HMST-2014.6.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 July 31, 2014 was 14,852,971.
 



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)
 
June 30,
2014
 
December 31,
2013
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $57,392 and $9,436)
 
$
74,991

 
$
33,908

Investment securities (includes $436,971 and $481,683 carried at fair value)
 
454,966

 
498,816

Loans held for sale (includes $536,658 and $279,385 carried at fair value)
 
549,440

 
279,941

Loans held for investment (net of allowance for loan losses of $21,926 and $23,908)
 
1,812,895

 
1,871,813

Mortgage servicing rights (includes $108,869 and $153,128 carried at fair value)
 
117,991

 
162,463

Other real estate owned
 
11,083

 
12,911

Federal Home Loan Bank stock, at cost
 
34,618

 
35,288

Premises and equipment, net
 
43,896

 
36,612

Goodwill
 
11,945

 
12,063

Other assets
 
123,851

 
122,239

Total assets
 
$
3,235,676

 
$
3,066,054

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
2,417,712

 
$
2,210,821

Federal Home Loan Bank advances
 
384,090

 
446,590

Securities sold under agreements to repurchase
 
14,681

 
—

Accounts payable and other liabilities
 
69,087

 
77,906

Long-term debt
 
61,857

 
64,811

Total liabilities
 
2,947,427

 
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, 14,849,692 shares and 14,799,991 shares
 
511

 
511

Additional paid-in capital
 
95,923

 
94,474

Retained earnings
 
192,972

 
182,935

Accumulated other comprehensive income
 
(1,157
)
 
(11,994
)
Total shareholders' equity
 
288,249

 
265,926

Total liabilities and shareholders' equity
 
$
3,235,676

 
$
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 June 30,
 
Six Months Ended June 30,
(in thousands, except share data)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
23,419

 
$
17,446

 
$
46,102

 
$
35,495

Investment securities
2,664

 
2,998

 
5,634

 
5,657

Other
142

 
24

 
299

 
54

 
26,225

 
20,468

 
52,035

 
41,206

Interest expense:
 
 
 
 
 
 
 
Deposits
2,356

 
2,367

 
4,716

 
5,856

Federal Home Loan Bank advances
444

 
387

 
857

 
680

Securities sold under agreements to repurchase
1

 
11

 
1

 
11

Long-term debt
265

 
283

 
580

 
1,999

Other
12

 
5

 
22

 
10

 
3,078

 
3,053

 
6,176

 
8,556

Net interest income
23,147

 
17,415

 
45,859

 
32,650

Provision (reversal of provision) for credit losses
—

 
400

 
(1,500
)
 
2,400

Net interest income after provision for credit losses
23,147

 
17,015

 
47,359

 
30,250

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
41,794

 
52,424

 
67,304

 
106,379

Mortgage servicing income
10,184

 
2,183

 
18,129

 
5,255

Income from WMS Series LLC
246

 
993

 
53

 
1,613

Gain (loss) on debt extinguishment
11

 
—

 
(575
)
 
—

Depositor and other retail banking fees
917

 
761

 
1,732

 
1,482

Insurance agency commissions
232

 
190

 
636

 
370

(Loss) gain on sale of investment securities available for sale (includes unrealized gain (loss) reclassified from accumulated other comprehensive income of $(20) and $238 for the three months ended June 30, 2014 and 2013, and $693 and $190 for the six months ended June 30, 2014 and 2013, respectively)
(20
)
 
238

 
693

 
190

Other
286

 
767

 
385

 
1,210

 
53,650

 
57,556

 
88,357

 
116,499

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
40,606

 
38,579

 
76,077

 
73,641

General and administrative
11,145

 
10,270

 
21,267

 
21,200

Legal
542

 
599

 
941

 
1,210

Consulting
603

 
763

 
1,554

 
1,459

Federal Deposit Insurance Corporation assessments
572

 
143

 
1,192

 
710

Occupancy
4,675

 
3,381

 
9,107

 
6,183

Information services
4,862

 
3,574

 
9,377

 
6,570

Net cost of operation and sale of other real estate owned
(34
)
 
(597
)
 
(453
)
 
1,538

 
62,971

 
56,712

 
119,062

 
112,511

Income before income taxes
13,826

 
17,859

 
16,654

 
34,238

Income tax expense (includes reclassification adjustments of $(7) and $83 for the three months ended June 30, 2014 and 2013, and $243 and $66 for the six months ended June 30, 2014 and 2013, respectively)
4,464

 
5,791

 
4,991

 
11,230

NET INCOME
$
9,362

 
$
12,068

 
$
11,663

 
$
23,008

Basic income per share
$
0.63

 
$
0.84

 
$
0.79

 
$
1.60

Diluted income per share
$
0.63

 
$
0.82

 
$
0.78

 
$
1.56

Basic weighted average number of shares outstanding
14,800,853

 
14,376,580

 
14,792,638

 
14,368,135

Diluted weighted average number of shares outstanding
14,954,998

 
14,785,481

 
14,956,079

 
14,794,805

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 June 30,
 
Six Months Ended June 30,
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Net income
$
9,362

 
$
12,068

 
$
11,663

 
$
23,008

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gain (loss) arising during the period, net of tax expense (benefit) of $2,537 and $(7,737) for the three months ended June 30, 2014 and 2013, and $6,078 and $(9,483) for the six months ended June 30, 2014 and 2013, respectively
4,713

 
(14,367
)
 
11,288

 
(17,610
)
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $(7) and $83 for the three months ended June 30, 2014 and 2013, and $243 and $66 for the six months ended June 30, 2014 and 2013, respectively
12

 
(155
)
 
(451
)
 
(124
)
Other comprehensive income (loss)
4,725

 
(14,522
)
 
10,837

 
(17,734
)
Comprehensive income (loss)
$
14,087

 
$
(2,454
)
 
$
22,500

 
$
5,274


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
—

 
—

 
—

 
23,008

 
—

 
23,008

Dividends declared ($0.11 per share)
—

 
—

 
—

 
(1,580
)
 
—

 
(1,580
)
Share-based compensation expense
—

 
—

 
783

 
—

 
—

 
783

Common stock issued
24,038

 
—

 
82

 
—

 
—

 
82

Other comprehensive loss
—

 
—

 
—

 
—

 
(17,734
)
 
(17,734
)
Balance, June 30, 2013
14,406,676

 
$
511

 
$
91,054

 
$
185,300

 
$
(8,544
)
 
$
268,321

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2014
14,799,991

 
$
511

 
$
94,474

 
$
182,935

 
$
(11,994
)
 
$
265,926

Net income
—

 
—

 
—

 
11,663

 
—

 
11,663

Dividends declared ($0.11 per share)
—

 
—

 
—

 
(1,626
)
 
—

 
(1,626
)
Share-based compensation expense
—

 
—

 
1,199

 
—

 
—

 
1,199

Common stock issued
49,701

 
—

 
250

 
—

 
—

 
250

Other comprehensive income
—

 
—

 
—

 
—

 
10,837

 
10,837

Balance, June 30, 2014
14,849,692

 
$
511

 
$
95,923

 
$
192,972

 
$
(1,157
)
 
$
288,249


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended June 30,
(in thousands)
2014
 
2013
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
11,663

 
$
23,008

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
7,152

 
6,645

(Reversal of) provision for credit losses
(1,500
)
 
2,400

(Reversal of) provision for losses on other real estate owned
(19
)
 
339

Fair value adjustment of loans held for sale
(12,660
)
 
32,661

Origination of mortgage servicing rights
(20,365
)
 
(36,168
)
Change in fair value of mortgage servicing rights
20,736

 
(6,628
)
Net gain on sale of investment securities
(693
)
 
(190
)
Net fair value adjustment and gain on sale of other real estate owned
(712
)
 
(618
)
Loss on early retirement of long-term debt
575

 
—

Net deferred income tax (benefit) expense
(15,623
)
 
10,883

Share-based compensation expense
683

 
624

Origination of loans held for sale
(1,512,392
)
 
(2,899,308
)
Proceeds from sale of loans originated as held for sale
1,282,100

 
3,016,255

Cash used by changes in operating assets and liabilities:
 
 
 
Increase in other assets
3,267

 
(33,328
)
Increase (decrease) in accounts payable and other liabilities
1,546

 
(1,457
)
Net cash (used in) provided by operating activities
(236,242
)
 
115,118

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(30,780
)
 
(221,106
)
Proceeds from sale of investment securities
65,846

 
50,594

Principal repayments and maturities of investment securities
24,455

 
18,079

Proceeds from sale of other real estate owned
4,832

 
14,697

Proceeds from sale of loans originated as held for investment
266,823

 
—

Proceeds from sale of mortgage servicing rights
39,004

 
—

Mortgage servicing rights purchased from others
(5
)
 
(10
)
Capital expenditures related to other real estate owned
—

 
(22
)
Origination of loans held for investment and principal repayments, net
(236,854
)
 
(113,428
)
Purchase of property and equipment
(11,348
)
 
(5,151
)
Net cash provided by (used in) investing activities
121,973

 
(256,347
)

8


 
Six Months Ended June 30,
(in thousands)
2014
 
2013
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase (decrease) in deposits, net
$
206,891

 
$
(13,711
)
Proceeds from Federal Home Loan Bank advances
2,492,300

 
3,264,946

Repayment of Federal Home Loan Bank advances
(2,554,800
)
 
(3,114,546
)
Proceeds from securities sold under agreements to repurchase
14,681

 
159,790

Repayment of securities sold under agreements to repurchase
—

 
(159,790
)
Proceeds from Federal Home Loan Bank stock repurchase
670

 
659

Repayment of long-term debt
(3,530
)
 
—

Dividends paid
(1,626
)
 
—

Proceeds from stock issuance, net
250

 
82

Excess tax benefits related to the exercise of stock options
516

 
159

Net cash provided by financing activities
155,352

 
137,589

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
41,083

 
(3,640
)
CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
33,908

 
25,285

End of period
$
74,991

 
$
21,645

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
7,159

 
$
21,524

Federal and state income taxes (paid), net of refunds
7,610

 
6,714

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
2,922

 
6,225

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

 
—

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

 
—

Ginnie Mae loans recognized with the right to repurchase, net
$
833

 
$
2,127


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”).

Purchase Accounting Adjustments

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

Recent Accounting Developments

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

10


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 six months ended June 30, 2014 includes discrete tax benefit items of $406 thousand related to the recognition of the cumulative effect for prior years of adoption of this new accounting guidance. 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's consolidated financial statements.

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

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



11


NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At June 30, 2014
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
111,460

 
$
365

 
$
(1,559
)
 
$
110,266

Commercial
13,209

 
465

 
—

 
13,674

Municipal bonds
124,772

 
2,085

 
(1,044
)
 
125,813

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
57,614

 
210

 
(1,057
)
 
56,767

Commercial
16,325

 
—

 
(304
)
 
16,021

Corporate debt securities
74,987

 
55

 
(2,622
)
 
72,420

U.S. Treasury securities
41,966

 
44

 
—

 
42,010

 
$
440,333

 
$
3,224

 
$
(6,586
)
 
$
436,971


 
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 June 30, 2014 and December 31, 2013, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As of June 30, 2014 and December 31, 2013, substantially all securities held had ratings available by external ratings agencies.


12


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

 
At June 30, 2014
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(19
)
 
$
3,679

 
$
(1,540
)
 
$
79,229

 
$
(1,559
)
 
$
82,908

Municipal bonds
(48
)
 
14,541

 
(996
)
 
44,986

 
(1,044
)
 
59,527

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(108
)
 
9,354

 
(949
)
 
32,299

 
(1,057
)
 
41,653

Commercial
—

 
—

 
(304
)
 
16,021

 
(304
)
 
16,021

Corporate debt securities
(285
)
 
4,770

 
(2,337
)
 
59,547

 
(2,622
)
 
64,317

 
$
(460
)
 
$
32,344

 
$
(6,126
)
 
$
232,082

 
$
(6,586
)
 
$
264,426


 
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 June 30, 2014 and December 31, 2013, the Company does not expect any credit losses on its debt securities. In addition, as of June 30, 2014 and December 31, 2013, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company did not hold any marketable equity securities as of June 30, 2014 and December 31, 2013.



13


The following tables present the fair value of investment securities available for sale by contractual maturity along with the associated contractual yield for the periods indicated below. Contractual maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the effect of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis.

 
At June 30, 2014
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
110,266

 
1.80
%
 
$
110,266

 
1.80
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,674

 
4.43

 
13,674

 
4.43

Municipal bonds
—

 
—

 
45

 
3.26

 
21,451

 
3.41

 
104,316

 
4.21

 
125,812

 
4.07

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
—

 
—

 
56,767

 
2.09

 
56,767

 
2.09

Commercial
—

 
—

 
—

 
—

 
9,823

 
1.98

 
6,198

 
1.41

 
16,021

 
1.76

Corporate debt securities
—

 
—

 
—

 
—

 
41,206

 
3.35

 
31,214

 
3.77

 
72,420

 
3.53

U.S. Treasury securities
1,001

 
0.18

 
41,009

 
0.35

 
—

 
—

 
—

 
—

 
42,010

 
0.34

Total available for sale
$
1,001

 
0.18
%
 
$
41,054

 
0.35
%
 
$
72,480

 
3.18
%
 
$
322,435

 
2.92
%
 
$
436,970

 
2.72
%
 
 
At December 31, 2013
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
10,581

 
1.63
%
 
$
123,329

 
1.82
%
 
$
133,910

 
1.81
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,433

 
4.51

 
13,433

 
4.51

Municipal bonds
—

 
—

 
—

 
—

 
19,598

 
3.51

 
111,252

 
4.29

 
130,850

 
4.17

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
19,987

 
2.31

 
70,340

 
2.17

 
90,327

 
2.20

Commercial
—

 
—

 
—

 
—

 
5,270

 
1.90

 
11,575

 
1.42

 
16,845

 
1.57

Corporate debt securities
—

 
—

 
—

 
—

 
32,848

 
3.31

 
36,018

 
3.75

 
68,866

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
26,451

 
0.30

 
—

 
—

 
—

 
—

 
27,452

 
0.29

Total available for sale
$
1,001

 
0.18
%
 
$
26,451

 
0.30
%
 
$
88,284

 
2.84
%
 
$
365,947

 
2.92
%
 
$
481,683

 
2.75
%


14


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Proceeds
$
11,541

 
$
34,840

 
$
65,846

 
$
50,594

Gross gains
118

 
318

 
895

 
322

Gross losses
(137
)
 
(80
)
 
(201
)
 
(132
)

There were $49.4 million and $47.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, there were $33.8 million and $37.7 million, respectively, of securities pledged to secure derivatives in a liability position. At June 30, 2014, there were $15.0 million of securities pledged under repurchase agreements and none at December 31, 2013.

Tax-exempt interest income on securities available for sale totaling $863 thousand and $1.4 million for the three months ended June 30, 2014 and 2013, respectively, and $1.8 million and $2.7 million for the six months ended June 30, 2014 and 2013, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 3–LOANS AND CREDIT QUALITY:

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

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

Loans held for investment consist of the following:
 
(in thousands)
At June 30,
2014
 
At December 31,
2013
 
 
 
 
Consumer loans
 
 
 
Single family
$
749,204

 
$
904,913

Home equity
136,181

 
135,650

 
885,385

 
1,040,563

Commercial loans
 
 
 
Commercial real estate
476,411

 
477,642

Multifamily
72,327

 
79,216

Construction/land development
219,282

 
130,465

Commercial business
185,177

 
171,054

 
953,197

 
858,377

 
1,838,582

 
1,898,940

Net deferred loan fees and discounts
(3,761
)
 
(3,219
)
 
1,834,821

 
1,895,721

Allowance for loan losses
(21,926
)
 
(23,908
)
 
$
1,812,895

 
$
1,871,813


Loans in the amount of $634.4 million and $800.5 million at June 30, 2014 and December 31, 2013, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.

15



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 June 30, 2014, we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family, commercial real estate and construction/land development within the state of Washington, which represented 27.5%, 21.8% and 10.1% 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 June 30, 2014. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.

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

Activity in the allowance for credit losses was as follows.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
 
 
 
Beginning balance
 
$
22,317

 
$
28,594

 
$
24,089

 
$
27,751

Provision (reversal of provision) for credit losses
 
—

 
400

 
(1,500
)
 
2,400

(Charge-offs), net of recoveries
 
(149
)
 
(1,136
)
 
(421
)
 
(2,293
)
Ending balance
 
$
22,168

 
$
27,858

 
$
22,168

 
$
27,858

Components:
 
 
 
 
 
 
 
 
Allowance for loan losses
 
$
21,926

 
$
27,655

 
$
21,926

 
$
27,655

Allowance for unfunded commitments
 
242

 
203

 
242

 
203

Allowance for credit losses
 
$
22,168

 
$
27,858

 
$
22,168

 
$
27,858




16


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

 
Three Months Ended June 30, 2014
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
9,406

 
$
(172
)
 
$
25

 
$
(148
)
 
$
9,111

Home equity
3,882

 
(136
)
 
236

 
(465
)
 
3,517

 
13,288

 
(308
)
 
261

 
(613
)
 
12,628

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,309

 
(23
)
 
100

 
(323
)
 
4,063

Multifamily
965

 
—

 
—

 
(78
)
 
887

Construction/land development
2,003

 
—

 
46

 
369

 
2,418

Commercial business
1,752

 
(288
)
 
63

 
645

 
2,172

 
9,029

 
(311
)
 
209

 
613

 
9,540

Total allowance for credit losses
$
22,317

 
$
(619
)
 
$
470

 
$
—

 
$
22,168

 
 
Three Months Ended June 30, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
14,478

 
$
(1,141
)
 
$
171

 
$
302

 
$
13,810

Home equity
4,708

 
(299
)
 
156

 
314

 
4,879

 
19,186

 
(1,440
)
 
327

 
616

 
18,689

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,958

 
(340
)
 
—

 
105

 
5,723

Multifamily
635

 
—

 
—

 
55

 
690

Construction/land development
894

 
—

 
281

 
10

 
1,185

Commercial business
1,921

 
—

 
36

 
(386
)
 
1,571

 
9,408

 
(340
)
 
317

 
(216
)
 
9,169

Total allowance for credit losses
$
28,594

 
$
(1,780
)
 
$
644

 
$
400

 
$
27,858


17




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

 
$
(283
)
 
$
41

 
$
(2,637
)
 
$
9,111

Home equity
3,987

 
(559
)
 
326

 
(237
)
 
3,517

 
15,977

 
(842
)
 
367

 
(2,874
)
 
12,628

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
(23
)
 
156

 
(82
)
 
4,063

Multifamily
942

 
—

 
—

 
(55
)
 
887

Construction/land development
1,414

 
—

 
62

 
942

 
2,418

Commercial business
1,744

 
(288
)
 
147

 
569

 
2,172

 
8,112

 
(311
)
 
365

 
1,374

 
9,540

Total allowance for credit losses
$
24,089

 
$
(1,153
)
 
$
732

 
$
(1,500
)
 
$
22,168



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

 
$
(1,862
)
 
$
246

 
$
2,038

 
$
13,810

Home equity
4,648

 
(1,138
)
 
253

 
1,116

 
4,879

 
18,036

 
(3,000
)
 
499

 
3,154

 
18,689

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,312

 
(143
)
 
—

 
554

 
5,723

Multifamily
622

 
—

 
—

 
68

 
690

Construction/land development
1,580

 
(148
)
 
351

 
(598
)
 
1,185

Commercial business
2,201

 
—

 
148

 
(778
)
 
1,571

 
9,715

 
(291
)
 
499

 
(754
)
 
9,169

Total allowance for credit losses
$
27,751

 
$
(3,291
)
 
$
998

 
$
2,400

 
$
27,858



18


The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
 
At June 30, 2014
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 
Total
 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family
$
8,235

 
$
876

 
$
9,111

 
$
678,418

 
$
70,786

 
$
749,204

Home equity
3,439

 
78

 
3,517

 
133,787

 
2,394

<