Document
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, 2016
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 August 2, 2016 was 24,826,304.6.
 


Table of Contents


PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents


 
 
 
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 (“HomeStreet Capital”) and other direct and indirect subsidiaries of HomeStreet, Inc.


3

PART I
ITEM 1. FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

(in thousands, except share data)
 
June 30,
2016
 
December 31,
2015
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-earning instruments of $2,557 and $2,079)
 
$
45,229

 
$
32,684

Investment securities (includes $890,356 and $541,151 carried at fair value)
 
928,364

 
572,164

Loans held for sale (includes $716,913 and $632,273 carried at fair value)
 
772,780

 
650,163

Loans held for investment (net of allowance for loan losses of $32,656 and $29,278; includes $22,362 and $21,544 carried at fair value)
 
3,698,959

 
3,192,720

Mortgage servicing rights (includes $130,900 and $156,604 carried at fair value)
 
147,266

 
171,255

Other real estate owned
 
10,698

 
7,531

Federal Home Loan Bank stock, at cost
 
40,414

 
44,342

Premises and equipment, net
 
67,884

 
63,738

Goodwill
 
19,846

 
11,521

Other assets
 
209,738

 
148,377

Total assets
 
$
5,941,178

 
$
4,894,495

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
4,239,155

 
$
3,231,953

Federal Home Loan Bank advances
 
878,987

 
1,018,159

Accounts payable and other liabilities
 
138,307

 
117,251

Long-term debt
 
125,126

 
61,857

Total liabilities
 
5,381,575

 
4,429,220

Commitments and contingencies (Note 9)
 
 
 
 
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, 24,821,349 shares and 22,076,534 shares
 
511

 
511

Additional paid-in capital
 
276,303

 
222,328

Retained earnings
 
273,041

 
244,885

Accumulated other comprehensive income (loss)
 
9,748

 
(2,449
)
Total shareholders' equity
 
559,603

 
465,275

Total liabilities and shareholders' equity
 
$
5,941,178

 
$
4,894,495


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)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
47,262

 
$
38,944

 
$
89,996

 
$
70,591

Investment securities
4,002

 
3,278

 
7,055

 
5,672

Other
27

 
218

 
294

 
423

 
51,291

 
42,440

 
97,345

 
76,686

Interest expense:
 
 
 
 
 
 
 
Deposits
4,449

 
3,005

 
8,018

 
5,587

Federal Home Loan Bank advances
1,462

 
906

 
2,881

 
1,518

Federal funds purchased and securities sold under agreements to repurchase
—

 
3

 
—

 
8

Long-term debt
823

 
272

 
1,134

 
537

Other
75

 
24

 
139

 
72

 
6,809

 
4,210

 
12,172

 
7,722

Net interest income
44,482

 
38,230

 
85,173

 
68,964

Provision for credit losses
1,100

 
500

 
2,500

 
3,500

Net interest income after provision for credit losses
43,382

 
37,730

 
82,673

 
65,464

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
85,630

 
69,974

 
146,893

 
131,861

Mortgage servicing income
13,182

 
1,831

 
21,311

 
6,128

Income from WMS Series LLC
1,164

 
484

 
1,300

 
1,048

Depositor and other retail banking fees
1,652

 
1,399

 
3,247

 
2,538

Insurance agency commissions
370

 
291

 
764

 
706

Gain on sale of investment securities available for sale
62

 
—

 
97

 
—

Bargain purchase gain (adjustment)
—

 
(79
)
 
—

 
6,549

Other
416

 
(913
)
 
572

 
(470
)
 
102,476

 
72,987

 
174,184

 
148,360

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
75,167

 
61,654

 
142,451

 
119,247

General and administrative
16,739

 
13,955

 
32,261

 
26,780

Amortization of core deposit intangibles
525

 
547

 
1,057

 
883

Legal
605

 
577

 
1,048

 
1,044

Consulting
1,177

 
813

 
2,849

 
6,378

Federal Deposit Insurance Corporation assessments
784

 
861

 
1,500

 
1,386

Occupancy
7,513

 
6,107

 
14,668

 
11,947

Information services
8,447

 
7,714

 
15,981

 
13,834

Net cost from operation and sale of other real estate owned
74

 
107

 
569

 
318

 
111,031

 
92,335

 
212,384

 
181,817

Income before income taxes
34,827

 
18,382

 
44,473

 
32,007

Income tax expense
13,078

 
6,006

 
16,317

 
9,327

NET INCOME
$
21,749

 
$
12,376

 
$
28,156

 
$
22,680

 
 
 
 
 
 
 
 
Basic income per share
$
0.88

 
$
0.56

 
$
1.16

 
$
1.16

Diluted income per share
$
0.87

 
$
0.56

 
$
1.15

 
$
1.14

Basic weighted average number of shares outstanding
24,708,375

 
22,028,539

 
24,192,441

 
19,593,421

Diluted weighted average number of shares outstanding
24,911,919

 
22,292,734

 
24,394,648

 
19,823,905


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

5

HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
21,749

 
$
12,376

 
$
28,156

 
$
22,680

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 $3,030 and $(2,313) for the three months ended June 30, 2016 and 2015, $6,602 and $(1,146) for the six months ended June 30, 2016 and 2015, respectively
5,627

 
(4,295
)
 
12,260

 
(2,128
)
Reclassification adjustment for net gains included in net income, net of tax expense of $22 and $0 for the three months ended June 30, 2016 and 2015, and $34 and $0 for the six months ended June 30, 2016 and 2015, respectively
(40
)
 
—

 
(63
)
 
—

Other comprehensive income (loss)
5,587

 
(4,295
)
 
12,197

 
(2,128
)
Comprehensive income
$
27,336

 
$
8,081

 
$
40,353

 
$
20,552


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, 2015
14,856,611

 
$
511

 
$
96,615

 
$
203,566

 
$
1,546

 
$
302,238

Net income
—

 
—

 
—

 
22,680

 
—

 
22,680

Share-based compensation expense
—

 
—

 
598

 
—

 
—

 
598

Common stock issued
7,208,638

 
—

 
124,338

 
—

 
—

 
124,338

Other comprehensive loss
—

 
—

 
—

 
—

 
(2,128
)
 
(2,128
)
Balance, June 30, 2015
22,065,249

 
$
511

 
$
221,551

 
$
226,246

 
$
(582
)
 
$
447,726

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
22,076,534

 
$
511

 
$
222,328

 
$
244,885

 
$
(2,449
)
 
$
465,275

Net income
—

 
—

 
—

 
28,156

 
—

 
28,156

Share-based compensation expense
—

 
—

 
827

 
—

 
—

 
827

Common stock issued
2,744,815

 
—

 
53,148

 
—

 
—

 
53,148

Other comprehensive income
—

 
—

 
—

 
—

 
12,197

 
12,197

Balance, June 30, 2016
24,821,349

 
$
511

 
$
276,303

 
$
273,041

 
$
9,748

 
$
559,603


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)
2016
 
2015
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
28,156

 
$
22,680

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation, amortization and accretion
8,565

 
7,156

Provision for credit losses
2,500

 
3,500

Net fair value adjustment and gain on sale of loans held for sale
(131,102
)
 
2,265

Fair value adjustment of loans held for investment
1,272

 
1,679

Origination of mortgage servicing rights
(34,580
)
 
(36,932
)
Change in fair value of mortgage servicing rights
57,284

 
7,075

Net gain on sale of investment securities
(97
)
 
—

Net gain on sale of loans originated as held for investment
(793
)
 
—

Net fair value adjustment, gain on sale and provision for losses on other real estate owned
646

 
(54
)
Loss on disposal of fixed assets
513

 
28

Net deferred income tax (benefit) expense
(7,951
)
 
4,292

Share-based compensation expense
827

 
630

Bargain purchase gain
—

 
(6,549
)
Origination of loans held for sale
(3,930,954
)
 
(3,628,598
)
Proceeds from sale of loans originated as held for sale
3,931,729

 
3,265,616

Changes in operating assets and liabilities:
 
 
 
Increase in other assets
(51,974
)
 
(24,903
)
Increase in accounts payable and other liabilities
17,077

 
24,706

Net cash used in operating activities
(108,882
)
 
(357,409
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(356,975
)
 
(49,972
)
Proceeds from sale of investment securities
11,467

 
—

Principal repayments and maturities of investment securities
37,099

 
16,290

Proceeds from sale of other real estate owned
164

 
2,142

Proceeds from sale of loans originated as held for investment
39,022

 
—

Proceeds from sale of mortgage servicing rights
—

 
3,825

Mortgage servicing rights purchased from others
—

 
(6
)
Capital expenditures related to other real estate owned
(32
)
 
—

Origination of loans held for investment and principal repayments, net
(414,089
)
 
(134,003
)
Proceeds from sale of property and equipment
1,148

 
—

Purchase of property and equipment
(12,151
)
 
(11,676
)
Net cash acquired from acquisitions
17,495

 
112,196

Net cash used in investing activities
(676,852
)
 
(61,204
)

8

 
Six Months Ended June 30,
(in thousands)
2016
 
2015
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
880,701

 
$
226,021

Proceeds from Federal Home Loan Bank advances
7,621,460

 
3,934,500

Repayment of Federal Home Loan Bank advances
(7,774,960
)
 
(3,675,000
)
Federal funds purchased and proceeds from securities sold under agreements to repurchase
—

 
73,004

Repayment of securities sold under agreements to repurchase
—

 
(123,004
)
Proceeds from Federal Home Loan Bank stock repurchase
123,038

 
27,685

Purchase of Federal Home Loan Bank stock
(117,879
)
 
(28,993
)
Proceeds from debt issuance, net
63,255

 
—

Proceeds from stock issuance, net
2,664

 
127

Excess tax benefit related to the exercise of stock options
—

 
(32
)
Net cash provided by financing activities
798,279

 
434,308

NET INCREASE IN CASH AND CASH EQUIVALENTS
12,545

 
15,695

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
32,684

 
30,502

End of period
$
45,229

 
$
46,197

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
14,905

 
$
7,677

Federal and state income taxes paid (refunds), net
(1,464
)
 
16,281

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
1,168

 
4,095

Loans transferred from held for investment to held for sale
37,648

 
15,899

Loans transferred from held for sale to held for investment
7,129

 
25,668

(Reduction in) Ginnie Mae loans recognized with the right to repurchase, net
(2,725
)
 
594

Simplicity acquisition:
 
 
 
Assets acquired, excluding cash acquired
—

 
737,483

Liabilities assumed
—

 
718,916

Bargain purchase gain
—

 
6,549

Common stock issued
—

 
124,214

Orange County Business Bank acquisition:
 
 
 
Assets acquired, excluding cash acquired
165,822

 
—

Liabilities assumed
141,267

 
—

Goodwill
8,325

 
—

Common stock issued
$
50,373

 
$
—


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 western United States, including 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, HS Properties, Inc. and Union Street Holdings LLC. HomeStreet Bank was formed in 1986 and is a state-chartered commercial 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. Equity investments through which we are able to exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. 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. 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 8, Mortgage Banking Operations), valuation of certain loans held for investment (Note 4, Loans and Credit Quality), valuation of investment securities (Note 3, Investment Securities), and valuation of derivatives (Note 7, 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, 2015, filed with the Securities and Exchange Commission (“2015 Annual Report on Form 10-K”).

Recent Accounting Developments

On June 16, 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326). The amendments in this ASU were issued to provide financial statement users with more decision-useful information about the current expected credit losses (CECL) on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. The amendments to this ASU require that financial assets measured at amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The amendments in this ASU eliminate the probable initial recognition in current GAAP and reflect an entity’s current estimate of all expected credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the financial assets.
For purchased financial assets with a more-than-insignificant amount of credit deterioration since origination (“PCD assets”) that are measured at amortized cost, the initial allowance for credit losses is added to the purchase price rather than being reported as a credit loss expense. Subsequent changes in the allowance for credit losses on PCD assets are recognized through the statement of income as a credit loss expense.
Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses rather than as a direct write-down to the security.
The amendments to this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments in this ASU should be applied on a modified-retrospective transition approach that would require a cumulative-effect adjustment to the opening retained earnings in the statement of financial condition as of the date of

10

adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of this ASU and the Company expects this ASU to have a material impact on the Company’s consolidated financial statements.
On March 30, 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. This new accounting standard simplifies several areas of accounting for share-based payment transactions, including tax provision, classification in the cash-flow statement, forfeitures, and statutory tax withholding requirements. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. Early application was permitted upon issuance of the ASU. The Company determined to early adopt the provisions of ASU 2016-09 during the second quarter of 2016 and determined the new standard did not have a material impact on the Company's Consolidated Financial Statements.

On February 25 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this ASU require lessees to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. This ASU simplifies the accounting for sale and leaseback transactions. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application was permitted upon issuance of the ASU. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements.

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 were effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company adopted this guidance during the first quarter of 2016 and applied it prospectively to adjustments to provisional amounts.

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 became effective for the Company for the interim and annual periods beginning after December 15, 2015, and early adoption was permitted for financial statements that had 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 Company adopted this guidance during the first quarter of 2016 and determined there was no material impact on the Company’s consolidated financial statements.

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 became effective for the Company for the interim and annual periods beginning after December 15, 2015; early adoption was permitted. The Company could 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 adopted this guidance during the first quarter of 2016 and determined there was no material impact on the Company’s consolidated financial statements.


11

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 variable interest entity ("VIE") primary beneficiary determination. This guidance was effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance during the first quarter of 2016 and determined there was no 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. On August 12, 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. On March 17, 2016, the FASB issued Accounting Standards Update 2016-08 to clarify the implementation guidance on principal versus agent considerations. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

NOTE 2–BUSINESS COMBINATIONS:

Recent Acquisition Activity

On February 1, 2016, the Company completed its acquisition of Orange County Business Bank ("OCBB") located in Irvine, California through the merger of OCBB with and into HomeStreet Bank with HomeStreet Bank as the surviving subsidiary. The purchase price of this acquisition was $55.9 million. OCBB shareholders as of the effective time received merger consideration equal to 0.5206 shares of HomeStreet common stock, and $1.1641 in cash upon the surrender of their OCBB shares, which resulted in the issuance of 2,459,408 shares of HomeStreet common stock. The provisional application of the acquisition method of accounting resulted in goodwill of $8.3 million. The primary objective for this acquisition is to grow our Commercial and Consumer Banking segment. Along with two de novo branches opened in California during the quarter, adding Orange County Business Bank’s branch brings HomeStreet’s Southern California retail deposit branch network to ten locations.

On December 11, 2015, the Company acquired a former AmericanWest Bank retail deposit branch and certain related assets located in Dayton, Washington. This acquisition increases HomeStreet’s network of branches in eastern Washington to a total of five retail deposit branches. The Company purchased the branch from Banner Bank, which had recently acquired AmericanWest Bank. The purchase resulted in a bargain purchase gain of $381 thousand.

Simplicity Acquisition

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 multifamily 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 was 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 are 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

12

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.

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

Bargain purchase (gain)
 
 
 
$
(7,345
)

The 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.


13

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

The following table provides a breakout of merger-related expense for the six months ended June 30, 2015:
 
Six Months Ended
(in thousands)
June 30, 2015
 
 
Noninterest expense
 
Salaries and related costs
$
7,676

General and administrative
1,249

Legal
351

Consulting
5,751

Occupancy
383

Information services
(37
)
Total noninterest expense
$
15,373


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 meeting 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 June 30,
 
Six Months Ended June 30,
(in thousands, except share data)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
44,482

 
$
38,370

 
$
85,173

 
$
73,587

Provision for credit losses
1,100

 
500

 
2,500

 
3,500

Total noninterest income
102,476

 
73,070

 
174,184

 
142,563

Total noninterest expense
111,031

 
89,095

 
212,384

 
174,686

 
 
 
 
 
 
 
 
Net income
$
21,749

 
$
14,384

 
$
28,156

 
$
25,599

 
 
 
 
 
 
 
 
Basic income per share
$
0.88

 
$
0.65

 
$
1.16

 
$
1.16

Diluted income per share
$
0.87

 
$
0.65

 
$
1.15

 
$
1.15

Basic weighted average number of shares outstanding
24,708,375

 
22,028,539

 
24,192,441

 
22,033,644

Diluted weighted average number of shares outstanding
24,911,919

 
22,292,734

 
24,394,648

 
22,165,741



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 June 30, 2016
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
138,277

 
$
1,109

 
$
(312
)
 
$
139,074

Commercial
24,271

 
436

 
—

 
24,707

Municipal bonds
326,717

 
9,120

 
(36
)
 
335,801

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
161,963

 
1,850

 
(407
)
 
163,406

Commercial
114,475

 
1,713

 
(89
)
 
116,099

Corporate debt securities
83,611

 
2,059

 
(421
)
 
85,249

U.S. Treasury securities
26,019

 
1

 
—

 
26,020

 
$
875,333

 
$
16,288

 
$
(1,265
)
 
$
890,356


15


 
At December 31, 2015
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
69,342

 
$
19

 
$
(1,260
)
 
$
68,101

Commercial
18,142

 
14

 
(305
)
 
17,851

Municipal bonds
168,722

 
3,460

 
(313
)
 
171,869

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
86,167

 
32

 
(1,702
)
 
84,497

Commercial
80,190

 
43

 
(1,100
)
 
79,133

Corporate debt securities
81,280

 
125

 
(2,669
)
 
78,736

U.S. Treasury securities
41,047

 
—

 
(83
)
 
40,964

 
$
544,890

 
$
3,693

 
$
(7,432
)
 
$
541,151


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 June 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, 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 June 30, 2016
 
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
$
(31
)
 
$
2,047

 
$
(281
)
 
$
17,584

 
$
(312
)
 
$
19,631

Municipal bonds
(29
)
 
9,814

 
(7
)
 
2,218

 
(36
)
 
12,032

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(107
)
 
18,875

 
(300
)
 
10,331

 
(407
)
 
29,206

Commercial
(40
)
 
14,351

 
(49
)
 
3,997

 
(89
)
 
18,348

Corporate debt securities
—

 
—

 
(421
)
 
11,119

 
(421
)
 
11,119

U.S. Treasury securities
—

 
25,020

 
—

 
—

 
—

 
25,020

 
$
(207
)
 
$
70,107

 
$
(1,058
)
 
$
45,249

 
$
(1,265
)
 
$
115,356



16

 
At December 31, 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
$
(572
)
 
$
36,477

 
$
(688
)
 
$
21,119

 
$
(1,260
)
 
$
57,596

Commercial
(305
)
 
16,072

 
—

 
—

 
(305
)
 
16,072

Municipal bonds
(211
)
 
21,302

 
(101
)
 
5,839

 
(312
)
 
27,141

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(673
)
 
50,490

 
(1,029
)
 
26,028

 
(1,702
)
 
76,518

Commercial
(986
)
 
60,812

 
(115
)
 
4,348

 
(1,101
)
 
65,160

Corporate debt securities
(1,142
)
 
36,953

 
(1,527
)
 
27,405

 
(2,669
)
 
64,358

U.S. Treasury securities
(83
)
 
40,964

 
—

 
—

 
(83
)
 
40,964

 
$
(3,972
)
 
$
263,070

 
$
(3,460
)
 
$
84,739

 
$
(7,432
)
 
$
347,809


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 June 30, 2016 and December 31, 2015. In addition, as of June 30, 2016 and December 31, 2015, 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 June 30, 2016
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars 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
$
—

 
—
%
 
$
2

 
0.33
%
 
$
2,645

 
1.57
%
 
$
136,427

 
1.76
%
 
$
139,074

 
1.76
%
Commercial
—

 
—

 
22,885

 
2.15

 
1,822

 
3.01

 
—

 
—

 
24,707

 
2.21

Municipal bonds
2,232

 
3.55

 
10,337

 
3.06

 
54,895

 
2.51

 
268,337

 
3.80

 
335,801

 
3.57

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
3,037

 
1.30

 
160,369

 
1.78

 
163,406

 
1.78

Commercial
—

 
—

 
22,537

 
2.11

 
53,505

 
2.48

 
40,057

 
1.99

 
116,099

 
2.24

Corporate debt securities
—

 
—

 
17,464

 
2.96

 
30,884

 
3.33

 
36,901

 
4.15

 
85,249

 
3.61

U.S. Treasury securities
25,020

 
0.36

 
1,000

 
0.64

 
—

 
—

 
—

 
—

 
26,020

 
0.37

Total available for sale
$
27,252

 
0.62
%
 
$
74,225

 
2.43
%
 
$
146,788

 
2.64
%
 
$
642,091

 
2.76
%
 
$
890,356

 
2.65
%
 


17

 
At December 31, 2015
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars 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

 
0.39
%
 
$
3,176

 
1.63
%
 
$
64,921

 
1.88
%
 
$
68,101

 
1.87
%
Commercial
—

 
—

 
—

 
—

 
17,851

 
2.20

 
—

 
—

 
17,851

 
2.20

Municipal bonds
510

 
2.09

 
8,828

 
3.33

 
31,806

 
3.16

 
130,725

 
3.99

 
171,869

 
3.79

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
153

 
0.92

 
84,344

 
1.74

 
84,497

 
1.74

Commercial
—

 
—

 
5,354

 
1.87

 
56,506

 
2.29

 
17,273

 
1.87

 
79,133

 
2.17

Corporate debt securities
—

 
—

 
10,413

 
2.70

 
38,291

 
3.20

 
30,032

 
3.64

 
78,736

 
3.31

U.S. Treasury securities
39,971

 
0.39

 
993

 
0.63

 
—

 
—

 
—

 
—

 
40,964

 
0.40

Total available for sale
$
40,481

 
0.41
%
 
$
25,592

 
2.65
%
 
$
147,783

 
2.69
%
 
$
327,295

 
2.83
%
 
$
541,151

 
2.60
%


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Proceeds
$
1,706

 
$
—

 
$
11,467

 
$
—

Gross gains
62

 
—

 
97

 
—

Gross losses
$
—

 
$
—

 
$
—

 
$
—


The following table summarizes the carrying value of securities pledged as collateral to secure public deposits, borrowings and other purposes as permitted or required by law:

(in thousands)
At June 30,
2016
 
 
Federal Home Loan Bank to secure borrowings
$
122,085

Washington and California State to secure public deposits
31,218

Securities pledged to secure derivatives in a liability position
24,585

Other securities pledged
4,985

Total securities pledged as collateral
$
182,873



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 June 30, 2016 and December 31, 2015.

Tax-exempt interest income on securities available for sale totaling $1.5 million and $852 thousand for the three months ended June 30, 2016 and 2015, respectively, and $2.4 million and $1.6 million for the six months ended June 30, 2016 and 2015, 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 2015 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 June 30,
2016
 
At December 31,
2015
 
 
 
 
Consumer loans
 
 
 
Single family(1)
$
1,218,216

 
$
1,203,180

Home equity and other
309,204

 
256,373

 
1,527,420

 
1,459,553

Commercial loans
 
 
 
Commercial real estate
762,170

 
600,703

Multifamily
562,728

 
426,557

Construction/land development
639,441

 
583,160

Commercial business
239,077

 
154,262

 
2,203,416

 
1,764,682

 
3,730,836

 
3,224,235

Net deferred loan fees and costs
779

 
(2,237
)
 
3,731,615

 
3,221,998

Allowance for loan losses
(32,656
)
 
(29,278
)
 
$
3,698,959

 
$
3,192,720

(1)
Includes $22.4 million and $21.5 million at June 30, 2016 and December 31, 2015, respectively, 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 $1.72 billion and $1.73 billion at June 30, 2016 and December 31, 2015, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. Additionally, loans totaling $522.8 million and $572.0 million at June 30, 2016 and December 31, 2015, 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.


19

Credit Risk Concentrations
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, California and Hawaii. At June 30, 2016, 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 15.4%, 14.1% and 10.0% 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 12.0% of the total portfolio. At December 31, 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 18.0%, 14.7% and 11.3% 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 13.6% of the total portfolio.

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, 2016. 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 2015 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)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
 
 
Beginning balance
$
32,423

 
$
25,628

 
$
30,659

 
$
22,524

Provision for credit losses
1,100

 
500

 
2,500

 
3,500

Recoveries, net of charge-offs
478

 
320

 
842

 
424

Ending balance
$
34,001

 
$
26,448

 
$
34,001

 
$
26,448

Components:
 
 
 
 
 
 
 
Allowance for loan losses
$
32,656

 
$
25,777

 
$
32,656

 
$
25,777

Allowance for unfunded commitments
1,345

 
671

 
1,345

 
671

Allowance for credit losses
$
34,001

 
$
26,448

 
$
34,001

 
$
26,448









20

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

 
Three Months Ended June 30, 2016
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
9,026

 
$
—

 
$
2

 
$
(734
)
 
$
8,294

Home equity and other
4,852

 
(204
)
 
87

 
665

 
5,400

 
13,878

 
(204
)
 
89

 
(69
)
 
13,694

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,175

 
—

 
—

 
870

 
6,045

Multifamily
1,832

 
—

 
—

 
216

 
2,048

Construction/land development
9,286

 
—

 
573

 
(490
)
 
9,369

Commercial business
2,252

 
—

 
20

 
573

 
2,845

 
18,545

 
—

 
593

 
1,169

 
20,307

Total allowance for credit losses
$
32,423

 
$
(204
)
 
$
682

 
$
1,100

 
$
34,001


 
Three Months Ended June 30, 2015
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
9,959

 
$
—

 
$
181

 
$
(1,143
)
 
$
8,997

Home equity and other
3,331

 
(119
)
 
57

 
613

 
3,882

 
13,290

 
(119
)
 
238

 
(530
)
 
12,879

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,551

 
—