.23

 
—

 
—

 
—

 
—

 
—

 
—

 
30,679

 
0.23

Total available for sale
$
30,679

 
0.23
%
 
$
—

 
—
%
 
$
15,673

 
3.64
%
 
$
369,977

 
3.33
%
 
$
416,329

 
3.11
%


13


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended March 31,
(in thousands)
2013
 
2012
 
 
 
 
Proceeds
$
15,754

 
$
34,047

Gross gains
4

 
113

Gross losses
(52
)
 
(72
)

There were no investment securities pledged to secure advances from the Federal Home Loan Bank ("FHLB") at March 31, 2013 and $51.9 million in securities pledged to secure advances from the FHLB at December 31, 2012. At March 31, 2013 and December 31, 2012 there were $18.5 million and $18.6 million, respectively, of securities pledged to secure derivatives in a liability position.

Tax-exempt interest income on securities available for sale of $1.3 million and $700 thousand for the three months ended March 31, 2013 and 2012, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies and Note 5, Loans and Credit Quality to the Company's 2012 Annual Report on Form 10-K.

Loans held for investment consist of the following.
 
(in thousands)
At March 31,
2013
 
At December 31,
2012
 
 
 
 
Consumer loans
 
 
 
Single family
$
730,553

 
$
673,865

Home equity
132,537

 
136,746

 
863,090

 
810,611

Commercial loans
 
 
 
Commercial real estate
387,819

 
361,879

Multifamily
21,859

 
17,012

Construction/land development
43,600

 
71,033

Commercial business
73,851

 
79,576

 
527,129

 
529,500

 
1,390,219

 
1,340,111

Net deferred loan fees and discounts
(2,832
)
 
(3,576
)
 
1,387,387

 
1,336,535

Allowance for loan losses
(28,405
)
 
(27,561
)
 
$
1,358,982

 
$
1,308,974


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, which totaled $361.7 million and $469.8 million at March 31, 2013 and December 31, 2012, respectively, 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.


14


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 March 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 42.6% and 23.2% respectively. At December 31, 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 40.4% and 22.5% of the total portfolio, respectively. These loans were mostly located within the Puget Sound area, 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 March 31, 2013. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments which 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 the 2012 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.

 
 
Three Months Ended March 31,
(in thousands)
 
2013
 
2012
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
Beginning balance
 
$
27,751

 
$
42,800

Provision for credit losses
 
2,000

 
—

(Charge-offs), net of recoveries
 
(1,157
)
 
(7,398
)
Ending balance
 
$
28,594

 
$
35,402

Components:
 
 
 
 
Allowance for loan losses
 
$
28,405

 
$
35,204

Allowance for unfunded commitments
 
189

 
198

Allowance for credit losses
 
$
28,594

 
$
35,402



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

 
Three Months Ended March 31, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
13,388

 
$
(721
)
 
$
75

 
$
1,736

 
$
14,478

Home equity
4,648

 
(839
)
 
97

 
802

 
4,708

 
18,036

 
(1,560
)
 
172

 
2,538

 
19,186

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,312

 
197

 
—

 
449

 
5,958

Multifamily
622

 
—

 
—

 
13

 
635

Construction/land development
1,580

 
(148
)
 
70

 
(608
)
 
894

Commercial business
2,201

 
—

 
112

 
(392
)
 
1,921

 
9,715

 
49

 
182

 
(538
)
 
9,408

Total allowance for credit losses
$
27,751

 
$
(1,511
)
 
$
354

 
$
2,000

 
$
28,594

 

15


 
Three Months Ended March 31, 2012
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
Balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
10,671

 
$
(1,275
)
 
$
—

 
$
2,271

 
$
11,667

Home equity
4,623

 
(1,349
)
 
65

 
1,192

 
4,531

 
15,294

 
(2,624
)
 
65

 
3,463

 
16,198

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,321

 
(26
)
 
—

 
603

 
4,898

Multifamily
335

 
—

 
—

 
11

 
346

Construction/land development
21,237

 
(4,812
)
 
128

 
(3,837
)
 
12,716

Commercial business
1,613

 
(141
)
 
12

 
(240
)
 
1,244

 
27,506

 
(4,979
)
 
140

 
(3,463
)
 
19,204

Total allowance for credit losses
$
42,800

 
$
(7,603
)
 
$
205

 
$
—

 
$
35,402


The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
 
At March 31, 2013
(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
$
12,073

 
$
2,405

 
$
14,478

 
$
652,570

 
$
77,983

 
$
730,553

Home equity
4,607

 
101

 
4,708

 
129,067

 
3,470

 
132,537

 
16,680

 
2,506

 
19,186

 
781,637

 
81,453

 
863,090

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,645

 
1,313

 
5,958

 
359,106

 
28,713

 
387,819

Multifamily
160

 
475

 
635

 
18,648

 
3,211

 
21,859

Construction/land development
630

 
264

 
894

 
33,139

 
10,461

 
43,600

Commercial business
847

 
1,074

 
1,921

 
71,876

 
1,975

 
73,851

 
6,282

 
3,126

 
9,408

 
482,769

 
44,360

 
527,129

Total
$
22,962

 
$
5,632

 
$
28,594

 
$
1,264,406

 
$
125,813

 
$
1,390,219

 

16


 
At December 31, 2012
(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
$
11,212

 
$
2,176

 
$
13,388

 
$
599,538

 
$
74,327

 
$
673,865

Home equity
4,611

 
37

 
4,648

 
133,026

 
3,720

 
136,746

 
15,823

 
2,213

 
18,036

 
732,564

 
78,047

 
810,611

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
3,682

 
1,630

 
5,312

 
334,406

 
27,473

 
361,879

Multifamily
106

 
516

 
622

 
13,791

 
3,221

 
17,012

Construction/land development
1,092

 
488

 
1,580

 
58,129

 
12,904

 
71,033

Commercial business
680

 
1,521

 
2,201

 
77,256

 
2,320

 
79,576

 
5,560

 
4,155

 
9,715

 
483,582

 
45,918

 
529,500

Total
$
21,383

 
$
6,368

 
$
27,751

 
$
1,216,146

 
$
123,965

 
$
1,340,111


Interest payments on impaired loans, applied against loan principal or recognized as interest income, of $1.1 million and $1.4 million were recorded for cash payments received during the three months ended March 31, 2013 and 2012 respectively.


17


Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.
 
 
At March 31, 2013
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
32,488

 
$
34,131

 
$
—

Home equity
2,382

 
2,869

 
—

 
34,870

 
37,000

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
10,629

 
12,229

 
—

Multifamily
508

 
508

 
—

Construction/land development
8,801

 
18,736

 
—

Commercial business
137

 
152

 
—

 
20,075

 
31,625

 
—

 
$
54,945

 
$
68,625

 
$
—

With an allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
45,495

 
$
46,893

 
$
2,405

Home equity
1,088

 
1,088

 
101

 
46,583

 
47,981

 
2,506

Commercial loans
 
 
 
 
 
Commercial real estate
18,084

 
18,084

 
1,313

Multifamily
2,703

 
2,880

 
475

Construction/land development
1,660

 
1,808

 
264

Commercial business
1,838

 
1,900

 
1,074

 
24,285

 
24,672

 
3,126

 
$
70,868

 
$
72,653

 
$
5,632

Total:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
77,983

 
$
81,024

 
$
2,405

Home equity
3,470

 
3,957

 
101

 
81,453

 
84,981

 
2,506

Commercial loans
 
 
 
 
 
Commercial real estate
28,713

 
30,313

 
1,313

Multifamily
3,211

 
3,388

 
475

Construction/land development
10,461

 
20,544

 
264

Commercial business
1,975

 
2,052

 
1,074

 
44,360

 
56,297

 
3,126

Total impaired loans
$
125,813

 
$
141,278

 
$
5,632



18


 
At December 31, 2012
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
28,202

 
$
29,946

 
$
—

Home equity
2,728

 
3,211

 
—

 
30,930

 
33,157

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
10,933

 
12,445

 
—

Multifamily
508

 
508

 
—

Construction/land development
11,097

 
20,990

 
—

Commercial business
147

 
162

 
—

 
22,685

 
34,105

 
—

 
$
53,615

 
$
67,262

 
$
—

With an allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
46,125

 
$
47,553

 
$
2,176

Home equity
992

 
1,142

 
37

 
47,117

 
48,695

 
2,213

Commercial loans
 
 
 
 
 
Commercial real estate
16,540

 
16,540

 
1,630

Multifamily
2,713

 
2,891

 
516

Construction/land development
1,807

 
1,807

 
488

Commercial business
2,173

 
2,287

 
1,521

 
23,233

 
23,525

 
4,155

 
$
70,350

 
$
72,220

 
$
6,368

Total:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
74,327

 
$
77,499

 
$
2,176

Home equity
3,720

 
4,353

 
37

 
78,047

 
81,852

 
2,213

Commercial loans
 
 
 
 
 
Commercial real estate
27,473

 
28,985

 
1,630

Multifamily
3,221