Edgar Filing: HomeStreet, Inc.

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: September 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 November 1, 2017 was 26,888,287.6.

Table of Contents



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at September 30, 2017 and December 31, 2016		4
Interim Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016		5
Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2017 and 2016		6
Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2017 and 2016		7
Interim Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017 and 2016		8
Notes to Interim Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies		10
Note 2 – Business Combinations		12
Note 3 – Investment Securities		13
Note 4 – Loans and Credit Quality		18
Note 5 – Deposits		35
Note 6 – Derivatives and Hedging Activities		36
Note 7 – Mortgage Banking Operations		38
Note 8 – Commitments, Guarantees and Contingencies		43
Note 9 – Fair Value Measurement		44
Note 10 – Earnings Per Share		55
Note 11 – Business Segments		55
Note 12 – Accumulated Other Comprehensive Income		57
Note 13 - Restructuring		57
Note 14 - Subsequent events		58
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements		59
Summary Financial Data		60
Management’s Overview of Financial Performance		63
Critical Accounting Policies and Estimates		66
Results of Operations		68
Review of Financial Condition		76
Business Segments		79
Off-Balance Sheet Arrangements		84
Enterprise Risk Management		84
Credit Risk Management		84
Liquidity and Capital Resources		89

Table of Contents



Accounting Developments		94

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	95
ITEM 4	CONTROLS AND PROCEDURES	98
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	98
ITEM 1A	RISK FACTORS	99
ITEM 6	EXHIBITS	118
SIGNATURES		119

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.

PART I



ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



(in thousands, except share data)	September 30, 2017			December 31, 2016

ASSETS
Cash and cash equivalents (including interest-earning instruments of $7,002 and $34,615)	$	55,050		$	53,932
Investment securities (includes $862,851 and $993,990 carried at fair value)	919,459			1,043,851
Loans held for sale (includes $730,042 and $656,334 carried at fair value)	851,126			714,559
Loans held for investment (net of allowance for loan losses of $37,055 and $34,001; includes $5,546 and $17,988 carried at fair value)	4,313,225			3,819,027
Mortgage servicing rights (includes $244,106 and $226,113 carried at fair value)	268,072			245,860
Other real estate owned	3,704			5,243
Federal Home Loan Bank stock, at cost	52,486			40,347
Premises and equipment, net	104,389			77,636
Goodwill	22,564			22,175
Other assets	206,271			221,070
Total assets	$	6,796,346		$	6,243,700
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	4,670,486		$	4,429,701
Federal Home Loan Bank advances	1,135,245			868,379
Accounts payable and other liabilities	193,866			191,189
Long-term debt	125,280			125,147
Total liabilities	6,124,877			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, 26,884,402 shares and 26,800,183 shares	511			511
Additional paid-in capital	338,283			336,149
Retained earnings	337,067			303,036
Accumulated other comprehensive loss	(4,392		)	(10,412		)
Total shareholders' equity	671,469			629,284
Total liabilities and shareholders' equity	$	6,796,346		$	6,243,700

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share data)	2017			2016		2017			2016

Interest income:
Loans	$	56,547		$	49,752	$	157,251		$	139,748
Investment securities	5,264			5,476		16,315			12,531
Other	170			102		431			396
	61,981			55,330		173,997			152,675
Interest expense:
Deposits	6,020			5,362		17,510			13,380
Federal Home Loan Bank advances	3,405			1,605		8,174			4,486
Federal funds purchased and securities sold under agreements to repurchase	—			2		5			2
Long-term debt	1,520			1,440		4,513			2,574
Other	196			119		436			258
	11,141			8,528		30,638			20,700
Net interest income	50,840			46,802		143,359			131,975
Provision for credit losses	250			1,250		750			3,750
Net interest income after provision for credit losses	50,590			45,552		142,609			128,225
Noninterest income:
Net gain on loan origination and sale activities	71,010			92,600		197,199			239,493
Loan servicing income	8,282			12,595		26,285			33,330
Income from WMS Series LLC	166			1,174		757			2,474
Depositor and other retail banking fees	1,839			1,744		5,306			4,991
Insurance agency commissions	535			441		1,432			1,205
Gain on sale of investment securities available for sale	331			48		888			145
Other	1,721			3,143		7,486			4,291
	83,884			111,745		239,353			285,929
Noninterest expense:
Salaries and related costs	75,374			79,164		223,072			221,615
General and administrative	16,147			14,949		49,147			47,210
Amortization of core deposit intangibles	470			579		1,477			1,636
Legal	352			639		662			1,687
Consulting	914			1,390		2,743			4,239
Federal Deposit Insurance Corporation assessments	791			919		2,312			2,419
Occupancy	12,391			7,740		29,480			22,408
Information services	8,760			7,876		24,580			23,857
Net (benefit) cost from operation and sale of other real estate owned	(502		)	1,143		(658		)	1,712
	114,697			114,399		332,815			326,783
Income before income taxes	19,777			42,898		49,147			87,371
Income tax expense	5,938			15,197		15,116			31,514
NET INCOME	$	13,839		$	27,701	$	34,031		$	55,857

Basic income per share	$	0.51		$	1.12	$	1.27		$	2.29
Diluted income per share	$	0.51		$	1.11	$	1.26		$	2.27
Basic weighted average number of shares outstanding	26,883,392			24,811,169		26,857,006			24,398,683
Diluted weighted average number of shares outstanding	27,089,040			24,996,747		27,077,032			24,595,348

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2017			2016			2017			2016

Net income	$	13,839		$	27,701		$	34,031		$	55,857
Other comprehensive income, net of tax:
Unrealized gain on investment securities available for sale:
Unrealized holding gain (loss) arising during the period, net of tax expense (benefit) of $665 and $(962) for the three months ended September 30, 2017 and 2016, and $3,552 and $5,640 for the nine months ended September 30, 2017 and 2016, respectively	1,236			(1,786		)	6,597			10,474
Reclassification adjustment for net gains included in net income, net of tax expense of $116 and $17 for the three months ended September 30, 2017 and 2016 and, $311 and $51 for the nine months ended September 30, 2017 and 2016, respectively	(215		)	(31		)	(577		)	(94		)
Other comprehensive income (loss)	1,021			(1,817		)	6,020			10,380
Comprehensive income	$	14,860		$	25,884		$	40,051		$	66,237

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

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	—	—		—		55,857		—			55,857
Share-based compensation expense	—	—		1,278		—		—			1,278
Common stock issued	2,756,474	—		53,238		—		—			53,238
Other comprehensive income	—	—		—		—		10,380			10,380
Balance, September 30, 2016	24,833,008	$	511	$	276,844	$	300,742	$	7,931		$	586,028

Balance, January 1, 2017	26,800,183	$	511	$	336,149	$	303,036	$	(10,412	)	$	629,284
Net income	—	—		—		34,031		—			34,031
Share-based compensation expense	—	—		1,884		—		—			1,884
Common stock issued	84,219	—		250		—		—			250
Other comprehensive income	—	—		—		—		6,020			6,020
Balance, September 30, 2017	26,884,402	$	511	$	338,283	$	337,067	$	(4,392	)	$	671,469

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	34,031		$	55,857
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation, amortization and accretion	16,765			12,789
Provision for credit losses	750			3,750
Net fair value adjustment and gain on sale of loans held for sale	(170,209		)	(220,944		)
Fair value adjustment of loans held for investment	(1,056		)	(863		)
Origination of mortgage servicing rights	(56,067		)	(59,487		)
Change in fair value of mortgage servicing rights	31,916			61,294
Net gain on sale of investment securities	(888		)	(145		)
Net gain on sale of loans originated as held for investment	(2,161		)	(1,181		)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned	(504		)	1,653
Loss on disposal of fixed assets	157			186
Loss on lease abandonment	4,450			—
Net deferred income tax expense	11,513			116
Share-based compensation expense	2,129			1,478
Origination of loans held for sale	(5,789,638		)	(6,582,189		)
Proceeds from sale of loans originated as held for sale	5,889,561			6,571,684
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other assets	11,660			(55,845		)
(Decrease) increase in accounts payable and other liabilities	(13,769		)	30,569
Net cash used in operating activities	(31,360		)	(181,278		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(296,843		)	(468,900		)
Proceeds from sale of investment securities	342,461			21,107
Principal repayments and maturities of investment securities	81,156			61,018
Proceeds from sale of other real estate owned	3,211			4,310
Proceeds from sale of loans originated as held for investment	140,642			80,956
Mortgage servicing rights purchased from others	(565		)	—
Capital expenditures related to other real estate owned	(57		)	(270		)
Origination of loans held for investment and principal repayments, net	(695,199		)	(497,222		)
Proceeds from sale of property and equipment	—			1,148
Purchase of property and equipment	(35,771		)	(17,932		)
Net cash acquired from acquisitions	19,285			24,248
Net cash used in investing activities	(441,680		)	(791,537		)



	Nine Months Ended September 30,
(in thousands)	2017			2016

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net	$	219,332		$	1,097,970
Proceeds from Federal Home Loan Bank advances	7,557,200			11,323,660
Repayment of Federal Home Loan Bank advances	(7,290,200		)	(11,497,160		)
Proceeds from federal funds purchased and securities sold under agreements to repurchase	351,618			52,304
Repayment of federal funds purchased and securities sold under agreements to repurchase	(351,618		)	(52,304		)
Proceeds from Federal Home Loan Bank stock repurchase	131,603			197,876
Purchase of Federal Home Loan Bank stock	(143,742		)	(192,086		)
Proceeds from debt issuance, net	—			63,205
Proceeds from stock issuance, net	11			2,664
Payments from equity raise	(46		)	—
Net cash provided by financing activities	474,158			996,129
NET INCREASE IN CASH AND CASH EQUIVALENTS	1,118			23,314
CASH AND CASH EQUIVALENTS:
Beginning of year	53,932			32,684
End of period	$	55,050		$	55,998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid	$	29,347		$	19,067
Federal and state income taxes (refunded) paid, net	(23,382		)	14,318
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	1,125			1,661
Loans transferred from held for investment to held for sale	246,664			101,938
Loans transferred from held for sale to held for investment	41,686			10,262
(Reduction in) Ginnie Mae loans recognized with the right to repurchase, net	493			(33		)
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).

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, management 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 August 2017 the Financial Accounting Standards Board ('"FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, or ASU 2017-12. This standard better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedge instruments and the hedged item in the financial statements. Adoption for this ASU is required for fiscal years and interim periods beginning after December 15, 2018 and 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 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 (Topic 805): Clarifying the Definition of a Business, 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 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 the Company's consolidated financial statements.

On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230):, Classification of Certain Cash Receipts and Cash Payments. 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.

In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the contractual right to receive cash. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s consolidated financial statements. The Company has formed an internal committee to oversee the project. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses; however, management is still assessing the magnitude of the increase and its impact on the Company's consolidated financial statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities available for sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address the amendments of this ASU.

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 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 consolidated statement of financial position. 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 consolidated statement of financial position 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 September 15, 2017, the Company completed its acquisition of one branch and its related deposits in Southern California, from Opus Bank. The provisional application of the acquisition method of accounting resulted in goodwill of $389 thousand.

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 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.

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 September 30, 2017

(in thousands)

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Fair
value