HomeStreet, Inc. - FORM 10-Q - November 5, 2015

Attached files

file	filename
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - HomeStreet, Inc.	hmst-ex312_20150930x10q.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - HomeStreet, Inc.	hmst-ex311_20150930x10q.htm
EX-32 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - HomeStreet, Inc.	hmst-ex32_20150930x10q.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, 2015

Commission file number: 001-35424

________________________________

HOMESTREET, INC.

(Exact name of registrant as specified in its charter)

________________________________



Washington		91-0186600
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

601 Union Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

(Zip Code)

(206) 623-3050

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:



Large Accelerated Filer	o	Accelerated Filer	x

Non-accelerated Filer	o	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of the registrant's common stock as of November 2, 2015 was 22,076,533.6.



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at September 30, 2015 and December 31, 2014		4

Interim Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014		5

Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014		6

Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2015 and 2014		7

Interim Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2015 and 2014		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		15

Note 4 – Loans and Credit Quality		19

Note 5 – Deposits		34

Note 6 – Derivatives and Hedging Activities		35

Note 7 – Mortgage Banking Operations		37

Note 8 – Commitments, Guarantees and Contingencies		41

Note 9 – Fair Value Measurement		43

Note 10 – Earnings Per Share		52

Note 11 – Business Segments		52

Note 12 – Subsequent Events		54

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements		55

Summary Financial Data		57

Management’s Overview of Financial Performance		60

Critical Accounting Policies and Estimates		63

Results of Operations		64

Review of Financial Condition		72

Business Segments		75

Off-Balance Sheet Arrangements		80

Enterprise Risk Management		80

Credit Risk Management		80

Liquidity and Capital Management		87

Accounting Developments		90




ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	91

ITEM 4	CONTROLS AND PROCEDURES	93

PART II – OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	94

ITEM 1A	RISK FACTORS	94

ITEM 6	EXHIBITS	110

SIGNATURES		111

Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to “HomeStreet,” “we,” “our,” “us” or the “Company” refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank (“Bank”), HomeStreet Capital Corporation and other direct and indirect subsidiaries of HomeStreet, Inc.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



(in thousands, except share data)	September 30, 2015		December 31, 2014

ASSETS
Cash and cash equivalents (including interest-earning instruments of $11,363 and $10,271)	$	37,303	$	30,502
Investment securities (includes $570,082 and $427,326 carried at fair value)	602,018		455,332
Loans held for sale (includes $860,800 and $610,350 carried at fair value)	882,319		621,235
Loans held for investment (net of allowance for loan losses of $26,922 and $22,021; includes $23,755 and $0 carried at fair value)	3,012,943		2,099,129
Mortgage servicing rights (includes $132,701 and $112,439 carried at fair value)	146,080		123,324
Other real estate owned	8,273		9,448
Federal Home Loan Bank stock, at cost	44,652		33,915
Premises and equipment, net	60,544		45,251
Goodwill	11,945		11,945
Other assets	169,576		105,009
Total assets	$	4,975,653	$	3,535,090
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	3,307,693	$	2,445,430
Federal Home Loan Bank advances	1,025,745		597,590
Federal funds purchased and securities sold under agreements to repurchase	—		50,000
Accounts payable and other liabilities	119,900		77,975
Long-term debt	61,857		61,857
Total liabilities	4,515,195		3,232,852
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares	—		—
Common stock, no par value, authorized 160,000,000, issued and outstanding, 22,061,702 shares and 14,856,611 shares	511		511
Additional paid-in capital	222,047		96,615
Retained earnings	236,207		203,566
Accumulated other comprehensive income	1,693		1,546
Total shareholders' equity	460,458		302,238
Total liabilities and shareholders' equity	$	4,975,653	$	3,535,090

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share data)	2015		2014			2015			2014

Interest income:
Loans	$	41,012	$	25,763		$	111,603		$	71,865
Investment securities	2,754		2,565			8,426			8,199
Other	224		150			647			449
	43,990		28,478			120,676			80,513
Interest expense:
Deposits	3,069		2,364			8,656			7,080
Federal Home Loan Bank advances	958		509			2,476			1,366
Federal funds purchased and securities sold under agreements to repurchase	—		6			8			7
Long-term debt	278		271			815			851
Other	51		20			123			42
	4,356		3,170			12,078			9,346
Net interest income	39,634		25,308			108,598			71,167
Provision (reversal of provision) for credit losses	700		—			4,200			(1,500		)
Net interest income after provision for credit losses	38,934		25,308			104,398			72,667
Noninterest income:
Net gain on mortgage loan origination and sale activities	57,885		37,642			189,746			104,946
Mortgage servicing income	4,768		6,155			10,896			24,284
Income (loss) from WMS Series LLC	380		(122		)	1,428			(69		)
Gain (loss) on debt extinguishment	—		2			—			(573		)
Depositor and other retail banking fees	1,701		944			4,239			2,676
Insurance agency commissions	477		256			1,183			892
Gain on sale of investment securities available for sale (includes unrealized gain reclassified from accumulated other comprehensive income of $1,002 and $480 for the three months ended September 30, 2015 and 2014, and $1,002 and $1,173 for the nine months ended September 30, 2015 and 2014, respectively)	1,002		480			1,002			1,173
Bargain purchase gain	796		—			7,345			—
Other	459		456			(11		)	841
	67,468		45,813			215,828			134,170
Noninterest expense:
Salaries and related costs	60,991		42,604			180,238			118,681
General and administrative	14,869		10,326			42,532			31,593
Legal	868		630			1,912			1,571
Consulting	166		628			6,544			2,182
Federal Deposit Insurance Corporation assessments	504		682			1,890			1,874
Occupancy	6,077		4,935			18,024			14,042
Information services	8,159		4,220			21,993			13,597
Net cost (income) from operation and sale of other real estate owned	392		133			710			(320		)
	92,026		64,158			273,843			183,220
Income before income taxes	14,376		6,963			46,383			23,617
Income tax expense (includes reclassification adjustments of $351 and $168 for the three months ended September 30, 2015 and 2014, and $351 and $411 for the nine months ended September 30, 2015 and 2014, respectively)	4,415		1,988			13,742			6,979
NET INCOME	$	9,961	$	4,975		$	32,641		$	16,638
Basic income per share	$	0.45	$	0.34		$	1.60		$	1.12
Diluted income per share	$	0.45	$	0.33		$	1.58		$	1.11
Dividends paid on common stock per share	$	—	$	—		$	—		$	0.11
Basic weighted average number of shares outstanding	22,035,317		14,805,780			20,407,386			14,797,019
Diluted weighted average number of shares outstanding	22,291,810		14,968,238			20,646,540			14,957,034

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Net income	$	9,961		$	4,975		$	32,641		$	16,638
Other comprehensive income, net of tax:
Unrealized gain on investment securities available for sale:
Unrealized holding gain arising during the period (net of tax expense of $1,576 and $501 for the three months ended September 30, 2015 and 2014 and $430 and $6,579 for the nine months ended September 30, 2015 and 2014, respectively)	2,926			930			798			12,218
Reclassification adjustment included in net income (net of tax expense of $351 and $168 for the three months ended September 30, 2015 and 2014, and $351 and $411 for the nine months ended September 30, 2015 and 2014, respectively)	(651		)	(312		)	(651		)	(762		)
Other comprehensive income	2,275			618			147			11,456
Comprehensive income	$	12,236		$	5,593		$	32,788		$	28,094

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



(in thousands, except share data)	Number of shares	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total

Balance, January 1, 2014	14,799,991	$	511	$	94,474	$	182,935		$	(11,994	)	$	265,926
Net income	—	—		—		16,638			—			16,638
Dividends ($0.11 per share)	—	—		—		(1,628		)	—			(1,628		)
Share-based compensation expense	—	—		1,867		—			—			1,867
Common stock issued	52,980	—		309		—			—			309
Other comprehensive income	—	—		—		—			11,456			11,456
Balance, September 30, 2014	14,852,971	$	511	$	96,650	$	197,945		$	(538	)	$	294,568

Balance, January 1, 2015	14,856,611	$	511	$	96,615	$	203,566		$	1,546		$	302,238
Net income	—	—		—		32,641			—			32,641
Share-based compensation expense	—	—		986		—			—			986
Common stock issued	7,205,091	—		124,446		—			—			124,446
Other comprehensive income	—	—		—		—			147			147
Balance, September 30, 2015	22,061,702	$	511	$	222,047	$	236,207		$	1,693		$	460,458

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2015			2014

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	32,641		$	16,638
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion	10,700			13,293
Provision (reversal of provision) for credit losses	4,200			(1,500		)
Fair value adjustment of loans held for sale	(3,797		)	(11,320		)
Fair value adjustment of loans held for investment	1,797			—
Origination of mortgage servicing rights	(58,158		)	(32,726		)
Change in fair value of mortgage servicing rights	34,949			26,075
Net gain on sale of investment securities	(1,002		)	(1,173		)
Net gain on sale of loans originated as held for investment	—			(4,586		)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned	290			(641		)
Loss on early retirement of long-term debt	—			573
Loss on disposal of fixed assets	89			—
Net deferred income tax expense (benefit)	11,491			(13,502		)
Share-based compensation expense	783			1,100
Bargain purchase gain	(7,345		)	—
Origination of loans held for sale	(5,599,978		)	(2,840,050		)
Proceeds from sale of loans originated as held for sale	5,349,444			2,459,748
Cash used by changes in operating assets and liabilities:
(Increase) decrease in accounts receivable and other assets	(32,025		)	25,486
Increase in accounts payable and other liabilities	22,550			9,959
Net cash (used in) operating activities	(233,371		)	(352,626		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(177,535		)	(45,179		)
Proceeds from sale of investment securities	28,080			75,599
Principal repayments and maturities of investment securities	25,835			32,040
Proceeds from sale of other real estate owned	4,953			6,019
Proceeds from sale of loans originated as held for investment	—			271,409
Proceeds from sale of mortgage servicing rights	3,825			39,004
Mortgage servicing rights purchased from others	(9		)	(8		)
Origination of loans held for investment and principal repayments, net	(260,404		)	(389,196		)
Purchase of property and equipment	(16,961		)	(13,904		)
Net cash acquired from Simplicity acquisition	112,196			—
Net cash used in investing activities	(280,020		)	(24,216		)



	Nine Months Ended September 30,
(in thousands)	2015			2014

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net	$	212,710		$	214,637
Proceeds from Federal Home Loan Bank advances	7,332,200			4,619,927
Repayment of Federal Home Loan Bank advances	(6,969,700		)	(4,467,927		)
Federal funds purchased and proceeds from securities sold under agreements to repurchase	73,004			58,308
Repayment of securities sold under agreements to repurchase	(123,004		)	(44,083		)
Proceeds from Federal Home Loan Bank stock repurchase	90,565			1,017
Purchase of Federal Home Loan Bank stock	(95,783		)	—
Repayment of long-term debt	—			(3,527		)
Dividends paid	—			(1,628		)
Proceeds from stock issuance, net	177			130
Excess tax benefit related to the exercise of stock options	23			767
Net cash provided by financing activities	520,192			377,621
NET INCREASE IN CASH AND CASH EQUIVALENTS	6,801			779
CASH AND CASH EQUIVALENTS:
Beginning of year	30,502			33,908
End of period	$	37,303		$	34,687
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid	$	12,021		$	10,785
Federal and state income taxes paid, net of (refunds)	16,533			(10,642		)
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	4,095			3,647
Loans transferred from held for investment to held for sale	32,421			310,455
Loans transferred from held for sale to held for investment	25,668			17,095
Ginnie Mae loans recognized with the right to repurchase, net	3,345			649
Simplicity acquisition:
Assets acquired, excluding cash acquired	738,279			—
Liabilities assumed	718,916			—
Bargain purchase gain	7,345			—
Common stock issued	$	124,214		$	—

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

HomeStreet, Inc. and Subsidiaries

Notes to Interim Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the Pacific Northwest, California and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. The consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation and HomeStreet Bank (the “Bank”), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company and Union Street Holdings LLC. HomeStreet Bank was formed in 1986 and is a state-chartered savings bank.

The Company’s accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (U.S. GAAP). Inter-company balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses during the reporting periods and related disclosures. These estimates that require application of management's most difficult, subjective or complex judgments often result in the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management has made significant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business combinations (Note 2, Business Combinations), allowance for credit losses (Note 4, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 7, Mortgage Banking Operations), loans held for investment (Note 4, Loans and Credit Quality), investment securities (Note 3, Investment Securities) and derivatives (Note 6, Derivatives and Hedging Activities). Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (“2014 Annual Report on Form 10-K”).

Recent Accounting Developments

On September 25, 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. The ASU was issued to simplify the accounting for measurement period adjustments for business combinations. The amendments in the ASU require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The Company will adopt this ASU for the first interim period beginning after December 15, 2015 and will apply prospectively to adjustments to provisional amounts which occur after the effective date of this ASU.

On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The ASU was issued to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented on the statement of financial condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. This guidance becomes effective for the Company for the interim and annual periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The guidance is required to be applied on a retrospective basis to each individual period presented on the statement of financial condition. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to consolidated obligations on the statement of financial condition. The Company is in the process of evaluating the effect of this guidance on the financial statements but the impact is not expected to be material.

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

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

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. The ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The prospective adoption of ASU 2014-04 did not have a material impact on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue from contracts with customers. The new accounting guidance, which does not apply to financial instruments, is effective on a retrospective basis beginning on January 1, 2017. The adoption of ASU 2014-09 is not expected to have a material impact on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to Maturity Transactions, Repurchase Financings, and Disclosures. The ASU applies to all entities that enter into repurchase-to-maturity transactions or repurchase financings. The amendments in this ASU require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The amendments in this ASU are effective for public business entities for the first interim or annual period beginning after December 15, 2014. The application of this guidance required enhanced disclosures of the Company's repurchase agreements, but had no impact on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The ASU clarifies the classification of certain foreclosed mortgage loans held by creditors that are either fully or partially guaranteed under government programs. The ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure; (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable should be measured based on the amount of the loan balance expected to be recovered from the guarantor. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The prospective adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

NOTE 2–BUSINESS COMBINATIONS:

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

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

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

A summary of the consideration paid, the assets acquired and liabilities assumed in the merger are presented below:



(in thousands)	March 1, 2015

Fair value consideration paid to Simplicity shareholders:
Cash paid (79,399 stock options, consideration based on intrinsic value at a calculated price of $17.53)		$	471
Fair value of common shares issued (7,180,005 shares at $17.30 per share)		124,214
Total purchase price		$	124,685
Fair value of assets acquired:
Cash and cash equivalents	112,667
Investment securities	26,845
Acquired loans	664,148
Mortgage servicing rights	980
Federal Home Loan Bank stock	5,520
Premises and equipment	2,966
Bank-owned life insurance	14,501
Core deposit intangibles	7,450
Accounts receivable and other assets	15,869
Total assets acquired	850,946

Fair value of liabilities assumed:
Deposits	651,202
Federal Home Loan Bank advances	65,855
Accounts payable and accrued expenses	1,859
Total liabilities assumed	718,916
Net assets acquired		$	132,030
Preliminary bargain purchase (gain)		$	(7,345	)

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

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

The following table provides a breakout of merger-related expense for the nine months ended September 30, 2015 and for the year ended December 31, 2014:



	Nine Months Ended September 30, 2015		Year Ended December 31, 2014
(in thousands)	Nine Months Ended September 30, 2015		Year Ended December 31, 2014

Noninterest expense
Salaries and related costs	$	7,669	$	23
General and administrative	1,256		179
Legal	530		245
Consulting	5,539		388
Occupancy	335		4
Information services	481		50
Total noninterest expense	$	15,810	$	889

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

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

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

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

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

Unaudited Pro Forma Results of Operations

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



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share data)	2015		2014			2015		2014


Net interest income	$	39,603	$	33,182		$	113,190	$	95,140
Provision (reversal of provision) for credit losses	700		(350		)	4,200		(2,250		)
Total noninterest income	66,676		47,207			209,239		145,702
Total noninterest expense	91,557		71,014			266,243		218,437

Net income	$	9,756	$	6,471		$	35,355	$	20,430

Basic income per share	$	0.44	$	0.30		$	1.60	$	0.94
Diluted income per share	$	0.44	$	0.30		$	1.59	$	0.93
Basic weighted average number of shares outstanding	22,035,317		21,551,126			22,034,201		21,749,352
Diluted weighted average number of shares outstanding	22,291,810		21,735,713			22,207,764		21,934,050

NOTE 3–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.



	At September 30, 2015
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	91,562	$	216	$	(774	)	$	91,004
Commercial	23,824		331		(90		)	24,065
Municipal bonds	184,160		3,350		(427		)	187,083
Collateralized mortgage obligations:
Residential	88,459		119		(789		)	87,789
Commercial	55,849		468		(71		)	56,246
Corporate debt securities	84,304		307		(1,729		)	82,882
U.S. Treasury securities	40,991		22		—			41,013
	$	569,149	$	4,813	$	(3,880	)	$	570,082



	At December 31, 2014
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	107,624	$	509	$	(853	)	$	107,280
Commercial	13,030		641		—			13,671
Municipal bonds	119,744		2,847		(257		)	122,334
Collateralized mortgage obligations:
Residential	44,254		161		(1,249		)	43,166
Commercial	20,775		—		(289		)	20,486
Corporate debt securities	80,214		296		(1,110		)	79,400
U.S. Treasury securities	40,976		13		—			40,989
	$	426,617	$	4,467	$	(3,758	)	$	427,326

Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2015 and December 31, 2014, all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As of September 30, 2015 and December 31, 2014, substantially all securities held had ratings available by external ratings agencies.

Investment securities available for sale that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.



	At September 30, 2015
	Less than 12 months					12 months or more					Total
(in thousands)	Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	(344	)	$	28,158	$	(430	)	$	21,833	$	(774	)	$	49,991
Commercial	(90		)	16,431		—			—		(90		)	16,431
Municipal bonds	(281		)	41,334		(147		)	5,815		(428		)	47,149
Collateralized mortgage obligations:
Residential	(191		)	37,565		(597		)	27,618		(788		)	65,183
Commercial	—			—		(71		)	4,698		(71		)	4,698
Corporate debt securities	(631		)	29,482		(1,098		)	27,152		(1,729		)	56,634
	$	(1,537	)	$	152,970	$	(2,343	)	$	87,116	$	(3,880	)	$	240,086



	At December 31, 2014
	Less than 12 months					12 months or more					Total
(in thousands)	Gross unrealized losses			Fair value		Gross unrealized losses			Fair value		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	—		$	—	$	(853	)	$	57,242	$	(853	)	$	57,242
Municipal bonds	(11		)	2,339		(246		)	17,155		(257		)	19,494
Collateralized mortgage obligations:
Residential	—			—		(1,249		)	31,021		(1,249		)	31,021
Commercial	(29		)	5,037		(260		)	15,449		(289		)	20,486
Corporate debt securities	(56		)	13,140		(1,054		)	40,997		(1,110		)	54,137
	$	(96	)	$	20,516	$	(3,662	)	$	161,864	$	(3,758	)	$	182,380

The Company has evaluated securities available for sale that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of September 30, 2015 and December 31, 2014. In addition, as of September 30, 2015 and December 31, 2014, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.

The following tables present the fair value of investment securities available for sale by contractual maturity along with the associated contractual yield for the periods indicated below. Contractual maturities for mortgage-backed securities and collateralized mortgage obligations as presented exclude the effect of expected prepayments. Expected maturities will differ from contractual maturities because borrowers may have the right to prepay obligations before the underlying mortgages mature. The weighted-average yield is computed using the contractual coupon of each security weighted based on the fair value of each security and does not include adjustments to a tax equivalent basis.



	At September 30, 2015
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield

Mortgage-backed securities:
Residential	$	—	—	%	$	4	0.40	%	$	3,425	1.60	%	$	87,575	1.86	%	$	91,004	1.85	%
Commercial	—		—		—		—		18,239		2.21		5,826		4.88		24,065		2.83
Municipal bonds	516		2.10		7,812		3.41		35,836		3.39		142,919		4.04		187,083		3.88
Collateralized mortgage obligations:
Residential	—		—		—		—		161		0.91		87,628		1.64		87,789		1.64
Commercial	—		—		5,461		1.90		40,649		2.28		10,136		2.03		56,246		2.20
Corporate debt securities	—		—		13,298		2.61		38,947		3.24		30,637		3.70		82,882		3.31
U.S. Treasury securities	40,013		0.35		1,000		0.64		—		—		—		—		41,013		0.35
Total available for sale	$	40,529	0.37	%	$	27,575	2.62	%	$	137,257	2.81	%	$	364,721	2.83	%	$	570,082	2.64	%



	At December 31, 2014
	Within one year				After one year through five years				After five years through ten years				After ten years				Total
(in thousands)	Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield		Fair Value		Weighted Average Yield

Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	6,949	1.72	%	$	100,331	1.75	%	$	107,280	1.75	%
Commercial	—		—		—		—		—		—		13,671		4.75		13,671		4.75
Municipal bonds	—		—		604		4.10		23,465		3.55		98,265		4.21		122,334		4.09
Collateralized mortgage obligations:
Residential	—		—		—		—		—		—		43,166		1.84		43,166		1.84
Commercial	—		—		—		—		9,776		1.96		10,710		1.99		20,486		1.97
Corporate debt securities	—		—		9,000		2.21		38,487		3.35		31,913		3.73		79,400		3.37
U.S. Treasury securities	25,998		0.28		14,991		0.46		—		—		—		—		40,989		0.35
Total available for sale	$	25,998	0.28	%	$	24,595	1.19	%	$	78,677	3.09	%	$	298,056	2.92	%	$	427,326	2.69	%

Sales of investment securities available for sale were as follows.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

Proceeds	$	28,080	$	9,753	$	28,080	$	75,599
Gross gains	1,002		480		1,002		1,375
Gross losses	—		—		—		(201		)

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

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

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

NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies and Note 5, Loans and Credit Quality within our 2014 Annual Report on Form 10-K.

The Company's portfolio of loans held for investment is divided into two portfolio segments, consumer loans and commercial loans, which are the same segments used to determine the allowance for loan losses. Within each portfolio segment, the Company monitors and assesses credit risk based on the risk characteristics of each of the following loan classes: single family and home equity and other loans within the consumer loan portfolio segment and commercial real estate, multifamily, construction/land development and commercial business loans within the commercial loan portfolio segment.

Loans held for investment consist of the following:



(in thousands)	At September 30, 2015				At December 31, 2014

Consumer loans
Single family	$	1,171,967		⁽¹⁾	$	896,665
Home equity and other	237,491				135,598
	1,409,458				1,032,263
Commercial loans
Commercial real estate	563,241				523,464
Multifamily	382,392				55,088
Construction/land development	529,871				367,934
Commercial business	158,135				147,449
	1,633,639				1,093,935
	3,043,097				2,126,198
Net deferred loan fees, costs and discounts	(3,232		)		(5,048		)
	3,039,865				2,121,150
Allowance for loan losses	(26,922		)		(22,021		)
	$	3,012,943			$	2,099,129


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

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

Credit Risk Concentration

Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

Loans held for investment are primarily secured by real estate located in the Pacific Northwest, Oregon, California and Hawaii. At September 30, 2015, we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family, commercial real estate and construction/land development within the state of Washington, which represented 19.3%, 15.2% and 11.5% of the total portfolio, respectively. Additionally, we had a concentration representing 10% or more by state and property type for the single family loan class within the state of California, which represented 13.5% of the total portfolio. At December 31, 2014 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family, commercial real estate and construction/land development within the state of Washington, which represented 28.0% and 20.7% and 13.7% of the total portfolio, respectively.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of September 30, 2015. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.

For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 1, Summary of Significant Accounting Policies within our 2014 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2015		2014			2015		2014

Allowance for credit losses (roll-forward):
Beginning balance	$	26,448	$	22,168		$	22,524	$	24,089
Provision (reversal of provision) for credit losses	700		—			4,200		(1,500		)
(Charge-offs), net of recoveries	739		(57		)	1,163		(478		)
Ending balance	$	27,887	$	22,111		$	27,887	$	22,111
Components:
Allowance for loan losses	$	26,922	$	21,847		$	26,922	$	21,847
Allowance for unfunded commitments	965		264			965		264
Allowance for credit losses	$	27,887	$	22,111		$	27,887	$	22,111

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



	Three Months Ended September 30, 2015
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	8,997	$	(232	)	$	250	$	(298	)	$	8,717
Home equity and other	3,882		(255		)	84		541			4,252
	12,879		(487		)	334		243			12,969
Commercial loans
Commercial real estate	5,046		—			—		(355		)	4,691
Multifamily	780		(150		)	—		153			783
Construction/land development	5,943		—			1,033		435			7,411
Commercial business	1,800		(14		)	23		224			2,033
	13,569		(164		)	1,056		457			14,918
Total allowance for credit losses	$	26,448	$	(651	)	$	1,390	$	700		$	27,887



	Three Months Ended September 30, 2014
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	9,111	$	(226	)	$	65	$	(72	)	$	8,878
Home equity and other	3,517		(135		)	94		87			3,563
	12,628		(361		)	159		15			12,441
Commercial loans
Commercial real estate	4,063		—			275		(357		)	3,981
Multifamily	887		—			—		(174		)	713
Construction/land development	2,418		—			123		146			2,687
Commercial business	2,172		(304		)	51		370			2,289
	9,540		(304		)	449		(15		)	9,670
Total allowance for credit losses	$	22,168	$	(665	)	$	608	$	—		$	22,111



	Nine Months Ended September 30, 2015
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	9,447	$	(232	)	$	496	$	(994	)	$	8,717
Home equity and other	3,322		(456		)	225		1,161			4,252
	12,769		(688		)	721		167			12,969
Commercial loans
Commercial real estate	3,846		(16		)	37		824			4,691
Multifamily	673		(150		)	—		260			783
Construction/land development	3,818		—			1,132		2,461			7,411
Commercial business	1,418		(23		)	150		488			2,033
	9,755		(189		)	1,319		4,033			14,918
Total allowance for credit losses	$	22,524	$	(877	)	$	2,040	$	4,200		$	27,887



	Nine Months Ended September 30, 2014
(in thousands)	Beginning balance		Charge-offs			Recoveries		(Reversal of) Provision			Ending balance

Consumer loans
Single family	$	11,990	$	(509	)	$	106	$	(2,709	)	$	8,878
Home equity and other	3,987		(694		)	420		(150		)	3,563
	15,977		(1,203		)	526		(2,859		)	12,441
Commercial loans
Commercial real estate	4,012		(23		)	431		(439		)	3,981
Multifamily	942		—			—		(229		)	713
Construction/land development	1,414		—			185		1,088			2,687
Commercial business	1,744		(592		)	198		939			2,289
	8,112		(615		)	814		1,359			9,670
Total allowance for credit losses	$	24,089	$	(1,818	)	$	1,340	$	(1,500	)	$	22,111

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.



	At September 30, 2015
(in thousands)	Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total

Consumer loans
Single family	$	8,475	$	242	$	8,717	$	1,070,100	$	78,112	$	1,148,212
Home equity and other	4,173		79		4,252		235,914		1,577		237,491
	12,648		321		12,969		1,306,014		79,689		1,385,703
Commercial loans
Commercial real estate	4,691		—		4,691		555,648		7,593		563,241
Multifamily	733		50		783		377,924		4,468		382,392
Construction/land development	7,411		—		7,411		525,539		4,332		529,871
Commercial business	1,494		539		2,033		152,411		5,724		158,135
	14,329		589		14,918		1,611,522		22,117		1,633,639
Total loans evaluated for impairment	26,977		910		27,887		2,917,536		101,806		3,019,342
Loans held for investment carried at fair value											23,755		⁽¹⁾
Total loans held for investment	$	26,977	$	910	$	27,887	$	2,917,536	$	101,806	$	3,043,097


(1)	Comprised of single family 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.



	At December 31, 2014
(in thousands)	Allowance: collectively evaluated for impairment		Allowance: individually evaluated for impairment		Total		Loans: collectively evaluated for impairment		Loans: individually evaluated for impairment		Total

Consumer loans
Single family	$	8,743	$	704	$	9,447	$	818,783	$	77,882	$	896,665
Home equity and other	3,165		157		3,322		132,937		2,661		135,598
	11,908		861		12,769		951,720		80,543		1,032,263
Commercial loans
Commercial real estate	3,806		40		3,846		496,685		26,779		523,464
Multifamily	312		361		673		52,011		3,077		55,088
Construction/land development	3,818		—		3,818		362,487		5,447		367,934
Commercial business	974		444		1,418		144,071		3,378		147,449
	8,910		845		9,755		1,055,254		38,681		1,093,935
Total	$	20,818	$	1,706	$	22,524	$	2,006,974	$	119,224	$	2,126,198

The Company recorded $700 thousand of provision for credit losses in the third quarter of 2015. The credit loss provision recorded in the quarter was the result of overall growth in the loans held for investment portfolio.

Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.



	At September 30, 2015
(in thousands)	Recorded investment⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	76,317	$	78,609	$	—
Home equity and other	917		989		—
	77,234		79,598		—
Commercial loans
Commercial real estate	7,593		8,861		—
Multifamily	3,768		4,197		—
Construction/land development	4,332		11,382		—
Commercial business	4,038		4,622		—
	19,731		29,062		—
	$	96,965	$	108,660	$	—
With an allowance recorded:
Consumer loans
Single family	$	1,795	$	1,946	$	242
Home equity and other	660		660		79
	2,455		2,606		321
Commercial loans
Multifamily	700		850		50
Commercial business	1,686		1,763		539
	2,386		2,613		589
	$	4,841	$	5,219	$	910
Total:
Consumer loans
Single family⁽³⁾	$	78,112	$	80,555	$	242
Home equity and other	1,577		1,649		79
	79,689		82,204		321
Commercial loans
Commercial real estate	7,593		8,861		—
Multifamily	4,468		5,047		50
Construction/land development	4,332		11,382		—
Commercial business	5,724		6,385		539
	22,117		31,675		589
Total impaired loans	$	101,806	$	113,879	$	910


(1)	Includes partial charge-offs and nonaccrual interest paid and purchase discounts and premiums.


(2)	Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.


(3)	Includes $74.4 million in performing troubled debt restructurings ("TDRs").



	At December 31, 2014
(in thousands)	Recorded investment ⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	48,104	$	50,787	$	—
Home equity and other	1,824		1,850		—
	49,928		52,637		—
Commercial loans
Commercial real estate	25,540		27,205		—
Multifamily	508		508		—
Construction/land development	5,447		14,532		—
Commercial business	1,302		3,782		—
	32,797		46,027		—
	$	82,725	$	98,664	$	—
With an allowance recorded:
Consumer loans
Single family	$	29,778	$	29,891	$	704
Home equity and other	837		837		157
	30,615		30,728		861
Commercial loans
Commercial real estate	1,239		1,399		40
Multifamily	2,569		2,747		361
Commercial business	2,076		2,204		444
	5,884		6,350		845
	$	36,499	$	37,078	$	1,706
Total:
Consumer loans
Single family⁽³⁾	$	77,882	$	80,678	$	704
Home equity and other	2,661		2,687		157
	80,543		83,365		861
Commercial loans
Commercial real estate	26,779		28,604		40
Multifamily	3,077		3,255		361
Construction/land development	5,447		14,532		—
Commercial business	3,378		5,986		444
	38,681		52,377		845
Total impaired loans	$	119,224	$	135,742	$	1,706


(1)	Includes partial charge-offs and nonaccrual interest paid.


(2)	Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.


(3)	Includes $73.6 million in single family performing TDRs.

The following table provides the average recorded investment in impaired loans by portfolio segment and class.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

Consumer loans
Single family	$	78,432	$	72,840	$	78,358	$	72,508
Home equity and other	1,872		2,457		2,184		2,524
	80,304		75,297		80,542		75,032
Commercial loans
Commercial real estate	15,797		31,209		20,328		31,638
Multifamily	4,590		3,114		4,022		3,134
Construction/land development	4,466		5,768		4,968		5,898
Commercial business	5,883		3,664		4,691		3,250
	30,736		43,755		34,009		43,920
	$	111,040	$	119,052	$	114,551	$	118,952

Credit Quality Indicators

Management regularly reviews loans in the portfolio to assess credit quality indicators and to determine appropriate loan classification and grading in accordance with applicable bank regulations. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Company differentiates its lending portfolios into homogeneous loans and non-homogeneous loans.

The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:

Pass. We have five pass risk ratings which represent a level of credit quality that ranges from no well-defined deficiency or weakness to some noted weakness, however the risk of default on any loan classified as pass is expected to be remote. The five pass risk ratings are described below:

Minimal Risk. A minimal risk loan, risk rated 1-Exceptional, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty.

Low Risk. A low risk loan, risk rated 2-Superior, is similar in characteristics to a minimal risk loan. Balance sheet and operations are slightly more prone to fluctuations within the business cycle; however, debt capacity and debt service coverage remains strong. The borrower will have a strong demonstrated ability to produce profits and absorb market disturbances.

Modest Risk. A modest risk loan, risk rated 3-Excellent, is a desirable loan with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the loan in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have cash reserves to weather these cycles.

Average Risk. An average risk loan, risk rated 4-Good, is an attractive loan with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.

Acceptable Risk. An acceptable risk loan, risk rated 5-Acceptable, is a loan with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.

Watch. A watch loan, risk rated 6-Watch, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time. Borrowers rated watch are characterized by elements of uncertainty, such as:


•	The borrower may be experiencing declining operating trends, strained cash flows or less-than anticipated performance. Cash flow should still be adequate to cover debt service, and the negative trends should be identified as being of a short-term or temporary nature.


•	The borrower may have experienced a minor, unexpected covenant violation.


•	Companies who may be experiencing tight working capital or have a cash cushion deficiency.


•	A loan may also be a watch if financial information is late, there is a documentation deficiency, the borrower has experienced unexpected management turnover, or if they face industry issues that, when combined with performance factors create uncertainty in their future ability to perform.


•	Delinquent payments, increasing and material overdraft activity, request for bulge and/or out- of-formula advances may be an indicator of inadequate working capital and may suggest a lower rating.


•	Failure of the intended repayment source to materialize as expected, or renewal of a loan (other than cash/marketable security secured or lines of credit) without reduction are possible indicators of a watch or worse risk rating.

Special Mention. A special mention loan, risk rated 7-Special Mention, has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or the institutions credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan has potential weaknesses, which if not checked or corrected, weaken the loan or inadequately protect the Company’s position at some future date. Such weaknesses include:


•	Performance is poor or significantly less than expected. There may be a temporary debt-servicing deficiency or inadequate working capital as evidenced by a cash cushion deficiency, but not to the extent that repayment is compromised. Material violation of financial covenants is common.


•	Loans with unresolved material issues that significantly cloud the debt service outlook, even though a debt servicing deficiency does not currently exist.


•	Modest underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt as structured. Depth of support for interest carry provided by owner/guarantors may mitigate and provide for improved rating


•	This rating may be assigned when a loan officer is unable to supervise the credit properly, an inadequate loan agreement, an inability to control collateral, failure to obtain proper documentation, or any other deviation from prudent lending practices.


•	Unlike a substandard credit, there should be a reasonable expectation that these temporary issues will be corrected within the normal course of business, rather than liquidation of assets, and in a reasonable period of time.

Substandard. A substandard loan, risk rated 8-Substandard, is inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the loan. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard. Loans are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan normally has one or more well-defined weaknesses that could jeopardize repayment of the loan. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between special mention and substandard. The following are examples of well-defined weaknesses:


•	Cash flow deficiencies or trends are of a magnitude to jeopardize current and future payments with no immediate relief. A loss is not presently expected, however the outlook is sufficiently uncertain to preclude ruling out the possibility.


•	The borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.


•	Material underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt and risk is not mitigated by willingness and capacity of owner/guarantor to support interest payments.


•	Management character or honesty has become suspect. This includes instances where the borrower has become uncooperative.

•

Due to unprofitable or unsuccessful business operations, some form of restructuring of the business, including liquidation of assets, has become the primary source of loan repayment. Cash flow has deteriorated, or been diverted, to the point that sale of collateral is now the Company’s primary source of repayment (unless this was the original source of repayment). If the collateral is under the Company’s control and is cash or other liquid, highly marketable securities and properly margined, then a more appropriate rating might be special mention or watch.


•	The borrower is involved in bankruptcy proceedings where collateral liquidation values are expected to fully protect the Company against loss.


•	There is material, uncorrectable faulty documentation or materially suspect financial information.

Doubtful. Loans classified as doubtful, risk rated 9-Doubtful, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the loan, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Company is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual.

Loss. Loans classified as loss, risk rated 10-Loss, are considered un-collectible and of such little value that the continuance as an active Company asset is not warranted. This rating does not mean that the loan has no recovery or salvage value, but rather that the loan should be charged-off now, even though partial or full recovery may be possible in the future.

Impaired. Loans are classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as nonaccrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification.

Homogeneous loans maintain their original risk rating until they are greater than 30 days past due, and risk rating reclassification is based primarily on the past due status of the loan. The risk rating categories can be generally described by the following groupings for commercial and commercial real estate homogeneous loans:

Watch. A homogeneous watch loan, risk rated 6, is 30-59 days past due from the required payment date at month-end.

Special Mention. A homogeneous special mention loan, risk rated 7, is 60-89 days past due from the required payment date at month-end.

Substandard. A homogeneous substandard loan, risk rated 8, is 90-179 days past due from the required payment date at month-end.

Loss. A homogeneous loss loan, risk rated 10, is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses.

The risk rating categories can be generally described by the following groupings for residential and home equity and other homogeneous loans:

Watch. A homogeneous retail watch loan, risk rated 6, is 60-89 days past due from the required payment date at month-end.

Substandard. A homogeneous retail substandard loan, risk rated 8, is 90-180 days past due from the required payment date at month-end.

Loss. A homogeneous retail loss loan, risk rated 10, becomes past due 180 cumulative days from the contractual due date. These loans are generally charged-off in the month in which the 180 day period elapses.

Residential and home equity loans modified in a troubled debt restructure are not considered homogeneous. The risk rating classification for such loans are based on the non-homogeneous definitions noted above.

The following tables summarize designated loan grades by loan portfolio segment and loan class.



	At September 30, 2015
(in thousands)	Pass			Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	1,135,079	⁽¹⁾	$	4,835	$	20,755	$	11,298	$	1,171,967
Home equity and other	235,406			156		298		1,631		237,491
	1,370,485			4,991		21,053		12,929		1,409,458
Commercial loans
Commercial real estate	483,325			62,221		8,362		9,333		563,241
Multifamily	357,985			20,370		2,146		1,891		382,392
Construction/land development	511,358			14,395		2,234		1,884		529,871
Commercial business	122,045			30,263		1,543		4,284		158,135
	1,474,713			127,249		14,285		17,392		1,633,639
	$	2,845,198		$	132,240	$	35,338	$	30,321	$	3,043,097


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



	At December 31, 2014
(in thousands)	Pass		Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	865,641	$	361	$	21,714	$	8,949	$	896,665
Home equity and other	133,338		82		652		1,526		135,598
	998,979		443		22,366		10,475		1,032,263
Commercial loans
Commercial real estate	441,509		67,434		13,066		1,455		523,464
Multifamily	50,495		1,516		3,077		—		55,088
Construction/land development	361,167		2,830		1,261		2,676		367,934
Commercial business	115,665		25,724		3,690		2,370		147,449
	968,836		97,504		21,094		6,501		1,093,935
	$	1,967,815	$	97,947	$	43,460	$	16,976	$	2,126,198

As of September 30, 2015 and December 31, 2014, none of the Company's loans were rated Doubtful or Loss. For a detailed discussion on credit quality, see Note 6, Loans and Credit Quality within our 2014 Annual Report on Form 10-K.

Nonaccrual and Past Due Loans

Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. Loans whose repayments are insured by the Federal Housing Authority ("FHA") or guaranteed by the Department of Veterans' Affairs ("VA") are generally maintained on accrual status even if 90 days or more past due.

The following table presents an aging analysis of past due loans by loan portfolio segment and loan class.



	At September 30, 2015
(in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current			Total loans		90 days or more past due and accruing⁽²⁾

Consumer loans
Single family	$	6,431	$	7,764	$	45,591	$	59,786	$	1,112,181	⁽¹⁾	$	1,171,967	$	35,152	⁽²⁾
Home equity and other	1,294		157		1,608		3,059		234,432			237,491		—
	7,725		7,921		47,199		62,845		1,346,613			1,409,458		35,152
Commercial loans
Commercial real estate	1,714		—		2,540		4,254		558,987			563,241		—
Multifamily	—		—		1,449		1,449		380,943			382,392		—
Construction/land development	715		—		—		715		529,156			529,871		—
Commercial business	202		—		3,434		3,636		154,499			158,135		—
	2,631		—		7,423		10,054		1,623,585			1,633,639		—
	$	10,356	$	7,921	$	54,622	$	72,899	$	2,970,198		$	3,043,097	$	35,152



	At December 31, 2014
(in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans		90 days or more past due and accruing⁽²⁾

Consumer loans
Single family	$	7,832	$	2,452	$	43,105	$	53,389	$	843,276	$	896,665	$	34,737	⁽²⁾
Home equity and other	371		81		1,526		1,978		133,620		135,598		—
	8,203		2,533		44,631		55,367		976,896		1,032,263		34,737
Commercial loans
Commercial real estate	—		—		4,843		4,843		518,621		523,464		—
Multifamily	—		—		—		—		55,088		55,088		—
Construction/land development	—		1,261		—		1,261		366,673		367,934		—
Commercial business	611		3		1,527		2,141		145,308		147,449		250
	611		1,264		6,370		8,245		1,085,690		1,093,935		250
	$	8,814	$	3,797	$	51,001	$	63,612	$	2,062,586	$	2,126,198	$	34,987


(1)	Includes $23.8 million of loans at September 30, 2015 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.


(2)	FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.



	At September 30, 2015
(in thousands)	Accrual			Nonaccrual		Total

Consumer loans
Single family	$	1,161,528	⁽¹⁾	$	10,439	$	1,171,967
Home equity and other	235,883			1,608		237,491
	1,397,411			12,047		1,409,458
Commercial loans
Commercial real estate	560,701			2,540		563,241
Multifamily	380,943			1,449		382,392
Construction/land development	529,871			—		529,871
Commercial business	154,701			3,434		158,135
	1,626,216			7,423		1,633,639
	$	3,023,627		$	19,470	$	3,043,097


(1)	Includes $23.8 million of loans at September 30, 2015 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.



	At December 31, 2014
(in thousands)	Accrual		Nonaccrual		Total

Consumer loans
Single family	$	888,297	$	8,368	$	896,665
Home equity and other	134,072		1,526		135,598
	1,022,369		9,894		1,032,263
Commercial loans
Commercial real estate	518,621		4,843		523,464
Multifamily	55,088		—		55,088
Construction/land development	367,934		—		367,934
Commercial business	146,172		1,277		147,449
	1,087,815		6,120		1,093,935
	$	2,110,184	$	16,014	$	2,126,198

The following tables present information about troubled debt restructurings ("TDRs") activity during the periods presented.



	Three Months Ended September 30, 2015
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	11	$	1,722	$	—
Total consumer
	Interest rate reduction	11	1,722		—
		11	1,722		—

Total loans
	Interest rate reduction	11	1,722		—
		11	$	1,722	$	—



	Three Months Ended September 30, 2014
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	18	$	3,268	$	—
	Payment restructure	8	1,626		—
Home equity
	Interest rate reduction	1	220		—
Total consumer
	Interest rate reduction	19	3,488		—
	Payment restructure	8	1,626		—
		27	5,114		—
Commercial loans
Commercial real estate
	Interest rate reduction	1	1,181		—
Commercial business
	Forgiveness of principal	1	391		266
Total commercial
	Interest rate reduction	1	1,181		—
	Forgiveness of principal	1	391		266
		2	1,572		266
Total loans
	Interest rate reduction	20	4,669		—
	Payment restructure	8	1,626		—
	Forgiveness of principal	1	391		266
		29	$	6,686	$	266



	Nine Months Ended September 30, 2015
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	39	$	8,514	$	—
Home equity and other
	Interest rate reduction	1	37		—
Total consumer
	Interest rate reduction	40	8,551		—
		40	8,551		—

Commercial loans
Commercial business
	Interest rate reduction	2	482		—
Total commercial
	Interest rate reduction	2	482		—
		2	482		—
Total loans
	Interest rate reduction	42	9,033		—
		42	$	9,033	$	—



	Nine Months Ended September 30, 2014
(dollars in thousands)	Concession type	Number of loan modifications	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	42	$	7,455	$	—
	Payment restructure	10	1,991		—
Home equity
	Interest rate reduction	1	220		—
Total consumer
	Interest rate reduction	43	7,675		—
	Payment restructure	10	1,991		—
		53	9,666		—
Commercial loans
Commercial real estate
	Interest rate reduction	1	1,181		—
	Payment restructure	3	4,248		—
Commercial business
	Interest rate reduction	2	117		—
	Forgiveness of principal	2	599		554
Total commercial
	Interest rate reduction	3	1,298		—
	Payment restructure	3	4,248		—
	Forgiveness of principal	2	599		554
		8	6,145		554
Total loans
	Interest rate reduction	46	8,973		—
	Payment restructure	13	6,239		—
	Forgiveness of principal	2	599		554
		61	$	15,811	$	554

The following tables present loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three and nine months ended September 30, 2015 and 2014, respectively. A TDR loan is considered re-defaulted when it becomes doubtful that the objectives of the modifications will be met, generally when a consumer loan TDR becomes 60 days or more past due on principal or interest payments or when a commercial loan TDR becomes 90 days or more past due on principal or interest payments.



	Three Months Ended September 30,
	2015			2014
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	3	$	552	3	$	282
Home equity and other	1	68		—	—
	4	620		3	282
	4	$	620	3	$	282



	Nine Months Ended September 30,
	2015			2014
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	10	$	2,270	7	$	1,010
Home equity and other	1	68		1	190
	11	2,338		8	1,200
	11	$	2,338	8	$	1,200

NOTE 5–DEPOSITS:

Deposit balances, including stated rates, were as follows.



(in thousands)	At September 30, 2015		At December 31, 2014

Noninterest-bearing accounts	$	698,360	$	470,663
NOW accounts, 0.00% to 1.00% at September 30, 2015 and 0.00% to 1.00% at December 31, 2014	452,482		272,390
Statement savings accounts, due on demand, 0.00% to 1.00% at September 30, 2015 and 0.00% to 1.99% at December 31, 2014	296,983		200,638
Money market accounts, due on demand, 0.00% to 1.45% at September 30, 2015 and 0.00% to 1.45% at December 31, 2014	1,140,660		1,007,214
Certificates of deposit, 0.05% to 3.80% at September 30, 2015 and 0.05% to 3.80% at December 31, 2014	719,208		494,525
	$	3,307,693	$	2,445,430

There were $1.6 million in public funds included in deposits as of September 30, 2015 and $2.2 million at December 31, 2014.

Interest expense on deposits was as follows.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

NOW accounts	$	495	$	289	$	1,283	$	835
Statement savings accounts	257		238		778		649
Money market accounts	1,272		1,125		3,655		3,226
Certificates of deposit	1,045		712		2,940		2,370
	$	3,069	$	2,364	$	8,656	$	7,080

The weighted-average interest rates on certificates of deposit September 30, 2015 and December 31, 2014 were 0.92% and 0.60%, respectively.

Certificates of deposit outstanding mature as follows.



(in thousands)	At September 30, 2015

Within one year	$	556,103
One to two years	97,049
Two to three years	21,351
Three to four years	28,206
Four to five years	16,499
	$	719,208

The aggregate amount of time deposits in denominations of $100 thousand or more at September 30, 2015 and December 31, 2014 was $263.0 million and $188.7 million, respectively. The aggregate amount of time deposits in denominations of more than $250 thousand at September 30, 2015 and December 31, 2014 was $70.8 million and $30.2 million, respectively. There were $149.1 million and $176.1 million of brokered deposits at each of September 30, 2015 and December 31, 2014.

NOTE 6–DERIVATIVES AND HEDGING ACTIVITIES:

To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as certain mortgage loans held for sale or mortgage servicing rights ("MSRs"), the Company utilizes derivatives, such as forward sale commitments, futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy. Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments. We held no derivatives designated as a fair value, cash flow or foreign currency hedge instrument at September 30, 2015 or December 31, 2014. Derivatives are reported at their respective fair values in the other assets or accounts payable and other liabilities line items on the consolidated statements of financial condition, with changes in fair value reflected in current period earnings.

As permitted under U.S. GAAP, the Company nets derivative assets and liabilities when a legally enforceable master netting agreement exists between the Company and the derivative counterparty, which are documented under industry standard master agreements and credit support annexes. The Company's master netting agreements provide that following an uncured payment default or other event of default the non-defaulting party may promptly terminate all transactions between the parties and determine a net amount due to be paid to, or by, the defaulting party. An event of default may also occur under a credit support annex if a party fails to make a collateral delivery (which remains uncured following applicable notice and grace periods). The Company's right of offset requires that master netting agreements are legally enforceable and that the exercise of rights by the non-defaulting party under these agreements will not be stayed, or avoided under applicable law upon an event of default including bankruptcy, insolvency or similar proceeding.

The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in other assets on the Company's consolidated statements of financial condition. Any securities pledged to counterparties as collateral remain on the consolidated statement of financial condition. Refer to Note 3, Investment Securities of this Form 10-Q for further information on securities collateral pledged. At September 30, 2015 and December 31, 2014, the Company did not hold any collateral received from counterparties under derivative transactions.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of Significant Accounting Policies and Note 11, Derivatives and Hedging Activities within our 2014 Annual Report on Form 10-K.

The notional amounts and fair values for derivatives consist of the following.



	At September 30, 2015
	Notional amount		Fair value derivatives
(in thousands)			Asset			Liability

Forward sale commitments	$	1,502,462	$	2,448		$	(9,662	)
Interest rate swaptions	55,000		—			(18		)
Interest rate lock commitments	775,136		26,211			(2		)
Interest rate swaps	857,950		13,634			(4,582		)
Total derivatives before netting	$	3,190,548	42,293			(14,264		)
Netting adjustments			(10,146		)	10,146
Carrying value on consolidated statements of financial condition			$	32,147		$	(4,118	)



	At December 31, 2014
	Notional amount		Fair value derivatives
(in thousands)			Asset			Liability

Forward sale commitments	$	934,986	$	1,071		$	(5,658	)
Interest rate swaptions	15,000		—			—
Interest rate lock commitments	392,687		11,939			(6		)
Interest rate swaps	610,150		11,689			(972		)
Total derivatives before netting	$	1,952,823	24,699			(6,636		)
Netting adjustments			(5,858		)	5,858
Carrying value on consolidated statements of financial condition			$	18,841		$	(778	)

The following tables present gross and net information about derivative instruments.



	At September 30, 2015
(in thousands)	Gross fair value			Netting adjustments			Carrying value			Cash collateral paid ⁽¹⁾		Securities pledged		Net amount

Derivative assets	$	42,293		$	(10,146	)	$	32,147		$	—	$	—	$	32,147

Derivative liabilities	$	(14,264	)	$	10,146		$	(4,118	)	$	3,798	$	—	$	(320	)



	At December 31, 2014
(in thousands)	Gross fair value			Netting adjustments			Carrying value			Cash collateral paid ⁽¹⁾		Securities pledged		Net amount

Derivative assets	$	24,699		$	(5,858	)	$	18,841		$	—	$	—	$	18,841

Derivative liabilities	$	(6,636	)	$	5,858		$	(778	)	$	—	$	762	$	(16	)

(1)

Excludes cash collateral of $28.4 million and $20.4 million at September 30, 2015 and December 31, 2014, which predominantly consists of collateral transferred by the Company at the initiation of derivative transactions and held by the counterparty as security. These amounts were not netted against the derivative receivables and payables, because, at an individual counterparty level, the collateral exceeded the fair value exposure at both September 30, 2015 and December 31, 2014.

The following table presents the net gain (loss) recognized on derivatives, including economic hedge derivatives, within the respective line items in the statement of operations for the periods indicated.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015		2014

Recognized in noninterest income:
Net gain on mortgage loan origination and sale activities ⁽¹⁾	$	(17,135	)	$	(2,868	)	$	5,116	$	(8,882	)
Mortgage servicing income ⁽²⁾	22,017			2,543			17,030		23,381
	$	4,882		$	(325	)	$	22,146	$	14,499


(1)	Comprised of interest rate lock commitments ("IRLCs") and forward contracts used as an economic hedge of IRLCs and single family mortgage loans held for sale.


(2)	Comprised of interest rate swaps, interest rate swaptions and forward contracts used as an economic hedge of single family MSRs.

NOTE 7–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.



(in thousands)	At September 30, 2015		At December 31, 2014

Single family	$	860,800	$	610,350
Multifamily	21,519		10,885
Total loans held for sale	$	882,319	$	621,235

Loans sold consisted of the following.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

Single family	$	1,965,223	$	1,179,464	$	5,176,569	$	2,705,719
Multifamily	42,333		20,409		140,965		42,574
Total loans sold	$	2,007,556	$	1,199,873	$	5,317,534	$	2,748,293

Net gain on mortgage loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands)	2015		2014			2015		2014

Single family:
Servicing value and secondary market gains⁽¹⁾	$	49,613	$	29,866		$	167,786	$	79,658
Loan origination and funding fees	6,362		6,947			16,452		18,489
Total single family	55,975		36,813			184,238		98,147
Multifamily	1,488		930			4,741		2,019
Other	422		(101		)	767		4,780
Total net gain on mortgage loan origination and sale activities	$	57,885	$	37,642		$	189,746	$	104,946


(1)	Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.

The Company’s portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the consolidated statements of financial condition as they are not assets of the Company. The composition of loans serviced for others is presented below at the unpaid principal balance.



(in thousands)	At September 30, 2015		At December 31, 2014

Single family
U.S. government and agency	$	13,590,706	$	10,630,864
Other	680,481		585,344
	14,271,187		11,216,208
Commercial
Multifamily	866,880		752,640
Other	86,567		82,354
	953,447		834,994
Total loans serviced for others	$	15,224,634	$	12,051,202

The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, appraisal errors, early payment defaults and fraud. For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies of this Form 10-Q. The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Balance, beginning of period	$	2,480		$	1,235		$	1,956		$	1,260
Additions ⁽¹⁾	883			518			2,052			1,070
Realized losses ⁽²⁾	(128		)	(86		)	(773		)	(663		)
Balance, end of period	$	3,235		$	1,667		$	3,235		$	1,667


(1)	Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.


(2)	Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants and certain related expense.

Advances are made to Ginnie Mae mortgage pools for delinquent loan payments. We also fund foreclosure costs and we repurchase loans from Ginnie Mae mortgage pools prior to recovery of guaranteed amounts. Ginnie Mae advances of $9.0 million and $7.8 million were recorded in other assets as of September 30, 2015 and December 31, 2014, respectively.

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company then records the loan on its consolidated statement of financial condition. At September 30, 2015 and December 31, 2014, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $24.5 million and $21.2 million, respectively, with a corresponding amount recorded within accounts payable and other liabilities on the consolidated statements of financial condition. The recognition of previously sold loans does not impact the accounting for the previously recognized MSRs.

Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Servicing income, net:
Servicing fees and other	$	11,136		$	9,350		$	30,256		$	29,311
Changes in fair value of single family MSRs due to modeled amortization ⁽¹⁾	(8,478		)	(6,212		)	(26,725		)	(19,289		)
Amortization of multifamily MSRs	(511		)	(425		)	(1,441		)	(1,283		)
	2,147			2,713			2,090			8,739
Risk management, single family MSRs:
Changes in fair value due to changes in model inputs and/or assumptions ⁽²⁾	(19,396		)	899			(8,224		)	(7,836		)	⁽³	⁾
Net gain from derivatives economically hedging MSR	22,017			2,543			17,030			23,381
	2,621			3,442			8,806			15,545
Mortgage servicing income	$	4,768		$	6,155		$	10,896		$	24,284


(1)	Represents changes due to collection/realization of expected cash flows and curtailments.


(2)	Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.


(3)	Includes pre-tax income of $4.7 million, net of brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during 2014.

All MSRs are initially measured and recorded at fair value at the time loans are sold. Single family MSRs are subsequently carried at fair value with changes in fair value reflected in earnings in the periods in which the changes occur, while multifamily MSRs are subsequently carried at the lower of amortized cost or fair value.

The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. The Company determines fair value using a valuation model that calculates the net present value of estimated future cash flows. Estimates of future cash flows include contractual servicing fees, ancillary income and costs of servicing, the timing of which are impacted by assumptions, primarily expected prepayment speeds and discount rates, which relate to the underlying performance of the loans.

The initial fair value measurement of MSRs is adjusted up or down depending on whether the underlying loan pool interest rate is at a premium, discount or par. Key economic assumptions used in measuring the initial fair value of capitalized single family MSRs were as follows.



	Three Months Ended September 30,				Nine Months Ended September 30,
(rates per annum)⁽¹⁾	2015		2014		2015		2014

Constant prepayment rate ("CPR")⁽²⁾	14.96	%	12.60	%	14.71	%	12.72	%
Discount rate⁽³⁾	10.34	%	10.27	%	10.31	%	10.60	%


(1)	Weighted average rates for sales during the period for sales of loans with similar characteristics.


(2)	Represents the expected lifetime average.


(3)	Discount rate is a rate based on market observations.

Key economic assumptions and the sensitivity of the current fair value for single family MSRs to immediate adverse changes in those assumptions were as follows.



(dollars in thousands)	At September 30, 2015

Fair value of single family MSR	$	132,701
Expected weighted-average life (in years)	4.27
Constant prepayment rate ⁽¹⁾	19.57		%
Impact on 25 basis points adverse change	$	(11,351	)
Impact on 50 basis points adverse change	$	(23,284	)
Discount rate	10.50		%
Impact on fair value of 100 basis points increase	$	(3,548	)
Impact on fair value of 200 basis points increase	$	(6,914	)


(1)	Represents the expected lifetime average.

These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, the Company’s methodology for estimating the fair value of MSRs is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.

The changes in single family MSRs measured at fair value are as follows.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Beginning balance	$	140,588		$	108,869		$	112,439		$	153,128
Additions and amortization:
Originations	19,984			11,944			55,202			31,664
Purchases	3			3			9			8
Sale of single family MSRs	—			—			—			(43,248		)	⁽³⁾
Changes due to modeled amortization⁽¹⁾	(8,478		)	(6,212		)	(26,725		)	(19,289		)
Net additions and amortization	11,509			5,735			28,486			(30,865		)
Changes in fair value due to changes in model inputs and/or assumptions ⁽²⁾	(19,396		)	873			(8,224		)	(6,786		)	⁽⁴⁾
Ending balance	$	132,701		$	115,477		$	132,701		$	115,477


(1)	Represents changes due to collection/realization of expected cash flows and curtailments.


(2)	Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.


(3)	On June 30, 2014, the Company sold the rights to service $2.96 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae.


(4)	Includes pre-tax income of $5.7 million, excluding transaction costs, resulting from the sale of single family MSRs during 2014.

MSRs resulting from the sale of multifamily loans are subsequently carried at the lower of amortized cost or fair value. Multifamily MSRs are recorded at fair value and are amortized in proportion to, and over, the estimated period the net servicing income will be collected.

The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Beginning balance	$	12,649		$	9,122		$	10,885		$	9,335
Origination	1,241			418			3,935			1,062
Amortization	(511		)	(424		)	(1,441		)	(1,281		)
Ending balance	$	13,379		$	9,116		$	13,379		$	9,116

At September 30, 2015, the expected weighted-average life of the Company’s multifamily MSRs was 9.83 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.



(in thousands)	At September 30, 2015

Remainder of 2015	$	524
2016	2,023
2017	1,901
2018	1,744
2019	1,633
2020 and thereafter	5,554
Carrying value of multifamily MSR	$	13,379

NOTE 8–COMMITMENTS, GUARANTEES AND CONTINGENCIES:

Commitments

Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual provisions. These commitments may be for specific periods or contain termination clauses and may require the payment of a fee by the borrower. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements in that commitments may expire without being drawn upon.

The Company makes certain unfunded loan commitments as part of its lending activities that have not been recognized in the Company’s financial statements. These include commitments to extend credit made as part of the Company's mortgage lending activities and interest rate lock commitments on loans the Company intends to hold in its loans held for investment portfolio. The aggregate amount of these unrecognized unfunded loan commitments existing at September 30, 2015 and December 31, 2014 was $33.9 million and $72.0 million, respectively.

In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $410.4 million and $379.4 million at September 30, 2015 and December 31, 2014, respectively. Unused home equity and commercial banking funding lines totaled $158.1 million and $149.4 million at September 30, 2015 and December 31, 2014, respectively. The Company has recorded an allowance for credit losses on loan commitments, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $965 thousand and $503 thousand at September 30, 2015 and December 31, 2014, respectively.

Guarantees

In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS"^®)¹ that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the program, the DUS lender is contractually responsible for the first 5% of losses and then shares equally in the remainder of losses with Fannie Mae with a maximum lender loss of 20% of the original principal balance of each DUS loan. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of September 30, 2015 and December 31, 2014, the total unpaid principal balance of loans sold under this program was $866.9 million and $752.6 million, respectively. The Company’s reserve liability related to this arrangement totaled $2.9 million and $2.3 million at September 30, 2015 and December 31, 2014, respectively. There were no actual losses incurred under this arrangement during the three and nine months ended September 30, 2015 and 2014.

Mortgage repurchase liability

In the ordinary course of business, the Company sells residential mortgage loans to GSEs that include the mortgage loans in GSE-guaranteed mortgage securitizations. In addition, the Company sells FHA-insured and VA-guaranteed mortgage loans that are sold to Ginnie Mae and are used to back Ginnie Mae-guaranteed securities. The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud.

These obligations expose the Company to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance that it may receive. Generally, the maximum amount of future payments the Company would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain circumstances, accrued and unpaid interest on such loans and certain expenses.

The Company does not typically receive repurchase requests from Ginnie Mae, FHA or VA. As an originator of FHA-insured or VA-guaranteed loans, the Company is responsible for obtaining the insurance with FHA or the guarantee with the VA. If loans are later found not to meet the requirements of FHA or VA, through required internal quality control reviews or through agency audits, the Company may be required to indemnify FHA or VA against losses. The loans remain in Ginnie Mae pools unless and until they are repurchased by the Company. In general, once a FHA or VA loan becomes 90 days past due, the Company repurchases the FHA or VA residential mortgage loan to minimize the cost of interest advances on the loan. If the loan is cured through borrower efforts or through loss mitigation activities, the loan may be resold into a Ginnie Mae pool. The Company's liability for mortgage loan repurchase losses incorporates probable losses associated with such indemnification.

The total unpaid principal balance of loans sold on a servicing-retained basis that were subject to the terms and conditions of these representations and warranties totaled $14.36 billion and $11.30 billion as of September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, the Company had recorded a mortgage repurchase liability for loans sold on a servicing-retained and servicing-released basis, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $3.2 million and $2.0 million, respectively.

Contingencies

In the normal course of business, the Company may have various legal claims and other similar contingent matters outstanding for which a loss may be realized. For these claims, the Company establishes a liability for contingent losses when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. For claims determined to be reasonably possible but not probable of resulting in a loss, there may be a range of possible losses in excess of the established liability. At September 30, 2015, we reviewed our legal claims and determined that there were no claims that are considered to be probable or reasonably possible of resulting in a loss. As a result, the Company did not have any amounts reserved for legal claims as of September 30, 2015.

NOTE 9–FAIR VALUE MEASUREMENT:

For a further discussion of fair value measurements, including information regarding the Company’s valuation methodologies and the fair value hierarchy, see Note 18, Fair Value Measurement within our 2014 Annual Report on Form 10-K.

Valuation Processes

The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. The Finance Committee provides oversight and approves the Company’s Asset/Liability Management Policy ("ALMP"). The Company's ALMP governs, among other things, the application and control of the valuation models used to measure fair value. On a quarterly basis, the Company’s Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Board review significant modeling variables used to measure the fair value of the Company’s financial instruments, including the significant inputs used in the valuation of single family MSRs. Additionally, at least annually ALCO obtains an independent review of the MSR valuation process and procedures, including a review of the model architecture and the valuation assumptions. The Company obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value estimate and the reasonableness of the assumptions used in measuring fair value.

The Company’s real estate valuations are overseen by the Company’s appraisal department, which is independent of the Company’s lending and credit administration functions. The appraisal department maintains the Company’s appraisal policy and recommends changes to the policy subject to approval by the Company’s Loan Committee and the Credit Committee of the Board. The Company’s appraisals are prepared by independent third-party appraisers and the Company’s internal appraisers. Single family appraisals are generally reviewed by the Company’s single family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as commercial real estate appraisals, are reviewed by the Company’s appraisal department.

We obtain pricing from third party service providers for determining the fair value of a substantial portion of our investment securities available for sale. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques used are appropriate. For fair value measurements obtained from third party services, we monitor and review the results to ensure the values are reasonable and in line with market experience for similar classes of securities. While the inputs used by the pricing vendor in determining fair value are not provided, and therefore unavailable for our review, we do perform certain procedures to validate the values received, including comparisons to other sources of valuation (if available), comparisons to other independent market data and a variance analysis of prices by Company personnel that are not responsible for the performance of the investment securities.

Estimation of Fair Value

Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.

The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and classification of the Company’s assets and liabilities.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Cash and cash equivalents	Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments.	Estimated fair value classified as Level 1.
Investment securities
Investment securities available for sale	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 2 recurring fair value measurement
Investment securities held to maturity	Observable market prices of identical or similar securities are used where available. If market prices are not readily available, value is based on discounted cash flows using the following significant inputs: • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Carried at amortized cost. Estimated fair value classified as Level 2.
Loans held for sale
Single-family loans, excluding loans transferred from held for investment	Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments	Level 2 recurring fair value measurement
Single-family loans transferred from held for investment	Fair value is based on observable market data, including: • Quoted market prices, where available • Dealer quotes for similar loans • Forward sale commitments	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 2.
Multifamily loans	The sale price is set at the time the loan commitment is made, and as such subsequent changes in market conditions have a very limited effect, if any, on the value of these loans carried on the consolidated statements of financial condition, which are typically sold within 30 days of origination.	Carried at lower of amortized cost or fair value. Estimated fair value classified as Level 2.
Loans held for investment
Loans held for investment, excluding collateral dependent loans and loans transferred from held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	For the carrying value of loans see Note 1–Summary of Significant Accounting Policies of the 2014 Annual Report on Form 10-K. Estimated fair value classified as Level 3.



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Loans held for investment, collateral dependent	Fair value is based on appraised value of collateral, which considers sales comparison and income approach methodologies. Adjustments are made for various factors, which may include: • Adjustments for variations in specific property qualities such as location, physical dissimilarities, market conditions at the time of sale, income producing characteristics and other factors • Adjustments to obtain “upon completion” and “upon stabilization” values (e.g., property hold discounts where the highest and best use would require development of a property over time) • Bulk discounts applied for sales costs, holding costs and profit for tract development and certain other properties	Carried at lower of amortized cost or fair value of collateral, less the estimated cost to sell. Classified as a Level 3 nonrecurring fair value measurement in periods where carrying value is adjusted to reflect the fair value of collateral.
Loans held for investment transferred from loans held for sale	Fair value is based on discounted cash flows, which considers the following inputs: • Current lending rates for new loans • Expected prepayment speeds • Estimated credit losses • Market liquidity adjustments	Level 3 recurring fair value measurement
Mortgage servicing rights
Single family MSRs	For information on how the Company measures the fair value of its single family MSRs, including key economic assumptions and the sensitivity of fair value to changes in those assumptions, see Note 7, Mortgage Banking Operations of this Form 10-Q.	Level 3 recurring fair value measurement
Multifamily MSRs	Fair value is based on discounted estimated future servicing fees and other revenue, less estimated costs to service the loans.	Carried at lower of amortized cost or fair value Estimated fair value classified as Level 3.
Derivatives
Interest rate swaps Interest rate swaptions Forward sale commitments	Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities	Level 2 recurring fair value measurement
Interest rate lock commitments	The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor	Level 3 recurring fair value measurement



Asset/Liability class	Valuation methodology, inputs and assumptions	Classification
Other real estate owned (“OREO”)	Fair value is based on appraised value of collateral, less the estimated cost to sell. See discussion of "loans held for investment, collateral dependent" above for further information on appraisals.	Carried at lower of amortized cost or fair value of collateral (Level 3), less the estimated cost to sell.
Federal Home Loan Bank stock	Carrying value approximates fair value as FHLB stock can only be purchased or redeemed at par value.	Carried at par value. Estimated fair value classified as Level 2.
Deposits
Demand deposits	Fair value is estimated as the amount payable on demand at the reporting date.	Carried at historical cost. Estimated fair value classified as Level 2.
Fixed-maturity certificates of deposit	Fair value is estimated using discounted cash flows based on market rates currently offered for deposits of similar remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Federal Home Loan Bank advances	Fair value is estimated using discounted cash flows based on rates currently available for advances with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.
Long-term debt	Fair value is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.	Carried at historical cost. Estimated fair value classified as Level 2.

The following table presents the levels of the fair value hierarchy for the Company’s assets and liabilities measured at fair value on a recurring basis.



(in thousands)	Fair Value at September 30, 2015		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	91,004	$	—	$	91,004	$	—
Commercial	24,065		—		24,065		—
Municipal bonds	187,083		—		187,083		—
Collateralized mortgage obligations:
Residential	87,789		—		87,789		—
Commercial	56,246		—		56,246		—
Corporate debt securities	82,882		—		82,882		—
U.S. Treasury securities	41,013		—		41,013		—
Single family mortgage servicing rights	132,701		—		—		132,701
Single family loans held for sale	860,800		—		860,800		—
Single family loans held for investment	23,755		—		—		23,755
Derivatives
Forward sale commitments	2,448		—		2,448		—
Interest rate swaptions	—		—		—		—
Interest rate lock commitments	26,211		—		—		26,211
Interest rate swaps	13,634		—		13,634		—
Total assets	$	1,629,631	$	—	$	1,446,964	$	182,667
Liabilities:
Derivatives
Forward sale commitments	$	9,662	$	—	$	9,662	$	—
Interest rate swaptions	18		—		18		—
Interest rate lock commitments	2		—		—		2
Interest rate swaps	4,582		—		4,582		—
Total liabilities	$	14,264	$	—	$	14,262	$	2



(in thousands)	Fair Value at December 31, 2014		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	107,280	$	—	$	107,280	$	—
Commercial	13,671		—		13,671		—
Municipal bonds	122,334		—		122,334		—
Collateralized mortgage obligations:
Residential	43,166		—		43,166		—
Commercial	20,486		—		20,486		—
Corporate debt securities	79,400		—		79,400		—
U.S. Treasury securities	40,989		—		40,989		—
Single family mortgage servicing rights	112,439		—		—		112,439
Single family loans held for sale	610,350		—		610,350		—
Derivatives
Forward sale commitments	1,071		—		1,071		—
Interest rate lock commitments	11,939		—		—		11,939
Interest rate swaps	11,689		—		11,689		—
Total assets	$	1,174,814	$	—	$	1,050,436	$	124,378
Liabilities:
Derivatives
Forward sale commitments	$	5,658	$	—	$	5,658	$	—
Interest rate lock commitments	6		—		—		6
Interest rate swaps	972		—		972		—
Total liabilities	$	6,636	$	—	$	6,630	$	6

There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2015 and 2014.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights, single family loans held for investment where fair value option was elected and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three and nine months ended September 30, 2015 and 2014, see Note 7, Mortgage Banking Operations of this Form 10-Q.

During the first quarter of 2015, the Company transferred certain loans from held for sale to held for investment. These loans were originated as held for sale loans where the Company has elected fair value option. The Company determined these loans to be level 3 recurring assets as the valuation technique included a significant unobservable input. The total amount of held for investment loans where fair value option election was made was $23.8 million at September 30, 2015.

The following information presents significant Level 3 unobservable inputs used to measure fair value of single family loans held for investment where fair value option was elected.

(dollars in thousands)

At September 30, 2015

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Loans held for investment, fair value option

23,755

Income approach

Implied spread to benchmark interest rate curve

3.19%

3.65%

3.30%

The following table presents fair value changes and activity for level 3 interest rate lock commitments.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Beginning balance, net	$	23,487		$	17,406		$	11,933		$	5,972
Total realized/unrealized gains⁽¹⁾	43,784			23,844			131,930			78,506
Settlements	(41,062		)	(27,183		)	(117,654		)	(70,411		)
Ending balance, net	$	26,209		$	14,067		$	26,209		$	14,067

(1)

All realized and unrealized gains and losses are recognized in earnings as net gain from mortgage loan origination and sale activities on the consolidated statements of operations. There were net unrealized gains of $797 thousand and $405 thousand for the three months ended September 30, 2015 and 2014, respectively, and $1.3 million and $27.3 million for the nine months ended September 30, 2015 and 2014, respectively, recognized on interest rate lock commitments outstanding at the beginning of the period and still outstanding at September 30, 2015 and 2014, respectively.

The following information presents significant Level 3 unobservable inputs used to measure fair value of interest rate lock commitments.

(dollars in thousands)

At September 30, 2015

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock commitments, net

26,209

Income approach

Fall out factor

1.12%

65.77%

16.85%

Value of servicing

0.45%

2.27%

0.85%

(dollars in thousands)

At December 31, 2014

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock commitments, net

11,933

Income approach

Fall out factor

0.60%

77.9%

21.4%

Value of servicing

0.56%

1.94%

0.93%

Nonrecurring Fair Value Measurements

Certain assets held by the Company are not included in the tables above, but are measured at fair value on a nonrecurring basis. These assets include certain loans held for investment and other real estate owned that are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The estimated fair values of real estate collateral are generally based on internal evaluations and appraisals of such collateral, which use the market approach and income approach methodologies. All impaired loans are subject to an internal evaluation completed quarterly by management as part of the allowance process.

The fair value of commercial properties are generally based on third-party appraisals that consider recent sales of comparable properties, including their income-generating characteristics, adjusted (generally based on unobservable inputs) to reflect the general assumptions that a market participant would make when analyzing the property for purchase. The Company uses a fair value of collateral technique to apply adjustments to the appraisal value of certain commercial loans held for investment that are collateralized by real estate. During the three and nine months ended September 30, 2015 and September 30, 2014, the Company recorded no adjustments to the appraisal values of certain commercial loans held for investment that are collateralized by real estate.

The Company uses a fair value of collateral technique to apply adjustments to the stated value of certain commercial loans held for investment that are not collateralized by real estate. During the three months ended September 30, 2015, the Company applied a range of stated value adjustments of 26.2% to 100.0%, with a weighted average rate of 35.2%. During the nine months ended September 30, 2015, the Company applied a range of stated value adjustments of 25.0% to 100.0%, with a weighted average of 36.3%. During the three months ended September 30, 2014, the Company applied a range of stated value

adjustments of 0.0% to 98.0%, with a weighted average of 18.6%. During the nine months ended September 30, 2014, the Company applied a range of stated value adjustments of 0.0% to 98.0%, with a weighted average of 22.5%.

Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

These adjustments include management assumptions that are based on the type of collateral dependent loan and may increase or decrease an appraised value. Management adjustments vary significantly depending on the location, physical characteristics and income producing potential of each individual property. The quality and volume of market information available at the time of the appraisal can vary from period-to-period and cause significant changes to the nature and magnitude of the unobservable inputs used. Given these variations, changes in these unobservable inputs are generally not a reliable indicator for how fair value will increase or decrease from period to period.

The following tables present assets that had changes in their recorded fair value during the three and nine months ended September 30, 2015 and 2014 and still held at the end of the respective reporting period.



	Three Months Ended September 30, 2015
(in thousands)	Fair Value of Assets Held at September 30, 2015		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	9,171	$	—	$	—	$	9,171	$	(375	)
Other real estate owned⁽²⁾	6,532		—		—		6,532		(399		)
Total	$	15,703	$	—	$	—	$	15,703	$	(774	)



	Three Months Ended September 30, 2014
(in thousands)	Fair Value of Assets Held at September 30, 2014		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	22,379	$	—	$	—	$	22,379	$	(82	)
Other real estate owned⁽²⁾	1,017		—		—		1,017		(93		)
Total	$	23,396	$	—	$	—	$	23,396	$	(175	)



	Nine Months Ended September 30, 2015
(in thousands)	Fair Value of Assets Held at September 30, 2015		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	9,171	$	—	$	—	$	9,171	$	(287	)
Other real estate owned⁽²⁾	6,532		—		—		6,532		(399		)
Total	$	15,703	$	—	$	—	$	15,703	$	(686	)



	Nine Months Ended September 30, 2014
(in thousands)	Fair Value of Assets Held at September 30, 2014		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	25,786	$	—	$	—	$	25,786	$	(495	)
Other real estate owned⁽²⁾	6,831		—		—		6,831		(69		)
Total	$	32,617	$	—	$	—	$	32,617	$	(564	)


(1)	Represents the carrying value of loans for which adjustments are based on the fair value of the collateral.


(2)	Represents other real estate owned where an updated fair value of collateral is used to adjust the carrying amount subsequent to the initial classification as other real estate owned.

Fair Value of Financial Instruments

The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company’s financial instruments other than assets and liabilities measured at fair value on a recurring basis.



	At September 30, 2015
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	37,303	$	37,303	$	37,303	$	—	$	—
Investment securities held to maturity	31,936		32,572		—		32,572		—
Loans held for investment	2,989,168		3,069,234		—		—		3,069,234
Loans held for sale – multifamily	21,519		21,519		—		21,519		—
Mortgage servicing rights – multifamily	13,379		15,062		—		—		15,062
Federal Home Loan Bank stock	44,652		44,652		—		44,652		—
Liabilities:
Deposits	$	3,307,693	$	3,308,155	$	—	$	3,308,155	$	—
Federal Home Loan Bank advances	1,025,745		1,029,713		—		1,029,713		—
Long-term debt	61,857		60,245		—		60,245		—



	At December 31, 2014
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	30,502	$	30,502	$	30,502	$	—	$	—
Investment securities held to maturity	28,006		28,537		—		28,537		—
Loans held for investment	2,099,129		2,150,672		—		—		2,150,672
Loans held for sale – multifamily	10,885		10,855		—		10,855		—
Mortgage servicing rights – multifamily	10,885		12,540		—		—		12,540
Federal Home Loan Bank stock	33,915		33,915		—		33,915		—
Liabilities:
Deposits	$	2,445,430	$	2,445,635	$	—	$	2,445,635	$	—
Federal Home Loan Bank advances	597,590		600,599		—		600,599		—
Federal funds purchased and securities sold under agreements to repurchase	50,000		50,000		—		50,000		—
Long-term debt	61,857		60,235		—		60,235		—

Excluded from the fair value tables above are certain off-balance sheet loan commitments such as unused home equity lines of credit, business banking line funds and undisbursed construction funds. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related allowance for credit losses, which amounted to $3.3 million and $3.4 million at September 30, 2015 and December 31, 2014, respectively.

NOTE 10–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except share and per share data)	2015		2014		2015		2014

Net income	$	9,961	$	4,975	$	32,641	$	16,638
Weighted average shares:
Basic weighted-average number of common shares outstanding	22,035,317		14,805,780		20,407,386		14,797,019
Dilutive effect of outstanding common stock equivalents ⁽¹⁾	256,493		162,458		239,154		160,015
Diluted weighted-average number of common stock outstanding	22,291,810		14,968,238		20,646,540		14,957,034
Earnings per share:
Basic earnings per share	$	0.45	$	0.34	$	1.60	$	1.12
Diluted earnings per share	$	0.45	$	0.33	$	1.58	$	1.11

(1)

Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three and nine months ended September 30, 2015 and 2014 were certain stock options and unvested restricted stock issued to key senior management personnel and directors of the Company. The aggregate number of common stock equivalents related to such options and unvested restricted shares, which could potentially be dilutive in future periods, was zero and 104,514 at September 30, 2015 and 2014, respectively.

NOTE 11–BUSINESS SEGMENTS:

The Company's business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which financial information is currently evaluated by management. The Company organizes the segments into two lines of business: Commercial and Consumer Banking segment and Mortgage Banking segment.

A description of the Company's business segments and the products and services that they provide is as follows.

Mortgage Banking originates single family residential mortgage loans for sale in the secondary markets. We have become a rated originator and servicer of jumbo loans, allowing us to sell these loans to other securitizers. We also purchase loans from WMS Series LLC through a correspondent arrangement with that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. On occasion, we may sell a portion of our MSR portfolio. We also sell loans on a servicing-released and servicing-retained basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders or sold on a servicing-released basis to correspondent lenders. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained single family mortgage servicing rights within this business segment.

Financial highlights by operating segment were as follows.



	Three Months Ended September 30, 2015
(in thousands)	Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	8,125	$	31,509	$	39,634
Provision for credit losses	—		700		700
Noninterest income	60,584		6,884		67,468
Noninterest expense	63,916		28,110		92,026
Income before income taxes	4,793		9,583		14,376
Income tax expense	1,632		2,783		4,415
Net income	$	3,161	$	6,800	$	9,961
Total assets	$	1,089,832	$	3,885,821	$	4,975,653



	Three Months Ended September 30, 2014
(in thousands)	Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	5,145	$	20,163	$	25,308
Provision (reversal of provision) for credit losses	—		—		—
Noninterest income	42,153		3,660		45,813
Noninterest expense	45,228		18,930		64,158
(Loss) income before income taxes	2,070		4,893		6,963
Income tax (benefit) expense	629		1,359		1,988
Net (loss) income	$	1,441	$	3,534	$	4,975
Total assets	$	791,131	$	2,683,525	$	3,474,656



	Nine Months Ended September 30, 2015
(in thousands)	Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	21,337	$	87,261	$	108,598
Provision for credit losses	—		4,200		4,200
Noninterest income	195,239		20,589		215,828
Noninterest expense	180,787		93,056		273,843
Income before income taxes	35,789		10,594		46,383
Income tax expense	12,788		954		13,742
Net income	$	23,001	$	9,640	$	32,641
Total assets	$	1,089,832	$	3,885,821	$	4,975,653



	Nine Months Ended September 30, 2014
(in thousands)	Mortgage Banking		Commercial and Consumer Banking			Total

Condensed income statement:
Net interest income ⁽¹⁾	$	11,368	$	59,799		$	71,167
Provision for credit losses	—		(1,500		)	(1,500		)
Noninterest income	120,938		13,232			134,170
Noninterest expense	124,563		58,657			183,220
Income before income taxes	7,743		15,874			23,617
Income tax expense	2,508		4,471			6,979
Net income	$	5,235	$	11,403		$	16,638
Total assets	$	791,131	$	2,683,525		$	3,474,656

(1)

Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment.

NOTE 12–SUBSEQUENT EVENTS:

The Company has evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q and has concluded that there are no significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the consolidated financial statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q and the documents incorporated by reference contain, in addition to historical information, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our future plans, objectives, expectations, intentions and financial performance, and assumptions that underlie these statements. When used in this Form 10-Q, terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of those terms or other comparable terms are intended to identify such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Our actual results may differ significantly from the results discussed in such forward-looking statements, and we may take actions that differ from our current plans and expectations. All statements other than statements of historical fact are “forward-looking statements” for the purposes of these provisions, including:


•	any projections of revenues, estimated operating expenses or other financial items;


•	any statements of the plans and objectives of management for future operations or programs;


•	any statements regarding future operations, plans, or regulatory or shareholder approvals;


•	any statements concerning proposed new products or services;


•	any statements regarding pending or future mergers, acquisitions or other transactions; and


•	any statement regarding future economic conditions or performance, and any statement of assumption underlying any of the foregoing.

These and other forward looking statements are, among other things, attempts to predict the future and, as such, may not come to pass. A wide variety of events, circumstances and conditions may cause us to fall short of management's expectations as expressed herein, or to deviate from the plans and intentions we have described in this report. Some of the factors that may cause us to fall short of expectations or to deviate from our intended courses of action include:


•	the qualifying disclosures and other factors referenced in this Form 10-Q including, but not limited to, those listed under Item 1A “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations;”


•	our ability to implement new or expanded business products and business lines;


•	our ability to grow our geographic footprint and our various lines of business, and to manage that growth effectively, including our effectiveness in managing the associated costs and in generating the expected revenues and strategic benefits;


•	our ability to manage the credit risks of our lending activities, including potential increases in loan delinquencies, nonperforming assets and write offs, decreased collateral values, inadequate loan reserve amounts and the effectiveness of our hedging strategies;


•	our ability to complete our proposed acquisition of Orange County Business Bank on the anticipated timeline or at all;


•	our ability to effectively integrate any recent or future acquisitions with our operations;


•	our ability to maintain confidentiality, integrity, and availability of enterprise data, including unauthorized electronic access, physical security threats, and inadvertent disclosure, which could lead to reputational harm and litigation risks;


•	our ability to implement and maintain appropriate disclosure controls and procedures and internal controls over financial reporting;


•	general economic conditions, either nationally or in our market area, including increases in mortgage interest rates, declines in housing refinance activities, changes in the availability and affordability of single family housing, employment trends, business contraction, consumer confidence, real estate values and other recessionary pressures;


•	the impact of changes to local zoning and land use ordinances that may impact the availability of single family housing in our market areas;


•	the impact of and our ability to anticipate and respond effectively to changes in the levels of general interest rates, mortgage interest rates, deposit interest rates, our net interest margin and funding sources;

•

our ability to achieve compliance with complex new regulatory requirements, including laws and regulations such as those related to the Dodd-Frank Act and new rules being promulgated under that Act, including the Final Truth In Lending Act ("TILA")/Real Estate Settlement Procedures Act ("RESPA") Integrated Disclosure Rule (“Rule”) which took effect on October 3, 2015 and comes with increased regulatory penalties and the right of private action under TILA and may impact our ability to sell or the price we receive for certain loans;


•	compliance with Basel III capital requirements and related regulations, as well as restrictions that may be imposed by our federal and state regulatory authorities, including the extent to which regulatory initiatives may affect our capital, liquidity and earnings;


•	the effect on our mortgage origination and resale operations of changes in mortgage markets generally, including the uncertain impact on the market for non-qualified mortgage loans resulting from regulations which took effect in January 2014, as well as in monetary policies and economic trends and initiatives as those events affect our mortgage origination and servicing operations;


•	compliance with requirements of investors and/or government-owned or sponsored entities, including Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (the “FHA”) the Department of Housing and Urban Development (“HUD”) and the Department of Veterans' Affairs (the “VA”);


•	costs associated with the integration of new personnel from growth through acquisitions and hiring initiatives, including increased salary costs, as well as time and attention from our management team that is needed to identify, investigate and successfully complete such acquisitions;


•	our ability to control costs while meeting operational needs and retaining key members of our senior management team and other key managers and business producers; and


•	competition.

Unless required by law, we do not intend to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q.

Except as otherwise noted, references to “we,” “our,” “us” or “the Company” refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes.

You may review a copy of this Form 10-Q quarterly report, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission's Public Reference Room at, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Except as otherwise expressly noted in that section of our investor relations website, information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.

This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see “Forward-Looking Statements.” Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2014 Annual Report on Form 10-K.

Summary Financial Data



	At or for the Three Months Ended										At or for the Nine Months Ended
(dollars in thousands, except share data)	Sept. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2014		Sept. 30, 2014		Sept. 30, 2015		Sept. 30, 2014

Income statement data (for the period ended):
Net interest income	$	39,634	$	38,230	$	30,734	$	27,502	$	25,308	$	108,598	$	71,167
Provision (reversal of provision) for credit losses	700		500		3,000		500		—		4,200		(1,500		)
Noninterest income	67,468		72,987		75,373		51,487		45,813		215,828		134,170
Noninterest expense	92,026		92,335		89,482		68,791		64,158		273,843		183,220
Net income before tax expense	14,376		18,382		13,625		9,698		6,963		46,383		23,617
Income tax expense	4,415		6,006		3,321		4,077		1,988		13,742		6,979
Net income	$	9,961	$	12,376	$	10,304	$	5,621	$	4,975	$	32,641	$	16,638
Basic earnings per common share	$	0.45	$	0.56	$	0.60	$	0.38	$	0.34	$	1.60	$	1.12
Diluted earnings per common share	$	0.45	$	0.56	$	0.59	$	0.38	$	0.33	$	1.58	$	1.11
Common shares outstanding	22,061,702		22,065,249		22,038,748		14,856,611		14,852,971		22,061,702		14,852,971
Weighted average common shares:
Basic	22,035,317		22,028,539		17,158,303		14,811,699		14,805,780		20,407,386		14,797,019
Diluted	22,291,810		22,292,734		17,355,076		14,973,222		14,968,238		20,646,540		14,957,034
Shareholders’ equity per share	$	20.87	$	20.29	$	19.94	$	20.34	$	19.83	20.87		19.83
Financial position (at period end):
Cash and cash equivalents	$	37,303	$	46,197	$	56,864	$	30,502	$	34,687	37,303		$	34,687
Investment securities	602,018		509,545		476,102		455,332		449,948		602,018		449,948
Loans held for sale	882,319		972,183		865,322		621,235		698,111		882,319		698,111
Loans held for investment, net	3,012,943		2,900,675		2,828,177		2,099,129		1,964,762		3,012,943		1,964,762
Mortgage servicing rights	146,080		153,237		121,722		123,324		124,593		146,080		124,593
Other real estate owned	8,273		11,428		11,589		9,448		10,478		8,273		10,478
Total assets	4,975,653		4,866,248		4,604,403		3,535,090		3,474,656		4,975,653		3,474,656
Deposits	3,307,693		3,322,653		3,344,223		2,445,430		2,425,458		3,307,693		2,425,458
Federal Home Loan Bank advances	1,025,745		922,832		669,419		597,590		598,590		1,025,745		598,590
Federal funds purchased and securities sold under agreements to repurchase	—		—		9,450		50,000		14,225		—		14,225
Shareholders’ equity	460,458		447,726		439,395		302,238		294,568		460,458		294,568
Financial position (averages):
Investment securities	$	539,330	$	506,904	$	462,762	$	454,127	$	457,545	$	503,280	$	460,723
Loans held for investment	2,975,624		2,861,223		2,370,763		2,044,873		1,917,503		2,738,085		1,838,526
Total interest-earning assets	4,394,557		4,266,382		3,473,652		3,140,708		2,952,916		4,048,237		2,777,988
Total interest-bearing deposits	2,573,512		2,626,925		2,205,585		1,892,399		1,861,164		2,470,022		1,880,664
Federal Home Loan Bank advances	887,711		783,801		515,958		606,753		442,409		730,519		372,605
Federal funds purchased and securities sold under agreements to repurchase	—		4,336		41,734		23,338		11,149		15,204		4,134
Total interest-bearing liabilities	3,523,080		3,476,919		2,825,134		2,584,347		2,376,579		3,277,602		2,319,872
Shareholders’ equity	460,489		455,721		370,008		305,068		295,229		429,071		284,146

Summary Financial Data (continued)



	At or for the Three Months Ended															At or for the Nine Months Ended
(dollars in thousands, except share data)	Sept. 30, 2015			Jun. 30, 2015			Mar. 31, 2015			Dec. 31, 2014			Sept. 30, 2014			Sept. 30, 2015			Sept. 30, 2014

Financial performance:
Return on average shareholders’ equity ⁽¹⁾	8.65		%	10.86		%	11.14		%	7.37		%	6.74		%	10.14		%	7.81		%
Return on average assets	0.83		%	1.06		%	1.08		%	0.65		%	0.61		%	0.98		%	0.71		%
Net interest margin ⁽²⁾	3.67		%	3.63		%	3.60		%	3.53		%	3.50		%	3.63		%	3.50		%
Efficiency ratio ⁽³⁾	85.92		%	83.02		%	84.33		%	87.09		%	90.21		%	84.41		%	89.23		%
Asset quality:
Allowance for credit losses	$	27,887		$	26,448		$	25,628		$	22,524		$	22,111		$	27,887		$	22,111
Allowance for loan losses/total loans⁽⁴⁾	0.89		%	0.88		%	0.87		%	1.04		%	1.10		%	0.89		%	1.10		%
Allowance for loan losses/nonaccrual loans	138.27		%	120.97		%	117.48		%	137.51		%	109.75		%	138.27		%	109.75		%
Total nonaccrual loans ⁽⁵⁾⁽⁶⁾	$	19,470		$	21,308		$	21,209		$	16,014		$	19,906		$	19,470		$	19,906
Nonaccrual loans/total loans	0.64		%	0.73		%	0.74		%	0.75		%	1.00		%	0.64		%	1.00		%
Other real estate owned	$	8,273		$	11,428		$	11,589		$	9,448		$	10,478		$	8,273		$	10,478
Total nonperforming assets⁽⁶⁾	$	27,743		$	32,736		$	32,798		$	25,462		$	30,384		$	27,743		$	30,384
Nonperforming assets/total assets	0.56		%	0.67		%	0.71		%	0.72		%	0.87		%	0.56		%	0.87		%
Net (recoveries) charge-offs	$	(739	)	$	(320	)	$	(104	)	$	87		$	57		$	(1,163	)	$	478
Regulatory capital ratios for the Bank:
Basel III - Tier 1 leverage capital (to average assets)⁽⁷⁾	9.69		%	9.46		%	11.47		%	NA			NA			9.69		%	NA
Basel III - Tier 1 common equity risk-based capital (to risk-weighted assets)	13.35		%	13.17		%	13.75		%	NA			NA			13.35		%	NA
Basel III - Tier 1 risk-based capital (to risk-weighted assets)	13.35		%	13.17		%	13.75		%	NA			NA			13.35		%	NA
Basel III - Total risk-based capital (to risk-weighted assets)	14.15		%	13.97		%	14.57		%	NA			NA			14.15		%	NA
Basel I - Tier 1 leverage capital (to average assets)⁽⁷⁾	NA			NA			NA			9.38		%	9.63		%	NA			9.63		%
Basel I - Tier 1 risk-based capital (to risk-weighted assets)	NA			NA			NA			13.10		%	13.03		%	NA			13.03		%
Basel I - Total risk-based capital (to risk-weighted assets)	NA			NA			NA			14.03		%	13.96		%	NA			13.96		%
Regulatory capital ratios for the Company:
Basel III - Tier 1 leverage capital (to average assets)⁽⁷⁾	10.00		%	9.87		%	11.95		%	NA			NA			10.00		%	NA
Basel III - Tier 1 common equity risk-based capital (to risk-weighted assets)	10.65		%	10.66		%	11.12		%	NA			NA			10.65		%	NA
Basel III - Tier 1 risk-based capital (to risk-weighted assets)	12.09		%	12.02		%	12.55		%	NA			NA			12.09		%	NA
Basel III - Total risk-based capital (to risk-weighted assets)	12.79		%	12.72		%	13.26		%	NA			NA			12.79		%	NA
Other data:
Full-time equivalent employees (ending)	2,100			1,964			1,829			1,611			1,598			2,100			1,598


(1)	Net earnings available to common shareholders divided by average shareholders’ equity.


(2)	Net interest income divided by total average interest-earning assets on a tax equivalent basis.


(3)	Noninterest expense divided by total revenue (net interest income and noninterest income).


(4)	Includes loans acquired with bank acquisitions. Excluding acquired loans, allowance for loan losses /total loans was 1.14%, 1.16%, 1.19%, 1.10% and 1.18% at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively.


(5)	Generally, loans are placed on nonaccrual status when they are 90 or more days past due.


(6)	Includes $1.5 million, $1.2 million, $1.4 million, $4.4 million and $6.3 million of nonperforming loans at September 30, 2015, June 30, 2015, March 31, 2015, December 31, 2014 and September 30, 2014, respectively, which are guaranteed by the Small Business Administration ("SBA").


(7)	March 31, 2015 Tier 1 leverage capital (to average assets) includes average assets from the Simplicity merger for one month. If the Simplicity merger had occurred on January 1, 2015, the Bank's Tier 1 leverage capital would have been 9.95% and the Company's Tier 1 leverage capital would have been 10.38% at March 31, 2015.



	At or for the Three Months Ended										At or for the Nine Months Ended
(in thousands)	Sept. 30, 2015		Jun. 30, 2015		Mar. 31, 2015		Dec. 31, 2014		Sept. 30, 2014		Sept. 30, 2015		Sept. 30, 2014

SUPPLEMENTAL DATA:
Loans serviced for others
Single family	$	14,271,187	$	12,980,045	$	11,910,254	$	11,216,208	$	10,593,265	$	14,271,187	$	10,593,265
Multifamily	866,880		840,051		773,092		752,640		703,197		866,880		703,197
Other	86,567		83,982		83,574		82,354		86,589		86,567		86,589
Total loans serviced for others	$	15,224,634	$	13,904,078	$	12,766,920	$	12,051,202	$	11,383,051	$	15,224,634	$	11,383,051

Loan production volumes:
Single family mortgage closed loans⁽¹⁾⁽²⁾	$	1,934,151	$	2,022,656	$	1,606,893	$	1,330,735	$	1,294,895	$	5,563,700	$	3,069,882
Single family mortgage interest rate lock commitments⁽²⁾	1,806,767		1,882,955		1,901,238		1,171,598		1,167,677		5,590,960		3,172,650
Single family mortgage loans sold⁽²⁾	1,965,223		1,894,387		1,316,959		1,273,679		1,179,464		5,176,569		2,705,719
Multifamily mortgage originations	47,342		79,789		24,428		57,135		60,699		151,559		95,147
Multifamily mortgage loans sold	42,333		72,459		26,173		99,285		20,409		140,965		42,574


(1)	Represents single family mortgage production volume designated for sale to the secondary market during each respective period.


(2)	Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank.

Management’s Overview of Third Quarter of 2015 Financial Performance

We are a diversified financial services company founded in 1921 and headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides consumer, mortgage and commercial loans, deposit products and services, non-deposit investment products, private banking and cash management services. Our primary loan products include consumer loans, single family residential mortgages, loans secured by commercial real estate, construction loans for residential and commercial real estate projects, commercial business loans and agricultural loans. HomeStreet Capital Corporation, a Washington corporation, originates, sells and services multifamily mortgage loans under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS"^®)¹in conjunction with HomeStreet Bank. Doing business as HomeStreet Insurance Agency, we provide insurance products and services for consumers and businesses. We also offer single family home loans through our partial ownership in an affiliated business arrangement with WMS Series LLC, whose businesses are known as Windermere Mortgage Services and Penrith Home Loans.

Reflecting the continued growth and diversification of our banking business, we are in the process of applying for a conversion to a Washington State Chartered Commercial Bank. To facilitate this bank charter conversion, we are also, simultaneously, in the process of applying to become a Bank Holding Company and a Financial Holding Company. Subject to regulatory approvals, we anticipate these organizational changes to become effective by the end of the year.

We generate revenue by earning “net interest income” and “noninterest income.” Net interest income is primarily the difference between interest income earned on loans and investment securities less the interest we pay on deposits and other borrowings. We earn noninterest income from the origination, sale and servicing of loans and from fees earned on deposit services and investment and insurance sales.

On September 28, 2015, the Company entered into a definitive agreement to acquire Orange County Business Bank ("OCBB"), a California banking corporation in Irvine, California. Management believes that this acquisition will complement HomeStreet's recent expansion of its banking activities into California. The proposed transaction was approved by the boards of both companies and is expected to close in the first quarter of 2016, subject to certain conditions set forth in the merger agreement as well as customary closing conditions, including OCBB shareholder approval and certain state and federal regulatory approvals.

On August 4, 2015, the Company entered into a definitive agreement to acquire a bank branch and deposits in Dayton, Washington. This acquisition, which has received regulatory approval and is expected to close in December, will increase HomeStreet’s network of branches in Eastern Washington to a total of five retail deposit branches.

On March 1, 2015, the Company completed its merger with Simplicity Bancorp, Inc., located in Southern California ("Simplicity"), immediately followed by the merger of its subsidiary Simplicity Bank with and into HomeStreet Bank (together, referred to as the “Simplicity merger”). At the closing, there were 7,180,005 shares of Simplicity common stock, par value $0.01, outstanding, all of which were cancelled in exchange for an equal number of shares of HomeStreet common stock, no par value, issued to Simplicity’s stockholders. The provisional application of the acquisition method of accounting resulted in a bargain purchase gain of $7.3 million, as subsequently adjusted, which was reported as a component of noninterest income on our consolidated statements of operations. We also recorded merger-related expenses of $15.8 million during the nine months ended September 30, 2015. The results of operations of Simplicity are included in the consolidated results of operations since the date of the merger. The merger represents a significant expansion of HomeStreet’s banking activities into California.

During the first quarter of 2015, we launched HomeStreet Commercial Capital, a commercial real estate lending group originating permanent loans up to $10 million in size. The group is based in Orange County, California and will provide permanent financing for a range of commercial real estate loans including multifamily, industrial, retail, office, mobile home parks and self-storage facilities. We also added a team specializing in U.S. Small Business Administration ("SBA") lending also located in Orange County, California.

At September 30, 2015, we had total assets of $4.98 billion, net loans held for investment of $3.01 billion, deposits of $3.31 billion and shareholders’ equity of $460.5 million. Through the Simplicity merger, we added $850.9 million of assets, $664.1 million of loans and $651.2 million of deposits.

Results for the third quarter of 2015 reflect the continued growth of our mortgage banking business and expansion of our commercial and consumer business. Since September 2014, we have increased our lending capacity by adding loan origination and operations personnel in all of our lending lines of business. We added nine home loan centers and 10 retail deposit branches



¹ DUS® is a registered trademark of Fannie Mae	60

(three de novo and seven from the Simplicity merger) to bring our total home loan centers to 64, our total commercial lending centers to six and our total retail deposit branches to 43.

On January 1, 2015, the Company and the Bank became subject to new capital standards commonly referred to as “Basel III” which raised our minimum capital requirements. For more on the Basel III requirements as they apply to us, please see “Capital Management" within the Liquidity and Capital Resources section of this Form 10-Q.

We continued to execute our strategy of diversifying earnings by expanding the commercial and consumer banking business; growing our mortgage banking market share in existing and new markets; growing and improving the quality of our deposits; and bolstering our processing, compliance and risk management capabilities.

Consolidated Financial Performance



	At or for the Three Months Ended September 30,						Percent Change		At or for the Nine Months Ended September 30,						Percent Change
(in thousands, except per share data and ratios)	2015			2014			2015 vs. 2014		2015			2014			2015 vs. 2014

Selected statement of operations data
Total net revenue	$	107,102		$	71,121		51	%	$	324,426		$	205,337		58	%
Total noninterest expense	92,026			64,158			43		273,843			183,220			49
Provision (reversal of provision) for credit losses	700			—			NM		4,200			(1,500		)	NM
Income tax expense	4,415			1,988			122		13,742			6,979			97
Net income	$	9,961		$	4,975		100	%	$	32,641		$	16,638		96	%

Financial performance
Diluted income per share	$	0.45		$	0.33				$	1.58		$	1.11
Return on average common shareholders’ equity	8.65		%	6.74		%			10.14		%	7.81		%
Return on average assets	0.83		%	0.61		%			0.98		%	0.71		%
Net interest margin	3.67		%	3.50		%			3.63		%	3.50		%
NM = Not meaningful

For the third quarter of 2015, net income was $10.0 million, or $0.45 per diluted share, compared to $5.0 million, or $0.33 per diluted share for the third quarter of 2014. Return on equity was 8.65% for the third quarter of 2015 (on an annualized basis), compared to 6.74% for the same period last year, while return on average assets was 0.83% for the third quarter of 2015 (on an annualized basis), compared to 0.61% for the same period last year.

Commercial and Consumer Banking Segment Results

Our Commercial and Consumer Banking segment net income was $6.8 million in the third quarter of 2015, compared to net income of $3.5 million in the third quarter of 2014. Included in the results for the third quarter of 2015 are merger-related items (net of tax) of a gain of $512 thousand compared to expense of $469 thousand during the same period last year.

Commercial and Consumer Banking segment net interest income was $31.5 million for the third quarter of 2015, an increase of $11.3 million, or 56.3%, from $20.2 million for the third quarter of 2014, primarily due to higher average balances of loans held for investment.

The Company recorded $700 thousand of provision for credit losses in the third quarter of 2015 compared to no provision recorded in the third quarter of 2014. The additional credit loss provision in the quarter was due in part to overall growth in the loans held for investment portfolio, partially offset by the favorable impact of net loan loss recoveries during the quarter. Net recoveries were $739 thousand in the third quarter of 2015 compared to net charge-offs of $57 thousand in the third quarter of 2014. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 0.89% of loans held for investment at September 30, 2015 compared to 1.10% at September 30, 2014, which primarily reflected the improved credit

quality of the Company's loan portfolio. Excluding acquired loans, the allowance for loan losses was 1.14% of loans held for investment at September 30, 2015 compared to 1.18% at September 30, 2014. Nonperforming assets were $27.7 million, or 0.56% of total assets at September 30, 2015, compared to $30.4 million, or 0.87% of total assets at September 30, 2014.

Commercial and Consumer Banking segment noninterest expense of $28.1 million increased $9.2 million, or 48.5%, from $18.9 million in the third quarter of 2014, primarily due to the continued organic growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network. We added 10 retail deposit branches, three de novo and seven from the Simplicity merger, and increased the segment's headcount by 33.4% during the twelve-month period. During the first quarter of 2015, the commercial and consumer banking segment further expanded its network into California through the launch of HomeStreet Commercial Capital and the addition of a team specializing in SBA lending.

Mortgage Banking Segment Results

Mortgage Banking segment net income was $3.2 million in the third quarter of 2015, compared to net income of $1.4 million in the third quarter of 2014. The increase in net income is primarily due to higher net gain on single family mortgage loan origination and sale activities due to higher interest rate lock commitments and composite margin, partially offset by higher commission expense resulting from increased closed loan volume in the quarter.

Mortgage Banking noninterest income of $60.6 million increased $18.4 million, or 43.7%, from $42.2 million in the third quarter of 2014, primarily due to a 54.7% increase in single family mortgage interest rate lock commitments. Increased interest rate lock commitments reflect sustained lower mortgage interest rates and growth in the overall segment loan origination capacity through the addition of mortgage production personnel and expansion of our network of mortgage loan centers. We have increased our mortgage production personnel by 14.1% at September 30, 2015 compared to September 30, 2014.

Mortgage Banking noninterest expense was $63.9 million an increase of $18.7 million, or 41.3%, from $45.2 million in the third quarter of 2014, primarily due to higher commission and incentive expense and general and administrative expenses resulting from a 49.4% increase in closed loan volumes and overall growth in personnel and expansion into new markets. We added nine home loan centers and increased the segment's headcount by 30.2% during the twelve-month period.

Regulatory Matters

On January 1, 2015, the Bank and the Company became subject to Basel III capital standards. The Bank and the Company remain above current “well-capitalized” regulatory minimums. Under the Basel III standards, the Bank's Tier 1 leverage and total risk-based capital ratios at September 30, 2015 were 9.69% and 14.15%, respectively. The Company's Tier 1 leverage and total risk-based capital ratios were 10.00% and 12.79%, respectively. At September 30, 2014, under the Basel I standards, the Bank's Tier 1 leverage and total risk-based capital ratios were 9.63% and 13.96%.

For more on the Basel III requirements as they apply to us, please see “Capital Management" within the Liquidity and Capital Resources section of this Form 10-Q.

Critical Accounting Policies and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Three of these policies are critical because they require management to make subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:


•	Allowance for Loan Losses


•	Fair Value of Financial Instruments


•	Single Family mortgage servicing rights ("MSRs")


•	Other real estate owned ("OREO")


•	Income Taxes

These policies and estimates are described in further detail in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies within our 2014 Annual Report on Form 10-K.

Business Combinations

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

The Company used valuation models to estimate the fair value for certain assets and liabilities. These models incorporate inputs such as forward yield curves, loan prepayment expectations, expected credit loss assumptions, market volatilities, and pricing spreads utilizing market-based inputs where available. We believe our valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount that could be realized in an actual sale or transfer of the asset or liability in a current market exchange.

Results of Operations

Average Balances and Rates

Average balances, together with the total dollar amounts of interest income and expense, on a tax equivalent basis related to such balances and the weighted average rates, were as follows.



	Three Months Ended September 30,
	2015						2014
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash and cash equivalents	$	27,725	$	13	0.18	%	$	27,631	$	13	0.19	%
Investment securities	539,330		3,453		2.54	%	457,545		3,141		2.72	%
Loans held for sale	851,878		8,394		3.91	%	550,237		5,393		3.89	%
Loans held for investment	2,975,624		32,727		4.36	%	1,917,503		20,402		4.22	%
Total interest-earning assets	4,394,557		44,587		4.03	%	2,952,916		28,949		3.89	%
Noninterest-earning assets ⁽²⁾	423,048						329,089
Total assets	$	4,817,605					$	3,282,005
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	404,874	495		0.49	%	$	281,820	301		0.42	%
Savings accounts	299,135		258		0.34	%	174,849		238		0.54	%
Money market accounts	1,126,119		1,268		0.45	%	1,001,709		1,125		0.45	%
Certificate accounts	743,384		1,101		0.59	%	402,786		720		0.71	%
Total interest-bearing deposits	2,573,512		3,122		0.48	%	1,861,164		2,384		0.51	%
Federal Home Loan Bank advances	887,711		958		0.43	%	442,409		509		0.46	%
Federal funds purchased and securities sold under agreements to repurchase	—		—		—	%	11,149		6		0.21	%
Long-term debt	61,857		278		1.78	%	61,857		271		1.74	%
Total interest-bearing liabilities	3,523,080		4,358		0.49	%	2,376,579		3,170		0.53	%
Noninterest-bearing liabilities	834,036						610,197
Total liabilities	4,357,116						2,986,776
Shareholders’ equity	460,489						295,229
Total liabilities and shareholders’ equity	$	4,817,605					$	3,282,005
Net interest income⁽³⁾			$	40,229					$	25,779
Net interest spread					3.54	%					3.36	%
Impact of noninterest-bearing sources					0.13	%					0.14	%
Net interest margin					3.67	%					3.50	%


(1)	The average balances of nonaccrual assets and related income, if any, are included in their respective categories.


(2)	Includes former loan balances that have been foreclosed and are now reclassified to OREO.


(3)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $595 thousand and $471 thousand for the three months ended September 30, 2015 and September 30, 2014, respectively. The estimated federal statutory tax rate was 35% for the periods presented.



	Nine Months Ended September 30,
	2015						2014
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash and cash equivalents	$	37,719	$	55	0.19	%	$	30,793	$	45	0.19	%
Investment securities	503,280		10,355		2.74	%	460,723		10,005		2.90	%
Loans held for sale	769,153		22,010		3.81	%	447,946		12,863		3.84	%
Loans held for investment	2,738,085		89,786		4.37	%	1,838,526		59,089		4.30	%
Total interest-earning assets	4,048,237		122,206		4.02	%	2,777,988		82,002		3.95	%
Noninterest-earning assets ⁽²⁾	389,691						345,229
Total assets	$	4,437,928					$	3,123,217
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	283,523	1,004		0.46	%	$	268,282	657		0.33	%
Savings accounts	281,212		800		0.39	%	166,896		657		0.53	%
Money market accounts	1,113,001		3,643		0.44	%	969,262		3,224		0.44	%
Certificate accounts	792,285		3,313		0.56	%	476,224		2,574		0.72	%
Total interest-bearing deposits	2,470,021		8,760		0.47	%	1,880,664		7,112		0.51	%
Federal Home Loan Bank advances	730,519		2,477		0.46	%	372,605		1,366		0.49	%
Federal funds purchased and securities sold under agreements to repurchase	15,204		28		0.16	%	4,134		7		0.23	%
Long-term debt	61,857		814		1.76	%	62,469		851		1.82	%
Total interest-bearing liabilities	3,277,601		12,079		0.49	%	2,319,872		9,336		0.54	%
Noninterest-bearing liabilities	731,256						519,199
Total liabilities	4,008,857						2,839,071
Shareholders’ equity	429,071						284,146
Total liabilities and shareholders’ equity	$	4,437,928					$	3,123,217
Net interest income⁽³⁾			$	110,127					$	72,666
Net interest spread					3.53	%					3.41	%
Impact of noninterest-bearing sources					0.10	%					0.09	%
Net interest margin					3.63	%					3.50	%


(1)	The average balances of nonaccrual assets and related income, if any, are included in their respective categories.


(2)	Includes former loan balances that have been foreclosed and are now reclassified to OREO.


(3)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.5 million for each of the nine months ended September 30, 2015 and September 30, 2014. The estimated federal statutory tax rate was 35% for the periods presented.

Interest on Nonaccrual Loans

We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual status, we reverse the accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Additionally, if interest is received on nonaccrual loans, the interest collected on the loan is recognized as an adjustment to the cost basis of the loan. The net decrease to interest income due to adjustments made for nonaccrual loans, including the effect of additional interest income that would have been recorded during the period if the loans had been accruing, was $488 thousand and $713 thousand for the three months ended September 30, 2015 and 2014, respectively, and $1.8 million and $2.2 million for the nine months ended September 30, 2015 and 2014, respectively.

Net Income

Net income was $10.0 million for the three months ended September 30, 2015, an increase of $5.0 million from net income of $5.0 million for the three months ended September 30, 2014, primarily due to an increase in noninterest income, which is largely due to a significantly higher gain on mortgage loan origination and sale activities driven by higher single family interest rate lock commitments. Interest rate lock commitments increased as a result of the expansion of our mortgage lending network and higher loan production per loan producer as a result of lower mortgage interest rates. For the nine months ended September 30, 2015, net income was $32.6 million, an increase of $16.0 million, or 96.2%, from $16.6 million for the nine months ended September 30, 2014. Included in net income for the three and nine months ended September 30, 2015 were merger-related costs (net of tax) of $284 thousand and $10.3 million, respectively. Additionally, during the three and nine months ended September 30, 2015, we recorded bargain purchase gain, as subsequently adjusted, of $796 thousand and $7.3 million, respectively. Such merger-related costs (net of tax) relating to prior acquisitions totaled $469 thousand and $1.4 million during the three and nine months ended September 30, 2014, respectively.

Net Interest Income

Our profitability depends significantly on net interest income, which is the difference between income earned on our interest-earning assets, primarily loans and investment securities, and interest paid on interest-bearing liabilities. Our interest-bearing liabilities consist primarily of deposits and borrowed funds, including our outstanding trust preferred securities and advances from the Federal Home Loan Bank ("FHLB").

Net interest income on a tax equivalent basis was $40.2 million for the third quarter of 2015, an increase of $14.5 million, or 56.1%, from $25.8 million for the third quarter of 2014. For the nine months ended September 30, 2015, net interest income was $110.1 million, an increase of $37.5 million, or 51.6%, from $72.7 million for the nine months ended September 30, 2014. The net interest margin for the third quarter of 2015 improved to 3.67% from 3.50% in the third quarter of 2014, and improved to 3.63% for the nine months ended September 30, 2015 from 3.50% for the nine months ended September 30, 2014. The increase in the net interest margin from the three and nine months ended September 30, 2014 primarily resulted from a higher yield on interest-earning assets, primarily due to higher yield on loans held for investment, coupled with a lower cost of interest-bearing funds.

Total average interest-earning assets increased from the three and nine months ended September 30, 2014, primarily as a result of growth in average loans held for investment, both from originations and from the March 2015 merger with Simplicity. Total average interest-bearing deposit balances increased from the prior periods primarily due to growth in certificates of deposit accounts.

Total interest income on a tax equivalent basis of $44.6 million in the third quarter of 2015 increased $15.6 million, or 54.0%, from $28.9 million in the third quarter of 2014, primarily driven by higher average balances of loans held for investment. Average balances of loans held for investment increased $1.06 billion, or 55.2%, from the third quarter of 2014. For the nine months ended September 30, 2015, interest income was $122.2 million compared to $82.0 million for the nine months ended September 30, 2014 also resulting from higher average balances of loans held for investment.

Total interest expense of $4.4 million in the third quarter of 2015 increased $1.2 million, or 37.5%, from $3.2 million in the third quarter of 2014. Higher average balances of interest-bearing deposits in the third quarter of 2015 were partially offset by a 3 basis point reduction in the cost of these interest-bearing deposits. For the nine months ended September 30, 2015, interest expense was $12.1 million compared to $9.3 million for the nine months ended September 30, 2014, primarily resulting from higher average balances of interest-bearing deposits, partially offset by a 5 basis point reduction in the cost of such funds.

Provision for Credit Losses

We recorded a provision for credit losses of $700 thousand in the third quarter of 2015, compared to no provision recorded in the third quarter of 2014. For the nine months ended September 30, 2015, we recorded a provision of $4.2 million, compared to a reversal of provision of $1.5 million during the same period in the prior year. Nonaccrual loans were $19.5 million at September 30, 2015, an increase of $3.5 million, or 21.6%, from $16.0 million at December 31, 2014. Nonaccrual loans as a percentage of total loans was 0.64% at September 30, 2015 compared to 0.75% at December 31, 2014.

Net recoveries were $739 thousand in the third quarter of 2015 compared to net charge-offs of $57 thousand in the third quarter of 2014. For the nine months ended September 30, 2015, net recoveries were $1.2 million, compared to net charge-offs of $478 thousand during the same period in the prior year. For a more detailed discussion on our allowance for loan losses and related provision for loan losses, see Credit Risk Management within Management’s Discussion and Analysis of this Form 10-Q.

Noninterest Income

Noninterest income was $67.5 million in the third quarter of 2015, an increase of $21.7 million, or 47.3%, from $45.8 million in the third quarter of 2014. For the nine months ended September 30, 2015, noninterest income was $215.8 million, an increase of $81.7 million, or 60.9%, from $134.2 million for the nine months ended September 30, 2014. Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale as well as mortgage servicing activities. The level of our mortgage banking activity fluctuates and is influenced by mortgage interest rates, the economy, employment and housing supply and affordability, among other factors. The increase in noninterest income in the third quarter of 2015 compared to the third quarter of 2014 was primarily the result of higher net gain on mortgage loan origination and sale activities mostly due to increased single family mortgage interest rate lock commitments. Our single family mortgage interest rate lock commitments of $1.81 billion in the third quarter of 2015 increased $639.1 million, or 54.7%, compared to $1.17 billion in the third quarter of 2014. Included in noninterest income for the nine months ended September 30, 2015 was a bargain purchase gain of $7.3 million from the merger with Simplicity. Included in noninterest income for the nine months ended September 30, 2014 were a $4.7 million pre-tax increase in mortgage servicing income resulting from the sale of MSRs and a $4.6 million pre-tax gain on sale of single family mortgage origination and sale activities from the sale of loans that were originally held for investment.

Noninterest income consisted of the following.



	Three Months Ended September 30,					Dollar Change			Percent Change		Nine Months Ended September 30,							Dollar Change			Percent Change
(in thousands)	2015		2014			Dollar Change			Percent Change		2015			2014				Dollar Change			Percent Change

Noninterest income
Net gain on mortgage loan origination and sale activities ⁽¹⁾	$	57,885	$	37,642		$	20,243		54	%	$	189,746		$	104,946		⁽²⁾	$	84,800		81	%
Mortgage servicing income	4,768		6,155			(1,387		)	(23	)	10,896			24,284			⁽³⁾	(13,388		)	(55	)
Income (loss) from WMS Series LLC	380		(122		)	502			NM		1,428			(69		)		1,497			NM
Gain (loss) on debt extinguishment	—		2			(2		)	(100	)	—			(573		)		573			(100	)
Depositor and other retail banking fees	1,701		944			757			80		4,239			2,676				1,563			58
Insurance agency commissions	477		256			221			86		1,183			892				291			33
Gain (loss) on securities available for sale	1,002		480			522			109		1,002			1,173				(171		)	(15	)
Bargain purchase gain	796		—			796			NM		7,345			—				7,345			NM
Other	459		456			3			1		(11		)	841				(852		)	(101	)
Total noninterest income	$	67,468	$	45,813		$	21,655		47	%	$	215,828		$	134,170			$	81,658		61	%
NM = not meaningful


(1)	Single family and multifamily mortgage banking activities.


(2)	Includes $4.6 million in pre-tax gain resulting from the sale of loans that were originally held for investment.


(3)	Includes pre-tax income of $4.7 million, net of transaction costs, resulting from the sale of single family MSRs during 2014.

The significant components of our noninterest income are described in greater detail, as follows.

Net gain on mortgage loan origination and sale activities consisted of the following.



	Three Months Ended September 30,					Dollar Change			Percent Change		Nine Months Ended September 30,					Dollar Change			Percent Change
(in thousands)	2015		2014			Dollar Change			Percent Change		2015		2014			Dollar Change			Percent Change

Single family held for sale:
Servicing value and secondary market gains⁽¹⁾	$	49,613	$	29,866		$	19,747		66	%	$	167,786	$	79,658		$	88,128		111	%
Loan origination and funding fees	6,362		6,947			(585		)	(8	)	16,452		18,489			(2,037		)	(11	)
Total single family held for sale	55,975		36,813			19,162			52		184,238		98,147			86,091			88
Multifamily	1,488		930			558			60		4,741		2,019			2,722			135
Other	422		(101		)	523			NM		767		4,780		⁽²⁾	(4,013		)	(84	)
Net gain on mortgage loan origination and sale activities	$	57,885	$	37,642		$	20,243		54	%	$	189,746	$	104,946		$	84,800		81	%
NM = not meaningful


(1)	Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.


(2)	Includes $4.6 million in pre-tax gain resulting from the sale of loans that were originally held for investment.

Single family production volumes related to loans designated for sale consisted of the following.



	Three Months Ended September 30,				Dollar Change		Percent Change		Nine Months Ended September 30,				Dollar Change		Percent Change
(in thousands)	2015		2014		Dollar Change		Percent Change		2015		2014		Dollar Change		Percent Change

Single family mortgage closed loan volume ⁽¹⁾	$	1,934,151	$	1,294,895	$	639,256	49	%	$	5,563,700	$	3,069,882	$	2,493,818	81	%
Single family mortgage interest rate lock commitments ⁽¹⁾	1,806,767		1,167,677		639,090		55		5,590,960		3,172,650		2,418,310		76


(1)	Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank.

During the third quarter of 2015, single family closed loan production increased 49.4% and single family interest rate lock commitments increased 54.7% compared to the third quarter of 2014. For the nine months ended September 30, 2015, single family closed loan production increased 81.2% and single family interest rate lock commitments increased 76.2% compared to the nine months ended September 30, 2014. These increases were mainly the result of the expansion of our mortgage lending operations and continued low mortgage interest rates.

Net gain on mortgage loan origination and sale activities was $57.9 million for the third quarter of 2015, an increase of $20.2 million, or 53.8%, from $37.6 million for the third quarter of 2014. For the nine months ended September 30, 2015, net gain on mortgage loan origination and sale activities was $189.7 million, an increase of $84.8 million, or 80.8%, from $104.9 million for the nine months ended September 30, 2014. This increase predominantly reflected higher single family mortgage interest rate lock commitments as a result of the expansion of our mortgage lending network and higher loan production per loan producer as a result of continued low mortgage interest rates. Mortgage production personnel grew by 14.1% at September 30, 2015 compared to September 30, 2014. During the first nine months of 2014, we recognized a $4.6 million pre-tax gain on sale of single family loans that were originally held for investment.

The Company records a liability for estimated mortgage repurchase losses, which has the effect of reducing net gain on mortgage loan origination and sale activities. The following table presents the effect of changes in the Company's mortgage repurchase liability within the respective line of net gain on mortgage loan origination and sale activities. For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies in this Form 10-Q.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Effect of changes to the mortgage repurchase liability recorded in net gain on mortgage loan origination and sale activities:
New loan sales⁽¹⁾	$	(883	)	$	(518	)	$	(2,052	)	$	(1,070	)
	$	(883	)	$	(518	)	$	(2,052	)	$	(1,070	)


(1)	Represents the estimated fair value of the repurchase or indemnity obligation recognized as a reduction of proceeds on new loan sales.

Mortgage servicing income consisted of the following.



	Three Months Ended September 30,						Dollar Change			Percent Change		Nine Months Ended September 30,							Dollar Change			Percent Change
(in thousands)	2015			2014			Dollar Change			Percent Change		2015			2014				Dollar Change			Percent Change

Servicing income, net:
Servicing fees and other	$	11,136		$	9,350		$	1,786		19	%	$	30,256		$	29,311			$	945		3	%
Changes in fair value of MSRs due to modeled amortization ⁽¹⁾	(8,478		)	(6,212		)	(2,266		)	36		(26,725		)	(19,289		)		(7,436		)	39
Amortization of multifamily MSRs	(511		)	(425		)	(86		)	20		(1,441		)	(1,283		)		(158		)	12
	2,147			2,713			(566		)	(21	)	2,090			8,739				(6,649		)	(76	)
Risk management:
Changes in fair value of MSRs due to changes in model inputs and/or assumptions ⁽²⁾	(19,396		)	899			(20,295		)	NM		(8,224		)	(7,836		)	⁽³⁾	(388		)	5
Net gain (loss) from derivatives economically hedging MSRs	22,017			2,543			19,474			766		17,030			23,381				(6,351		)	(27	)
	2,621			3,442			(821		)	(24	)	8,806			15,545				(6,739		)	(43	)
Mortgage servicing income	$	4,768		$	6,155		$	(1,387	)	(23	)%	$	10,896		$	24,284			$	(13,388	)	(55	)%
NM = not meaningful


(1)	Represents changes due to collection/realization of expected cash flows and curtailments.


(2)	Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.


(3)	Includes pre-tax income of $4.7 million, net of brokerage fees and prepayment reserves, resulting from the sale of single family MSRs during 2014.

For the third quarter of 2015, mortgage servicing income was $4.8 million, a decrease of $1.4 million, or 22.5%, from $6.2 million in the third quarter of 2014. For the nine months ended September 30, 2015, mortgage servicing income was $10.9 million, a decrease of $13.4 million, or 55.1%, from $24.3 million for the nine months ended September 30, 2014. The decrease in comparative quarters was primarily attributable to a $2.3 million decrease in the changes in fair value of MSRs due to modeled amortization and an $821 thousand decrease in risk management results. The decrease in the changes in fair value of MSRs due to modeled amortization occurred as a result of higher current loan prepayments. The decrease in risk management results for the nine months ended September 30, 2015 was primarily attributable to a pre-tax gain of $4.7 million included in the nine months ended September 30, 2014, resulting from the sale of single family MSRs, as well as gains from model assumption adjustments in 2014 to better align observed borrower prepayment behavior with modeled borrower prepayment behavior.

MSR risk management results represent changes in the fair value of single family MSRs due to changes in model inputs and assumptions net of the gain/(loss) from derivatives economically hedging MSRs. The fair value of MSRs is sensitive to changes in interest rates, primarily due to the effect on prepayment speeds. MSRs typically decrease in value when interest rates decline because declining interest rates tend to increase mortgage prepayment speeds and therefore reduce the expected life of the net servicing cash flows of the MSR asset. Certain other changes in MSR fair value relate to factors other than interest rate changes and are generally not within the scope of the Company's MSR economic hedging strategy. These factors may include but are not limited to the impact of changes to the housing price index, the level of home sales activity, changes to mortgage spreads, valuation discount rates, costs to service and policy changes by U.S. government agencies.

The net performance of our MSR risk management activities for the third quarter of 2015 was a gain of $2.6 million compared to a gain of $3.4 million in the third quarter of 2014. For the nine months ended September 30, 2015, risk management results was a gain of $8.8 million compared to a gain of $15.5 million for the nine months ended September 30, 2014. The lower hedging gain in the first nine months of 2015 largely resulted from the one-time gain of $4.7 million in the third quarter of 2014 resulting from the sale of single family MSRs, as well as a reduction in gains from model assumption adjustments in 2014 to better align observed borrower prepayment behavior with modeled borrower prepayment behavior.

Mortgage servicing fees collected in the third quarter of 2015 were $11.1 million, an increase of $1.8 million, or 19.1%, from $9.4 million in the third quarter of 2014. For the nine months ended September 30, 2015, mortgage servicing fees were $30.3 million compared to mortgage servicing fees of $29.3 million for the nine months ended September 30, 2014. Our loans serviced for others portfolio was $15.22 billion at September 30, 2015 compared to $11.38 billion at September 30, 2014. The lower balance at September 30, 2014 was the result of the June 2014 sale of the rights to service $2.96 billion of single family mortgage loans.

Income (loss) from WMS Series LLC in the third quarter of 2015 was $380 thousand compared to a loss of $122 thousand in the third quarter of 2014. For the nine months ended September 30, 2015, income from WMS Series LLC was $1.4 million compared to a loss of $69 thousand for the nine months ended September 30, 2014. The improvement in 2015 was primarily due to continued low mortgage interest rates which led to a 35.2% increase in interest rate lock commitments and a 18.4% increase in closed loan volume, which were $155.1 million and $172.7 million, respectively, for the three months ended September 30, 2015 compared to $114.7 million and $145.8 million, respectively, for the same period in 2014. For the nine months ended September 30, 2015, interest rate lock commitments and closed loan volume were $468.2 million and $491.1 million compared to $346.1 million and $362.4 million, respectively, for the same period in 2014.

Depositor and other retail banking fees for the three and nine months ended September 30, 2015 increased from the three and nine months ended September 30, 2014, primarily driven by an increase in the number of transaction accounts as we grow our retail deposit branch network both organically and through the merger with Simplicity. The following table presents the composition of depositor and other retail banking fees for the periods indicated.



	Three Months Ended September 30,				Dollar Change		Percent Change		Nine Months Ended September 30,				Dollar Change		Percent Change
(in thousands)	2015		2014		Dollar Change		Percent Change		2015		2014		Dollar Change		Percent Change

Fees:
Monthly maintenance and deposit-related fees	$	721	$	423	$	298	70	%	$	1,931	$	1,241	$	690	56	%
Debit Card/ATM fees	954		511		443		87		2,242		1,397		845		60
Other fees	26		10		16		160		66		38		28		74
Total depositor and other retail banking fees	$	1,701	$	944	$	757	80	%	$	4,239	$	2,676	$	1,563	58	%

Noninterest Expense

Noninterest expense was $92.0 million in the third quarter of 2015, an increase of $27.9 million, or 43.4%, from $64.2 million in the third quarter of 2014. For the nine months ended September 30, 2015, noninterest expense was $273.8 million, an increase of $90.6 million, or 49.5%, from $183.2 million for the nine months ended September 30, 2014. The increase in noninterest expense in the third quarter of 2015 was due to an $18.4 million increase in salaries and related costs, a $4.5 million increase in general and administrative costs, and a $3.9 million increase in information services costs. These increased costs were primarily a result of the integration of Simplicity and a 31.4% growth in personnel in connection with our continued expansion of our mortgage banking and commercial and consumer businesses. The increase in noninterest expense in the nine

months ended September 30, 2015 was due to a $61.6 million increase in salaries and related costs, a $10.9 million increase in general and administrative costs and a $8.4 million increase in information services costs. Included in noninterest expense in the nine months ended September 30, 2015 was $15.8 million of merger costs related to Simplicity. Such merger-related costs from prior acquisitions totaled $2.2 million for the nine months ended September 30, 2014.

Noninterest expense consisted of the following.



	Three Months Ended September 30,				Dollar Change			Percent Change		Nine Months Ended September 30,					Dollar Change		Percent Change
(in thousands)	2015		2014		Dollar Change			Percent Change		2015		2014			Dollar Change		Percent Change

Noninterest expense
Salaries and related costs	$	60,991	$	42,604	$	18,387		43	%	$	180,238	$	118,681		$	61,557	52	%
General and administrative	14,869		10,326		4,543			44		42,532		31,593			10,939		35
Legal	868		630		238			38		1,912		1,571			341		22
Consulting	166		628		(462		)	(74	)	6,544		2,182			4,362		200
Federal Deposit Insurance Corporation assessments	504		682		(178		)	(26	)	1,890		1,874			16		1
Occupancy	6,077		4,935		1,142			23		18,024		14,042			3,982		28
Information services	8,159		4,220		3,939			93		21,993		13,597			8,396		62
Net cost of operation and sale of other real estate owned	392		133		259			195		710		(320		)	1,030		(322	)
Total noninterest expense	$	92,026	$	64,158	$	27,868		43	%	$	273,843	$	183,220		$	90,623	49	%

The following table provides a breakout of expenses related to the merger with Simplicity for the three and nine months ended September 30, 2015:



	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015
(in thousands)	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015

Noninterest expense
Salaries and related costs	$	(7	)	$	7,669
General and administrative	7			1,256
Legal	179			530
Consulting	(212		)	5,539
Occupancy	(48		)	335
Information services	518			481
Total noninterest expense	$	437		$	15,810

Salaries and related costs were $61.0 million in the third quarter of 2015, an increase of $18.4 million, or 43.2%, from $42.6 million in the third quarter of 2014. For the nine months ended September 30, 2015, salaries and related costs were $180.2 million, an increase of $61.6 million, or 51.9%, from $118.7 million for the nine months ended September 30, 2014. The increases primarily resulted from a 31.4% increase in full-time equivalent employees at September 30, 2015 compared to September 30, 2014 and higher commission and incentive expense, as single family closed loan volumes increased 49.4% and 81.2%, respectively, from the three and nine months ended September 30, 2014.

General and administrative expenses were $14.9 million in the third quarter of 2015, an increase of $4.5 million, or 44.0%, from $10.3 million in the third quarter of 2014. For the nine months ended September 30, 2015, general and administrative expenses were $42.5 million, an increase of $10.9 million, or 34.6%, from $31.6 million for the nine months ended September 30, 2014. These expenses include general office and equipment expense, marketing, taxes and insurance.

Information services expense was $8.2 million in the third quarter of 2015, an increase of $3.9 million, or 93.3%, from $4.2 million in the third quarter of 2014. For the nine months ended September 30, 2015, information services expense was $22.0 million, an increase of $8.4 million, or 61.7%, from $13.6 million for the nine months ended September 30, 2014. The increases primarily resulted from increased headcount and continued growth of our mortgage banking business and expansion of our commercial and consumer business.

Consulting expense was $166 thousand in the third quarter of 2015, a decrease of $462 thousand, or 73.6%, from $628 thousand in the third quarter of 2014. For the nine months ended September 30, 2015, consulting expenses were $6.5 million, an increase of $4.4 million, or 200%, from $2.2 million for the nine months ended September 30, 2014. The increase in the nine months ended September 30, 2015 was predominantly due to incurred merger-related costs.

Income Tax Expense

For the third quarter of 2015 we recorded income tax provision of $4.4 million, compared to a provision of $2.0 million for the third quarter of 2014.

For the nine months ended September 30, 2015, income tax provision was $13.7 million with an effective tax rate of 29.6% (inclusive of discrete items), compared to $7.0 million and a 29.6% effective tax rate (inclusive of discrete items) for the same period in 2014.

Our effective income tax rate for the nine months ended September 30, 2015 differs from the Federal statutory tax rate of 35% primarily due to the impact of state income taxes, the benefit of tax exempt interest income, the benefit of low income housing tax credit investments, the tax impacts related to the Simplicity transaction, and the impacts of our 2014 tax return true-up adjustments. The Company’s discrete amounts for the nine months ended September 30, 2015 resulted in a net reduction of approximately 4.3% to the effective tax rate, largely due to the Simplicity acquisition. For tax purposes, the bargain purchase gain from the Simplicity acquisition is nontaxable and resulted in a discrete reduction of 5.6% to the effective tax rate as of September 30, 2015. Additionally, re-evaluation of the estimated 2015 state tax rate as a result of the Company's increased business activities in California resulted in a discrete increase of 2.4% to the effective tax rate as of September 30, 2015.

Review of Financial Condition – Comparison of September 30, 2015 to December 31, 2014

Total assets were $4.98 billion at September 30, 2015 and $3.54 billion at December 31, 2014. Through the Simplicity merger, we added $850.2 million of total assets to the balance sheet.

Cash and cash equivalents were $37.3 million at September 30, 2015 compared to $30.5 million at December 31, 2014, an increase of $6.8 million, or 22.3%.

Investment securities were $602.0 million at September 30, 2015 compared to $455.3 million at December 31, 2014, an increase of $146.7 million, or 32.2%, primarily resulting from the execution of our strategic growth and diversification.

We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of interest income. We designated substantially all securities as available for sale. We held securities having a carrying value of $31.9 million at September 30, 2015, which were designated as held to maturity.

The following table details the composition of our investment securities available for sale by dollar amount and as a percentage of the total available for sale securities portfolio.



	At September 30, 2015				At December 31, 2014
(in thousands)	Fair Value		Percent		Fair Value		Percent

Investment securities available for sale:
Mortgage-backed securities:
Residential	$	91,004	16.0	%	$	107,280	25.1	%
Commercial	24,065		4.2		13,671		3.2
Municipal bonds	187,083		32.8		122,334		28.6
Collateralized mortgage obligations:
Residential	87,789		15.4		43,166		10.1
Commercial	56,246		9.9		20,486		4.8
Corporate debt securities	82,882		14.5		79,400		18.6
U.S. Treasury securities	41,013		7.2		40,989		9.6
Total investment securities available for sale	$	570,082	100.0	%	$	427,326	100.0	%

Loans held for sale were $882.3 million at September 30, 2015 compared to $621.2 million at December 31, 2014, an increase of $261.1 million, or 42.0%. Loans held for sale include single family and multifamily residential loans, typically sold within 30 days of closing the loan. The increase in the loans held for sale balance was primarily due to a 45.3% increase in single family mortgage closed loans during the quarter compared to the fourth quarter of 2014.

Loans held for investment, net were $3.01 billion at September 30, 2015 compared to $2.10 billion at December 31, 2014, an increase of $913.8 million, or 43.5%. Our single family loan portfolio increased $275.3 million from December 31, 2014. Our multifamily loan portfolio increased $327.3 million from December 31, 2014, primarily from the Simplicity merger as well as organic growth of our commercial portfolio. Our construction loans, including commercial construction and residential construction, increased $161.9 million from December 31, 2014, primarily from new originations in our commercial real estate and residential construction lending business.

Mortgage servicing rights were $146.1 million at September 30, 2015 compared to $123.3 million at December 31, 2014, an increase of $22.8 million, or 18.5%, as a result of growth in the loans serviced for others portfolio and changes in model assumptions, including prepayment speed assumptions.

The following table details the composition of our loans held for investment portfolio by dollar amount and as a percentage of our total loan portfolio.



	At September 30, 2015						At December 31, 2014
(in thousands)	Amount				Percent		Amount			Percent

Consumer loans
Single family	$	1,171,967		⁽¹⁾	38.6	%	$	896,665		42.2	%
Home equity and other	237,491				7.8		135,598			6.4
	1,409,458				46.4		1,032,263			48.6
Commercial loans
Commercial real estate ⁽²⁾	563,241				18.5		523,464			24.6
Multifamily	382,392				12.6		55,088			2.6
Construction/land development	529,871				17.3		367,934			17.3
Commercial business	158,135				5.2		147,449			6.9
	1,633,639				53.6		1,093,935			51.4
	3,043,097				100.0	%	2,126,198			100.0	%
Net deferred loan fees, costs and discounts	(3,232		)				(5,048		)
	3,039,865						2,121,150
Allowance for loan losses	(26,922		)				(22,021		)
	$	3,012,943					$	2,099,129


(1)	Includes $23.8 million of loans at September 30, 2015 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.


(2)	September 30, 2015 and December 31, 2014 balances comprised of $154.1 million and $143.8 million of owner occupied loans, respectively, and $409.1 million and $379.6 million of non-owner occupied loans, respectively.

Deposits were $3.31 billion at September 30, 2015 compared to $2.45 billion at December 31, 2014, an increase of $862.3 million, or 35.3%. During the first quarter of 2015, we added $651.2 million of deposits from the Simplicity merger. Transaction and savings deposits increased $541.3 million, or 31.5%, during the first nine months of 2015 reflecting the growth and expansion of our branch banking network. The $224.7 million, or 45.4%, increase in certificates of deposit since December 31, 2014 was primarily due to the Simplicity merger.

Deposit balances by dollar amount and as a percentage of our total deposits were as follows for the periods indicated:



(in thousands)	At September 30, 2015				At December 31, 2014
	Amount		Percent		Amount		Percent

Noninterest-bearing accounts - checking and savings	$	372,070	11.2	%	$	240,679	9.8	%
Interest-bearing transaction and savings deposits:
NOW accounts	452,482		13.7		272,390		11.1
Statement savings accounts due on demand	296,983		9.0		200,638		8.2
Money market accounts due on demand	1,140,660		34.5		1,007,213		41.2
Total interest-bearing transaction and savings deposits	1,890,125		57.2		1,480,241		60.5
Total transaction and savings deposits	2,262,195		68.4		1,720,920		70.3
Certificates of deposit	719,208		21.7		494,526		20.2
Noninterest-bearing accounts - other	326,290		9.9		229,984		9.5
Total deposits	$	3,307,693	100.0	%	$	2,445,430	100.0	%

Federal Home Loan Bank advances were $1.03 billion at September 30, 2015 compared to $597.6 million at December 31, 2014, an increase of $428.2 million, or 71.6%. The Company uses these borrowings to primarily fund our mortgage banking and securities investment activities.

Shareholders’ Equity

Shareholders' equity was $460.5 million at September 30, 2015 compared to $302.2 million at December 31, 2014. This increase included additional paid in capital from issuance of common stock of $124.4 million mostly related to the issuance of HomeStreet common stock to Simplicity shareholders, net income of $32.6 million and other comprehensive income of $147 thousand recognized during the nine months ended September 30, 2015. Other comprehensive income represents unrealized gains and losses in the valuation of our investment securities portfolio at September 30, 2015.

Shareholders’ equity, on a per share basis, was $20.87 per share at September 30, 2015, compared to $20.34 per share at December 31, 2014.

Return on Equity and Assets

The following table presents certain information regarding our returns on average equity and average total assets.



	At or for the Three Months Ended September 30,				At or for the Nine Months Ended September 30,
	2015		2014		2015		2014

Return on assets ⁽¹⁾	0.83	%	0.61	%	0.98	%	0.71	%
Return on equity ⁽²⁾	8.65	%	6.74	%	10.14	%	7.81	%
Equity to assets ratio ⁽³⁾	9.56	%	9.00	%	9.67	%	9.10	%


(1)	Net income (annualized) divided by average total assets.


(2)	Net earnings (loss) available to common shareholders (annualized) divided by average common shareholders’ equity.


(3)	Average equity divided by average total assets.

Business Segments

This process is dynamic and is based on management's current view of the Company's operations and is not necessarily comparable with similar information for other financial institutions. We define our business segments by product type and customer segment. If the management structure or the allocation process changes, allocations, transfers and assignments may change. The information that follows has been revised to reflect the manner in which financial information is currently evaluated by management.

Commercial and Consumer Banking Segment

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through bank branches and through ATMs, online, mobile and telephone banking. These products and services include deposit products; residential, consumer, business and agricultural portfolio loans; non-deposit investment products; insurance products and cash management services. We originate construction loans, bridge loans and permanent loans for our portfolio primarily on single family residences, and on office, retail, industrial and multifamily property types. We originate multifamily real estate loans through our Fannie Mae DUS business, whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. During the first quarter of 2015, we launched HomeStreet Commercial Capital, a commercial real estate lending group originating permanent loans up to $10 million in size. The group is based in Orange County, California and will provide permanent financing for a range of commercial real estate loans including multifamily, industrial, retail, office, mobile home parks and self-storage facilities. We also added a team specializing in U.S. Small Business Administration ("SBA") lending also located in Orange County, California. As of September 30, 2015, our bank branch network consists of 43 branches in the Pacific Northwest, California and Hawaii. At September 30, 2015 and December 31, 2014, our transaction and savings deposits totaled $2.26 billion and $1.72 billion, respectively, and our loan portfolio totaled $3.01 billion and $2.10 billion, respectively. This segment is also responsible for the management of the Company's portfolio of investment securities.

Commercial and Consumer Banking segment results are detailed below.



	Three Months Ended September 30,						Dollar Change			Percent Change		Nine Months Ended September 30,							Dollar Change			Percent Change
(in thousands)	2015			2014			Dollar Change			Percent Change		2015			2014				Dollar Change			Percent Change

Net interest income	$	31,509		$	20,163		$	11,346		56	%	$	87,261		$	59,799			$	27,462		46	%
Provision for credit losses	700			—			700			NM		4,200			(1,500		)		5,700			NM
Noninterest income	6,884			3,660			3,224			88		20,589			13,232			⁽²⁾	7,357			56
Noninterest expense	28,110			18,930			9,180			48		93,056			58,657				34,399			59
Income (loss) before income tax expense (benefit)	9,583			4,893			4,690			96		10,594			15,874				(5,280		)	(33	)
Income tax expense (benefit)	2,783			1,359			1,424			105		954			4,471				(3,517		)	(79	)
Net income (loss)	$	6,800		$	3,534		$	3,266		92	%	$	9,640		$	11,403			$	(1,763	)	(15	)%

Total assets	$	3,885,821		$	2,683,525		$	1,202,296		45	%	$	3,885,821		$	2,683,525			$	1,202,296		45	%
Efficiency ratio ⁽¹⁾	73.22		%	79.46		%						86.28		%	80.32		%
Full-time equivalent employees (ending)	807			605			202			33		807			605				202			33
Net gain on mortgage loan origination and sale activities:
Multifamily	1,488			930			558			60		4,741			2,019				2,722			135
Other	422			(101		)	523			NM		767			4,780			⁽²⁾	(4,013		)	(84	)
	$	1,910		$	829		$	1,081		130	%	$	5,508		$	6,799			$	(1,291	)	(19	)%

Production volumes:
Multifamily mortgage originations	$	47,342		$	60,699		$	(13,357	)	(22	)%	$	151,559		$	95,147			$	56,412		59	%
Multifamily mortgage loans sold	$	42,333		$	20,409		$	21,924		107	%	$	140,965		$	42,574			$	98,391		231	%
NM = not meaningful


(1)	Noninterest expense divided by total net revenue (net interest income and noninterest income).


(2)	Includes $4.6 million in pre-tax gain resulting from the sale of loans that were originally held for investment.

Commercial and Consumer Banking net income was $6.8 million for the third quarter of 2015 compared to $3.5 million for the third quarter of 2014. The increase in net income in the third quarter of 2015 was primarily the result of an $11.3 million increase in net interest income resulting from higher average balances of interest-earning assets. This increase to net income was partially offset by a $9.2 million increase in noninterest expense primarily resulting from the continued expansion of this segment. Full-time equivalent employees increased by 202, or 33.4% from the third quarter of 2014. Included in noninterest expense for the third quarter of 2015 was $437 thousand of merger-related costs. For the nine months ended September 30, 2015, Commercial and Consumer Banking net income was $9.6 million, compared to $11.4 million for the nine months ended September 30, 2014. Included in pre-tax net income for the nine months ended September 30, 2015 was $15.8 million of merger-related costs and a bargain purchase gain of $7.3 million from the merger with Simplicity. Included in pre-tax net income for the nine months ended September 30, 2014 was a $4.6 million pre-tax net gain on sale of single family mortgage origination and sale activities from the sale of loans that were originally held for investment.

We recorded $700 thousand of provision for credit losses in the third quarter of 2015, compared to no provision recorded in the third quarter of 2014. For the nine months ended September 30, 2015, we recorded a provision of $4.2 million, compared to a reversal of provision of $1.5 million during the same period in the prior year. The additional credit loss provision in the nine months ended September 30, 2015 was due in part to an extension in the modeled loan loss emergence period for commercial loans, higher qualitative reserves for construction loans and overall growth in the loans held for investment portfolio.

Commercial and Consumer Banking segment servicing income consisted of the following.



	Three Months Ended September 30,						Dollar Change			Percent Change		Nine Months Ended September 30,						Dollar Change			Percent Change
(in thousands)	2015			2014			Dollar Change			Percent Change		2015			2014			Dollar Change			Percent Change

Servicing income, net:
Servicing fees and other	$	1,181		$	1,289		$	(108	)	(8	)%	$	3,202		$	3,196		$	6		—	%
Amortization of multifamily MSRs	(511		)	(425		)	(86		)	20		(1,441		)	(1,283		)	(158		)	12
Commercial mortgage servicing income	$	670		$	864		$	(194	)	(22	)%	$	1,761		$	1,913		$	(152	)	(8	)%

Commercial and Consumer Banking segment loans serviced for others consisted of the following.



(in thousands)	At September 30, 2015		At December 31, 2014

Multifamily	$	866,880	$	752,640
Other	86,567		82,354
Total commercial loans serviced for others	$	953,447	$	834,994

Commercial and Consumer Banking segment noninterest expense of $28.1 million increased $9.2 million, or 48.5%, from $18.9 million in the third quarter of 2014, primarily due to the addition of Simplicity operating expenses for the quarter and the continued organic growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network. During the first quarter of 2015, we added commercial lending capabilities in California by launching HomeStreet Commercial Capital, a commercial real estate lending group, and adding a team specializing in U.S. SBA lending. For the nine months ended September 30, 2015, Commercial and Consumer Banking segment noninterest expense was $93.1 million, an increase of $34.4 million, or 58.6%, from $58.7 million for the nine months ended September 30, 2014. Included in noninterest expense for the nine months ended September 30, 2015 was $15.8 million of merger-related costs primarily related to Simplicity. Such merger-related costs from prior acquisitions totaled $2.2 million for the nine months ended September 30, 2014.

Mortgage Banking Segment

Mortgage Banking originates single family residential mortgage loans primarily for sale in the secondary markets. We have become a rated originator and servicer of jumbo loans, allowing us to sell these loans to other securitizers. We also purchase loans from WMS Series LLC through a correspondent arrangement with that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. On occasion, we may sell a portion of our MSR portfolio. We also sell loans on a servicing-released and servicing-retained basis to securitizers and correspondent lenders. A small percentage of our loans are brokered to other lenders or sold on a servicing-released basis to correspondent lenders. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained single family mortgage servicing rights within this business segment.

Mortgage Banking segment results are detailed below.



	Three Months Ended September 30,						Dollar Change		Percent Change		Nine Months Ended September 30,						Dollar Change		Percent Change
(in thousands)	2015			2014			Dollar Change		Percent Change		2015			2014			Dollar Change		Percent Change

Net interest income	$	8,125		$	5,145		$	2,980	58	%	$	21,337		$	11,368		$	9,969	88	%
Noninterest income	60,584			42,153			18,431		44		195,239			120,938			74,301		61
Noninterest expense	63,916			45,228			18,688		41		180,787			124,563			56,224		45
Income before income tax expense	4,793			2,070			2,723		132		35,789			7,743			28,046		362
Income tax expense	1,632			629			1,003		159		12,788			2,508			10,280		410
Net income	$	3,161		$	1,441		$	1,720	119	%	$	23,001		$	5,235		$	17,766	339	%

Total assets	$	1,089,832		$	791,131		$	298,701	38	%	$	1,089,832		$	791,131		$	298,701	38	%
Efficiency ratio ⁽¹⁾	93.02		%	95.62		%					83.48		%	94.15		%
Full-time equivalent employees (ending)	1,293			993			300		30		1,293			993			300		30
Production volumes for sale to the secondary market:
Single family mortgage closed loan volume⁽²⁾⁽³⁾	$	1,934,151		$	1,294,895		$	639,256	49		$	5,563,700		$	3,069,882		$	2,493,818	81
Single family mortgage interest rate lock commitments⁽²⁾	$	1,806,767		$	1,167,677		$	639,090	55		$	5,590,960		$	3,172,650		$	2,418,310	76
Single family mortgage loans sold⁽²⁾	$	1,965,223		$	1,179,464		$	785,759	67	%	$	5,176,569		$	2,705,719		$	2,470,850	91	%


(1)	Noninterest expense divided by total net revenue (net interest income and noninterest income).


(2)	Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank.


(3)	Represents single family mortgage production volume designated for sale to the secondary market during each respective period.

Mortgage Banking net income was $3.2 million for the third quarter of 2015, compared to $1.4 million for the third quarter of 2014. The increase in Mortgage Banking net income for the third quarter of 2015 primarily reflected a 54.7% increase in interest rate lock commitments resulting from expansion of our network of mortgage loan centers and a 14.1% increase in mortgage production personnel coupled with continued low mortgage interest rates. For the nine months ended September 30, 2015, Mortgage Banking net income was $23.0 million, compared to $5.2 million for the same period in the prior year, resulting primarily from a 76.2% increase in interest rate lock commitments. Results for the nine months ended September 30, 2014 includes pre-tax Mortgage Banking servicing income of $4.7 million, net of transaction costs, from the 2014 sale of single family MSRs.

Mortgage Banking net gain on sale to the secondary market is detailed in the following table.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2015		2014		2015		2014

Net gain on mortgage loan origination and sale activities:⁽¹⁾
Single family:
Servicing value and secondary market gains⁽²⁾	$	49,613	$	29,866	$	167,786	$	79,658
Loan origination and funding fees	6,362		6,947		16,452		18,489
Total mortgage banking net gain on mortgage loan origination and sale activities⁽¹⁾	$	55,975	$	36,813	$	184,238	$	98,147


(1)	Excludes inter-segment activities.


(2)	Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and the estimated fair value of the repurchase or indemnity obligation recognized on new loan sales.

Net gain on mortgage loan origination and sale activities was $56.0 million for the third quarter of 2015, an increase of $19.2 million, or 52.1%, from $36.8 million in the third quarter of 2014. This increase is primarily the result of a 54.7% increase in interest rate lock commitments, which was mainly driven by low mortgage interest rates and the expansion of our mortgage production offices and personnel. Since September 2014, we have increased our lending footprint by adding nine home loan centers to bring our total home loan centers to 64. For the nine months ended September 30, 2015, Mortgage Banking net gain on mortgage loan origination and sale activities was $184.2 million, an increase of $86.1 million, or 87.7%, from $98.1 million for the same period in the prior year, primarily due to increased interest rate lock commitments.

Mortgage Banking servicing income consisted of the following.



	Three Months Ended September 30,						Dollar Change			Percent Change		Nine Months Ended September 30,							Dollar Change			Percent Change
(in thousands)	2015			2014			Dollar Change			Percent Change		2015			2014				Dollar Change			Percent Change

Servicing income, net:
Servicing fees and other	$	9,955		$	8,061		$	1,894		23	%	$	27,054		$	26,115			$	939		4	%
Changes in fair value of MSRs due to modeled amortization ⁽¹⁾	(8,478		)	(6,212		)	(2,266		)	36		(26,725		)	(19,289		)		(7,436		)	39
	1,477			1,849			(372		)	(20	)	329			6,826				(6,497		)	(95	)
Risk management:
Changes in fair value of MSRs due to changes in model inputs and/or assumptions ⁽²⁾	(19,396		)	899			$	(20,295	)	NM		(8,224		)	(7,836		)	⁽³⁾	$	(388	)	5
Net gain from derivatives economically hedging MSRs	22,017			2,543			19,474			766		17,030			23,381				(6,351		)	(27	)
	2,621			3,442			(821		)	(24	)	8,806			15,545				(6,739		)	(43	)
Mortgage Banking servicing income	$	4,098		$	5,291		$	(1,193	)	(23	)%	$	9,135		$	22,371			$	(13,236	)	(59	)%
NM = not meaningful


(1)	Represents changes due to collection/realization of expected cash flows and curtailments.


(2)	Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.


(3)	Includes pre-tax income of $4.7 million, net of transaction costs, resulting from the sale of single family MSRs in 2014.

Mortgage Banking servicing income of $4.1 million in the third quarter of 2015 decreased $1.2 million, or 22.5%, from $5.3 million in the third quarter of 2014. The decrease was primarily attributable to a $821 thousand decrease in risk management results and a $372 thousand decrease in servicing income. The decrease in risk management results were primarily attributable to a reduction in the estimated yield from the hedge portfolio. The decrease in the changes in fair value of MSRs due to modeled amortization occurred as a result of higher current loan prepayments. For the nine months ended September 30, 2015, single family mortgage servicing income of $9.1 million decreased $13.2 million, or 59.2% from $22.4 million for the nine months ended September 30, 2014, primarily as a result of lower risk management results and lower servicing income. Included in risk management results for the nine months ended September 30, 2014 is $4.7 million of pre-tax income recognized from the sale of single family MSRs.

Single family mortgage servicing fees collected in the third quarter of 2015 increased $1.9 million, or 23.5%, from the third quarter of 2014 primarily due to higher average balances in our loans serviced for others portfolio. The portfolio of single family loans serviced for others was $14.27 billion at September 30, 2015 compared to $10.59 billion at September 30, 2014.

Single family loans serviced for others consisted of the following.



(in thousands)	At September 30, 2015		At December 31, 2014

U.S. government and agency	$	13,590,706	$	10,630,864
Other	680,481		585,344
Total single family loans serviced for others	$	14,271,187	$	11,216,208

Mortgage Banking noninterest expense was $63.9 million in the third quarter of 2015 an increase of $18.7 million, or 41.3%, from $45.2 million in the third quarter of 2014, primarily due to higher commission and incentive expense, as closed loan volumes increased 49.4% from the third quarter of 2014, as well as increased salaries and related costs, occupancy expenses and information services expenses as we grew our single family mortgage lending network. For the nine months ended September 30, 2015, noninterest expense was $180.8 million, an increase of $56.2 million, or 45.14%, from $124.6 million for the same period in the prior year.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.

For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the Off-Balance Sheet Arrangements and Commitments, Guarantees and Contingencies discussions within Part II, Item 7 Management's Discussion and Analysis in our 2014 Annual Report on Form 10-K, as well as Note 13, Commitments, Guarantees and Contingencies in our 2014 Annual Report on Form 10-K and Note 8, Commitments, Guarantees and Contingencies in this Form 10-Q.

Enterprise Risk Management

All financial institutions manage and control a variety of business and financial risks that can significantly affect their financial performance. Among these risks are credit risk; market risk, which includes interest rate risk and price risk; liquidity risk; and operational risk. We are also subject to risks associated with compliance/legal, strategic and reputational matters.

For more information on how we manage these business, financial and other risks, see the Enterprise Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 2014 Annual Report on Form 10-K.

Credit Risk Management

The following discussion highlights developments since December 31, 2014 and should be read in conjunction with the Credit Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 2014 Annual Report on Form 10-K.

Loan Underwriting Standards

Our underwriting standards for single family and home equity loans require evaluating and understanding a borrower’s credit, collateral and ability to repay the loan. Credit is determined based on how well a borrower manages their current and prior debts, documented by a credit report that provides credit scores and the borrower’s current and past information about their credit history. Collateral is based on the type and use of property, occupancy and market value, largely determined by property appraisals. A borrower's ability to repay the loan is based on several factors, including employment, income, current debt, assets and level of equity in the property. We also consider loan-to-property value and debt-to-income ratios, loan amount and lien position in assessing whether to originate a loan. Single family and home equity borrowers are particularly susceptible to downturns in economic trends that negatively affect housing prices and demand and levels of unemployment.

For commercial, multifamily and construction loans, we consider the same factors with regard to the borrower and the guarantors. In addition, we evaluate liquidity, net worth, leverage, other outstanding indebtedness of the borrower, an analysis of cash expected to flow through the borrower (including the outflow to other lenders) and prior experience with the borrower. We use this information to assess financial capacity, profitability and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.

Additional considerations for commercial permanent loans secured by real estate:

Our underwriting standards for commercial permanent loans generally require that the loan-to-value ratio for these loans not exceed 75% of appraised value or discounted cash flow value, as appropriate, and that commercial properties attain debt coverage ratios (net operating income divided by annual debt servicing) of 1.25 or better.

Our underwriting standards for multifamily residential permanent loans generally require that the loan-to-value ratio for these loans not exceed 80% of appraised value, cost, or discounted cash flow value, as appropriate, and that multifamily residential properties attain debt coverage ratios of 1.20 or better. However, underwriting standards can be influenced by competition and other factors. We endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

Additional considerations for commercial construction loans secured by real estate:

We originate a variety of real estate construction loans. Underwriting guidelines for these loans vary by loan type but include loan-to-value limits, term limits, loan advance limits and pre-leasing requirements, as applicable.

Our underwriting guidelines for commercial real estate construction loans generally require that the loan-to-value ratio not exceed 75% and stabilized debt coverage ratios of 1.25 or better.

Our underwriting guidelines for multifamily residential construction loans generally require that the loan-to-value ratio not exceed 80% and stabilized debt coverage ratios of 1.20 or better.

Our underwriting guidelines for single family residential construction loans to builders generally require that the loan-to-value ratio not exceed 85%.

As noted above, underwriting standards can be influenced by competition and other factors. However, we endeavor to maintain the highest practical underwriting standards while balancing the need to remain competitive in our lending practices.

Asset Quality and Nonperforming Assets

Nonperforming assets ("NPAs") were $27.7 million, or 0.56% of total assets at September 30, 2015, compared to $25.5 million, or 0.72% of total assets at December 31, 2014.

Nonaccrual loans of $19.5 million, or 0.64% of total loans at September 30, 2015, increased $3.5 million, or 21.6%, from $16.0 million, or 0.75% of total loans at December 31, 2014. OREO balances of $8.3 million at September 30, 2015 decreased $1.2 million, or 12.4%, from $9.4 million at December 31, 2014. Net recoveries during the three and nine months ended September 30, 2015 were $739 thousand and $1.2 million, respectively, compared with net charge-offs of $57 thousand and $478 thousand during the three and nine months ended September 30, 2014, respectively.

At September 30, 2015, our loans held for investment portfolio, excluding the allowance for loan losses, was $3.0 billion, an increase of $913.8 million from December 31, 2014. During the first quarter of 2015, we added $664.1 million of loans to the portfolio from the Simplicity merger. The allowance for loan losses increased to $26.9 million, or 0.89% of loans held for investment, compared to $22.0 million, or 1.04% of loans held for investment at December 31, 2014.

We recorded $700 thousand of provision for credit losses in the third quarter of 2015, compared to no provision recorded in the third quarter of 2014. For the nine months ended September 30, 2015, we recorded a provision of $4.2 million, compared to a reversal of provision of $1.5 million during the nine months ended September 30, 2014. The additional credit loss provision in the nine months ended September 30, 2015 was due in part to an extension in the modeled loan loss emergence period for commercial loans, higher qualitative reserves for construction loans and overall growth in the loans held for investment portfolio.

The following tables present the recorded investment, unpaid principal balance and related allowance for impaired loans, broken down by those with and those without a specific reserve.



	At September 30, 2015
(in thousands)	Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	96,965		$	108,660	$	—
Loans with an allowance recorded	4,841			5,219		910
Total	$	101,806	⁽¹⁾	$	113,879	$	910

	At December 31, 2014
(in thousands)	Recorded Investment			Unpaid Principal Balance ⁽²⁾		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	82,725		$	98,664	$	—
Loans with an allowance recorded	36,499			37,078		1,706
Total	$	119,224	⁽¹⁾	$	135,742	$	1,706


(1)	Includes $74.4 million and $73.6 million in single family performing troubled debt restructurings ("TDRs") at September 30, 2015 and December 31, 2014, respectively.


(2)	Unpaid principal balance does not include partial charge-offs, purchase discounts and premiums or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.

The Company had 270 impaired loans totaling $101.8 million at September 30, 2015 and 258 impaired loans totaling $119.2 million at December 31, 2014. The average recorded investment in these loans for the three and nine months ended September 30, 2015 was $111.0 million and $114.6 million, respectively, compared with $119.1 million and $119.0 million for the three and nine months ended September 30, 2014, respectively. Impaired loans of $4.8 million and $36.5 million had a valuation allowance of $910 thousand and $1.7 million at September 30, 2015 and December 31, 2014, respectively.

The allowance for credit losses represents management’s estimate of the incurred credit losses inherent within our loan portfolio. For further discussion related to credit policies and estimates see Critical Accounting Policies and Estimates — Allowance for Loan Losses within Part II, Item 7 Management's Discussion and Analysis in our 2014 Annual Report on Form 10-K.

The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.



	At September 30, 2015						At December 31, 2014
(in thousands)	Amount		Percent of Allowance to Total Allowance		Loan Category as a % of Total Loans ⁽¹⁾		Amount		Percent of Allowance to Total Allowance		Loan Category as a % of Total Loans

Consumer loans
Single family	$	8,717	31.3	%	38.0	%	$	9,447	41.9	%	42.2	%
Home equity and other	4,252		15.2		7.9		3,322		14.7		6.4
	12,969		46.5		45.9		12,769		56.6		48.6
Commercial loans
Commercial real estate	4,691		16.8		18.7		3,846		17.1		24.6
Multifamily	783		2.8		12.7		673		3.0		2.6
Construction/land development	7,411		26.6		17.5		3,818		17.0		17.3
Commercial business	2,033		7.3		5.2		1,418		6.3		6.9
	14,918		53.5		54.1		9,755		43.4		51.4
Total allowance for credit losses	$	27,887	100.0	%	100.0	%	$	22,524	100.0	%	100.0	%


(1)	Excludes loans held for investment balances that are carried at fair value.

The following table presents activity in our allowance for credit losses, which includes reserves for unfunded commitments.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014

Allowance at the beginning of period	$	26,448		$	22,168		$	22,524		$	24,089
Provision (reversal of provision) for loan losses	700			—			4,200			(1,500		)
Recoveries:
Consumer
Single family	250			65			496			106
Home equity and other	84			94			225			420
	334			159			721			526
Commercial
Commercial real estate	—			275			37			431
Construction/land development	1,033			123			1,132			185
Commercial business	23			51			150			198
	1,056			449			1,319			814
Total recoveries	1,390			608			2,040			1,340
Charge-offs:
Consumer
Single family	(232		)	(226		)	(232		)	(509		)
Home equity and other	(255		)	(135		)	(456		)	(694		)
	(487		)	(361		)	(688		)	(1,203		)
Commercial
Commercial real estate	—			—			(16		)	(23		)
Multifamily	(150		)	—			(150		)	—
Commercial business	(14		)	(304		)	(23		)	(592		)
	(164		)	(304		)	(189		)	(615		)
Total charge-offs	(651		)	(665		)	(877		)	(1,818		)
Recoveries, net of (charge-offs)	739			(57		)	1,163			(478		)
Balance at end of period	$	27,887		$	22,111		$	27,887		$	22,111

The following table presents the composition of TDRs by accrual and nonaccrual status.



	At September 30, 2015
(in thousands)	Accrual		Nonaccrual		Total

Consumer
Single family ⁽¹⁾	$	74,408	$	2,158	$	76,566
Home equity and other	1,395		181		1,576
	75,803		2,339		78,142
Commercial
Commercial real estate	4,431		1,060		5,491
Multifamily	3,019		—		3,019
Construction/land development	4,332		—		4,332
Commercial business	1,784		195		1,979
	13,566		1,255		14,821
	$	89,369	$	3,594	$	92,963



	At December 31, 2014
(in thousands)	Accrual		Nonaccrual		Total

Consumer
Single family ⁽¹⁾	$	73,585	$	2,482	$	76,067
Home equity and other	2,430		231		2,661
	76,015		2,713		78,728
Commercial
Commercial real estate	21,703		1,148		22,851
Multifamily	3,077		—		3,077
Construction/land development	5,447		—		5,447
Commercial business	1,573		249		1,822
	31,800		1,397		33,197
	$	107,815	$	4,110	$	111,925


(1)	Includes loan balances insured by the FHA or guaranteed by the VA of $29.1 million and $26.8 million, at September 30, 2015 and December 31, 2014, respectively.

The Company had 249 loan relationships classified as troubled debt restructurings (“TDRs”) totaling $93.0 million at September 30, 2015 with no related unfunded commitments. The Company had 244 loan relationships classified as TDRs totaling $111.9 million at December 31, 2014 with related unfunded commitments of $151 thousand. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above.

Delinquent loans and other real estate owned by loan type consisted of the following.



	At September 30, 2015
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Not Accruing		90 Days or More Past Due and Still Accruing			Total Past Due Loans		Other Real Estate Owned

Consumer loans
Single family	$	6,431	$	7,764	$	10,439	$	35,152	⁽¹⁾	$	59,786	$	916
Home equity and other	1,294		157		1,608		—			3,059		—
	7,725		7,921		12,047		35,152			62,845		916
Commercial loans
Commercial real estate	1,714		—		2,540		—			4,254		4,113
Multifamily	—		—		1,449		—			1,449		—
Construction/land development	715		—		—		—			715		3,244
Commercial business	202		—		3,434		—			3,636		—
	2,631		—		7,423		—			10,054		7,357
Total	$	10,356	$	7,921	$	19,470	$	35,152		$	72,899	$	8,273


(1)	FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.



	At December 31, 2014
(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due and Not Accruing		90 Days or More Past Due and Still Accruing⁽¹⁾			Total Past Due Loans		Other Real Estate Owned

Consumer loans
Single family	$	7,832	$	2,452	$	8,368	$	34,737	⁽¹⁾	$	53,389	$	1,613
Home equity and other	371		81		1,526		—			1,978		—
	8,203		2,533		9,894		34,737			55,367		1,613
Commercial loans
Commercial real estate	—		—		4,843		—			4,843		1,996
Construction/land development	—		1,261		—		—			1,261		5,839
Commercial business	611		3		1,277		250			2,141		—
	611		1,264		6,120		250			8,245		7,835
Total	$	8,814	$	3,797	$	16,014	$	34,987		$	63,612	$	9,448


(1)	FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status as they have little to no risk of loss.

Liquidity and Capital Resources

Liquidity risk management is primarily intended to ensure we are able to maintain cash flows adequate to fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc., HomeStreet Capital ("HSC") and the Bank

have established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity.

HomeStreet, Inc., HomeStreet Capital and the Bank have different funding needs and sources of liquidity and separate regulatory capital requirements.

HomeStreet, Inc.

The main source of liquidity for HomeStreet, Inc. is proceeds from dividends from the Bank and HomeStreet Capital. In the past, we have raised longer-term funds through the issuance of senior debt and TruPS. Historically, the main cash outflows were distributions to shareholders, interest and principal payments to creditors and operating expenses. HomeStreet, Inc.’s ability to pay dividends to shareholders depends substantially on dividends received from the Bank.

HomeStreet Capital

HomeStreet Capital generates positive cash flow from its servicing fee income on the DUS portfolio, net of its costs to service the portfolio. Offsetting this are HomeStreet Capital's costs to purchase the servicing rights on new production from the Bank. Liquidity management and reporting requirements for DUS lenders such as HomeStreet Capital are set by Fannie Mae. HomeStreet Capital's liquidity management therefore consists of meeting Fannie Mae requirements and its own operational needs.

HomeStreet Bank

The Bank’s primary short-term sources of funds include deposits, advances from the FHLB, repayments and prepayments of loans, proceeds from the sale of loans and investment securities and interest from our loans and investment securities. We have also raised short-term funds through the sale of securities under agreements to repurchase. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit inflows and outflows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The primary liquidity ratio is defined as net cash, short-term investments and other marketable assets as a percent of net deposits and short-term borrowings. At September 30, 2015, our primary liquidity ratio was 30.1% compared to 30.0% at December 31, 2014.

At September 30, 2015 and December 31, 2014, the Bank had available borrowing capacity of $353.0 million and $317.9 million, respectively, from the FHLB, and $388.5 million and $316.1 million, respectively, from the Federal Reserve Bank of San Francisco.

Cash Flows

For the nine months ended September 30, 2015, cash and cash equivalents increased $6.8 million, compared to an increase of $779 thousand for the nine months ended September 30, 2014. The following discussion highlights the major activities and transactions that affected our cash flows during these periods.

Cash flows from operating activities

The Company's operating assets and liabilities are used to support our lending activities, including the origination and sale of mortgage loans. For the nine months ended September 30, 2015, net cash of $233.4 million was used in operating activities, as cash used to fund loans held for sale production exceeded proceeds from the sale of loans. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt are sufficient to fund our operating liquidity needs. For the nine months ended September 30, 2014, net cash of $352.6 million was used in operating activities, as cash used to fund loans held for sale production exceeded proceeds from the sale of loans.

Cash flows from investing activities

The Company's investing activities primarily include available-for-sale securities and loans originated as held for investment. For the nine months ended September 30, 2015, net cash of $280.0 million was used in investing activities, primarily due to cash used for the origination of portfolio loans and principal repayments and purchases of investment securities, partially offset by $112.2 million of net cash acquired from the Simplicity merger. For the nine months ended September 30, 2014, net cash of $24.2 million was used in investing activities, as the Company increased the balances of its loans held for investment portfolio, primarily offset by the sale of loans originated as held for investment and the sale of investment securities. The Company elected to sell single family mortgage loans during the second quarter of 2014 to provide additional liquidity to support the commercial loan portfolio growth and to reduce the concentration of single family mortgage loans in the portfolio.

Cash flows from financing activities

The Company's financing activities are primarily related to customer deposits and net proceeds from the FHLB. For the nine months ended September 30, 2015, net cash of $520.2 million was provided by financing activities, primarily resulting from net proceeds of $362.5 million of FHLB advances and a $212.7 million growth in deposits. For the nine months ended September 30, 2014, net cash of $377.6 million was provided by financing activities, primarily driven by a $214.6 million growth in deposits and net proceeds of $152.0 million of FHLB advances.

Capital Management

HomeStreet, Inc. and HomeStreet Bank are required to maintain a minimum level of regulatory capital. On January 1, 2015, the Bank and the Company became subject to Basel III capital standards. Bank regulations currently recognize three components, or tiers, of capital: common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. The FDIC measures a bank’s capital using (1) Tier 1 leverage ratio, (2) Common equity risk-based capital ratio, (3) Tier 1 risk-based capital ratio and (4) Total risk-based capital ratio. Key differences between the new capital requirements and the prior requirements under Basel I, include, but are not limited to, the following:

•

Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”) except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Both the Company and the Bank elected this one-time option to exclude certain components of AOCI.

•

The Rules modified the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities as a component of Tier 1 capital. As finally adopted, however, the Rules permit holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Company) to continue to include trust preferred securities issued prior to May 19, 2010 in Tier 1 capital, generally up to 25% of other Tier 1 capital.

•

The Rules made changes in the methods of calculating certain risk-based assets, which in turn affected the calculation of risk- based ratios. Higher or more sensitive risk weights are assigned to various categories of assets, among which are commercial real estate, credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or are nonaccrual, foreign exposures, certain corporate exposures, securitization exposures, equity exposures and in certain cases mortgage servicing rights and deferred tax assets. Certain calculations under the rules related to deductions from capital have phase-in periods through 2018. Specifically, the capital treatment of mortgage servicing rights will have an increasingly negative impact our capital ratios as the deductions are phased in through the transition periods. Under the prior rules, the Bank deducted 10% of the value of MSRs (net of deferred tax) from Tier 1 capital ratios. However, under Basel III, the Bank and Company must deduct a much larger portion of the value of MSRs from Tier 1 capital.


•	MSRs in excess of a 10% threshold must be deducted from common equity. The disallowable portion of MSRs will be phased in incrementally (40% in 2015; 60% in 2016; 80% in 2017) to 100% deduction in 2018.


•	In addition, the combined balance of MSRs and deferred tax assets is limited to approximately 15% of the Bank’s and the Company’s common equity Tier 1 capital. These combined assets must be deducted from common equity to the extent that they exceed the 15% threshold.


•	Any portion of the Bank’s and the Company’s MSRs that are not deducted from the calculation of common equity Tier 1 are subject to a 100% risk weight that will increase to 250% in 2018.

In order to qualify as “well capitalized,” a bank must have a Tier 1 leverage ratio of at least 5.0%, a Common equity risk-based capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8.0% and a Total risk-based capital ratio of at least 10.0%. In order to be deemed “adequately capitalized,” a bank generally must have a Tier 1 leverage ratio of at least 4.0%, a Common equity risk-based capital of at least 4.5%, a Tier 1 risk-based capital ratio of at least 6.0% and a Total risk-based capital ratio of at least 8.0%. The FDIC retains the right to require a depository institution to maintain a higher capital level based on its particular risk profile. In addition to the preceding requirements, both the Company and the Bank are required to establish a “conservation buffer,” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019.

At September 30, 2015, the Bank's capital ratios continued to meet the regulatory capital category of “well capitalized” as defined by the FDIC’s prompt corrective action rules.

The following table presents regulatory capital information for HomeStreet, Inc. and HomeStreet Bank. Information presented for September 30, 2015 reflects the transition to Basel III capital requirements from previous regulatory capital adequacy guidelines under Basel I effective in 2014.



	At September 30, 2015
HomeStreet Bank	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

Tier 1 leverage capital (to average assets)	$	461,121	9.69	%	$	190,407	4.0	%	$	238,009	5.0	%
Common equity risk-based capital (to risk-weighted assets)	461,121		13.35	%	155,465		4.5	%	224,560		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	461,121		13.35	%	207,287		6.0	%	276,382		8.0	%
Total risk-based capital (to risk-weighted assets)	$	489,008	14.15	%	$	276,382	8.0	%	$	345,478	10.0	%



	At September 30, 2015
HomeStreet, Inc.	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

Tier 1 leverage capital (to average assets)	$	477,591	10.00	%	$	190,987	4.0	%	$	238,733	5.0	%
Common equity risk-based capital (to risk-weighted assets)	420,570		10.65	%	177,787		4.5	%	256,804		6.5	%
Tier 1 risk-based capital (to risk-weighted assets)	477,591		12.09	%	237,049		6.0	%	316,066		8.0	%
Total risk-based capital (to risk-weighted assets)	$	505,478	12.79	%	$	316,066	8.0	%	$	395,082	10.0	%



	At December 31, 2014
HomeStreet Bank	Actual				For Minimum Capital Adequacy Purposes				To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio

Tier 1 leverage capital (to average assets)	$	319,010	9.38	%	$	136,058	4.0	%	$	170,072	5.0	%
Tier 1 risk-based capital (to risk-weighted assets)	319,010		13.10	%	97,404		4.0	%	146,106		6.0	%
Total risk-based capital (to risk-weighted assets)	$	341,534	14.03	%	$	194,808	8.0	%	$	243,511