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, 2017
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
 
 
 
 
 
 
Emerging growth Company
 
x
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 12(a) of the Exchange Act.
 
x
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 1, 2017 was 26,884,028.6.
 

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,
2017
 
December 31,
2016
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-earning instruments of $23,107 and $34,615)
 
$
54,447

 
$
53,932

Investment securities (includes $884,266 and $993,990 carried at fair value)
 
936,522

 
1,043,851

Loans held for sale (includes $680,959 and $656,334 carried at fair value)
 
784,556

 
714,559

Loans held for investment (net of allowance for loan losses of $36,136 and $34,001; includes $5,134 and $17,988 carried at fair value)
 
4,156,424

 
3,819,027

Mortgage servicing rights (includes $236,621 and $226,113 carried at fair value)
 
258,222

 
245,860

Other real estate owned
 
4,597

 
5,243

Federal Home Loan Bank stock, at cost
 
41,769

 
40,347

Premises and equipment, net
 
101,797

 
77,636

Goodwill
 
22,175

 
22,175

Other assets
 
226,048

 
221,070

Total assets
 
$
6,586,557

 
$
6,243,700

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
4,747,771

 
$
4,429,701

Federal Home Loan Bank advances
 
867,290

 
868,379

Accounts payable and other liabilities
 
190,421

 
191,189

Long-term debt
 
125,234

 
125,147

Total liabilities
 
5,930,716

 
5,614,416

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 shares, issued and outstanding, 26,874,871 shares and 26,800,183 shares
 
511

 
511

Additional paid-in capital
 
337,515

 
336,149

Retained earnings
 
323,228

 
303,036

Accumulated other comprehensive loss
 
(5,413
)
 
(10,412
)
Total shareholders' equity
 
655,841

 
629,284

Total liabilities and shareholders' equity
 
$
6,586,557

 
$
6,243,700


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)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
51,198

 
$
47,262

 
$
100,704

 
$
89,996

Investment securities
5,419

 
4,002

 
11,051

 
7,055

Other
125

 
27

 
261

 
294

 
56,742

 
51,291

 
112,016

 
97,345

Interest expense:
 
 
 
 
 
 
 
Deposits
5,867

 
4,449

 
11,490

 
8,018

Federal Home Loan Bank advances
2,368

 
1,462

 
4,769

 
2,881

Federal funds purchased and securities sold under agreements to repurchase
5

 
—

 
5

 
—

Long-term debt
1,514

 
823

 
2,993

 
1,134

Other
120

 
75

 
240

 
139

 
9,874

 
6,809

 
19,497

 
12,172

Net interest income
46,868

 
44,482

 
92,519

 
85,173

Provision for credit losses
500

 
1,100

 
500

 
2,500

Net interest income after provision for credit losses
46,368

 
43,382

 
92,019

 
82,673

Noninterest income:
 
 
 
 
 
 
 
Net gain on loan origination and sale activities
65,908

 
85,630

 
126,189

 
146,893

Loan servicing income
8,764

 
12,703

 
18,003

 
20,735

Income from WMS Series LLC
406

 
1,164

 
591

 
1,300

Depositor and other retail banking fees
1,811

 
1,652

 
3,467

 
3,247

Insurance agency commissions
501

 
370

 
897

 
764

Gain on sale of investment securities available for sale
551

 
62

 
557

 
97

Other
3,067

 
895

 
5,765

 
1,148

 
81,008

 
102,476

 
155,469

 
174,184

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
76,390

 
75,167

 
147,698

 
142,451

General and administrative
15,872

 
16,739

 
33,000

 
32,261

Amortization of core deposit intangibles
493

 
525

 
1,007

 
1,057

Legal
150

 
605

 
310

 
1,048

Consulting
771

 
1,177

 
1,829

 
2,849

Federal Deposit Insurance Corporation assessments
697

 
784

 
1,521

 
1,500

Occupancy
8,880

 
7,513

 
17,089

 
14,668

Information services
8,172

 
8,447

 
15,820

 
15,981

Net (benefit) cost from operation and sale of other real estate owned
(181
)
 
74

 
(156
)
 
569

 
111,244

 
111,031

 
218,118

 
212,384

Income before income taxes
16,132

 
34,827

 
29,370

 
44,473

Income tax expense
4,923

 
13,078

 
9,178

 
16,317

NET INCOME
$
11,209

 
$
21,749

 
$
20,192

 
$
28,156

 
 
 
 
 
 
 
 
Basic income per share
$
0.42

 
$
0.88

 
$
0.75

 
$
1.16

Diluted income per share
$
0.41

 
$
0.87

 
$
0.75

 
$
1.15

Basic weighted average number of shares outstanding
26,866,230

 
24,708,375

 
26,843,813

 
24,192,441

Diluted weighted average number of shares outstanding
27,084,608

 
24,911,919

 
27,071,028

 
24,394,648

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)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
11,209

 
$
21,749

 
$
20,192

 
$
28,156

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 $1,848 and $3,030 for the three months ended June 30, 2017 and 2016, and $2,887 and $6,602 for the six months ended June 30, 2017 and 2016, respectively
3,431

 
5,627

 
5,361

 
12,260

Reclassification adjustment for net gains included in net income, net of tax expense of $193 and $22 for the three months ended June 30, 2017 and 2016 and, $195 and $34 for the six months ended June 30, 2017 and 2016, respectively
(358
)
 
(40
)
 
(362
)
 
(63
)
Other comprehensive income
3,073

 
5,587

 
4,999

 
12,197

Comprehensive income
$
14,282

 
$
27,336

 
$
25,191

 
$
40,353


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, 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

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
26,800,183

 
$
511

 
$
336,149

 
$
303,036

 
$
(10,412
)
 
$
629,284

Net income
—

 
—

 
—

 
20,192

 
—

 
20,192

Share-based compensation expense
—

 
—

 
1,211

 
—

 
—

 
1,211

Common stock issued
74,688

 
—

 
155

 
—

 
—

 
155

Other comprehensive income
—

 
—

 
—

 
—

 
4,999

 
4,999

Balance, June 30, 2017
26,874,871

 
$
511

 
$
337,515

 
$
323,228

 
$
(5,413
)
 
$
655,841


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)
2017
 
2016
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
20,192

 
$
28,156

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation, amortization and accretion
10,911

 
8,565

Provision for credit losses
500

 
2,500

Net fair value adjustment and gain on sale of loans held for sale
(113,742
)
 
(131,102
)
Fair value adjustment of loans held for investment
(1,203
)
 
1,272

Origination of mortgage servicing rights
(35,211
)
 
(34,580
)
Change in fair value of mortgage servicing rights
21,722

 
57,284

Net gain on sale of investment securities
(557
)
 
(97
)
Net gain on sale of loans originated as held for investment
(297
)
 
(793
)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned
(356
)
 
646

Loss on disposal of fixed assets
106

 
513

Loss on lease abandonment
502

 
—

Net deferred income tax expense (benefit)
7,510

 
(7,951
)
Share-based compensation expense
1,362

 
827

Origination of loans held for sale
(3,665,396
)
 
(3,930,954
)
Proceeds from sale of loans originated as held for sale
3,769,126

 
3,931,729

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable and other assets
(7,207
)
 
(51,974
)
(Decrease) increase in accounts payable and other liabilities
(17,371
)
 
17,077

Net cash used in operating activities
(9,409
)
 
(108,882
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(246,435
)
 
(356,975
)
Proceeds from sale of investment securities
314,633

 
11,467

Principal repayments and maturities of investment securities
50,043

 
37,099

Proceeds from sale of other real estate owned
2,170

 
164

Proceeds from sale of loans originated as held for investment
23,780

 
39,022

Mortgage servicing rights purchased from others
(565
)
 
—

Capital expenditures related to other real estate owned
(57
)
 
(32
)
Origination of loans held for investment and principal repayments, net
(420,530
)
 
(414,089
)
Proceeds from sale of property and equipment
—

 
1,148

Purchase of property and equipment
(28,789
)
 
(12,151
)
Net cash acquired from acquisitions
—

 
17,495

Net cash used in investing activities
(305,750
)
 
(676,852
)

8

 
Six Months Ended June 30,
(in thousands)
2017
 
2016
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
318,132

 
$
880,701

Proceeds from Federal Home Loan Bank advances
4,497,700

 
7,621,460

Repayment of Federal Home Loan Bank advances
(4,498,700
)
 
(7,774,960
)
Proceeds from federal funds purchased and securities sold under agreements to repurchase
326,618

 
—

Repayment of federal funds purchased and securities sold under agreements to repurchase
(326,618
)
 
—

Proceeds from Federal Home Loan Bank stock repurchase
91,939

 
123,038

Purchase of Federal Home Loan Bank stock
(93,362
)
 
(117,879
)
Proceeds from debt issuance, net
—

 
63,255

Proceeds from stock issuance, net
11

 
2,664

Payments from equity raise
(46
)
 
—

Net cash provided by financing activities
315,674

 
798,279

NET INCREASE IN CASH AND CASH EQUIVALENTS
515

 
12,545

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
53,932

 
32,684

End of period
$
54,447

 
$
45,229

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
19,757

 
$
14,905

Federal and state income taxes paid (refunded), net
(23,382
)
 
(1,464
)
Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
1,125

 
1,168

Loans transferred from held for investment to held for sale
113,278

 
37,648

Loans transferred from held for sale to held for investment
29,809

 
7,129

(Reduction in) Ginnie Mae loans recognized with the right to repurchase, net
(2,358
)
 
(2,725
)
Orange County Business Bank acquisition:
 
 
 
Assets acquired, excluding cash acquired
—

 
165,786

Liabilities assumed
—

 
141,267

Goodwill
—

 
8,360

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 commercial banking, mortgage banking, and consumer/retail banking activities. The Company's 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., HS Evergreen Corporate Center LLC 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. 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 7, 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 6, Derivatives and Hedging Activities). We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income, cash flows, total assets or total shareholder's equity as previously reported.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of 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, 2016, filed with the Securities and Exchange Commission (“2016 Annual Report on Form 10-K”).

Recent Accounting Developments

In March 2017 the Financial Accounting Standards Board ('"FASB") issued Accounting Standards Update ("ASU") No. 2017-08, Receivables - Nonrefundable Fees and other Costs (Subtopic 320-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. Adoption of ASU 2017-08 is required for fiscal years and interim periods within those fiscal years, beginning after December, 15, 2018, early adoption is permitted. 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.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption being permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations Clarifying the Definition of a Business (Topic 805), for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted for transactions that occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The standard must

10

be applied prospectively. Upon adoption, the standard will impact how we assess acquisitions (or disposals) of assets or businesses. Management does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
On November 17, 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash: a Consensus of the FASB Emerging Issues Task Force.” This ASU requires a company’s cash flow statement to explain the changes during a reporting period of the totals for cash, cash equivalents, restricted cash, and restricted cash equivalents. Additionally, amounts for restricted cash and restricted cash equivalents are to be included with cash and cash equivalents if the cash flow statement includes a reconciliation of the total cash balances for a reporting period. This ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. Management does not anticipate that this guidance will have a material impact on its consolidated financial statements.
On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments (Topic 230). The amendments in this ASU were issued to reduce diversity in how certain cash receipts and payments are presented and classified in the statement of cash flows in eight specific areas. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied using a retrospective transition method to each period presented. Early application was permitted upon issuance of the ASU. Management is currently evaluating the impact of this ASU but does not expect this ASU to have a material impact on the Company’s consolidated financial statements.
On June 16, 2016, the FASB issued 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 requirement that losses be recognized only when incurred, and instead require that an entity recognize its 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 adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Management 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 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. Management 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. While we have not quantified the impact to our balance sheet, upon the adoption of this ASU we expect to report increased assets and liabilities on our Consolidated Statement of Financial Condition as a result of recognizing right-of-use assets and lease liabilities related to these leases and certain equipment under non-cancelable operating lease agreements, which currently are not on our Consolidated Statement of Financial Condition.
In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized

11

through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. This ASU simplifies the impairment assessment of equity investments without readily determinable fair values. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This ASU excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2016-01 to determine the potential impact the new standard will have 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. We intend to adopt this new guidance on January 1, 2018. We are in the process of completing an analysis that includes (1)identification of all revenue streams included in the financial statements ; (2) of the revenue streams identified, determine which are within the scope of the pronouncement; (3) determination of size, timing and amount of revenue recognition for streams of income within the scope of this pronouncement; (4) determination of the sample size of contracts for further analysis; and (5) completion of analysis on sample of contracts to evaluate the impact of the new guidance. Based on this analysis, we are developing processes and procedures in 2017 to address the amendments of this ASU, including new disclosures. Additionally, we do not expect the implementation of this guidance to have a material impact on our consolidated financial statements.


NOTE 2–BUSINESS COMBINATIONS:

Recent Acquisition Activity

On November 10, 2016, the Company completed its acquisition of two branches and their related deposits in Southern California, from Boston Private Bank and Trust. The provisional application of the acquisition method of accounting resulted in goodwill of $2.3 million.

On August 12, 2016, the Company completed its acquisition of certain assets and liabilities, including two branches in Lake Oswego, Oregon from The Bank of Oswego. The provisional application of the acquisition method of accounting resulted in goodwill of $19 thousand.

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 2,459,461 shares of HomeStreet common stock. The application of the acquisition method of accounting resulted in goodwill of $8.4 million.


12

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 and held to maturity.
 
 
At June 30, 2017
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
154,145

 
$
1

 
$
(3,211
)
 
$
150,935

Commercial
23,592

 
22

 
(233
)
 
23,381

Municipal bonds
373,336

 
3,334

 
(3,941
)
 
372,729

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
187,351

 
273

 
(2,929
)
 
184,695

Commercial
76,961

 
75

 
(806
)
 
76,230

Corporate debt securities
30,839

 
61

 
(682
)
 
30,218

U.S. Treasury securities
10,890

 
—

 
(150
)
 
10,740

Agency
35,457

 
—

 
(119
)
 
35,338

 
$
892,571

 
$
3,766

 
$
(12,071
)
 
$
884,266

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
13,104

 
$
73

 
$
(68
)
 
$
13,109

Commercial
16,127

 
137

 
(10
)
 
16,254

Collateralized mortgage obligations
3,500

 
—

 
—

 
3,500

Municipal bonds
19,425

 
315

 
(152
)
 
19,588

Corporate debt securities
100

 
—

 
—

 
100

 
$
52,256

 
$
525

 
$
(230
)
 
$
52,551


13

 
At December 31, 2016
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
181,158

 
$
31

 
$
(4,115
)
 
$
177,074

Commercial
25,896

 
13

 
(373
)
 
25,536

Municipal bonds
473,153

 
1,333

 
(6,813
)
 
467,673

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
194,982

 
32

 
(3,813
)
 
191,201

Commercial
71,870

 
29

 
(1,135
)
 
70,764

Corporate debt securities
52,045

 
110

 
(1,033
)
 
51,122

U.S. Treasury securities
10,882

 
—

 
(262
)
 
10,620

 
$
1,009,986

 
$
1,548

 
$
(17,544
)
 
$
993,990

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
13,844

 
$
71

 
$
(90
)
 
$
13,825

Commercial
16,303

 
70

 
(64
)
 
16,309

Municipal bonds
19,612

 
99

 
(459
)
 
19,252

Corporate debt securities
102

 
—

 
—

 
102

 
$
49,861

 
$
240

 
$
(613
)
 
$
49,488


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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, substantially all securities held had ratings available by external ratings agencies.

Investment securities available for sale and held to maturity 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.


14

 
At June 30, 2017
 
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
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(2,952
)
 
$
132,749

 
$
(259
)
 
$
10,212

 
$
(3,211
)
 
$
142,961

Commercial
(233
)
 
21,660

 
—

 
—

 
(233
)
 
21,660

Municipal bonds
(3,805
)
 
199,291

 
(136
)
 
8,661

 
(3,941
)
 
207,952

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(1,855
)
 
129,559

 
(1,074
)
 
23,623

 
(2,929
)
 
153,182

Commercial
(545
)
 
57,142

 
(261
)
 
9,124

 
(806
)
 
66,266

Corporate debt securities
(282
)
 
14,807

 
(400
)
 
7,137

 
(682
)
 
21,944

U.S. Treasury securities
(150
)
 
10,740

 
—

 
—

 
(150
)
 
10,740

Agency
(119
)
 
35,338

 
—

 
$
—

 
(119
)
 
35,338

 
$
(9,941
)
 
$
601,286

 
$
(2,130
)
 
$
58,757

 
$
(12,071
)
 
$
660,043

 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(68
)
 
$
6,360

 
$
—

 
$
—

 
$
(68
)
 
$
6,360

Commercial
(10
)
 
4,533

 
—

 
—

 
(10
)
 
4,533

Municipal bonds
(152
)
 
10,690

 
—

 
—

 
(152
)
 
10,690

 
$
(230
)
 
$
21,583

 
$
—

 
$
—

 
$
(230
)
 
$
21,583


 
At December 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(3,842
)
 
$
144,240

 
$
(273
)
 
$
9,907

 
$
(4,115
)
 
$
154,147

Commercial
(373
)
 
23,798

 
—

 
—

 
(373
)
 
23,798

Municipal bonds
(6,813
)
 
283,531

 
—

 
—

 
(6,813
)
 
283,531

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(3,052
)
 
175,490

 
(761
)
 
11,422

 
(3,813
)
 
186,912

Commercial
(1,005
)
 
60,926

 
(130
)
 
5,349

 
(1,135
)
 
66,275

Corporate debt securities
(472
)
 
24,447

 
(561
)
 
11,677

 
(1,033
)
 
36,124

U.S. Treasury securities
(262
)
 
10,620

 
—

 
—

 
(262
)
 
10,620

 
$
(15,819
)
 
$
723,052

 
$
(1,725
)
 
$
38,355

 
$
(17,544
)
 
$
761,407

 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(90
)
 
$
5,481

 
$
—

 
$
—

 
$
(90
)
 
$
5,481

Commercial
(64
)
 
13,156

 
—

 
—

 
(64
)
 
13,156

Municipal bonds
(459
)
 
11,717

 
—

 
—

 
(459
)
 
11,717

 
$
(613
)
 
$
30,354

 
$
—

 
$
—

 
$
(613
)
 
$
30,354


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

15

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, 2017 and December 31, 2016. In addition, as of June 30, 2017 and December 31, 2016, 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 and held to maturity 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, 2017
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
1

 
0.28
%
 
$
—

 
—
%
 
$
1,663

 
1.53
%
 
$
149,271

 
1.89
%
 
$
150,935

 
1.88
%
Commercial
—

 
—

 
18,763

 
2.08

 
4,618

 
2.04

 
—

 
—

 
23,381

 
2.07

Municipal bonds
508

 
3.96

 
21,843

 
3.15

 
39,867

 
3.07

 
310,511

 
3.76

 
372,729

 
3.65

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
507

 
1.24

 
184,188

 
1.98

 
184,695

 
1.98

Commercial
—

 
—

 
10,671

 
1.91

 
14,938

 
2.88

 
50,621

 
2.02

 
76,230

 
2.17

Agency
—

 
—

 
5,072

 
1.90

 
30,266

 
2.24

 
—

 
—

 
35,338

 
2.20

Corporate debt securities
—

 
—

 
7,884

 
2.74

 
8,622

 
3.37

 
13,712

 
3.47

 
30,218

 
3.25

U.S. Treasury securities
999

 
0.64

 
—

 
—

 
9,741

 
1.78

 
—

 
—

 
10,740

 
1.68

Total available for sale
$
1,508

 
1.75
%
 
$
64,233

 
2.48
%
 
$
110,222

 
2.65
%
 
$
708,303

 
2.78
%
 
$
884,266

 
2.74
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
13,109

 
2.96
%
 
$
13,109

 
2.95
%
Commercial
—

 
—

 
4,533

 
2.04

 
11,721

 
2.69

 
—

 
—

 
16,254

 
2.50

Collateralized mortgage obligations
—

 
—

 
—

 
—

 
—

 
—

 
3,500

 
1.75

 
3,500

 
1.75

Municipal bonds
—

 
—

 
1,167

 
2.92

 
5,435

 
2.79

 
12,986

 
3.40

 
19,588

 
3.20

Corporate debt securities
—

 
—

 
—

 
—

 
—

 
—

 
100

 
6.00

 
100

 
6.00

Total held to maturity
$
—

 
—
%
 
$
5,700

 
2.21
%
 
$
17,156

 
2.72
%
 
$
29,695

 
3.01
%
 
$
52,551

 
2.83
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


16

 
At December 31, 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
1

 
0.29
%
 
$
—

 
—
%
 
$
2,122

 
1.59
%
 
$
174,951

 
2.03
%
 
$
177,074

 
2.02
%
Commercial
—

 
—

 
20,951

 
2.13

 
4,585

 
2.06

 
—

 
—

 
25,536

 
2.11

Municipal bonds
3,479

 
3.30

 
20,939

 
2.94

 
52,043

 
2.55

 
391,212

 
3.08

 
467,673

 
3.02

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
1,639

 
1.32

 
189,562

 
2.06

 
191,201

 
2.06

Commercial
—

 
—

 
10,860

 
1.84

 
19,273

 
2.74

 
40,631

 
1.91

 
70,764

 
2.12

Corporate debt securities
—

 
—

 
10,516

 
2.67

 
21,493

 
3.74

 
19,113

 
3.54

 
51,122

 
3.45

U.S. Treasury securities
999

 
0.64

 
—

 
—

 
9,621

 
1.76

 
—

 
—

 
10,620

 
1.66

Total available for sale
$
4,479

 
2.70
%
 
$
63,266

 
2.43
%
 
$
110,776

 
2.69
%
 
$
815,469

 
2.57
%
 
$
993,990

 
2.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
13,825

 
3.11
%
 
$
13,825

 
3.11
%
Commercial
—

 
—

 
4,581

 
2.06

 
11,728

 
2.71

 
—

 
—

 
16,309

 
2.53

Municipal bonds
—

 
—

 
—

 
—

 
6,450

 
2.73

 
12,802

 
3.31

 
19,252

 
3.11

Corporate debt securities
—

 
—

 
—

 
—

 
—

 
—

 
102

 
6.00

 
102

 
6.00

Total held to maturity
$
—

 
—
%
 
$
4,581

 
2.06
%
 
$
18,178

 
2.72
%
 
$
26,729

 
3.22
%
 
$
49,488

 
2.93
%


Sales of investment securities available for sale were as follows.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Proceeds
$
312,247

 
$
1,706

 
$
314,633

 
$
11,467

Gross gains
551

 
62

 
576

 
97

Gross losses
—

 
—

 
(19
)
 
—



17

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

(in thousands)
At June 30,
2017
 
 
Federal Home Loan Bank to secure borrowings
$
203,377

Washington and California State to secure public deposits
32,495

Securities pledged to secure derivatives in a liability position
6,757

Other securities pledged
7,273

Total securities pledged as collateral
$
249,902



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, 2017 and December 31, 2016.

Tax-exempt interest income on securities available for sale totaling $2.4 million and $1.5 million for the three months ended June 30, 2017 and 2016, respectively, and $4.9 million and $2.4 million for the six months ended June 30, 2017 and 2016, respectively, and was recorded in the Company's consolidated statements of operations.

NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies, and Note 5, Loans and Credit Quality, within our 2016 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,
2017
 
At December 31,
2016
 
 
 
 
Consumer loans