10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2015
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 November 2, 2015 was 22,076,533.6.
 



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)
 
September 30,
2015
 
December 31,
2014
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-earning instruments of $11,363 and $10,271)
 
$
37,303

 
$
30,502

Investment securities (includes $570,082 and $427,326 carried at fair value)
 
602,018

 
455,332

Loans held for sale (includes $860,800 and $610,350 carried at fair value)
 
882,319

 
621,235

Loans held for investment (net of allowance for loan losses of $26,922 and $22,021; includes $23,755 and $0 carried at fair value)
 
3,012,943

 
2,099,129

Mortgage servicing rights (includes $132,701 and $112,439 carried at fair value)
 
146,080

 
123,324

Other real estate owned
 
8,273

 
9,448

Federal Home Loan Bank stock, at cost
 
44,652

 
33,915

Premises and equipment, net
 
60,544

 
45,251

Goodwill
 
11,945

 
11,945

Other assets
 
169,576

 
105,009

Total assets
 
$
4,975,653

 
$
3,535,090

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
3,307,693

 
$
2,445,430

Federal Home Loan Bank advances
 
1,025,745

 
597,590

Federal funds purchased and securities sold under agreements to repurchase
 
—

 
50,000

Accounts payable and other liabilities
 
119,900

 
77,975

Long-term debt
 
61,857

 
61,857

Total liabilities
 
4,515,195

 
3,232,852

Commitments and contingencies (Note 8)
 

 

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, 22,061,702 shares and 14,856,611 shares
 
511

 
511

Additional paid-in capital
 
222,047

 
96,615

Retained earnings
 
236,207

 
203,566

Accumulated other comprehensive income
 
1,693

 
1,546

Total shareholders' equity
 
460,458

 
302,238

Total liabilities and shareholders' equity
 
$
4,975,653

 
$
3,535,090


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

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
41,012

 
$
25,763

 
$
111,603

 
$
71,865

Investment securities
2,754

 
2,565

 
8,426

 
8,199

Other
224

 
150

 
647

 
449

 
43,990

 
28,478

 
120,676

 
80,513

Interest expense:
 
 
 
 
 
 
 
Deposits
3,069

 
2,364

 
8,656

 
7,080

Federal Home Loan Bank advances
958

 
509

 
2,476

 
1,366

Federal funds purchased and securities sold under agreements to repurchase
—

 
6

 
8

 
7

Long-term debt
278

 
271

 
815

 
851

Other
51

 
20

 
123

 
42

 
4,356

 
3,170

 
12,078

 
9,346

Net interest income
39,634

 
25,308

 
108,598

 
71,167

Provision (reversal of provision) for credit losses
700

 
—

 
4,200

 
(1,500
)
Net interest income after provision for credit losses
38,934

 
25,308

 
104,398

 
72,667

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
57,885

 
37,642

 
189,746

 
104,946

Mortgage servicing income
4,768

 
6,155

 
10,896

 
24,284

Income (loss) from WMS Series LLC
380

 
(122
)
 
1,428

 
(69
)
Gain (loss) on debt extinguishment
—

 
2

 
—

 
(573
)
Depositor and other retail banking fees
1,701

 
944

 
4,239

 
2,676

Insurance agency commissions
477

 
256

 
1,183

 
892

Gain on sale of investment securities available for sale (includes unrealized gain reclassified from accumulated other comprehensive income of $1,002 and $480 for the three months ended September 30, 2015 and 2014, and $1,002 and $1,173 for the nine months ended September 30, 2015 and 2014, respectively)
1,002

 
480

 
1,002

 
1,173

Bargain purchase gain
796

 
—

 
7,345

 
—

Other
459

 
456

 
(11
)
 
841

 
67,468

 
45,813

 
215,828

 
134,170

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
60,991

 
42,604

 
180,238

 
118,681

General and administrative
14,869

 
10,326

 
42,532

 
31,593

Legal
868

 
630

 
1,912

 
1,571

Consulting
166

 
628

 
6,544

 
2,182

Federal Deposit Insurance Corporation assessments
504

 
682

 
1,890

 
1,874

Occupancy
6,077

 
4,935

 
18,024

 
14,042

Information services
8,159

 
4,220

 
21,993

 
13,597

Net cost (income) from operation and sale of other real estate owned
392

 
133

 
710

 
(320
)
 
92,026

 
64,158

 
273,843

 
183,220

Income before income taxes
14,376

 
6,963

 
46,383

 
23,617

Income tax expense (includes reclassification adjustments of $351 and $168 for the three months ended September 30, 2015 and 2014, and $351 and $411 for the nine months ended September 30, 2015 and 2014, respectively)
4,415

 
1,988

 
13,742

 
6,979

NET INCOME
$
9,961

 
$
4,975

 
$
32,641

 
$
16,638

Basic income per share
$
0.45

 
$
0.34

 
$
1.60

 
$
1.12

Diluted income per share
$
0.45

 
$
0.33

 
$
1.58

 
$
1.11

Dividends paid on common stock per share
$
—

 
$
—

 
$
—

 
$
0.11

Basic weighted average number of shares outstanding
22,035,317

 
14,805,780

 
20,407,386

 
14,797,019

Diluted weighted average number of shares outstanding
22,291,810

 
14,968,238

 
20,646,540

 
14,957,034

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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Net income
$
9,961

 
$
4,975

 
$
32,641

 
$
16,638

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on investment securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gain arising during the period (net of tax expense of $1,576 and $501 for the three months ended September 30, 2015 and 2014 and $430 and $6,579 for the nine months ended September 30, 2015 and 2014, respectively)
2,926

 
930

 
798

 
12,218

Reclassification adjustment included in net income (net of tax expense of $351 and $168 for the three months ended September 30, 2015 and 2014, and $351 and $411 for the nine months ended September 30, 2015 and 2014, respectively)
(651
)
 
(312
)
 
(651
)
 
(762
)
Other comprehensive income
2,275

 
618

 
147

 
11,456

Comprehensive income
$
12,236

 
$
5,593

 
$
32,788

 
$
28,094


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, 2014
14,799,991

 
$
511

 
$
94,474

 
$
182,935

 
$
(11,994
)
 
$
265,926

Net income
—

 
—

 
—

 
16,638

 
—

 
16,638

Dividends ($0.11 per share)
—

 
—

 
—

 
(1,628
)
 
—

 
(1,628
)
Share-based compensation expense
—

 
—

 
1,867

 
—

 
—

 
1,867

Common stock issued
52,980

 
—

 
309

 
—

 
—

 
309

Other comprehensive income
—

 
—

 
—

 
—

 
11,456

 
11,456

Balance, September 30, 2014
14,852,971

 
$
511

 
$
96,650

 
$
197,945

 
$
(538
)
 
$
294,568

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2015
14,856,611

 
$
511

 
$
96,615

 
$
203,566

 
$
1,546

 
$
302,238

Net income
—

 
—

 
—

 
32,641

 
—

 
32,641

Share-based compensation expense
—

 
—

 
986

 
—

 
—

 
986

Common stock issued
7,205,091

 
—

 
124,446

 
—

 
—

 
124,446

Other comprehensive income
—

 
—

 
—

 
—

 
147

 
147

Balance, September 30, 2015
22,061,702

 
$
511

 
$
222,047

 
$
236,207

 
$
1,693

 
$
460,458


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
32,641

 
$
16,638

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
10,700

 
13,293

Provision (reversal of provision) for credit losses
4,200

 
(1,500
)
Fair value adjustment of loans held for sale
(3,797
)
 
(11,320
)
Fair value adjustment of loans held for investment
1,797

 
—

Origination of mortgage servicing rights
(58,158
)
 
(32,726
)
Change in fair value of mortgage servicing rights
34,949

 
26,075

Net gain on sale of investment securities
(1,002
)
 
(1,173
)
Net gain on sale of loans originated as held for investment
—

 
(4,586
)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned
290

 
(641
)
Loss on early retirement of long-term debt
—

 
573

Loss on disposal of fixed assets
89

 
—

Net deferred income tax expense (benefit)
11,491

 
(13,502
)
Share-based compensation expense
783

 
1,100

Bargain purchase gain
(7,345
)
 
—

Origination of loans held for sale
(5,599,978
)
 
(2,840,050
)
Proceeds from sale of loans originated as held for sale
5,349,444

 
2,459,748

Cash used by changes in operating assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable and other assets
(32,025
)
 
25,486

Increase in accounts payable and other liabilities
22,550

 
9,959

Net cash (used in) operating activities
(233,371
)
 
(352,626
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(177,535
)
 
(45,179
)
Proceeds from sale of investment securities
28,080

 
75,599

Principal repayments and maturities of investment securities
25,835

 
32,040

Proceeds from sale of other real estate owned
4,953

 
6,019

Proceeds from sale of loans originated as held for investment
—

 
271,409

Proceeds from sale of mortgage servicing rights
3,825

 
39,004

Mortgage servicing rights purchased from others
(9
)
 
(8
)
Origination of loans held for investment and principal repayments, net
(260,404
)
 
(389,196
)
Purchase of property and equipment
(16,961
)
 
(13,904
)
Net cash acquired from Simplicity acquisition
112,196

 
—

Net cash used in investing activities
(280,020
)
 
(24,216
)

8


 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
212,710

 
$
214,637

Proceeds from Federal Home Loan Bank advances
7,332,200

 
4,619,927

Repayment of Federal Home Loan Bank advances
(6,969,700
)
 
(4,467,927
)
Federal funds purchased and proceeds from securities sold under agreements to repurchase
73,004

 
58,308

Repayment of securities sold under agreements to repurchase
(123,004
)
 
(44,083
)
Proceeds from Federal Home Loan Bank stock repurchase
90,565

 
1,017

Purchase of Federal Home Loan Bank stock
(95,783
)
 
—

Repayment of long-term debt
—

 
(3,527
)
Dividends paid
—

 
(1,628
)
Proceeds from stock issuance, net
177

 
130

Excess tax benefit related to the exercise of stock options
23

 
767

Net cash provided by financing activities
520,192

 
377,621

NET INCREASE IN CASH AND CASH EQUIVALENTS
6,801

 
779

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
30,502

 
33,908

End of period
$
37,303

 
$
34,687

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
12,021

 
$
10,785

Federal and state income taxes paid, net of (refunds)
16,533

 
(10,642
)
Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
4,095

 
3,647

Loans transferred from held for investment to held for sale
32,421

 
310,455

Loans transferred from held for sale to held for investment
25,668

 
17,095

Ginnie Mae loans recognized with the right to repurchase, net
3,345

 
649

Simplicity acquisition:
 
 
 
Assets acquired, excluding cash acquired
738,279

 
—

Liabilities assumed
718,916

 
—

Bargain purchase gain
7,345

 
—

Common stock issued
$
124,214

 
$
—


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 and Union Street Holdings 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. These estimates that require application of management's most difficult, subjective or complex judgments often result in the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management has made significant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business combinations (Note 2, Business Combinations), allowance for credit losses (Note 4, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 7, Mortgage Banking Operations), loans held for investment (Note 4, Loans and Credit Quality), investment securities (Note 3, Investment Securities) and derivatives (Note 6, Derivatives and Hedging Activities). Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

These unaudited interim financial statements reflect 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, 2014, filed with the Securities and Exchange Commission (“2014 Annual Report on Form 10-K”).

Recent Accounting Developments

On September 25, 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The ASU was issued to simplify the accounting for measurement period adjustments for business combinations. The amendments in the ASU require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company will adopt this ASU for the first interim period beginning after December 15, 2015 and will apply prospectively to adjustments to provisional amounts which occur after the effective date of this ASU.
On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The ASU was issued to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented on the statement of financial condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. This guidance becomes effective for the Company for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of financial condition. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to consolidated obligations on the statement of financial condition. The Company is in the process of evaluating the effect of this guidance on the financial statements but the impact is not expected to be material.

10


On April 15, 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in Cloud Computing Arrangement. The ASU was issued to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers in determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. This guidance becomes effective for the Company for the interim and annual periods beginning after December 15, 2015, early adoption is permitted. The Company can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The Company is in the process of evaluating this guidance and its effect on the financial statements but the impact is not expected to be material.

In February 2015, the FASB issued ASU 2015-02, Consolidation. The ASU provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity, amending the criteria for consolidating such an entity and eliminating the deferral provided under previous guidance for investment companies. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

In January 2014, the FASB issued 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 prospective adoption of ASU 2014-04 did not 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 adoption of ASU 2014-09 is not expected to have a material impact on the Company's consolidated financial statements.

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. The application of this guidance required enhanced disclosures of the Company's repurchase agreements, but had no impact on the Company's consolidated financial statements.


11


In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The ASU clarifies the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. 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 prospective adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

NOTE 2–BUSINESS COMBINATIONS:

On March 1, 2015, the Company completed its acquisition of Simplicity Bancorp, Inc., a Maryland corporation (“Simplicity”) and Simplicity’s wholly owned subsidiary, Simplicity Bank. Simplicity’s principal business activities prior to the merger were attracting retail deposits from the general public, originating or purchasing loans, primarily loans secured by first mortgages on owner-occupied, one-to-four family residences and multi-family residences located in Southern California and, to a lesser extent, commercial real estate, automobile and other consumer loans; and the origination and sale of fixed-rate, conforming, one-to-four family residential real estate loans in the secondary market, usually with servicing retained. The primary objective for this acquisition is to grow our Commercial and Consumer Banking segment by expanding the business of the former Simplicity branches by offering additional banking and lending products to former Simplicity customers as well as new customers. The acquisition was accomplished by the merger of Simplicity with and into HomeStreet, Inc. with HomeStreet, Inc. as the surviving corporation, followed by the merger of Simplicity Bank with and into HomeStreet Bank with HomeStreet Bank as the surviving subsidiary. The results of operations of Simplicity will be included in the consolidated results of operations from the date of acquisition.

At the closing, there were 7,180,005 shares of Simplicity common stock, par value $0.01, outstanding, all of which were cancelled and exchanged for an equal number of shares of HomeStreet common stock, no par value, issued to Simplicity’s stockholders. In connection with the merger, all outstanding options to purchase Simplicity common stock were cancelled in exchange for a cash payment equal to the difference between a calculated price of HomeStreet common stock and the exercise price of the option, provided, however, that any options that were out-of-the-money at the time of closing were cancelled for no consideration. The calculated price of $17.53 was determined by averaging the closing price of HomeStreet common stock for the 10 trading days prior to but not including the 5th business day before the closing date. The aggregate consideration paid by us in the Simplicity acquisition was approximately $471 thousand in cash and 7,180,005 shares of HomeStreet common stock with a fair value of approximately $124.2 million as of the acquisition date. We used current liquidity sources to fund the cash consideration.

The acquisition was accounted for under the acquisition method of accounting pursuant to ASC 805, Business Combinations. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of acquisition date. The Company made significant estimates and exercised significant judgment in estimating the fair values and accounting for such acquired assets and assumed liabilities. The valuation of acquired loans, mortgage servicing rights, premises and equipment, core deposit intangibles, deferred taxes, deposits, Federal Home Loan Bank advances and any contingent liabilities that arise as a result of the transaction are considered preliminary and such fair value estimates are subject to adjustment for up to one year after the acquisition date or when additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

12


A summary of the consideration paid, the assets acquired and liabilities assumed in the merger are presented below:
(in thousands)
 
March 1, 2015
 
 
 
 
 
Fair value consideration paid to Simplicity shareholders:
 
 
 
 
Cash paid (79,399 stock options, consideration based on intrinsic value at a calculated price of $17.53)
 
 
 
$
471

Fair value of common shares issued (7,180,005 shares at $17.30 per share)
 
 
 
124,214

Total purchase price
 
 
 
$
124,685

Fair value of assets acquired:
 
 
 
 
Cash and cash equivalents
 
112,667

 
 
Investment securities
 
26,845

 
 
Acquired loans
 
664,148

 
 
Mortgage servicing rights
 
980

 
 
Federal Home Loan Bank stock
 
5,520

 
 
Premises and equipment
 
2,966

 
 
Bank-owned life insurance
 
14,501

 
 
Core deposit intangibles
 
7,450

 
 
Accounts receivable and other assets
 
15,869

 
 
Total assets acquired
 
850,946

 
 
 
 
 
 
 
Fair value of liabilities assumed:
 
 
 
 
Deposits
 
651,202

 
 
Federal Home Loan Bank advances
 
65,855

 
 
Accounts payable and accrued expenses
 
1,859

 
 
Total liabilities assumed
 
718,916

 
 
Net assets acquired
 
 
 
$
132,030

Preliminary bargain purchase (gain)
 


 
$
(7,345
)

The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $7.3 million which was reported as a component of noninterest income on our consolidated statements of operations. A substantial portion of the assets acquired from Simplicity were mortgage-related assets, which generally decrease in value as interest rates rise and increase in value as interest rates fall. The bargain purchase gain was driven largely by a substantial decline in long-term interest rates between the period shortly after our announcement of the Simplicity acquisition and its closing, which resulted in an increase in the fair value of the acquired mortgage assets and the overall net fair value of assets acquired. In addition, the Company believes it was able to acquire Simplicity for less than the fair value of its net assets due to Simplicity’s stock trading below its book value for an extended period of time prior to the announcement of the acquisition. The Company negotiated a purchase price per share for Simplicity that was above the prevailing stock price thereby representing a premium to the shareholders. The stock consideration transferred was based on a 1:1 stock conversion ratio. The price of the Company’s shares declined between the time the deal was announced and when it closed which also attributed to the bargain purchase gain. The acquisition of Simplicity by the Company was approved by Simplicity’s shareholders. For tax purposes, the bargain purchase gain is a non-taxable event.

The operations of Simplicity are included in the Company's operating results as of the acquisition date of March 1, 2015 through the period ended September 30, 2015. Acquisition-related costs were expensed as incurred in noninterest expense as merger and integration costs.

13


The following table provides a breakout of merger-related expense for the nine months ended September 30, 2015 and for the year ended December 31, 2014:
 
Nine Months Ended September 30, 2015
 
Year Ended December 31, 2014
(in thousands)
 
 
 
 
 
Noninterest expense
 
 
 
Salaries and related costs
$
7,669

 
$
23

General and administrative
1,256

 
179

Legal
530

 
245

Consulting
5,539

 
388

Occupancy
335

 
4

Information services
481

 
50

Total noninterest expense
$
15,810

 
$
889


The $664.1 million estimated fair value of loans acquired from Simplicity was determined by utilizing a discounted cash flow methodology considering credit and interest rate risk. Cash flows were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on the Company’s weighted average cost of capital. The discount for acquired loans from Simplicity was $16.6 million as of the acquisition date.

A core deposit intangible (“CDI”) of $7.5 million was recognized related to the core deposits acquired from Simplicity. A discounted cash flow method was used to estimate the fair value of the certificates of deposit. The CDI is amortized over its estimated useful life of approximately ten years using an accelerated method and will be reviewed for impairment quarterly.

The fair value of savings and transaction deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. A discounted cash flow method was used to estimate the fair value of the certificates of deposit. A premium, which will be amortized over the contractual life of the deposits, of $4.0 million was recorded for certificates of deposit.

The fair value of Federal Home Loan Bank advances was estimated using a discounted cash flow method. A premium, which will be amortized over the contractual life of the advances, of $855 thousand was recorded for the Federal Home Loan Bank advances.

The Company determined that the disclosure requirements related to the amounts of revenues and earnings of the acquiree included in the consolidated statements of operations since the acquisition date is impracticable. The financial activity and operating results of the acquiree were commingled with the Company’s financial activity and operating results as of the acquisition date.


14


Unaudited Pro Forma Results of Operations

The following table presents our unaudited pro forma results of operations for the periods presented as if the Simplicity acquisition had been completed on January 1, 2014. The unaudited pro forma results of operations include the historical accounts of Simplicity and pro forma adjustments as may be required, including the amortization of intangibles with definite lives and the amortization or accretion of any premiums or discounts arising from fair value adjustments for assets acquired and liabilities assumed. The unaudited pro forma information is intended for informational purposes only and is not necessarily indicative of our future operating results or operating results that would have occurred had the Simplicity acquisition been completed at the beginning of 2014. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
39,603

 
$
33,182

 
$
113,190

 
$
95,140

Provision (reversal of provision) for credit losses
700

 
(350
)
 
4,200

 
(2,250
)
Total noninterest income
66,676

 
47,207

 
209,239

 
145,702

Total noninterest expense
91,557

 
71,014

 
266,243

 
218,437

 
 
 
 
 
 
 
 
Net income
$
9,756

 
$
6,471

 
$
35,355

 
$
20,430

 
 
 
 
 
 
 
 
Basic income per share
$
0.44

 
$
0.30

 
$
1.60

 
$
0.94

Diluted income per share
$
0.44

 
$
0.30

 
$
1.59

 
$
0.93

Basic weighted average number of shares outstanding
22,035,317

 
21,551,126

 
22,034,201

 
21,749,352

Diluted weighted average number of shares outstanding
22,291,810

 
21,735,713

 
22,207,764

 
21,934,050



NOTE 3–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At September 30, 2015
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
91,562

 
$
216

 
$
(774
)
 
$
91,004

Commercial
23,824

 
331

 
(90
)
 
24,065

Municipal bonds
184,160

 
3,350

 
(427
)
 
187,083

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
88,459

 
119

 
(789
)
 
87,789

Commercial
55,849

 
468

 
(71
)
 
56,246

Corporate debt securities
84,304

 
307

 
(1,729
)
 
82,882

U.S. Treasury securities
40,991

 
22

 
—

 
41,013

 
$
569,149

 
$
4,813

 
$
(3,880
)
 
$
570,082



15


 
At December 31, 2014
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
107,624

 
$
509

 
$
(853
)
 
$
107,280

Commercial
13,030

 
641

 
—

 
13,671

Municipal bonds
119,744

 
2,847

 
(257
)
 
122,334

Collateralized mortgage obligations:
 
 
 
 
 
 

Residential
44,254

 
161

 
(1,249
)
 
43,166

Commercial
20,775

 
—

 
(289
)
 
20,486

Corporate debt securities
80,214

 
296

 
(1,110
)
 
79,400

U.S. Treasury securities
40,976

 
13

 
—

 
40,989

 
$
426,617

 
$
4,467

 
$
(3,758
)
 
$
427,326


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("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 September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014, substantially all securities held had ratings available by external ratings agencies.

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 September 30, 2015
 
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
$
(344
)
 
$
28,158

 
$
(430
)
 
$
21,833

 
$
(774
)
 
$
49,991

Commercial
(90
)
 
16,431

 
—

 
—

 
(90
)
 
16,431

Municipal bonds
(281
)
 
41,334

 
(147
)
 
5,815

 
(428
)
 
47,149

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(191
)
 
37,565

 
(597
)
 
27,618

 
(788
)
 
65,183

Commercial
—

 
—

 
(71
)
 
4,698

 
(71
)
 
4,698

Corporate debt securities
(631
)
 
29,482

 
(1,098
)
 
27,152

 
(1,729
)
 
56,634

 
$
(1,537
)
 
$
152,970

 
$
(2,343
)
 
$
87,116

 
$
(3,880
)
 
$
240,086



16


 
At December 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
$
—

 
$
—

 
$
(853
)
 
$
57,242

 
$
(853
)
 
$
57,242

Municipal bonds
(11
)
 
2,339

 
(246
)
 
17,155

 
(257
)
 
19,494

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 


 


Residential
—

 
—

 
(1,249
)
 
31,021

 
(1,249
)
 
31,021

Commercial
(29
)
 
5,037

 
(260
)
 
15,449

 
(289
)
 
20,486

Corporate debt securities
(56
)
 
13,140

 
(1,054
)
 
40,997

 
(1,110
)
 
54,137

 
$
(96
)
 
$
20,516

 
$
(3,662
)
 
$
161,864

 
$
(3,758
)
 
$
182,380


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. The Company has not identified any expected credit losses on its debt securities as of September 30, 2015 and December 31, 2014. In addition, as of September 30, 2015 and December 31, 2014, 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 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 September 30, 2015
 
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
$
—

 
—
%
 
$
4

 
0.40
%
 
$
3,425

 
1.60
%
 
$
87,575

 
1.86
%
 
$
91,004

 
1.85
%
Commercial
—

 
—

 
—

 
—

 
18,239

 
2.21

 
5,826

 
4.88

 
24,065

 
2.83

Municipal bonds
516

 
2.10

 
7,812

 
3.41

 
35,836

 
3.39

 
142,919

 
4.04

 
187,083

 
3.88

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
161

 
0.91

 
87,628

 
1.64

 
87,789

 
1.64

Commercial
—

 
—

 
5,461

 
1.90

 
40,649

 
2.28

 
10,136

 
2.03

 
56,246

 
2.20

Corporate debt securities
—

 
—

 
13,298

 
2.61

 
38,947

 
3.24

 
30,637

 
3.70

 
82,882

 
3.31

U.S. Treasury securities
40,013

 
0.35

 
1,000

 
0.64

 
—

 
—

 
—

 
—

 
41,013

 
0.35

Total available for sale
$
40,529

 
0.37
%
 
$
27,575

 
2.62
%
 
$
137,257

 
2.81
%
 
$
364,721

 
2.83
%
 
$
570,082

 
2.64
%
 

17


 
At December 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
$
—

 
—
%
 
$
—

 
—
%
 
$
6,949

 
1.72
%
 
$
100,331

 
1.75
%
 
$
107,280

 
1.75
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,671

 
4.75

 
13,671

 
4.75

Municipal bonds
—

 
—

 
604

 
4.10

 
23,465

 
3.55

 
98,265

 
4.21

 
122,334

 
4.09

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
—

 
—

 
43,166

 
1.84

 
43,166

 
1.84

Commercial
—

 
—

 
—

 
—

 
9,776

 
1.96

 
10,710

 
1.99

 
20,486

 
1.97

Corporate debt securities
—

 
—

 
9,000

 
2.21

 
38,487

 
3.35

 
31,913

 
3.73

 
79,400

 
3.37

U.S. Treasury securities
25,998

 
0.28

 
14,991

 
0.46

 
—

 
—

 
—

 
—

 
40,989

 
0.35

Total available for sale
$
25,998

 
0.28
%
 
$
24,595

 
1.19
%
 
$
78,677

 
3.09
%
 
$
298,056

 
2.92
%
 
$
427,326

 
2.69
%


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Proceeds
$
28,080

 
$
9,753

 
$
28,080

 
$
75,599

Gross gains
1,002

 
480

 
1,002

 
1,375

Gross losses
—

 
—

 
—

 
(201
)

There were $113.7 million and $44.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Des Moines ("FHLB") at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, there were $33.1 million and $33.4 million, respectively, of securities pledged to secure derivatives in a liability position.

The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little risk. There were no securities pledged under repurchase agreements at September 30, 2015 and December 31, 2014.

Tax-exempt interest income on securities available for sale totaling $968 thousand and $856 thousand for the three months ended September 30, 2015 and 2014, respectively, and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively, was recorded in the Company's consolidated statements of operations.



18


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 within our 2014 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 and other 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 September 30,
2015
 
At December 31,
2014
 
 
 
 
Consumer loans
 
 
 
Single family
$
1,171,967

(1) 
$
896,665

Home equity and other
237,491

 
135,598

 
1,409,458

 
1,032,263

Commercial loans
 
 
 
Commercial real estate
563,241

 
523,464

Multifamily
382,392

 
55,088

Construction/land development
529,871

 
367,934

Commercial business
158,135

 
147,449

 
1,633,639

 
1,093,935

 
3,043,097

 
2,126,198

Net deferred loan fees, costs and discounts
(3,232
)
 
(5,048
)
 
3,039,865

 
2,121,150

Allowance for loan losses
(26,922
)
 
(22,021
)
 
$
3,012,943

 
$
2,099,129

(1)
Includes $23.8 million of loans where a fair value option election was made at the time of origination and, therefore, are carried at fair value with changes recognized in the consolidated statements of operations.

Loans in the amount of $1.74 billion and $1.06 billion at September 30, 2015 and December 31, 2014, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. Additionally, loans totaling $593.1 million and $487.2 million at September 30, 2015 and December 31, 2014, respectively, were pledged to secure borrowings from the Federal Reserve Bank. The FHLB and Federal Reserve Bank do not have the right to sell or re-pledge these loans.

Credit Risk Concentration
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 Pacific Northwest, Oregon, California and Hawaii. At September 30, 2015, 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 19.3%, 15.2% and 11.5% of the total portfolio, respectively. Additionally, we had a concentration representing 10% or more by state and property type for the single family loan class within the state of California, which represented 13.5% of the total portfolio. At December 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, commercial real estate and construction/land development within the state of Washington, which represented 28.0% and 20.7% and 13.7% of the total portfolio, respectively.


19


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 September 30, 2015. 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 2014 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
 
 
 
Beginning balance
 
$
26,448

 
$
22,168

 
$
22,524

 
$
24,089

Provision (reversal of provision) for credit losses
 
700

 
—

 
4,200

 
(1,500
)
(Charge-offs), net of recoveries
 
739

 
(57
)
 
1,163

 
(478
)
Ending balance
 
$
27,887

 
$
22,111

 
$
27,887

 
$
22,111

Components:
 
 
 
 
 
 
 
 
Allowance for loan losses
 
$
26,922

 
$
21,847

 
$
26,922

 
$
21,847

Allowance for unfunded commitments
 
965

 
264

 
965

 
264

Allowance for credit losses
 
$
27,887

 
$
22,111

 
$
27,887

 
$
22,111



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

 
Three Months Ended September 30, 2015
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
8,997

 
$
(232
)
 
$
250

 
$
(298
)
 
$
8,717

Home equity and other
3,882

 
(255
)
 
84

 
541

 
4,252

 
12,879

 
(487
)
 
334

 
243

 
12,969

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,046

 
—

 
—

 
(355
)
 
4,691

Multifamily
780

 
(150
)
 
—

 
153

 
783

Construction/land development
5,943

 
—

 
1,033

 
435

 
7,411

Commercial business
1,800

 
(14
)
 
23

 
224

 
2,033

 
13,569

 
(164
)
 
1,056

 
457

 
14,918

Total allowance for credit losses
$
26,448

 
$
(651
)
 
$
1,390

 
$
700

 
$
27,887

 

20


 
Three Months Ended September 30, 2014
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
9,111

 
$
(226
)
 
$
65

 
$
(72
)
 
$
8,878

Home equity and other
3,517

 
(135
)
 
94

 
87

 
3,563

 
12,628

 
(361
)
 
159

 
15

 
12,441

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,063

 
—

 
275

 
(357
)
 
3,981

Multifamily
887

 
—

 
—

 
(174
)
 
713

Construction/land development
2,418

 
—

 
123

 
146

 
2,687

Commercial business
2,172

 
(304
)
 
51

 
370

 
2,289

 
9,540

 
(304
)