HMST-2014.3.31-10Q

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, 2014
Commission file number: 001-35424
________________________________ 
HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
________________________________ 
Washington
 
91-0186600
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification No.)
601 Union Street, Suite 2000
Seattle, Washington 98101
(Address of principal executive offices)
(Zip Code)
(206) 623-3050
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large Accelerated Filer
 
o
Accelerated Filer
 
x
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x
The number of outstanding shares of the registrant's common stock as of April 30, 2014 was 14,849,692.
 



PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


ITEM 3
 
 
 
ITEM 4
 
 
 
 
 
 
 
ITEM 1
 
 
 
ITEM 1A
 
 
 
ITEM 6
 
 

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

3


PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
 
(in thousands, except share data)
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $19,428 and $9,436)
 
$
47,714

 
$
33,908

Investment securities (includes $428,536 and $481,683 carried at fair value)
 
446,639

 
498,816

Loans held for sale (includes $321,307 and $279,385 carried at fair value)
 
588,465

 
279,941

Loans held for investment (net of allowance for loan losses of $22,127 and $23,908)
 
1,662,623

 
1,871,813

Mortgage servicing rights (includes $149,646 and $153,128 carried at fair value)
 
158,741

 
162,463

Other real estate owned
 
12,089

 
12,911

Federal Home Loan Bank stock, at cost
 
34,958

 
35,288

Premises and equipment, net
 
40,894

 
36,612

Goodwill
 
12,063

 
12,063

Other assets
 
120,626

 
122,239

Total assets
 
$
3,124,812

 
$
3,066,054

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
2,371,358

 
$
2,210,821

Federal Home Loan Bank advances
 
346,590

 
446,590

Accounts payable and other liabilities
 
71,498

 
77,906

Long-term debt
 
61,856

 
64,811

Total liabilities
 
2,851,302

 
2,800,128

Shareholders’ equity:
 
 
 
 
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares
 
—

 
—

Common stock, no par value, authorized 160,000,000, issued and outstanding, 14,846,519 shares and 14,799,991 shares
 
511

 
511

Additional paid-in capital
 
95,271

 
94,474

Retained earnings
 
183,610

 
182,935

Accumulated other comprehensive income
 
(5,882
)
 
(11,994
)
Total shareholders' equity
 
273,510

 
265,926

Total liabilities and shareholders' equity
 
$
3,124,812

 
$
3,066,054


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

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended March 31,
(in thousands, except share data)
2014
 
2013
 
 
 
 
Interest income:
 
 
 
Loans
$
22,683

 
$
18,049

Investment securities
2,970

 
2,659

Other
157

 
30

 
25,810

 
20,738

Interest expense:
 
 
 
Deposits
2,360

 
3,489

Federal Home Loan Bank advances
413

 
292

Long-term debt
315

 
1,717

Other
10

 
5

 
3,098

 
5,503

Net interest income
22,712

 
15,235

Provision (reversal of provision) for credit losses
(1,500
)
 
2,000

Net interest income after provision for credit losses
24,212

 
13,235

Noninterest income:
 
 
 
Net gain on mortgage loan origination and sale activities
25,510

 
53,955

Mortgage servicing income
7,945

 
3,072

(Loss) income from WMS Series LLC
(193
)
 
620

Loss on debt extinguishment
(586
)
 
—

Depositor and other retail banking fees
815

 
721

Insurance agency commissions
404

 
180

Gain (loss) on sale of investment securities available for sale (includes unrealized gain (loss) reclassified from accumulated other comprehensive income of $713 and $(48))
713

 
(48
)
Other
99

 
443

 
34,707

 
58,943

Noninterest expense:
 
 
 
Salaries and related costs
35,471

 
35,062

General and administrative
10,122

 
10,930

Legal
399

 
611

Consulting
951

 
696

Federal Deposit Insurance Corporation assessments
620

 
567

Occupancy
4,432

 
2,802

Information services
4,515

 
2,996

Net cost of operation and sale of other real estate owned
(419
)
 
2,135

 
56,091

 
55,799

Income before income taxes
2,828

 
16,379

Income tax expense (includes reclassification adjustments of $250 and $(17))
527

 
5,439

NET INCOME
$
2,301

 
$
10,940

Basic income per share
$
0.16

 
$
0.76

Diluted income per share
$
0.15

 
$
0.74

Basic weighted average number of shares outstanding
14,784,424

 
14,359,691

Diluted weighted average number of shares outstanding
14,947,864

 
14,804,129

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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended March 31,
(in thousands)
2014
 
2013
 
 
 
 
Net income
$
2,301

 
$
10,940

Other comprehensive income (loss), net of tax:
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
Unrealized holding gain (loss) arising during the period, net of tax expense of $3,541 and $1,746
6,575

 
(3,243
)
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $250 and $(17)
(463
)
 
31

Other comprehensive income (loss)
6,112

 
(3,212
)
Comprehensive income
$
8,413

 
$
7,728


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

6


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

 
$
511

 
$
90,189

 
$
163,872

 
$
9,190

 
$
263,762

Net income
—

 
—

 
—

 
10,940

 
—

 
10,940

Dividends declared ($0.11 per share)
—

 
—

 
—

 
(1,583
)
 
—

 
(1,583
)
Share-based compensation expense
—

 
—

 
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

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
14,799,991

 
$
511

 
$
94,474

 
$
182,935

 
$
(11,994
)
 
$
265,926

Net income
—

 
—

 
—

 
2,301

 
—

 
2,301

Dividends declared ($0.11 per share)
—

 
—

 
—

 
(1,626
)
 
—

 
(1,626
)
Share-based compensation expense
—

 
—

 
736

 
—

 
—

 
736

Common stock issued
46,528

 
—

 
61

 
—

 
—

 
61

Other comprehensive income
—

 
—

 
—

 
—

 
6,112

 
6,112

Balance, March 31, 2014
14,846,519

 
$
511

 
$
95,271

 
$
183,610

 
$
(5,882
)
 
$
273,510


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)
2014
 
2013
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,301

 
$
10,940

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
4,418

 
2,501

(Reversal of) provision for credit losses
(1,500
)
 
2,000

(Reversal of) provision for losses on other real estate owned
(19
)
 
638

Fair value adjustment of loans held for sale
(3,254
)
 
13,034

Origination of mortgage servicing rights
(8,076
)
 
(18,349
)
Change in fair value of mortgage servicing rights
11,377

 
1,528

Net (loss) gain on sale of investment securities
(713
)
 
48

Net fair value adjustment and gain on sale of other real estate owned
(468
)
 
(108
)
Loss on early retirement of long-term debt
586

 
—

Net deferred income tax (benefit) expense
(1,008
)
 
1,374

Share-based compensation expense
476

 
343

Origination of loans held for sale
(676,630
)
 
(1,431,625
)
Proceeds from sale of loans originated as held for sale
625,747

 
1,608,533

Cash used by changes in operating assets and liabilities:
 
 
 
Decrease (increase) in other assets
1,869

 
(3,405
)
Decrease in accounts payable and other liabilities
(9,140
)
 
(19,652
)
Net cash provided by (used in) operating activities
(54,034
)
 
167,800

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
—

 
(29,013
)
Proceeds from sale of investment securities
54,305

 
15,754

Principal repayments and maturities of investment securities
6,200

 
8,029

Proceeds from sale of other real estate owned
2,949

 
2,225

Proceeds from sale of loans originated as held for investment
56,079

 
—

Mortgage servicing rights purchased from others
(2
)
 
(4
)
Capital expenditures related to other real estate owned
—

 
(22
)
Origination of loans held for investment and principal repayments, net
(101,841
)
 
(51,524
)
Property and equipment purchased
(5,871
)
 
(2,675
)
Net cash (used in) provided by investing activities
11,819

 
(57,230
)

8


 
Three Months Ended March 31,
(in thousands)
2014
 
2013
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
$
160,537

 
$
(42,131
)
Proceeds from Federal Home Loan Bank advances
966,300

 
1,569,042

Repayment of Federal Home Loan Bank advances
(1,066,300
)
 
(1,644,542
)
Proceeds from Federal Home Loan Bank stock repurchase
330

 
330

Repayment of long-term debt
(3,541
)
 
—

Dividends paid
(1,626
)
 
—

Proceeds from stock issuance, net
61

 
42

Excess tax benefits related to the exercise of stock options
260

 
113

Net cash provided by (used in) financing activities
56,021

 
(117,146
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
13,806

 
(6,576
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
33,908

 
25,285

End of period
$
47,714

 
$
18,709

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,572

 
$
17,880

Federal and state income taxes
—

 
5,442

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
2,007

 
3,303

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

 
—

Ginnie Mae loans recognized with the right to repurchase, net
$
473

 
$
3,132


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

9


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

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the Pacific Northwest, California and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. The consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation and HomeStreet Bank (the “Bank”), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, Union Street Holdings LLC 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 financial 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 financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (“2013 Annual Report on Form 10-K”).

Recent Accounting Developments

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The ASU applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The amendments in this ASU should be applied retrospectively to all periods presented and are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, although early adoption is permitted. The Company elected to adopt this new accounting guidance as of January 1, 2014. It is being adopted prospectively, as the retrospective adjustments were not material. The Company's income tax expense for the three months ended March 31, 2014 includes discrete tax benefit items of $406 thousand related to the recognition of the cumulative effect for prior years of adoption of this new accounting guidance.  The effective tax rate for the three months ended March 31, 2014, excluding the effect of these discrete items, was 33.0%.


10


NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At March 31, 2014
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
122,576

 
$
313

 
$
(2,786
)
 
$
120,103

Commercial
13,299

 
297

 
—

 
13,596

Municipal bonds
126,716

 
901

 
(2,756
)
 
124,861

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
62,200

 
53

 
(1,716
)
 
60,537

Commercial
12,015

 
—

 
(376
)
 
11,639

Corporate debt securities
75,052

 
4

 
(4,252
)
 
70,804

U.S. Treasury securities
26,987

 
9

 
—

 
26,996

 
$
438,845

 
$
1,577

 
$
(11,886
)
 
$
428,536


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

 
$
187

 
$
(3,879
)
 
$
133,910

Commercial
13,391

 
45

 
(3
)
 
13,433

Municipal bonds
136,937

 
185

 
(6,272
)
 
130,850

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
93,112

 
85

 
(2,870
)
 
90,327

Commercial
17,333

 
—

 
(488
)
 
16,845

Corporate debt securities
75,542

 
—

 
(6,676
)
 
68,866

U.S. Treasury securities
27,478

 
1

 
(27
)
 
27,452

 
$
501,395

 
$
503

 
$
(20,215
)
 
$
481,683


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored entities ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. As of March 31, 2014 and December 31, 2013, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As of March 31, 2014 and December 31, 2013, substantially all securities held had ratings available by external ratings agencies.


11


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

 
At March 31, 2014
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(2,710
)
 
$
92,269

 
$
(77
)
 
$
6,293

 
$
(2,787
)
 
$
98,562

Municipal bonds
(2,536
)
 
74,561

 
(220
)
 
4,254

 
(2,756
)
 
78,815

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(1,000
)
 
27,233

 
(716
)
 
19,540

 
(1,716
)
 
46,773

Commercial
—

 
—

 
(376
)
 
11,639

 
(376
)
 
11,639

Corporate debt securities
(4,251
)
 
70,538

 
—

 
—

 
(4,251
)
 
70,538

 
$
(10,497
)
 
$
264,601

 
$
(1,389
)
 
$
41,726

 
$
(11,886
)
 
$
306,327


 
At December 31, 2013
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(3,767
)
 
$
98,717

 
$
(112
)
 
$
6,728

 
$
(3,879
)
 
$
105,445

Commercial
(3
)
 
7,661

 
—

 
—

 
(3
)
 
7,661

Municipal bonds
(5,991
)
 
106,985

 
(281
)
 
3,490

 
(6,272
)
 
110,475

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 


 


Residential
(2,120
)
 
63,738

 
(750
)
 
15,081

 
(2,870
)
 
78,819

Commercial
(488
)
 
16,845

 
—

 
—

 
(488
)
 
16,845

Corporate debt securities
(6,676
)
 
68,844

 
—

 
—

 
(6,676
)
 
68,844

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

 
—

 
—

 
(27
)
 
25,452

 
$
(19,072
)
 
$
388,242

 
$
(1,143
)
 
$
25,299

 
$
(20,215
)
 
$
413,541


The Company has evaluated securities available for sale that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. As of March 31, 2014 and December 31, 2013, the present value of the cash flows expected to be collected on all of the Company debt securities was greater than amortized cost of those securities. In addition, as of March 31, 2014 and December 31, 2013, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company did not hold any equity securities as of March 31, 2014 and December 31, 2013.



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, 2014
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
120,103

 
1.84
%
 
$
120,103

 
1.84
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,596

 
4.30

 
13,596

 
4.30

Municipal bonds
—

 
—

 
—

 
—

 
19,393

 
3.45

 
105,467

 
4.25

 
124,860

 
4.12

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
4,312

 
2.08

 
56,225

 
2.14

 
60,537

 
2.14

Commercial
—

 
—

 
—

 
—

 
5,350

 
1.90

 
6,289

 
1.49

 
11,639

 
1.68

Corporate debt securities
—

 
—

 
—

 
—

 
40,634

 
3.35

 
30,171

 
3.81

 
70,805

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
25,995

 
0.28

 
—

 
—

 
—

 
—

 
26,996

 
0.28

Total available for sale
$
1,001

 
0.18
%
 
$
25,995

 
0.28
%
 
$
69,689

 
3.19
%
 
$
331,851

 
2.93
%
 
$
428,536

 
2.80
%
 
 
At December 31, 2013
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
10,581

 
1.63
%
 
$
123,329

 
1.82
%
 
$
133,910

 
1.81
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,433

 
4.51

 
13,433

 
4.51

Municipal bonds
—

 
—

 
—

 
—

 
19,598

 
3.51

 
111,252

 
4.29

 
130,850

 
4.17

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
19,987

 
2.31

 
70,340

 
2.17

 
90,327

 
2.20

Commercial
—

 
—

 
—

 
—

 
5,270

 
1.90

 
11,575

 
1.42

 
16,845

 
1.57

Corporate debt securities
—

 
—

 
—

 
—

 
32,848

 
3.31

 
36,018

 
3.75

 
68,866

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
26,451

 
0.30

 
—

 
—

 
—

 
—

 
27,452

 
0.29

Total available for sale
$
1,001

 
0.18
%
 
$
26,451

 
0.30
%
 
$
88,284

 
2.84
%
 
$
365,947

 
2.92
%
 
$
481,683

 
2.75
%


13


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended March 31,
(in thousands)
2014
 
2013
 
 
 
 
Proceeds
$
54,305

 
$
15,754

Gross gains
777

 
4

Gross losses
(64
)
 
(52
)

There were $45.0 million and $47.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013 there were $36.6 million and $37.7 million, respectively, of securities pledged to secure derivatives in a liability position.

Tax-exempt interest income on securities available for sale totaling $921 thousand and $1.3 million for the three months ended March 31, 2014 and 2013, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 3–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies and Note 6, Loans and Credit Quality within our 2013 Annual Report on Form 10-K.

The Company's portfolio of loans held for investment is divided into two portfolio segments, consumer loans and commercial loans, which are the same segments used to determine the allowance for loan losses.  Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity loans within the consumer loan portfolio segment and commercial real estate, multifamily, construction/land development and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following:
 
(in thousands)
At March 31,
2014
 
At December 31,
2013
 
 
 
 
Consumer loans
 
 
 
Single family
$
668,277

 
$
904,913

Home equity
134,882

 
135,650

 
803,159

 
1,040,563

Commercial loans
 
 
 
Commercial real estate
480,200

 
477,642

Multifamily
71,278

 
79,216

Construction/land development
162,717

 
130,465

Commercial business
171,080

 
171,054

 
885,275

 
858,377

 
1,688,434

 
1,898,940

Net deferred loan fees and discounts
(3,684
)
 
(3,219
)
 
1,684,750

 
1,895,721

Allowance for loan losses
(22,127
)
 
(23,908
)
 
$
1,662,623

 
$
1,871,813


Loans in the amount of $880.3 million and $800.5 million at March 31, 2014 and December 31, 2013, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.


14


Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

Loans held for investment are primarily secured by real estate located in the states of Washington, Oregon, California, Idaho and Hawaii. At March 31, 2014 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 27.7% and 24.1% of the total portfolio, respectively. At December 31, 2013 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 37.3% and 21.2% of the total portfolio, respectively. These loans were mostly located within the metropolitan area of Puget Sound, particularly within King County.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of March 31, 2014. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.

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

Activity in the allowance for credit losses was as follows.

 
 
Three Months Ended March 31,
(in thousands)
 
2014
 
2013
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
Beginning balance
 
$
24,089

 
$
27,751

Provision (reversal of provision) for credit losses
 
(1,500
)
 
2,000

(Charge-offs), net of recoveries
 
(272
)
 
(1,157
)
Ending balance
 
$
22,317

 
$
28,594

Components:
 
 
 
 
Allowance for loan losses
 
$
22,127

 
$
28,405

Allowance for unfunded commitments
 
190

 
189

Allowance for credit losses
 
$
22,317

 
$
28,594




15


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

 
Three Months Ended March 31, 2014
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
11,990

 
$
(111
)
 
$
16

 
$
(2,489
)
 
$
9,406

Home equity
3,987

 
(423
)
 
90

 
228

 
3,882

 
15,977

 
(534
)
 
106

 
(2,261
)
 
13,288

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
—

 
56

 
241

 
4,309

Multifamily
942

 
—

 
—

 
23

 
965

Construction/land development
1,414

 
—

 
16

 
573

 
2,003

Commercial business
1,744

 
—

 
84

 
(76
)
 
1,752

 
8,112

 
—

 
156

 
761

 
9,029

Total allowance for credit losses
$
24,089

 
$
(534
)
 
$
262

 
$
(1,500
)
 
$
22,317

 
 
Three Months Ended March 31, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) 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



16


The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
 
At March 31, 2014
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 
Total
 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family
$
8,419

 
$
987

 
$
9,406

 
$
597,108

 
$
71,169

 
$
668,277

Home equity
3,801

 
81

 
3,882

 
132,344

 
2,538

 
134,882

 
12,220

 
1,068

 
13,288

 
729,452

 
73,707

 
803,159

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,260

 
49

 
4,309

 
447,940

 
32,260

 
480,200

Multifamily
556

 
409

 
965

 
68,133

 
3,145

 
71,278

Construction/land development
2,003

 
—

 
2,003

 
156,810

 
5,907

 
162,717

Commercial business
1,368

 
384

 
1,752

 
168,263

 
2,817

 
171,080

 
8,187

 
842

 
9,029

 
841,146

 
44,129

 
885,275

Total
$
20,407

 
$
1,910

 
$
22,317

 
$
1,570,598

 
$
117,836

 
$
1,688,434

 
 
At December 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
$
10,632

 
$
1,358

 
$
11,990

 
$
831,730

 
$
73,183

 
$
904,913

Home equity
3,903

 
84

 
3,987

 
133,006

 
2,644

 
135,650

 
14,535

 
1,442

 
15,977

 
964,736

 
75,827

 
1,040,563

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
—

 
4,012

 
445,766

 
31,876

 
477,642

Multifamily
515

 
427

 
942

 
76,053

 
3,163

 
79,216

Construction/land development
1,414

 
—

 
1,414

 
124,317

 
6,148

 
130,465

Commercial business
1,042

 
702

 
1,744

 
168,199

 
2,855

 
171,054

 
6,983

 
1,129

 
8,112

 
814,335

 
44,042

 
858,377

Total
$
21,518

 
$
2,571

 
$
24,089

 
$
1,779,071

 
$
119,869

 
$
1,898,940




17


Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.
 
 
At March 31, 2014
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
37,002

 
$
39,115

 
$
—

Home equity
1,834

 
1,910

 
—

 
38,836

 
41,025

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
27,716

 
31,017

 
—

Multifamily
508

 
508

 
—

Construction/land development
5,907

 
15,058

 
—

Commercial business
964

 
1,833

 
—

 
35,095

 
48,416

 
—

 
$
73,931

 
$
89,441

 
$
—

With an allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
34,167

 
$
34,225

 
$
987

Home equity
704

 
704

 
81

 
34,871

 
34,929

 
1,068

Commercial loans
 
 
 
 
 
Commercial real estate
4,544

 
4,716

 
49

Multifamily
2,637

 
2,814

 
409

Construction/land development
—

 
—

 
—

Commercial business
1,853

 
2,195

 
384

 
9,034

 
9,725

 
842

 
$
43,905

 
$
44,654

 
$
1,910

Total:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family(3)
$
71,169

 
$
73,340

 
$
987

Home equity
2,538

 
2,614

 
81

 
73,707

 
75,954

 
1,068

Commercial loans
 
 
 
 
 
Commercial real estate
32,260

 
35,733

 
49

Multifamily
3,145

 
3,322

 
409

Construction/land development
5,907

 
15,058

 
—

Commercial business
2,817

 
4,028

 
384

 
44,129

 
58,141

 
842

Total impaired loans
$
117,836

 
$
134,095

 
$
1,910


(1)
Includes partial charge-offs and nonaccrual interest paid.
(2)
Unpaid principal balance does not include partial charge-offs or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $70.6 million in performing TDRs.


18


 
At December 31, 2013
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
39,341

 
$
41,935

 
$
—

Home equity
1,895

 
1,968

 
—

 
41,236

 
43,903

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
31,876

 
45,921

 
—

Multifamily
508

 
508

 
—

Construction/land development
6,148

 
15,299

 
—

Commercial business
1,533

 
7,164

 
—

 
40,065

 
68,892

 
—

 
$
81,301

 
$
112,795

 
$
—

With an allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
33,842

 
$
33,900

 
$
1,358

Home equity
749

 
749