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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - HomeStreet, Inc.hmst-ex311_20160930x10q.htm
EX-32 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - HomeStreet, Inc.hmst-ex32_20160930x10q.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - HomeStreet, Inc.hmst-ex312_20160930x10q.htm
EX-12.1 - COMPUTATION OF EARNINGS TO FIXED CHARGES - HomeStreet, Inc.calculationofratiosofearni.htm
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, 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 November 2, 2016 was 24,836,124.6.
 




PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



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)
 
September 30,
2016
 
December 31,
2015
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-earning instruments of $8,580 and $2,079)
 
$
55,998

 
$
32,684

Investment securities (includes $949,075 and $541,151 carried at fair value)
 
991,325

 
572,164

Loans held for sale (includes $834,144 and $632,273 carried at fair value)
 
893,513

 
650,163

Loans held for investment (net of allowance for loan losses of $33,975 and $29,278; includes $20,547, and $21,544 carried at fair value)
 
3,764,178

 
3,192,720

Mortgage servicing rights (includes $149,910 and $156,604 carried at fair value)
 
167,501

 
171,255

Other real estate owned
 
6,440

 
7,531

Federal Home Loan Bank stock, at cost
 
39,783

 
44,342

Premises and equipment, net
 
72,951

 
63,738

Goodwill
 
19,900

 
11,521

Other assets
 
215,012

 
148,377

Total assets
 
$
6,226,601

 
$
4,894,495

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
4,504,560

 
$
3,231,953

Federal Home Loan Bank advances
 
858,923

 
1,018,159

Accounts payable and other liabilities
 
151,968

 
117,251

Long-term debt
 
125,122

 
61,857

Total liabilities
 
5,640,573

 
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, 24,833,008 shares and 22,076,534 shares
 
511

 
511

Additional paid-in capital
 
276,844

 
222,328

Retained earnings
 
300,742

 
244,885

Accumulated other comprehensive income (loss)
 
7,931

 
(2,449
)
Total shareholders' equity
 
586,028

 
465,275

Total liabilities and shareholders' equity
 
$
6,226,601

 
$
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 September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
49,752

 
$
41,012

 
$
139,748

 
$
111,603

Investment securities
5,476

 
2,754

 
12,531

 
8,426

Other
102

 
224

 
396

 
647

 
55,330

 
43,990

 
152,675

 
120,676

Interest expense:
 
 
 
 
 
 
 
Deposits
5,362

 
3,069

 
13,380

 
8,656

Federal Home Loan Bank advances
1,605

 
958

 
4,486

 
2,476

Federal funds purchased and securities sold under agreements to repurchase
2

 

 
2

 
8

Long-term debt
1,440

 
278

 
2,574

 
815

Other
119

 
51

 
258

 
123

 
8,528

 
4,356

 
20,700

 
12,078

Net interest income
46,802

 
39,634

 
131,975

 
108,598

Provision for credit losses
1,250

 
700

 
3,750

 
4,200

Net interest income after provision for credit losses
45,552

 
38,934

 
128,225

 
104,398

Noninterest income:
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
92,600

 
57,885

 
239,493

 
189,746

Mortgage servicing income
14,544

 
4,768

 
35,855

 
10,896

Income from WMS Series LLC
1,174

 
380

 
2,474

 
1,428

Depositor and other retail banking fees
1,744

 
1,701

 
4,991

 
4,239

Insurance agency commissions
441

 
477

 
1,205

 
1,183

Gain on sale of investment securities available for sale
48

 
1,002

 
145

 
1,002

Bargain purchase gain

 
796

 

 
7,345

Other
1,194

 
459

 
1,766

 
(11
)
 
111,745

 
67,468

 
285,929

 
215,828

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
79,164

 
60,991

 
221,615

 
180,238

General and administrative
14,949

 
14,342

 
47,210

 
41,122

Amortization of core deposit intangibles
579

 
527

 
1,636

 
1,410

Legal
639

 
868

 
1,687

 
1,912

Consulting
1,390

 
166

 
4,239

 
6,544

Federal Deposit Insurance Corporation assessments
919

 
504

 
2,419

 
1,890

Occupancy
7,740

 
6,077

 
22,408

 
18,024

Information services
7,876

 
8,159

 
23,857

 
21,993

Net cost from operation and sale of other real estate owned
1,143

 
392

 
1,712

 
710

 
114,399

 
92,026

 
326,783

 
273,843

Income before income taxes
42,898

 
14,376

 
87,371

 
46,383

Income tax expense
15,197

 
4,415

 
31,514

 
13,742

NET INCOME
$
27,701

 
$
9,961

 
$
55,857

 
$
32,641

 
 
 
 
 
 
 
 
Basic income per share
$
1.12

 
$
0.45

 
$
2.29

 
$
1.60

Diluted income per share
$
1.11

 
$
0.45

 
$
2.27

 
$
1.58

Basic weighted average number of shares outstanding
24,811,169

 
22,035,317

 
24,398,683

 
20,407,386

Diluted weighted average number of shares outstanding
24,996,747

 
22,291,810

 
24,595,348

 
20,646,540

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

5


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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
27,701

 
$
9,961

 
$
55,857

 
$
32,641

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during the period, net of tax (benefit) expense of $(962) and $1,576 for the three months ended September 30, 2016 and 2015, and $5,640 and $430 for the nine months ended September 30, 2016 and 2015, respectively
(1,786
)
 
2,926

 
10,474

 
798

Reclassification adjustment for net gains included in net income, net of tax expense of $17 and $351 for the three months ended September 30, 2016 and 2015, and $51 and $351 for the nine months ended September 30, 2016 and 2015, respectively
(31
)
 
(651
)
 
(94
)
 
(651
)
Other comprehensive (loss) income
(1,817
)
 
2,275

 
10,380

 
147

Comprehensive income
$
25,884

 
$
12,236

 
$
66,237

 
$
32,788


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

 

 

 
32,641

 

 
32,641

Share-based compensation expense

 

 
986

 

 

 
986

Common stock issued
7,205,091

 

 
124,446

 

 

 
124,446

Other comprehensive income

 

 

 

 
147

 
147

Balance, September 30, 2015
22,061,702

 
$
511

 
$
222,047

 
$
236,207

 
$
1,693

 
$
460,458

 
 
 
 
 
 
 
 
 
 
 
 
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


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
55,857

 
$
32,641

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation, amortization and accretion
12,789

 
10,700

Provision for credit losses
3,750

 
4,200

Net fair value adjustment and gain on sale of loans held for sale
(220,944
)
 
(3,797
)
Fair value adjustment of loans held for investment
(863
)
 
1,797

Origination of mortgage servicing rights
(59,487
)
 
(58,158
)
Change in fair value of mortgage servicing rights
61,294

 
34,949

Net gain on sale of investment securities
(145
)
 
(1,002
)
Net gain on sale of loans originated as held for investment
(1,181
)
 

Net fair value adjustment, gain on sale and provision for losses on other real estate owned
1,653

 
290

Loss on disposal of fixed assets
186

 
89

Net deferred income tax expense
116

 
11,491

Share-based compensation expense
1,478

 
783

Bargain purchase gain

 
(7,345
)
Origination of loans held for sale
(6,582,189
)
 
(5,599,978
)
Proceeds from sale of loans originated as held for sale
6,571,684

 
5,349,444

Changes in operating assets and liabilities:
 
 
 
Increase in other assets
(55,845
)
 
(32,025
)
Increase in accounts payable and other liabilities
30,569

 
22,550

Net cash used in operating activities
(181,278
)
 
(233,371
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(468,900
)
 
(177,535
)
Proceeds from sale of investment securities
21,107

 
28,080

Principal repayments and maturities of investment securities
61,018

 
25,835

Proceeds from sale of other real estate owned
4,310

 
4,953

Proceeds from sale of loans originated as held for investment
80,956

 

Proceeds from sale of mortgage servicing rights

 
3,825

Mortgage servicing rights purchased from others

 
(9
)
Capital expenditures related to other real estate owned
(270
)
 

Origination of loans held for investment and principal repayments, net
(497,222
)
 
(260,404
)
Proceeds from sale of property and equipment
1,148

 

Purchase of property and equipment
(17,932
)
 
(16,961
)
Net cash acquired from acquisitions
24,248

 
112,196

Net cash used in investing activities
(791,537
)
 
(280,020
)

8


 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
1,097,970

 
$
212,710

Proceeds from Federal Home Loan Bank advances
11,323,660

 
7,332,200

Repayment of Federal Home Loan Bank advances
(11,497,160
)
 
(6,969,700
)
Proceeds from federal funds purchased and securities sold under agreements to repurchase
52,304

 
73,004

Repayment of federal funds purchased and securities sold under agreements to repurchase
(52,304
)
 
(123,004
)
Proceeds from Federal Home Loan Bank stock repurchase
197,876

 
90,565

Purchase of Federal Home Loan Bank stock
(192,086
)
 
(95,783
)
Proceeds from debt issuance, net
63,205

 

Proceeds from stock issuance, net
2,664

 
177

Excess tax benefit related to the exercise of stock options

 
23

Net cash provided by financing activities
996,129

 
520,192

NET INCREASE IN CASH AND CASH EQUIVALENTS
23,314

 
6,801

CASH AND CASH EQUIVALENTS:
 
 
 
Beginning of year
32,684

 
30,502

End of period
$
55,998

 
$
37,303

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
19,067

 
$
12,021

Federal and state income taxes paid, net
14,318

 
16,533

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
1,661

 
4,095

Loans transferred from held for investment to held for sale
101,938

 
32,421

Loans transferred from held for sale to held for investment
10,262

 
25,668

(Reduction in) Ginnie Mae loans recognized with the right to repurchase, net
(33
)
 
3,345

Simplicity acquisition:
 
 
 
Assets acquired, excluding cash acquired

 
738,279

Liabilities assumed

 
718,916

Bargain purchase gain

 
7,345

Common stock issued

 
124,214

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 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. 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 of the periods presented. These adjustments are of a normal recurring mature, 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 August 26, 2016, the FASB issued Accounting Standards Update ("ASU") 2016-15, Statement of Cash Flows, 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. The Company is currently evaluating the impact of this ASU and the Company 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 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.

10


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. 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

11


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.

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 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. This acquisition increases HomeStreet’s network of branches in the Portland, Oregon metropolitan area to a total of five retail deposit branches.

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 one de novo branch opened in California during the quarter, adding Orange County Business Bank’s branch brings HomeStreet’s Southern California retail deposit branch network to eleven 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

12


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 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

13


able to acquire Simplicity for less than the fair value of its net assets due to Simplicity’s stock trading below its book value for an extended period of time prior to the announcement of the acquisition. The Company negotiated a purchase price per share for Simplicity that was above the prevailing stock price thereby representing a premium to the shareholders. The stock consideration transferred was based on a 1:1 stock conversion ratio. The price of the Company’s shares declined between the time the deal was announced and when it closed which also attributed to the bargain purchase gain. The acquisition of Simplicity by the Company was approved by Simplicity’s shareholders. For tax purposes, the bargain purchase gain is a non-taxable event.

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

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

General and administrative
1,256

Legal
530

Consulting
5,539

Occupancy
335

Information services
481

Total noninterest expense
$
15,810


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 September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
$
46,802

 
$
39,603

 
$
131,975

 
$
113,190

Provision for credit losses
1,250

 
700

 
3,750

 
4,200

Total noninterest income
111,745

 
66,676

 
285,929

 
209,239

Total noninterest expense
114,399

 
91,557

 
326,783

 
266,243

 
 
 
 
 
 
 
 
Net income
$
27,701

 
$
9,756

 
$
55,857

 
$
35,355

 
 
 
 
 
 
 
 
Basic income per share
$
1.12

 
$
0.44

 
$
2.29

 
$
1.60

Diluted income per share
$
1.11

 
$
0.44

 
$
2.27

 
$
1.59

Basic weighted average number of shares outstanding
24,811,169

 
22,035,317

 
24,398,683

 
22,034,201

Diluted weighted average number of shares outstanding
24,996,747

 
22,291,810

 
24,595,348

 
22,207,764



NOTE 3–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At September 30, 2016
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
151,521

 
$
993

 
$
(278
)
 
$
152,236

Commercial
26,898

 
333

 
(23
)
 
27,208

Municipal bonds
348,181

 
7,582

 
(419
)
 
355,344

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
182,631

 
906

 
(704
)
 
182,833

Commercial
118,589

 
1,775

 
(105
)
 
120,259

Corporate debt securities
83,026

 
2,511

 
(346
)
 
85,191

U.S. Treasury securities
26,003

 
1

 

 
26,004

 
$
936,849

 
$
14,101

 
$
(1,875
)
 
$
949,075



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 September 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 September 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 September 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
$
(66
)
 
$
28,439

 
$
(212
)
 
$
10,282

 
$
(278
)
 
$
38,721

Commercial
(23
)
 
3,041

 

 

 
(23
)
 
3,041

Municipal bonds
(420
)
 
64,081

 

 

 
(420
)
 
64,081

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(340
)
 
77,897

 
(364
)
 
9,666

 
(704
)
 
87,563

Commercial
(44
)
 
11,125

 
(61
)
 
6,059

 
(105
)
 
17,184

Corporate debt securities
(30
)
 
1,615

 
(315
)
 
11,163

 
(345
)
 
12,778

U.S. Treasury securities

 
1,000

 

 

 

 
1,000

 
$
(923
)
 
$
187,198

 
$
(952
)
 
$
37,170

 
$
(1,875
)
 
$
224,368



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 September 30, 2016 and December 31, 2015. In addition, as of September 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 September 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

 
0.31
%
 
$
4,065

 
1.71
%
 
$
148,169

 
1.86
%
 
$
152,236

 
1.86
%
Commercial

 

 
22,349

 
2.14

 
4,859

 
2.39

 

 

 
27,208

 
2.18

Municipal bonds
1,712

 
3.95

 
17,030

 
2.97

 
46,779

 
3.04

 
289,823

 
3.78

 
355,344

 
3.65

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 
2,291

 
1.32

 
180,542

 
1.84

 
182,833

 
1.84

Commercial

 

 
22,472

 
2.00

 
53,350

 
2.49

 
44,437

 
1.97

 
120,259

 
2.21

Corporate debt securities

 

 
19,567

 
2.97

 
33,473

 
3.71

 
32,151

 
3.98

 
85,191

 
3.64

U.S. Treasury securities
26,004

 
0.37

 

 

 

 

 

 

 
26,004

 
0.37

Total available for sale
$
27,716

 
0.59
%
 
$
81,420

 
2.47
%
 
$
144,817

 
2.91
%
 
$
695,122

 
2.75
%
 
$
949,075

 
2.69
%
 


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 September 30,
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Proceeds
$
9,641

 
$
28,080

 
$
21,108

 
$
28,080

Gross gains
48

 
1,002

 
145

 
1,002

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 September 30,
2016
 
 
Federal Home Loan Bank to secure borrowings
$
92,313

Washington and California State to secure public deposits
30,877

Securities pledged to secure derivatives in a liability position
25,003

Other securities pledged
9,193

Total securities pledged as collateral
$
157,386



The Company assesses the creditworthiness of the counterparties that hold the pledged collateral and has determined that these arrangements have little risk. There were no securities pledged under repurchase agreements at September 30, 2016 and December 31, 2015.

Tax-exempt interest income on securities available for sale totaling $1.8 million and $968 thousand for the three months ended September 30, 2016 and 2015, respectively, and $4.3 million and $2.6 million for the nine months ended September 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 September 30,
2016
 
At December 31,
2015
 
 
 
 
Consumer loans
 
 
 
Single family(1)
$
1,186,476

 
$
1,203,180

Home equity and other
338,155

 
256,373

 
1,524,631

 
1,459,553

Commercial loans
 
 
 
Commercial real estate
810,346

 
600,703

Multifamily
562,272

 
426,557

Construction/land development
661,813

 
583,160

Commercial business
237,117

 
154,262

 
2,271,548

 
1,764,682

 
3,796,179

 
3,224,235

Net deferred loan fees and costs
1,974

 
(2,237
)
 
3,798,153

 
3,221,998

Allowance for loan losses
(33,975
)
 
(29,278
)
 
$
3,764,178

 
$
3,192,720

(1)
Includes $20.5 million and $21.5 million at September 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 $1.59 billion and $1.73 billion at September 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 $674.4 million and $572.0 million at September 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 September 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 and commercial real estate within the state of Washington, which represented 14.5% and 14.6% 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 11.6% 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 September 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 September 30,
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
 
 
Beginning balance
$
34,001

 
$
26,448

 
$
30,659

 
$
22,524

Provision for credit losses
1,250

 
700

 
3,750

 
4,200

Recoveries and (charge-offs), net
(18
)
 
739

 
824

 
1,163

Ending balance
$
35,233

 
$
27,887

 
$
35,233

 
$
27,887

Components:
 
 
 
 
 
 
 
Allowance for loan losses
$
33,975

 
$
26,922

 
$
33,975

 
$
26,922

Allowance for unfunded commitments
1,258

 
965

 
1,258

 
965

Allowance for credit losses
$
35,233

 
$
27,887

 
$
35,233

 
$
27,887









20


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

 
Three Months Ended September 30, 2016
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
(Reversal of) Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
8,294

 
$
(42
)
 
$
1

 
$
995

 
$
9,248

Home equity and other
5,400

 
(356
)
 
192

 
512

 
5,748

 
13,694

 
(398
)
 
193

 
1,507

 
14,996

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
6,045

 

 

 
80

 
6,125

Multifamily
2,048

 

 

 
49

 
2,097

Construction/land development
9,369

 

 
176

 
(524
)
 
9,021