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: SeptemberJune 30, 20132014
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 ¨oAccelerated Filer x
      
Non-accelerated Filer ¨oSmaller 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 OctoberJuly 31, 20132014 was 14,425,22414,852,971.
 




PART I – FINANCIAL INFORMATION 
  
ITEM 1FINANCIAL STATEMENTS 
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
ITEM 2 
  
  
  
  
  
  
  
  
  
  
  
  

2



   
ITEM 3
   
ITEM 4
   
 
   
ITEM 1
   
ITEM 1A
   
ITEM 6
  

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

3



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,
2013
 December 31,
2012
 June 30,
2014
 December 31,
2013
       
ASSETS       
Cash and cash equivalents (including interest-bearing instruments of $21,747 and $12,414)$37,906
 $25,285
Investment securities available for sale573,591
 416,329
Loans held for sale (includes $385,110 and $607,578 carried at fair value)385,110
 620,799
Loans held for investment (net of allowance for loan losses of $24,694 and $27,561)1,510,169
 1,308,974
Mortgage servicing rights (includes $136,897 and $87,396 carried at fair value)146,300
 95,493
Cash and cash equivalents (including interest-bearing instruments of $57,392 and $9,436) $74,991
 $33,908
Investment securities (includes $436,971 and $481,683 carried at fair value) 454,966
 498,816
Loans held for sale (includes $536,658 and $279,385 carried at fair value) 549,440
 279,941
Loans held for investment (net of allowance for loan losses of $21,926 and $23,908) 1,812,895
 1,871,813
Mortgage servicing rights (includes $108,869 and $153,128 carried at fair value) 117,991
 162,463
Other real estate owned12,266
 23,941
 11,083
 12,911
Federal Home Loan Bank stock, at cost35,370
 36,367
 34,618
 35,288
Premises and equipment, net24,684
 15,232
 43,896
 36,612
Accounts receivable and other assets128,927
 88,810
Goodwill 11,945
 12,063
Other assets 123,851
 122,239
Total assets$2,854,323
 $2,631,230
 $3,235,676
 $3,066,054
LIABILITIES AND SHAREHOLDERS’ EQUITY       
Liabilities:       
Deposits$2,098,076
 $1,976,835
 $2,417,712
 $2,210,821
Federal Home Loan Bank advances338,690
 259,090
 384,090
 446,590
Securities sold under agreements to repurchase 14,681
 
Accounts payable and other liabilities87,492
 69,686
 69,087
 77,906
Long-term debt61,857
 61,857
 61,857
 64,811
Total liabilities2,586,115
 2,367,468
 2,947,427
 2,800,128
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, 14,422,354 shares and 14,382,638 shares511
 511
Common stock, no par value, authorized 160,000,000, issued and outstanding, 14,849,692 shares and 14,799,991 shares 511
 511
Additional paid-in capital91,415
 90,189
 95,923
 94,474
Retained earnings185,379
 163,872
 192,972
 182,935
Accumulated other comprehensive income (loss)(9,097) 9,190
Accumulated other comprehensive income (1,157) (11,994)
Total shareholders' equity268,208
 263,762
 288,249
 265,926
Total liabilities and shareholders' equity$2,854,323
 $2,631,230
 $3,235,676
 $3,066,054

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

4



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except share data)2013 2012 2013 20122014 2013 2014 2013
              
Interest income:              
Loans$19,425
 $18,512
 $54,920
 $52,344
$23,419
 $17,446
 $46,102
 $35,495
Investment securities available for sale3,895
 2,517
 9,552
 7,205
Investment securities2,664
 2,998
 5,634
 5,657
Other28
 24
 82
 216
142
 24
 299
 54
23,348
 21,053
 64,554
 59,765
26,225
 20,468
 52,035
 41,206
Interest expense:              
Deposits2,222
 3,908
 8,078
 12,985
2,356
 2,367
 4,716
 5,856
Federal Home Loan Bank advances434
 297
 1,113
 1,506
444
 387
 857
 680
Securities sold under agreements to repurchase
 19
 11
 69
1
 11
 1
 11
Long-term debt274
 305
 2,274
 1,041
265
 283
 580
 1,999
Other6
 4
 16
 13
12
 5
 22
 10
2,936
 4,533
 11,492
 15,614
3,078
 3,053
 6,176
 8,556
Net interest income20,412
 16,520
 53,062
 44,151
23,147
 17,415
 45,859
 32,650
(Reversal of) provision for credit losses(1,500) 5,500
 900
 7,500
Provision (reversal of provision) for credit losses
 400
 (1,500) 2,400
Net interest income after provision for credit losses21,912
 11,020
 52,162
 36,651
23,147
 17,015
 47,359
 30,250
Noninterest income:              
Net gain on mortgage loan origination and sale activities33,491
 65,336
 139,870
 141,683
41,794
 52,424
 67,304
 106,379
Mortgage servicing income4,011
 506
 9,265
 15,470
10,184
 2,183
 18,129
 5,255
(Loss) income from Windermere Mortgage Services Series LLC(550) 1,188
 1,063
 3,748
Loss on debt extinguishment
 
 
 (939)
Income from WMS Series LLC246
 993
 53
 1,613
Gain (loss) on debt extinguishment11
 
 (575) 
Depositor and other retail banking fees791
 756
 2,273
 2,262
917
 761
 1,732
 1,482
Insurance commissions242
 192
 612
 551
(Loss) gain on sale of investment securities available for sale (includes unrealized gains (losses) reclassified from accumulated other comprehensive income of $(184) and $397 for the three months ended September 30, 2013 and 2012, and $6 and $1,349 for the nine months ended September 30, 2013 and 2012, respectively)(184) 397
 6
 1,349
Insurance agency commissions232
 190
 636
 370
(Loss) gain on sale of investment securities available for sale (includes unrealized gain (loss) reclassified from accumulated other comprehensive income of $(20) and $238 for the three months ended June 30, 2014 and 2013, and $693 and $190 for the six months ended June 30, 2014 and 2013, respectively)(20) 238
 693
 190
Other373
 716
 1,584
 1,965
286
 767
 385
 1,210
38,174
 69,091
 154,673
 166,089
53,650
 57,556
 88,357
 116,499
Noninterest expense:              
Salaries and related costs39,689
 31,573
 113,330
 81,148
40,606
 38,579
 76,077
 73,641
General and administrative9,234
 7,148
 30,434
 19,304
11,145
 10,270
 21,267
 21,200
Legal844
 312
 2,054
 1,471
542
 599
 941
 1,210
Consulting884
 1,069
 2,343
 1,746
603
 763
 1,554
 1,459
Federal Deposit Insurance Corporation assessments227
 794
 937
 2,751
572
 143
 1,192
 710
Occupancy3,484
 2,279
 9,667
 6,160
4,675
 3,381
 9,107
 6,183
Information services3,552
 2,411
 10,122
 6,128
4,862
 3,574
 9,377
 6,570
Net cost of operation and sale of other real estate owned202
 348
 1,740
 8,917
(34) (597) (453) 1,538
58,116
 45,934
 170,627
 127,625
62,971
 56,712
 119,062
 112,511
Income before income taxes1,970
 34,177
 36,208
 75,115
13,826
 17,859
 16,654
 34,238
Income tax expense (includes reclassification adjustments of $(64) and $139 for the three months ended September 30, 2013 and 2012, and $2 and $472 for the nine months ended September 30, 2013 and 2012, respectively)308
 12,186
 11,538
 14,487
Income tax expense (includes reclassification adjustments of $(7) and $83 for the three months ended June 30, 2014 and 2013, and $243 and $66 for the six months ended June 30, 2014 and 2013, respectively)4,464
 5,791
 4,991
 11,230
NET INCOME$1,662
 $21,991
 $24,670
 $60,628
$9,362
 $12,068
 $11,663
 $23,008
Basic income per share$0.12
 $1.53
 $1.72
 $4.68
$0.63
 $0.84
 $0.79
 $1.60
Diluted income per share$0.11
 $1.50
 $1.67
 $4.52
$0.63
 $0.82
 $0.78
 $1.56
Basic weighted average number of shares outstanding14,388,559
 14,335,950
 14,374,943
 12,960,212
14,800,853
 14,376,580
 14,792,638
 14,368,135
Diluted weighted average number of shares outstanding14,790,671
 14,699,032
 14,793,427
 13,414,475
14,954,998
 14,785,481
 14,956,079
 14,794,805
See accompanying notes to interim consolidated financial statements (unaudited).

5



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Net income$1,662
 $21,991
 $24,670
 $60,628
$9,362
 $12,068
 $11,663
 $23,008
Other comprehensive income (loss), net of tax:              
Unrealized (loss) gain on securities:       
Unrealized holding (loss) gain arising during the period (net of tax (benefit) expense of $(362) and $1,564 for the three months ended September 30, 2013 and 2012 and $(9,845) and $3,135 for the nine months ended September 30, 2013 and 2012, respectively)(673) 3,525
 (18,283) 6,107
Reclassification adjustment included in net income (net of tax (benefit) expense of $(64) and $139 for the three months ended September 30, 2013 and 2012, and $2 and $472 for the nine months ended September 30, 2013 and 2012, respectively)120
 (258) (4) (877)
Unrealized gain (loss) on investment securities available for sale:       
Unrealized holding gain (loss) arising during the period, net of tax expense (benefit) of $2,537 and $(7,737) for the three months ended June 30, 2014 and 2013, and $6,078 and $(9,483) for the six months ended June 30, 2014 and 2013, respectively4,713
 (14,367) 11,288
 (17,610)
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $(7) and $83 for the three months ended June 30, 2014 and 2013, and $243 and $66 for the six months ended June 30, 2014 and 2013, respectively12
 (155) (451) (124)
Other comprehensive income (loss)(553) 3,267
 (18,287) 5,230
4,725
 (14,522) 10,837
 (17,734)
Comprehensive income$1,109
 $25,258
 $6,383
 $65,858
Comprehensive income (loss)$14,087
 $(2,454) $22,500
 $5,274

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

6



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
 
(in thousands, except share data)
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 Total
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 Total
                      
Balance, January 1, 20125,403,498
 $511
 $31
 $81,746
 $4,119
 $86,407
Balance, January 1, 201314,382,638
 $511
 $90,189
 $163,872
 $9,190
 $263,762
Net income
 
 
 60,628
 
 60,628

 
 
 23,008
 
 23,008
Share-based compensation
 
 2,415
 
 
 2,415
Dividends declared ($0.11 per share)
 
 
 (1,580) 
 (1,580)
Share-based compensation expense
 
 783
 
 
 783
Common stock issued24,038
 
 82
 
 
 82
Other comprehensive loss
 
 
 
 (17,734) (17,734)
Balance, June 30, 201314,406,676
 $511
 $91,054
 $185,300
 $(8,544) $268,321
           
Balance, January 1, 201414,799,991
 $511
 $94,474
 $182,935
 $(11,994) $265,926
Net income
 
 
 11,663
 
 11,663
Dividends declared ($0.11 per share)
 
 
 (1,626) 
 (1,626)
Share-based compensation expense
 
 1,199
 
 
 1,199
Common stock issued8,951,474
 
 86,818
 
 
 86,818
49,701
 
 250
 
 
 250
Other comprehensive income
 
 
 
 5,230
 5,230

 
 
 
 10,837
 10,837
Balance, September 30, 201214,354,972
 $511
 $89,264
 $142,374
 $9,349
 $241,498
           
Balance, January 1, 201314,382,638
 $511
 $90,189
 $163,872
 $9,190
 $263,762
Net income
 
 
 24,670
 
 24,670
Dividends declared
 
 
 (3,163) 
 (3,163)
Share-based compensation
 
 1,098
 
 
 1,098
Common stock issued39,716
 
 128
 
 
 128
Other comprehensive loss
 
 
 
 (18,287) (18,287)
Balance, September 30, 201314,422,354
 $511
 $91,415
 $185,379
 $(9,097) $268,208
Balance, June 30, 201414,849,692
 $511
 $95,923
 $192,972
 $(1,157) $288,249

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

7



HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,Six Months Ended June 30,
(in thousands)2013 20122014 2013
      
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income$24,670
 $60,628
$11,663
 $23,008
Adjustments to reconcile net income to net cash used in operating activities:   
Amortization/accretion of discount/premium on loans held for investment, net of additions56
 (919)
Amortization/accretion of discount/premium on investment securities5,629
 3,877
Amortization of intangibles22
 77
Amortization of mortgage servicing rights1,347
 1,551
Provision for credit losses900
 7,500
Provision for losses on other real estate owned547
 10,955
Depreciation on premises and equipment3,231
 1,864
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   
Depreciation, amortization and accretion7,152
 6,645
(Reversal of) provision for credit losses(1,500) 2,400
(Reversal of) provision for losses on other real estate owned(19) 339
Fair value adjustment of loans held for sale15,602
 (26,975)(12,660) 32,661
Fair value adjustment of foreclosed loans transferred to other real estate owned(218) (489)
Origination of mortgage servicing rights(53,627) (33,606)(20,365) (36,168)
Change in fair value of mortgage servicing rights1,493
 27,889
20,736
 (6,628)
Net gain on sale of investment securities(6) (1,349)(693) (190)
Net gain on sale of other real estate owned(526) (2,764)
Net deferred income tax expense (benefit)18,650
 (11,494)
Net fair value adjustment and gain on sale of other real estate owned(712) (618)
Loss on early retirement of long-term debt575
 
Net deferred income tax (benefit) expense(15,623) 10,883
Share-based compensation expense932
 2,415
683
 624
Origination of loans held for sale(4,151,302) (3,433,925)(1,512,392) (2,899,308)
Proceeds from sale of loans held for sale4,425,792
 3,075,401
Proceeds from sale of loans originated as held for sale1,282,100
 3,016,255
Cash used by changes in operating assets and liabilities:      
Increase in accounts receivable and other assets(36,680) (55,462)
Increase in accounts payable and other liabilities1,704
 38,691
Net cash provided by (used in) operating activities258,216
 (336,135)
Increase in other assets3,267
 (33,328)
Increase (decrease) in accounts payable and other liabilities1,546
 (1,457)
Net cash (used in) provided by operating activities(236,242) 115,118
      
CASH FLOWS FROM INVESTING ACTIVITIES:      
Purchase of investment securities(286,741) (260,566)(30,780) (221,106)
Proceeds from sale of investment securities54,166
 159,174
65,846
 50,594
Principal repayments and maturities of investment securities41,556
 28,150
24,455
 18,079
Proceeds from sale of other real estate owned17,396
 47,392
4,832
 14,697
Proceeds from sale of loans originated as held for investment266,823
 
Proceeds from sale of mortgage servicing rights39,004
 
Mortgage servicing rights purchased from others(20) (65)(5) (10)
Capital expenditures related to other real estate owned(22) (4,643)
 (22)
Origination of loans held for investment and principal repayments, net(261,379) (62)(236,854) (113,428)
Property and equipment purchased(12,683) (8,355)
Net cash used in investing activities(447,727) (38,975)
Purchase of property and equipment(11,348) (5,151)
Net cash provided by (used in) investing activities121,973
 (256,347)

8



Nine Months Ended September 30,Six Months Ended June 30,
(in thousands)2013 20122014 2013
      
CASH FLOWS FROM FINANCING ACTIVITIES:      
Increase (decrease) in deposits, net$121,241
 $(27,941)$206,891
 $(13,711)
Proceeds from Federal Home Loan Bank advances4,477,102
 4,975,490
2,492,300
 3,264,946
Repayment of Federal Home Loan Bank advances(4,397,502) (4,901,811)(2,554,800) (3,114,546)
Proceeds from securities sold under agreements to repurchase159,790
 393,500
14,681
 159,790
Repayment of securities sold under agreements to repurchase(159,790) (393,500)
 (159,790)
Proceeds from Federal Home Loan Bank stock repurchase997
 330
670
 659
Repayment of long-term debt(3,530) 
Dividends paid(1,626) 
Proceeds from stock issuance, net128
 87,791
250
 82
Excess tax benefits related to the exercise of stock options166
 
516
 159
Net cash provided by financing activities202,132
 133,859
155,352
 137,589
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS12,621
 (241,251)41,083
 (3,640)
CASH AND CASH EQUIVALENTS:      
Beginning of year25,285
 263,302
33,908
 25,285
End of period$37,906
 $22,051
$74,991
 $21,645
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid during the period for:      
Interest$24,969
 $16,642
$7,159
 $21,524
Federal and state income taxes6,796
 11,746
Federal and state income taxes (paid), net of refunds7,610
 6,714
Non-cash activities:      
Loans held for investment foreclosed and transferred to other real estate owned10,831
 37,305
2,922
 6,225
Loans transferred from held for investment to held for sale54,403
 9,966
310,455
 
Ginnie Mae loans recorded with the right to repurchase, net$3,775
 $3,330
Loans transferred from held for sale to held for investment17,095
 
Ginnie Mae loans recognized with the right to repurchase, net$833
 $2,127

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

9



HomeStreet, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the 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, Union Street Holdings LLC and Lacey Gateway 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. Although these estimates contemplate current conditions and how they are expected to change in the future, it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect the Company’s results of operations and financial condition. Management has made significant estimates in several areas, and actual results could differ materially from those estimates. Certain amounts in the financial statements from prior periods have been reclassified to conform to the current financial statement presentation.

The information furnished in these unaudited interim financial statements reflects 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 the Company’sour Annual Report on Form 10-K for the year ended December 31, 20122013, filed with the Securities and Exchange Commission (“20122013 Annual Report on Form 10-K”).

Shares outstanding and per share information presented in this Form 10-Q have been adjusted to reflect the 2-for-1 forward stock splits effective on November 5, 2012 and on March 6, 2012.

NOTE 2–SIGNIFICANT RISKS AND UNCERTAINTIES:

Regulatory Agreements

Homestreet, Inc. received notification from the Federal Reserve Bank of San Francisco that the Cease and Desist Order, dated May 18, 2009 issued by the Office of Thrift Supervision, had been terminated effective March 26, 2013.Purchase Accounting Adjustments

On December 27, 2012,6, 2013, the Company acquired two retail deposit branches and some related assets from AmericanWest Bank, had been notifieda Washington state-chartered bank. On November 1, 2013, the Company completed its acquisition of Fortune Bank and YNB Financial Services Corp. ("YNB"), the parent of Yakima National Bank. The assets acquired and liabilities assumed in the acquisitions were accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. During the second quarter of 2014, the Company completed a more detailed fair value analysis of premises and equipment assumed in the acquisition of YNB and has determined that adjustments to the acquisition-date fair value are required. The Company also determined that adjustments were required to the provisional estimates for core deposit intangibles that were assumed in all three acquisitions. As a result of these adjustments, core deposit intangibles increased by $1.1 million, premises and equipment decreased by $740 thousand, and deferred tax liabilities increased by $280 thousand, resulting in a net decrease to goodwill of $118 thousand. These immaterial measurement period adjustments and corrections of accounting errors were made in the current period as they were not material to the current or prior periods.

Recent Accounting Developments

In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The ASU applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The amendments in this ASU should be applied retrospectively to all periods presented and are effective for public business entities

10



for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, although early adoption is permitted. The Company elected to adopt this new accounting guidance as of January 1, 2014. It is being adopted prospectively, as the retrospective adjustments were not material. The Company's income tax expense for the six months ended June 30, 2014 includes discrete tax benefit items of $406 thousand related to the recognition of the cumulative effect for prior years of adoption of this new accounting guidance. 

In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 Federal Deposit Insurance Corporation (“FDIC”)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 adoption of ASU No. 2014-04 is not expected to 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 Company does not expect the new guidance to have a material impact on its consolidated statements of financial condition or results of operation.

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 Washington State Departmenttenor of Financial Institutions (“WDFI”) thatthose transactions. The amendments in this ASU are effective for public business entities for the Bank had taken appropriate corrective actions to address the memorandumfirst interim or annual period beginning after December 15, 2014. Early adoption is not permitted. The application of understanding ("MOU") in place since March 26, 2012, and consequently the Bank's MOU was terminated effective December 27, 2012. The Bank is no longer considered a “troubled institution” and is considered “well-capitalized” within the meaningthis guidance may require enhanced disclosures of the FDIC's prompt corrective action rules.

Company's repurchase agreements, but will have no impact on the Company's consolidated statements of financial condition or results of operations.



1011



NOTE 3–2–INVESTMENT SECURITIES AVAILABLE FOR SALE:SECURITIES:

The following tables settable sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
At September 30, 2013At June 30, 2014
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value

              
Mortgage-backed securities:              
Residential$147,396
 $221
 $(3,354) $144,263
$111,460
 $365
 $(1,559) $110,266
Commercial13,478
 242
 
 13,720
13,209
 465
 
 13,674
Municipal bonds152,481
 672
 (5,712) 147,441
124,772
 2,085
 (1,044) 125,813
Collateralized mortgage obligations:      
      
Residential153,460
 1,473
 (1,467) 153,466
57,614
 210
 (1,057) 56,767
Commercial17,457
 
 (466) 16,991
16,325
 
 (304) 16,021
Corporate debt securities75,888
 1
 (5,926) 69,963
74,987
 55
 (2,622) 72,420
U.S. Treasury securities27,744
 3
 
 27,747
41,966
 44
 
 42,010
$587,904
 $2,612
 $(16,925) $573,591
$440,333
 $3,224
 $(6,586) $436,971

At December 31, 2012At December 31, 2013
(in thousands)Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
Amortized
cost
 Gross
unrealized
gains
 Gross
unrealized
losses
 Fair
value
              
Mortgage-backed securities:              
Residential$62,847
 $223
 $(217) $62,853
$137,602
 $187
 $(3,879) $133,910
Commercial13,720
 660
 
 14,380
13,391
 45
 (3) 13,433
Municipal bonds123,695
 5,574
 (94) 129,175
136,937
 185
 (6,272) 130,850
Collateralized mortgage obligations:      
      
Residential163,981
 6,333
 (115) 170,199
93,112
 85
 (2,870) 90,327
Commercial8,983
 60
 
 9,043
17,333
 
 (488) 16,845
Corporate debt securities75,542
 
 (6,676) 68,866
U.S. Treasury securities30,670
 11
 (2) 30,679
27,478
 1
 (27) 27,452
$403,896
 $12,861
 $(428) $416,329
$501,395
 $503
 $(20,215) $481,683

Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored entities ("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 SeptemberJune 30, 20132014 and December 31, 20122013, 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 SeptemberJune 30, 20132014 and December 31, 20122013, substantially all securities held had ratings available by external ratings agencies.


12



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.


11



At September 30, 2013At June 30, 2014
Less than 12 months 12 months or more TotalLess 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
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value

                      
Residential mortgage-backed securities$(3,133) $121,234
 $(221) $7,361
 $(3,354) $128,595
Mortgage-backed securities:           
Residential$(19) $3,679
 $(1,540) $79,229
 $(1,559) $82,908
Municipal bonds(5,712) 97,091
 
 
 (5,712) 97,091
(48) 14,541
 (996) 44,986
 (1,044) 59,527
Collateralized mortgage obligations:                      
Residential(1,169) 50,895
 (298) 10,678
 (1,467) 61,573
(108) 9,354
 (949) 32,299
 (1,057) 41,653
Commercial(466) 16,991
 
 
 (466) 16,991

 
 (304) 16,021
 (304) 16,021
Corporate debt securities(5,926) 69,826
 
 
 (5,926) 69,826
(285) 4,770
 (2,337) 59,547
 (2,622) 64,317
$(16,406) $356,037
 $(519) $18,039
 $(16,925) $374,076
$(460) $32,344
 $(6,126) $232,082
 $(6,586) $264,426

At December 31, 2012At December 31, 2013
Less than 12 months 12 months or more TotalLess 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
Gross
unrealized
losses
 Fair
value
 Gross
unrealized
losses
 Fair
value
 Gross
unrealized
losses
 Fair
value
                      
Mortgage-backed securities:                      
Residential$(217) $18,121
 $
 $
 $(217) $18,121
$(3,767) $98,717
 $(112) $6,728
 $(3,879) $105,445
Commercial(3) 7,661
 
 
 (3) 7,661
Municipal bonds(94) 4,212
 
 
 (94) 4,212
(5,991) 106,985
 (281) 3,490
 (6,272) 110,475
Collateralized mortgage obligations:        
 
        

 

Residential(115) 13,883
 
 
 (115) 13,883
(2,120) 63,738
 (750) 15,081
 (2,870) 78,819
Commercial(488) 16,845
 
 
 (488) 16,845
Corporate debt securities(6,676) 68,844
 
 
 (6,676) 68,844
U.S. Treasury securities
 
 (2) 10,238
 (2) 10,238
(27) 25,452
 
 
 (27) 25,452
$(426) $36,216
 $(2) $10,238
 $(428) $46,454
$(19,072) $388,242
 $(1,143) $25,299
 $(20,215) $413,541

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 company-issuer- or industry-specific credit event. As of SeptemberJune 30, 20132014 and December 31, 20122013, the present value of the cash flows expected to be collectedCompany does not expect any credit losses on all of the Companyits debt securities was greater than amortized cost of those securities. In addition, as of SeptemberJune 30, 20132014 and December 31, 20122013, 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 Company did not hold any marketable equity securities as of SeptemberJune 30, 20132014 and December 31, 20122013.



1213



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, 2013At June 30, 2014
Within one year 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 TotalWithin 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
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$
 % $
 % $11,310
 1.82% $132,953
 2.18% $144,263
 2.15%$
 % $
 % $
 % $110,266
 1.80% $110,266
 1.80%
Commercial
 
 
 
 
 
 13,720
 4.49
 13,720
 4.49

 
 
 
 
 
 13,674
 4.43
 13,674
 4.43
Municipal bonds
 
 
 
 19,890
 3.51
 127,551
 4.41
 147,441
 4.29

 
 45
 3.26
 21,451
 3.41
 104,316
 4.21
 125,812
 4.07
Collateralized mortgage obligations:                                      
Residential
 
 
 
 13,643
 2.17
 139,823
 2.65
 153,466
 2.61

 
 
 
 
 
 56,767
 2.09
 56,767
 2.09
Commercial
 
 
 
 5,311
 1.85
 11,680
 1.40
 16,991
 1.54

 
 
 
 9,823
 1.98
 6,198
 1.41
 16,021
 1.76
Corporate debt securities
 
 
 
 33,238
 3.31
 36,725
 3.75
 69,963
 3.54

 
 
 
 41,206
 3.35
 31,214
 3.77
 72,420
 3.53
U.S. Treasury securities26,746
 0.24
 1,001
 0.18
 
 
 
 
 27,747
 0.23
1,001
 0.18
 41,009
 0.35
 
 
 
 
 42,010
 0.34
Total available for sale$26,746
 0.24% $1,001
 0.18% $83,392
 2.88% $462,452
 3.11% $573,591
 2.94%$1,001
 0.18% $41,054
 0.35% $72,480
 3.18% $322,435
 2.92% $436,970
 2.72%
 
At December 31, 2012At December 31, 2013
Within one year 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 TotalWithin 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
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$
 % $
 % $
 % $62,853
 2.81% $62,853
 2.81%$
 % $
 % $10,581
 1.63% $123,329
 1.82% $133,910
 1.81%
Commercial
 
 
 
 
 
 14,380
 4.03
 14,380
 4.03

 
 
 
 
 
 13,433
 4.51
 13,433
 4.51
Municipal bonds
 
 
 
 15,673
 3.64
 113,502
 4.66
 129,175
 4.53

 
 
 
 19,598
 3.51
 111,252
 4.29
 130,850
 4.17
Collateralized mortgage obligations:                                      
Residential
 
 
 
 
 
 170,199
 2.64
 170,199
 2.64

 
 
 
 19,987
 2.31
 70,340
 2.17
 90,327
 2.20
Commercial
 
 
 
 
 
 9,043
 2.06
 9,043
 2.06

 
 
 
 5,270
 1.90
 11,575
 1.42
 16,845
 1.57
Corporate debt securities
 
 
 
 32,848
 3.31
 36,018
 3.75
 68,866
 3.54
U.S. Treasury securities30,679
 0.23
 
 
 
 
 
 
 30,679
 0.23
1,001
 0.18
 26,451
 0.30
 
 
 
 
 27,452
 0.29
Total available for sale$30,679
 0.23% $
 % $15,673
 3.64% $369,977
 3.33% $416,329
 3.11%$1,001
 0.18% $26,451
 0.30% $88,284
 2.84% $365,947
 2.92% $481,683
 2.75%


1314



Sales of investment securities available for sale were as follows.
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Proceeds$1,972
 $39,635
 $52,566
 $159,174
$11,541
 $34,840
 $65,846
 $50,594
Gross gains
 434
 322
 1,780
118
 318
 895
 322
Gross losses(184) (37) (316) (431)(137) (80) (201) (132)

There were $57.649.4 million and $47.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at SeptemberJune 30, 2013 and $51.9 million in investment securities pledged to secure advances from the FHLB at December 31, 2012. At September 30, 20132014 and December 31, 20122013, respectively. At June 30, 2014 and December 31, 2013, there were $27.133.8 million and $18.637.7 million, respectively, of securities pledged to secure derivatives in a liability position. At June 30, 2014, there were $15.0 million of securities pledged under repurchase agreements and none at December 31, 2013.

Tax-exempt interest income on securities available for sale oftotaling $1.5 million863 thousand and $1.31.4 million for the three months ended SeptemberJune 30, 20132014 and 20122013, respectively, and $1.8 million and $2.7 million for the six months ended $4.2 millionJune 30, 2014 and $3.0 million for the nine months ended September 30, 2013 and 2012, respectively, was recorded in the Company's consolidated statements of operations.


NOTE 4–3–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 5,6, Loans and Credit Qualityto the Company's within our 20122013 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 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.following:
 
(in thousands)At September 30,
2013
 At December 31,
2012
At June 30,
2014
 At December 31,
2013
      
Consumer loans      
Single family$818,992
 $673,865
$749,204
 $904,913
Home equity129,785
 136,746
136,181
 135,650
948,777
 810,611
885,385
 1,040,563
Commercial loans      
Commercial real estate400,150
 361,879
476,411
 477,642
Multifamily42,187
 17,012
72,327
 79,216
Construction/land development79,435
 71,033
219,282
 130,465
Commercial business67,547
 79,576
185,177
 171,054
589,319
 529,500
953,197
 858,377
1,538,096
 1,340,111
1,838,582
 1,898,940
Net deferred loan fees and discounts(3,233) (3,576)(3,761) (3,219)
1,534,863
 1,336,535
1,834,821
 1,895,721
Allowance for loan losses(24,694) (27,561)(21,926) (23,908)
$1,510,169
 $1,308,974
$1,812,895
 $1,871,813

Loans in the amount of $675.2634.4 million and $469.8800.5 million at SeptemberJune 30, 20132014 and December 31, 20122013, respectively, were pledged to secure borrowings from the FHLB as part of our liquidity management strategy. The FHLB does not have the right to sell or re-pledge these loans.

1415




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 states of Washington, Oregon, California, Idaho and Hawaii. Loan concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or similar types of loans extended to a diverse group of borrowers that would cause them to be similarly impacted by economic or other conditions. At SeptemberJune 30, 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 27.5%, 21.8% and 10.1% of the total portfolio, respectively. At December 31, 2013 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 42.8%37.3% and 20.8% respectively. At December 31, 2012 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 40.4% and 22.5%21.2% of the total portfolio, respectively. These loans were mostly located within the metropolitan area of Puget Sound, area, particularly within King County.

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 SeptemberJune 30, 20132014. 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 theour 20122013 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, Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2013 2012 2013 2012 2014 2013 2014 2013
                
Allowance for credit losses (roll-forward):                
Beginning balance $27,858
 $27,125
 $27,751
 $42,800
 $22,317
 $28,594
 $24,089
 $27,751
(Reversal of) provision for credit losses (1,500) 5,500
 900
 7,500
Provision (reversal of provision) for credit losses 
 400
 (1,500) 2,400
(Charge-offs), net of recoveries (1,464) (4,998) (3,757) (22,673) (149) (1,136) (421) (2,293)
Ending balance $24,894
 $27,627
 $24,894
 $27,627
 $22,168
 $27,858
 $22,168
 $27,858
Components:                
Allowance for loan losses $24,694
 $27,461
 $24,694
 $27,461
 $21,926
 $27,655
 $21,926
 $27,655
Allowance for unfunded commitments 200
 166
 200
 166
 242
 203
 242
 203
Allowance for credit losses $24,894
 $27,627
 $24,894
 $27,627
 $22,168
 $27,858
 $22,168
 $27,858



16



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

Three Months Ended September 30, 2013Three Months Ended June 30, 2014
(in thousands)
Beginning
balance
 Charge-offs Recoveries (Reversal of)Provision 
Ending
balance
Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision 
Ending
balance
                  
Consumer loans                  
Single family$13,810
 $(606) $179
 $(1,251) $12,132
$9,406
 $(172) $25
 $(148) $9,111
Home equity4,879
 (377) 273
 (139) 4,636
3,882
 (136) 236
 (465) 3,517
18,689
 (983) 452
 (1,390) 16,768
13,288
 (308) 261
 (613) 12,628
Commercial loans                  
Commercial real estate5,723
 (1,306) 
 51
 4,468
4,309
 (23) 100
 (323) 4,063
Multifamily690
 
 
 80
 770
965
 
 
 (78) 887
Construction/land development1,185
 
 348
 (141) 1,392
2,003
 
 46
 369
 2,418
Commercial business1,571
 
 25
 (100) 1,496
1,752
 (288) 63
 645
 2,172
9,169
 (1,306) 373
 (110) 8,126
9,029
 (311) 209
 613
 9,540
Total allowance for credit losses$27,858
 $(2,289) $825
 $(1,500) $24,894
$22,317
 $(619) $470
 $
 $22,168
 Three Months Ended June 30, 2013
(in thousands)
Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision 
Ending
balance
          
Consumer loans         
Single family$14,478
 $(1,141) $171
 $302
 $13,810
Home equity4,708
 (299) 156
 314
 4,879
 19,186
 (1,440) 327
 616
 18,689
Commercial loans         
Commercial real estate5,958
 (340) 
 105
 5,723
Multifamily635
 
 
 55
 690
Construction/land development894
 
 281
 10
 1,185
Commercial business1,921
 
 36
 (386) 1,571
 9,408
 (340) 317
 (216) 9,169
Total allowance for credit losses$28,594
 $(1,780) $644
 $400
 $27,858

1517



 Three Months Ended September 30, 2012
(in thousands)
Beginning
balance
 Charge-offs Recoveries (Reversal of)Provision 
Ending
balance
          
Consumer loans         
Single family$12,865
 $(1,363) $22
 $2,028
 $13,552
Home equity4,851
 (1,078) 121
 1,139
 5,033
 17,716
 (2,441) 143
 3,167
 18,585
Commercial loans         
Commercial real estate4,343
 (1,757) 130
 1,020
 3,736
Multifamily923
 
 
 (151) 772
Construction/land development3,022
 (1,823) 193
 1,472
 2,864
Commercial business1,121
 (74) 631
 (8) 1,670
 9,409
 (3,654) 954
 2,333
 9,042
Total allowance for credit losses$27,125
 $(6,095) $1,097
 $5,500
 $27,627


Nine Months Ended September 30, 2013Six Months Ended June 30, 2014
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision Ending
balance
Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision 
Ending
balance
                  
Consumer loans                  
Single family$13,388
 $(2,468) $425
 $787
 $12,132
$11,990
 $(283) $41
 $(2,637) $9,111
Home equity4,648
 (1,515) 526
 977
 4,636
3,987
 (559) 326
 (237) 3,517
18,036
 (3,983) 951
 1,764
 16,768
15,977
 (842) 367
 (2,874) 12,628
Commercial loans                  
Commercial real estate5,312
 (1,449) 
 605
 4,468
4,012
 (23) 156
 (82) 4,063
Multifamily622
 
 
 148
 770
942
 
 
 (55) 887
Construction/land development1,580
 (148) 699
 (739) 1,392
1,414
 
 62
 942
 2,418
Commercial business2,201
 
 173
 (878) 1,496
1,744
 (288) 147
 569
 2,172
9,715
 (1,597) 872
 (864) 8,126
8,112
 (311) 365
 1,374
 9,540
Total allowance for credit losses$27,751
 $(5,580) $1,823
 $900
 $24,894
$24,089
 $(1,153) $732
 $(1,500) $22,168


Nine Months Ended September 30, 2012Six Months Ended June 30, 2013
(in thousands)Beginning
balance
 Charge-offs Recoveries (Reversal of)Provision Ending
balance
Beginning
balance
 Charge-offs Recoveries (Reversal of) Provision 
Ending
balance
                  
Consumer loans                  
Single family$10,671
 $(3,889) $455
 $6,315
 $13,552
$13,388
 $(1,862) $246
 $2,038
 $13,810
Home equity4,623
 (3,577) 398
 3,589
 5,033
4,648
 (1,138) 253
 1,116
 4,879
15,294
 (7,466) 853
 9,904
 18,585
18,036
 (3,000) 499
 3,154
 18,689
Commercial loans                  
Commercial real estate4,321
 (3,474) 258
 2,631
 3,736
5,312
 (143) 
 554
 5,723
Multifamily335
 
 
 437
 772
622
 
 
 68
 690
Construction/land development21,237
 (13,858) 835
 (5,350) 2,864
1,580
 (148) 351
 (598) 1,185
Commercial business1,613
 (538) 717
 (122) 1,670
2,201
 
 148
 (778) 1,571
27,506
 (17,870) 1,810
 (2,404) 9,042
9,715
 (291) 499
 (754) 9,169
Total allowance for credit losses$42,800
 $(25,336) $2,663
 $7,500
 $27,627
$27,751
 $(3,291) $998
 $2,400
 $27,858


1618



The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
At September 30, 2013At June 30, 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
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$10,676
 $1,456
 $12,132
 $745,211
 $73,781
 $818,992
$8,235
 $876
 $9,111
 $678,418
 $70,786
 $749,204
Home equity4,585
 51
 4,636
 127,226
 2,559
 129,785
3,439
 78
 3,517
 133,787
 2,394
 136,181
15,261
 1,507
 16,768
 872,437
 76,340
 948,777
11,674
 954
 12,628
 812,205
 73,180
 885,385
Commercial loans                      
Commercial real estate4,468
 
 4,468
 372,905
 27,245
 400,150
3,851
 212
 4,063
 445,130
 31,281
 476,411
Multifamily315
 455
 770
 38,997
 3,190
 42,187
485
 402
 887
 69,202
 3,125
 72,327
Construction/land development1,081
 311
 1,392
 72,768
 6,667
 79,435
2,418
 
 2,418
 213,439
 5,843
 219,282
Commercial business811
 685
 1,496
 66,022
 1,525
 67,547
1,212
 960
 2,172
 181,594
 3,583
 185,177
6,675
 1,451
 8,126
 550,692
 38,627
 589,319
7,966
 1,574
 9,540
 909,365
 43,832
 953,197
Total$21,936
 $2,958
 $24,894
 $1,423,129
 $114,967
 $1,538,096
$19,640
 $2,528
 $22,168
 $1,721,570
 $117,012
 $1,838,582
 
At December 31, 2012At December 31, 2013
(in thousands)
Allowance:
collectively
evaluated for
impairment
 
Allowance:
individually
evaluated for
impairment
 Total 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 Total
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$11,212
 $2,176
 $13,388
 $599,538
 $74,327
 $673,865
$10,632
 $1,358
 $11,990
 $831,730
 $73,183
 $904,913
Home equity4,611
 37
 4,648
 133,026
 3,720
 136,746
3,903
 84
 3,987
 133,006
 2,644
 135,650
15,823
 2,213
 18,036
 732,564
 78,047
 810,611
14,535
 1,442
 15,977
 964,736
 75,827
 1,040,563
Commercial loans                      
Commercial real estate3,682
 1,630
 5,312
 334,406
 27,473
 361,879
4,012
 
 4,012
 445,766
 31,876
 477,642
Multifamily106
 516
 622
 13,791
 3,221
 17,012
515
 427
 942
 76,053
 3,163
 79,216
Construction/land development1,092
 488
 1,580
 58,129
 12,904
 71,033
1,414
 
 1,414
 124,317
 6,148
 130,465
Commercial business680
 1,521
 2,201
 77,256
 2,320
 79,576
1,042
 702
 1,744
 168,199
 2,855
 171,054
5,560
 4,155
 9,715
 483,582
 45,918
 529,500
6,983
 1,129
 8,112
 814,335
 44,042
 858,377
Total$21,383
 $6,368
 $27,751
 $1,216,146
 $123,965
 $1,340,111
$21,518
 $2,571
 $24,089
 $1,779,071
 $119,869
 $1,898,940

Interest payments on impaired loans, applied against loan principal or recognized as interest income, of $1.2 million and $1.3 million were recorded for cash payments received during the three months ended September 30, 2013 and 2012, respectively, and $3.5 million and $4.3 million was recorded for cash payments received during the nine months ended September 30, 2013 and 2012, respectively.


1719



Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.
 
At September 30, 2013At June 30, 2014
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
          
With no related allowance recorded:          
Consumer loans          
Single family$38,138
 $41,130
 $
$38,056
 $40,366
 $
Home equity1,802
 1,868
 
1,991
 2,068
 
39,940
 42,998
 
40,047
 42,434
 
Commercial loans          
Commercial real estate27,245
 29,247
 
26,185
 29,383
 
Multifamily508
 508
 
508
 508
 
Construction/land development6,356
 16,061
 
5,843
 14,974
 
Commercial business120
 137
 
1,033
 1,911
 
34,229
 45,953
 
33,569
 46,776
 
$74,169
 $88,951
 $
$73,616
 $89,210
 $
With an allowance recorded:          
Consumer loans          
Single family$35,643
 $35,701
 $1,456
$32,730
 $32,826
 $876
Home equity757
 757
 51
403
 402
 78
36,400
 36,458
 1,507
33,133
 33,228
 954
Commercial loans          
Commercial real estate5,096
 5,325
 212
Multifamily2,682
 2,860
 455
2,617
 2,795
 402
Construction/land development311
 311
 311

 
 
Commercial business1,405
 1,534
 685
2,550
 2,824
 960
4,398
 4,705
 1,451
10,263
 10,944
 1,574
$40,798
 $41,163
 $2,958
$43,396
 $44,172
 $2,528
Total:          
Consumer loans          
Single family$73,781
 $76,831
 $1,456
Single family(3)
$70,786
 $73,192
 $876
Home equity2,559
 2,625
 51
2,394
 2,470
 78
76,340
 79,456
 1,507
73,180
 75,662
 954
Commercial loans          
Commercial real estate27,245
 29,247
 
31,281
 34,708
 212
Multifamily3,190
 3,368
 455
3,125
 3,303
 402
Construction/land development6,667
 16,372
 311
5,843
 14,974
 
Commercial business1,525
 1,671
 685
3,583
 4,735
 960
38,627
 50,658
 1,451
43,832
 57,720
 1,574
Total impaired loans$114,967
 $130,114
 $2,958
$117,012
 $133,382
 $2,528

(1)
Includes partial charge-offs and nonaccrual interest paid.
(2)
Unpaid principal balance does not include partial charge-offs or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $67.8 million in performing troubled debt restructurings ("TDRs").


1820



At December 31, 2012At December 31, 2013
(in thousands)
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
Recorded
investment (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
          
With no related allowance recorded:          
Consumer loans          
Single family$28,202
 $29,946
 $
$39,341
 $41,935
 $
Home equity2,728
 3,211
 
1,895
 1,968
 
30,930
 33,157
 
41,236
 43,903
 
Commercial loans          
Commercial real estate10,933
 12,445
 
31,876
 45,921
 
Multifamily508
 508
 
508
 508
 
Construction/land development11,097
 20,990
 
6,148
 15,299
 
Commercial business147
 162
 
1,533
 7,164
 
22,685
 34,105
 
40,065
 68,892
 
$53,615
 $67,262
 $
$81,301
 $112,795
 $
With an allowance recorded:          
Consumer loans          
Single family$46,125
 $47,553
 $2,176
$33,842
 $33,900
 $1,358
Home equity992
 1,142
 37
749
 749
 84
47,117
 48,695
 2,213
34,591
 34,649
 1,442
Commercial loans          
Commercial real estate16,540
 16,540
 1,630
Multifamily2,713
 2,891
 516
2,655
 2,832
 427
Construction/land development1,807
 1,807
 488
Commercial business2,173
 2,287
 1,521
1,322
 1,478
 702
23,233
 23,525
 4,155
3,977
 4,310
 1,129
$70,350
 $72,220
 $6,368
$38,568
 $38,959
 $2,571
Total:          
Consumer loans          
Single family$74,327
 $77,499
 $2,176
Single family(3)
$73,183
 $75,835
 $1,358
Home equity3,720
 4,353
 37
2,644
 2,717
 84
78,047
 81,852
 2,213
75,827
 78,552
 1,442
Commercial loans          
Commercial real estate27,473
 28,985
 1,630
31,876
 45,921
 
Multifamily3,221
 3,399
 516
3,163
 3,340
 427
Construction/land development12,904
 22,797
 488
6,148
 15,299
 
Commercial business2,320
 2,449
 1,521
2,855
 8,642
 702
45,918
 57,630
 4,155
44,042
 73,202
 1,129
Total impaired loans$123,965
 $139,482
 $6,368
$119,869
 $151,754
 $2,571
 
(1)Includes partial charge-offs and nonaccrual interest paid.
(2)Unpaid principal balance does not include partial charge-offs or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $70.3 million in performing TDRs.


1921



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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Consumer loans              
Single family$79,527
 $69,419
 $77,841
 $66,967
$70,977
 $81,628
 $71,713
 $79,194
Home equity3,095
 2,860
 3,345
 2,788
2,466
 3,550
 2,525
 3,607
82,622
 72,279
 81,186
 69,755
73,443
 85,178
 74,238
 82,801
Commercial loans              
Commercial real estate27,456
 31,765
 27,775
 33,439
31,771
 28,191
 31,806
 27,952
Multifamily3,194
 5,779
 3,205
 6,512
3,135
 3,204
 3,144
 3,210
Construction/land development7,218
 19,197
 9,450
 43,656
5,875
 9,115
 5,966
 10,378
Commercial business1,696
 1,792
 1,922
 1,379
3,200
 1,921
 3,085
 2,054
39,564
 58,533
 42,352
 84,986
43,981
 42,431
 44,001
 43,594
$122,186
 $130,812
 $123,538
 $154,741
$117,424
 $127,609
 $118,239
 $126,395


20



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 following tables present designated loan grades by loan portfolio segment and loan class.
 
At September 30, 2013At June 30, 2014
(in thousands)Pass Watch Special mention Substandard TotalPass Watch Special mention Substandard Total
                  
Consumer loans                  
Single family$729,682
 $48,950
 $15,587
 $24,773
 $818,992
$719,493
 $230
 $15,346
 $14,135
 $749,204
Home equity127,100
 50
 265
 2,370
 129,785
134,225
 368
 422
 1,166
 136,181
856,782
 49,000
 15,852
 27,143
 948,777
853,718
 598
 15,768
 15,301
 885,385
Commercial loans                  
Commercial real estate263,828
 86,418
 41,424
 8,480
 400,150
380,101
 71,009
 18,403
 6,898
 476,411
Multifamily37,447
 1,550
 3,190
 
 42,187
67,671
 1,531
 3,125
 
 72,327
Construction/land development65,655
 7,215
 2,920
 3,645
 79,435
209,293
 6,923
 92
 2,974
 219,282
Commercial business54,340
 7,083
 3,304
 2,820
 67,547
161,215
 19,482
 558
 3,922
 185,177
421,270
 102,266
 50,838
 14,945
 589,319
818,280
 98,945
 22,178
 13,794
 953,197
$1,278,052
 $151,266
 $66,690
 $42,088
 $1,538,096
$1,671,998
 $99,543
 $37,946
 $29,095
 $1,838,582
         
         
At December 31, 2012
(in thousands)Pass Watch Special mention Substandard Total
         
Consumer loans         
Single family$565,312
 $55,768
 $27,599
 $25,186
 $673,865
Home equity131,246
 1,337
 1,193
 2,970
 136,746
696,558
 57,105
 28,792
 28,156
 810,611
Commercial loans         
Commercial real estate217,370
 102,353
 17,931
 24,225
 361,879
Multifamily12,222
 1,569
 3,221
 
 17,012
Construction/land development21,540
 7,243
 35,368
 6,882
 71,033
Commercial business68,134
 7,914
 462
 3,066
 79,576
319,266
 119,079
 56,982
 34,173
 529,500
$1,015,824
 $176,184
 $85,774
 $62,329
 $1,340,111


22



 At December 31, 2013
(in thousands)Pass Watch Special mention Substandard Total
          
Consumer loans         
Single family$817,877
 $53,711
 $12,746
 $20,579
 $904,913
Home equity132,086
 1,442
 276
 1,846
 135,650
 949,963
 55,153
 13,022
 22,425
 1,040,563
Commercial loans         
Commercial real estate368,817
 63,579
 37,758
 7,488
 477,642
Multifamily74,509
 1,544
 3,163
 
 79,216
Construction/land development121,026
 3,414
 2,895
 3,130
 130,465
Commercial business145,760
 20,062
 586
 4,646
 171,054
 710,112
 88,599
 44,402
 15,264
 858,377
 $1,660,075
 $143,752
 $57,424
 $37,689
 $1,898,940

The Company considers ‘adversely classified assets’ to include loans graded as Substandard, Doubtful, and Loss as well as other real estate owned ("OREO"). As of SeptemberJune 30, 20132014 and December 31, 2012,2013, none of the Company's loans were rated Doubtful or Loss. The total amount of adversely classified assets was $40.2 million and $50.6 million as of June 30, 2014 and December 31, 2013, respectively. For a detailed discussion on credit quality indicators used by management, see Note 5,6, Loans and Credit Quality within theour 20122013 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.

21



The following tables presenttable presents an aging analysesanalysis of past due loans by loan portfolio segment and loan class.

At September 30, 2013At June 30, 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
still accruing(1)
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(1)
                          
Consumer loans                          
Single family$10,359
 $5,170
 $56,410
 $71,939
 $747,053
 $818,992
 $43,762
$10,967
 $3,943
 $39,020
 $53,930
 $695,274
 $749,204
 $32,032
Home equity554
 100
 2,295
 2,949
 126,836
 129,785
 
209
 368
 1,166
 1,743
 134,438
 136,181
 
10,913
 5,270
 58,705
 74,888
 873,889
 948,777
 43,762
11,176
 4,311
 40,186
 55,673
 829,712
 885,385
 32,032
Commercial loans                          
Commercial real estate
 
 6,861
 6,861
 393,289
 400,150
 

 
 9,871
 9,871
 466,540
 476,411
 
Multifamily
 
 
 
 42,187
 42,187
 

 
 
 
 72,327
 72,327
 
Construction/land development
 
 3,544
 3,544
 75,891
 79,435
 

 72
 
 72
 219,210
 219,282
 
Commercial business
 
 1,405
 1,405
 66,142
 67,547
 
759
 837
 3,172
 4,768
 180,409
 185,177
 

 
 11,810
 11,810
 577,509
 589,319
 
759
 909
 13,043
 14,711
 938,486
 953,197
 
$10,913
 $5,270
 $70,515
 $86,698
 $1,451,398
 $1,538,096
 $43,762
$11,935
 $5,220
 $53,229
 $70,384
 $1,768,198
 $1,838,582
 $32,032
             
             
At December 31, 2012
(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
still accruing(1)
             
Consumer loans             
Single family$11,916
 $4,732
 $53,962
 $70,610
 $603,255
 $673,865
 $40,658
Home equity787
 242
 2,970
 3,999
 132,747
 136,746
 
12,703
 4,974
 56,932
 74,609
 736,002
 810,611
 40,658
Commercial loans             
Commercial real estate
 
 6,403
 6,403
 355,476
 361,879
 
Multifamily
 
 
 
 17,012
 17,012
 
Construction/land development
 
 5,042
 5,042
 65,991
 71,033
 
Commercial business
 
 2,173
 2,173
 77,403
 79,576
 

 
 13,618
 13,618
 515,882
 529,500
 
$12,703
 $4,974
 $70,550
 $88,227
 $1,251,884
 $1,340,111
 $40,658
(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.

23



 At December 31, 2013
(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
(1)
              
Consumer loans             
Single family$6,466
 $4,901
 $55,672
 $67,039
 $837,874
 $904,913
 $46,811
Home equity375
 75
 1,846
 2,296
 133,354
 135,650
 
 6,841
 4,976
 57,518
 69,335
 971,228
 1,040,563
 46,811
Commercial loans             
Commercial real estate
 
 12,257
 12,257
 465,385
 477,642
 
Multifamily
 
 
 
 79,216
 79,216
 
Construction/land development
 
 
 
 130,465
 130,465
 
Commercial business
 
 2,743
 2,743
 168,311
 171,054
 
 
 
 15,000
 15,000
 843,377
 858,377
 
 $6,841
 $4,976
 $72,518
 $84,335
 $1,814,605
 $1,898,940
 $46,811

(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.

22




The following tables present accrualperforming and nonaccrualnonperforming loan balances by loan portfolio segment and loan class.
 
 At September 30, 2013
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family$806,344
 $12,648
 $818,992
Home equity127,490
 2,295
 129,785
 933,834
 14,943
 948,777
Commercial loans     
Commercial real estate393,289
 6,861
 400,150
Multifamily42,187
 
 42,187
Construction/land development75,891
 3,544
 79,435
Commercial business66,142
 1,405
 67,547
 577,509
 11,810
 589,319
 $1,511,343
 $26,753
 $1,538,096
At December 31, 2012At June 30, 2014
(in thousands)Accrual Nonaccrual TotalAccrual Nonaccrual Total
          
Consumer loans          
Single family$660,561
 $13,304
 $673,865
$742,216
 $6,988
 $749,204
Home equity133,776
 2,970
 136,746
135,015
 1,166
 136,181
794,337
 16,274
 810,611
877,231
 8,154
 885,385
Commercial loans          
Commercial real estate355,476
 6,403
 361,879
466,540
 9,871
 476,411
Multifamily17,012
 
 17,012
72,327
 
 72,327
Construction/land development65,991
 5,042
 71,033
219,282
 
 219,282
Commercial business77,403
 2,173
 79,576
182,005
 3,172
 185,177
515,882
 13,618
 529,500
940,154
 13,043
(1) 
953,197
$1,310,219
 $29,892
 $1,340,111
$1,817,385
 $21,197
 $1,838,582

The Company had 194 loan relationships classified as troubled debt restructurings (“TDRs”) totaling $109.4 million at September 30, 2013 with related unfunded commitments of $41 thousand. The Company had 162 loan relationships classified as TDRs totaling $110.8 million at December 31, 2012 with related unfunded commitments of $25 thousand. The increase in the number of TDR loan relationships at September 30, 2013 from December 31, 2012 is primarily due to an increase in the number of single family loan TDRs, partially offset by a decline in the number of commercial construction/land development loan TDRs. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above.
(1)Includes $6.5 million of nonperforming loans at June 30, 2014 that are guaranteed by the Small Business Association ("SBA").


2324



Troubled Debt Restructurings
 At December 31, 2013
(in thousands)Accrual Nonaccrual Total
      
Consumer loans     
Single family$896,052
 $8,861
 $904,913
Home equity133,804
 1,846
 135,650
 1,029,856
 10,707
 1,040,563
Commercial loans     
Commercial real estate465,385
 12,257
 477,642
Multifamily79,216
 
 79,216
Construction/land development130,465
 
 130,465
Commercial business168,311
 2,743
 171,054
 843,377
 15,000
(1) 
858,377
 $1,873,233
 $25,707
 $1,898,940

(1)Includes $6.5 million of nonperforming loans at December 31, 2013 that are guaranteed by the SBA.


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

At Three Months Ended September 30, 2013Three Months Ended June 30, 2014
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 
Related charge-
offs
Concession type 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
            
Consumer loans            
Single family            
Interest rate reduction 27
 $5,538
 $
Interest rate reduction 15
 $2,430
 $
Payment restructure 
 
 
Home equity            
Interest rate reduction 2
 132
 
Interest rate reduction 
 
 
Total consumer            
Interest rate reduction 29
 $5,670
 $
Interest rate reduction 15
 2,430
 
Payment restructure 
 
 
 15
 2,430
 
      
Commercial loans      
Commercial real estate      
Payment restructure 2
 2,092
 
Commercial business      
Forgiveness of principal 1
 208
 288
Total commercial      
Payment restructure 2
 2,092
 
Forgiveness of principal 1
 208
 288
 3
 2,300
 288
Total loans            
Interest rate reduction 29
 $5,670
 $
Interest rate reduction 15
 2,430
 
Payment restructure 2
 2,092
 
Forgiveness of principal 1
 $208
 $288
 18
 $4,730
 $288

 At Three Months Ended September 30, 2012
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 
Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 4
 $960
 $
Home equity       
 Interest rate reduction 1
 48
 
Total consumer       
 Interest rate reduction 5
 $1,008
 $
Commercial loans       
Commercial real estate       
 Interest rate reduction 1
 $5,012
 $
Total loans       
 Interest rate reduction 6
 $6,020
 $


 At Nine Months Ended September 30, 2013
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 
Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 51
 $11,300
 $
Home equity       
 Interest rate reduction 5
 301
 
Total consumer       
 Interest rate reduction 56
 $11,601
 $
Total loans       
 Interest rate reduction 56
 $11,601
 $

2425



At Nine Months Ended September 30, 2012Three Months Ended June 30, 2013
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 
Related charge-
offs
Concession type 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
            
Consumer loans            
Single family            
Interest rate reduction 28
 $9,092
 $58
Interest rate reduction 36
 $8,007
 $
Payment restructure 1
 273
 
 29
 $9,365
 $58
Home equity            
Interest rate reduction 6
 $492
 $
Interest rate reduction 3
 77
 
Total consumer            
Interest rate reduction 34
 $9,584
 $58
Interest rate reduction 39
 8,084
 
Payment restructure 1
 273
 
 35
 $9,857
 $58
Commercial loans      
Commercial real estate      
Interest rate reduction 2
 $5,779
 $
Total loans            
Interest rate reduction 36
 $15,363
 $58
Interest rate reduction 39
 $8,084
 $
Payment restructure 1
 273
 
 37
 $15,636
 $58


 Six Months Ended June 30, 2014
(dollars in thousands)Concession type 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 24
 $4,187
 $
 Payment restructure 2
 365
 
Total consumer       
 Interest rate reduction 24
 4,187
 
 Payment restructure 2
 365
 
   26
 4,552
 
        
Commercial loans       
Commercial real estate       
 Payment restructure 3
 4,248
 
Commercial business       
 Interest rate reduction 2
 117
 
 Forgiveness of principal 1
 208
 288
Total commercial       
 Interest rate reduction 2
 117
 
 Payment restructure 3
 4,248
 
 Forgiveness of principal 1
 208
 288
   6
 4,573
 288
Total loans       
 Interest rate reduction 26
 4,304
 
 Payment restructure 5
 4,613
 
 Forgiveness of principal 1
 $208
 $288
   32
 $9,125
 $288


26



 Six Months Ended June 30, 2013
(dollars in thousands)Concession type 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
        
Consumer loans       
Single family       
 Interest rate reduction 63
 $13,848
 $
Home equity       
 Interest rate reduction 6
 248
 
Total consumer       
 Interest rate reduction 69
 14,096
 
   69
 14,096
 
Total loans       
 Interest rate reduction 69
 $14,096
 $

The following table presentstables present loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013, 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,Three Months Ended June 30,
2013 20122014 2013
(dollars in thousands)Number of loan relationships that re-defaulted 
Recorded
investment
 Number of loan relationships that re-defaulted 
Recorded
investment
Number of loan relationships that re-defaulted 
Recorded
investment
 Number of loan relationships that re-defaulted 
Recorded
investment
              
Consumer loans              
Single family7
 $1,017
 18
 $4,290
2
 $425
 1
 $133
Home equity
 
 
 

 
 
 
7
 1,017
 18
 4,290
2
 425
 1
 133
Commercial loans       
Commercial real estate
 
 1
 7,716
Construction/land development
 
 
 
Commercial business
 
 1
 21

 
 2
 7,737
2
 $425
 1
 $133
7
 $1,017
 20
 $12,027
 

 Six Months Ended June 30,
 2014 2013
(dollars in thousands)Number of loan relationships that re-defaulted 
Recorded
investment
 Number of loan relationships that re-defaulted 
Recorded
investment
        
Consumer loans       
Single family4
 $728
 7
 $1,556
Home equity1
 190
 1
 22
 5
 918
 8
 1,578
Commercial loans       
Commercial real estate
 
 1
 770
 
 
 1
 770
 5
 $918
 9
 $2,348


2527



 Nine Months Ended September 30,
 2013 2012
(dollars in thousands)Number of loan relationships that re-defaulted Recorded
investment
 Number of loan relationships that re-defaulted Recorded
investment
        
Consumer loans       
Single family14
 $2,573
 41
 $9,551
Home equity1
 22
 1
 34
 15
 2,595
 42
 9,585
Commercial loans       
Commercial real estate1
 770
 1
 7,716
Construction/land development
 
 
 
Commercial business
 
 3
 410
 1
 770
 4
 8,126
 16
 $3,365
 46
 $17,711


NOTE 5–4–DEPOSITS:

Deposit balances, including stated rates, were as follows.
 
(in thousands)At September 30,
2013
 At December 31,
2012
    
Noninterest-bearing accounts$351,274
 $358,831
NOW accounts 0.00% to 0.75% at September 30, 2013 and December 31, 2012272,029
 174,699
Statement savings accounts, due on demand 0.20% to 1.00% at September 30, 2013 and 0.20% to 0.85% at December 31, 2012135,428
 103,932
Money market accounts, due on demand 0.00% to 1.50% at September 30, 2013 and December 31, 2012879,122
 683,906
Certificates of deposit 0.10% to 3.92% at September 30, 2013 and 0.10% to 4.70% at December 31, 2012460,223
 655,467
 $2,098,076
 $1,976,835
(in thousands)At June 30,
2014
 At December 31,
2013
    
Noninterest-bearing accounts$472,255
 $322,952
NOW accounts, 0.00% to 1.00% at June 30, 2014 and 0.00% to 0.75% at December 31, 2013324,604
 297,966
Statement savings accounts, due on demand, 0.10% to 2.00% at June 30, 2014 and 0.20% to 2.00% at December 31, 2013166,851
 156,181
Money market accounts, due on demand, 0.00% to 1.45% at June 30, 2014 and 0.00% to 1.50% at December 31, 2013996,473
 919,322
Certificates of deposit, 0.10% to 3.80% at June 30, 2014 and 0.10% to 3.80% at December 31, 2013457,529
 514,400
 $2,417,712
 $2,210,821

There were no$1.9 million in public funds included in deposits as of SeptemberJune 30, 20132014 and none at December 31, 20122013.

Interest expense on deposits was as follows.
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
NOW accounts$265
 $129
 $656
 $368
$286
 $233
 $546
 $391
Statement savings accounts140
 113
 358
 289
211
 114
 411
 218
Money market accounts1,060
 858
 2,890
 2,394
1,080
 973
 2,101
 1,830
Certificates of deposit757
 2,808
 4,174
 9,934
779
 1,047
 1,658
 3,417
$2,222
 $3,908
 $8,078
 $12,985
$2,356
 $2,367
 $4,716
 $5,856

The weighted-average interest rates on certificates of deposit at SeptemberJune 30, 20132014 and December 31, 20122013 were 0.63%0.67% and 1.59%0.71%, respectively.

Certificates of deposit outstanding as of September 30, 2013, mature as follows.
 

26



(in thousands)At September 30, 2013At June 30, 2014
  
Within one year$377,372
$321,986
One to two years31,189
78,911
Two to three years36,728
43,864
Three to four years9,157
9,948
Four to five years5,777
2,820
$460,223
$457,529

The aggregate amount of time deposits in denominations of $100 thousand or more at SeptemberJune 30, 20132014 and December 31, 20122013 was $143.7208.0 million and $300.4216.5 million, respectively. The aggregate amount of time deposits in denominations of more than $250 thousand at SeptemberJune 30, 20132014 and December 31, 20122013 was $15.020.9 million and $45.326.3 million, respectively. There were $158.0119.9 million in brokered deposits as of September 30, 2013 and none$144.3 million of brokered deposits atJune 30, 2014 and December 31, 20122013., respectively.



28



NOTE 6–5–DERIVATIVES AND HEDGING ACTIVITIES:

In order toTo 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 cash flow or foreign currency hedge instruments at SeptemberJune 30, 20132014 or December 31, 20122013. Derivatives are reported at their respective fair values in the accounts receivable and other assets or the 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 accounts receivable and 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 3,2, Investment Securities Available for Saleof this Form 10-Q for further information on securities collateral pledged. As ofAt SeptemberJune 30, 20132014 and December 31, 20122013, 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 11,12, Derivatives and Hedging Activities within theour 20122013 Annual Report on Form 10-K.


27



The notional amounts and fair values for derivatives consist of the following.
 
At September 30, 2013At June 30, 2014
Notional amount Fair value derivativesNotional amount Fair value derivatives
(in thousands)  Asset Liability  Asset Liability
          
Forward sale commitments$677,538
 $2,357
 $(10,871)$1,122,581
 $1,473
 $(8,210)
Interest rate swaptions305,000
 136
 
25,000
 29
 
Interest rate lock commitments388,977
 13,753
 (76)594,953
 17,441
 (35)
Interest rate swaps500,997
 4,611
 (13,176)479,111
 5,908
 (5,137)
Total derivatives before netting$1,872,512
 20,857
 (24,123)$2,221,645
 24,851
 (13,382)
Netting adjustments  (5,635) 5,635
  (737) 737
Carrying value on consolidated statements of financial condition  $15,222
 $(18,488)  $24,114
 $(12,645)
 

29



At December 31, 2012At December 31, 2013
Notional amount Fair value derivativesNotional amount Fair value derivatives
(in thousands)  Asset Liability  Asset Liability
          
Forward sale commitments$1,258,152
 $621
 $(2,743)$526,382
 $3,630
 $(578)
Interest rate swaptions110,000
 858
 (199)
Interest rate lock commitments734,762
 22,548
 (20)261,070
 6,012
 (40)
Interest rate swaps361,892
 538
 (9,358)508,004
 1,088
 (9,548)
Total derivatives before netting$2,354,806
 23,707
 (12,121)$1,405,456
 11,588
 (10,365)
Netting adjustments  (1,052) 1,052
  (1,363) 1,363
Carrying value on consolidated statements of financial condition  $22,655
 $(11,069)  $10,225
 $(9,002)
 
The following tables present gross and net information about derivative instruments.
At September 30, 2013At June 30, 2014
(in thousands)Gross fair value Netting adjustments Carrying value 
Cash collateral paid (1)
 Securities pledged Net amountGross fair value Netting adjustments Carrying value 
Cash collateral paid (1)
 Securities pledged Net amount
                      
Derivative assets:                      
Forward sale commitments$2,357
 $(992) $1,365
 $
 $
 $1,365
$1,473
 $(799) $674
 $
 $
 $674
Interest rate swaps / swaptions4,747
 (4,643) 104
 
 
 104
5,937
 62
 5,999
 
 
 5,999
Total derivatives subject to legally enforceable master netting agreements7,104
 (5,635) 1,469
 
 
 1,469
7,410
 (737) 6,673
 
 
 6,673
Interest rate lock commitments13,753
 
 13,753
 
 
 13,753
17,441
 
 17,441
 
 
 17,441
Total derivative assets$20,857
 $(5,635) $15,222
 $
 $
 $15,222
$24,851
 $(737) $24,114
 $
 $
 $24,114
                      
Derivative liabilities:                      
Forward sale commitments$(10,871) $992
 $(9,879) $8,273
 $1,467
 $(139)$(8,210) $799
 $(7,411) $6,433
 $820
 $(158)
Interest rate swaps(13,176) 4,643
 (8,533) 7,928
 605
 
(5,137) (62) (5,199) 5,063
 135
 (1)
Total derivatives subject to legally enforceable master netting agreements(24,047) 5,635
 (18,412) 16,201
 2,072
 (139)(13,347) 737
 (12,610) 11,496
 955
 (159)
Interest rate lock commitments(76) 
 (76) 
 
 (76)(35) 
 (35) 
 
 (35)
Total derivative liabilities$(24,123) $5,635
 $(18,488) $16,201
 $2,072
 $(215)$(13,382) $737
 $(12,645) $11,496
 $955
 $(194)


2830



At December 31, 2012At December 31, 2013
(in thousands)Gross fair value Netting adjustments Carrying value 
Cash collateral paid (1)
 Net amountGross fair value Netting adjustments Carrying value 
Cash collateral paid (1)
 Securities pledged Net amount
                    
Derivative assets:                    
Forward sale commitments$621
 $(621) $
 $
 $
$3,630
 $(33) $3,597
 $
 $
 $3,597
Interest rate swaps538
 (431) 107
 
 107
1,946
 (1,330) 616
 
 
 616
Total derivatives subject to legally enforceable master netting agreements1,159
 (1,052) 107
 
 107
5,576
 (1,363) 4,213
 
 
 4,213
Interest rate lock commitments22,548
 
 22,548
 
 22,548
6,012
 
 6,012
 
 
 6,012
Total derivative assets$23,707
 $(1,052) $22,655
 $
 $22,655
$11,588
 $(1,363) $10,225
 $
 $
 $10,225
                    
Derivative liabilities:                    
Forward sale commitments$(2,743) $621
 $(2,122) $1,953
 $(169)$(578) $33
 $(545) $115
 $410
 $(20)
Interest rate swaps(9,358) 431
 (8,927) 8,927
 
(9,747) 1,330
 (8,417) 8,376
 41
 
Total derivatives subject to legally enforceable master netting agreements(12,101) 1,052
 (11,049) 10,880
 (169)(10,325) 1,363
 (8,962) 8,491
 451
 (20)
Interest rate lock commitments(20) 
 (20) 
 (20)(40) 
 (40) 
 
 (40)
Total derivative liabilities$(12,121) $1,052
 $(11,069) $10,880
 $(189)$(10,365) $1,363
 $(9,002) $8,491
 $451
 $(60)

(1)
Excludes cash collateral of $27.6$20.6 million and $18.0$18.5 million at SeptemberJune 30, 20132014 and December 31, 20122013, 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 SeptemberJune 30, 20132014 and December 31, 20122013.

The ineffective portion of net gain (loss) on derivatives in fair value hedging relationships, recognized in other noninterest income on the consolidated statements of operations, for loans held for investment were $10(19) thousand and $16$75 thousand for the three months ended SeptemberJune 30, 20132014 and 20122013, respectively, and $12 thousand and $106 thousand for the six months ended $116 thousandJune 30, 2014 and $64 thousand for the nine months ended September 30, 2013 and 2012, respectively.

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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Recognized in noninterest income:              
Net gain on mortgage loan origination and sale activities (1)
$(37,017) $891
 $(17,368) $11,456
$(4,580) $21,014
 $(6,014) $19,649
Mortgage servicing income (2)
3,631
 4,861
 (12,392) 24,600
Mortgage servicing income (loss) (2)
10,941
 (13,505) 20,838
 (16,023)
$(33,386) $5,752
 $(29,760) $36,056
$6,361
 $7,509
 $14,824
 $3,626
 
(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 mortgage servicing rights MSRs.



2931



NOTE 7–6–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
(in thousands)At September 30,
2013
 At December 31,
2012
At June 30,
2014
 At December 31,
2013
      
Single family$385,110
 $607,578
$536,657
(1) 
$279,385
Multifamily
 13,221
12,783
 556
$385,110
 $620,799
$549,440
 $279,941
(1)
The Company transferred $310.5 million of loans from the held for investment portfolio into loans held for sale in March of this year and subsequently sold $266.8 million of these loans. At June 30, 2014, the Company had transferred $17.1 million of these loans back to the held for investment portfolio.


Loans sold consisted of the following.
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Single family$1,326,888
 $1,238,879
 $3,916,918
 $2,735,893
$906,342
 $1,229,686
 $1,526,255
 $2,590,030
Multifamily21,998
 26,515
 87,971
 85,116
15,902
 15,386
 22,165
 65,973
$1,348,886
 $1,265,394
 $4,004,889
 $2,821,009
$922,244
 $1,245,072
 $1,548,420
 $2,656,003

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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Single family:              
Servicing value and secondary marketing gains(1)
$23,076
 $56,142
 $110,760
 $120,471
Provision for repurchase losses(2)

 (526) 
 (2,846)
Net gain from secondary marketing activities23,076
 55,616
 110,760
 117,625
Servicing value and secondary market gains(1)
$30,233
 $43,448
 $49,792
 $87,683
Loan origination and funding fees8,302
 8,680
 24,363
 20,817
6,781
 8,267
 11,542
 16,062
Total single family31,378
 64,296
 135,123
 138,442
37,014
 51,715
 61,334
 103,745
Multifamily2,113
 1,040
 4,747
 3,241
693
 709
 1,089
 2,634
Other4,087
 
 4,881
 
Total net gain on mortgage loan origination and sale activities$33,491
 $65,336
 $139,870
 $141,683
$41,794
 $52,424
 $67,304
 $106,379
 
(1)
ComprisedComprised 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.
(2)
Represents changes in estimated probable futurethe Company's repurchase losses on previously sold loans.liability for loans that have been sold.



3032



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,
2013
 At December 31,
2012
At June 30,
2014
 At December 31,
2013
      
Single family      
U.S. government and agency$10,950,086
 $8,508,458
$9,308,096
 $11,467,853
Other336,158
 362,230
586,978
 327,768
11,286,244
 8,870,688
9,895,074
 11,795,621
Commercial      
Multifamily722,767
 727,118
704,997
 720,429
Other50,629
 53,235
97,996
 95,673
773,396
 780,353
802,993
 816,102
Total loans serviced for others$12,059,640
 $9,651,041
$10,698,067
 $12,611,723

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 8,7, 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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Beginning balance$1,810
 $2,119
 $1,955
 $471
Balance, beginning of period$1,142
 $1,975
 $1,260
 $1,955
Additions (1)
505
 1,018
 1,513
 3,624
313
 472
 552
 1,008
Realized losses (2)
(717) (1,202) (1,870) (2,160)(220) (637) (577) (1,153)
Balance, end of period$1,598
 $1,935
 $1,598
 $1,935
$1,235
 $1,810
 $1,235
 $1,810
 
(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 $7.58.7 million and $5.97.1 million were recorded in accounts receivable and other assets as of SeptemberJune 30, 20132014 and December 31, 20122013, 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 SeptemberJune 30, 20132014 and December 31, 20122013, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $11.813.5 million and $8.014.3 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.


3133



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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Servicing income, net:              
Servicing fees and other$8,934
 $7,168
 $24,497
 $20,310
$10,112
 $7,955
 $19,961
 $15,562
Changes in fair value of single family MSRs due to modeled amortization (1)
(5,221) (5,360) (16,896) (14,382)(7,109) (6,964) (13,077) (12,639)
Amortization of multifamily MSRs(433) (598) (1,347) (1,551)(434) (423) (858) (913)
3,280
 1,210
 6,254
 4,377
2,569
 568
 6,026
 2,010
Risk management, single family MSRs:              
Changes in fair value due to changes in model inputs and/or assumptions (2)
(2,900) (5,565) 15,403
 (13,507)(3,326)
(3) 
15,120
 (8,735)
(3) 
19,268
Net gain (loss) from derivatives economically hedging MSR3,631
 4,861
 (12,392) 24,600
10,941
 (13,505) 20,838
 (16,023)
731
 (704) 3,011
 11,093
7,615
 1,615
 12,103
 3,245
Mortgage servicing income$4,011
 $506
 $9,265
 $15,470
$10,184
 $2,183
 $18,129
 $5,255
 
(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 the three months ended June 30, 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,Three Months Ended June 30, Six Months Ended June 30,
(rates per annum) (1)
2013 2012 2013 20122014 2013 2014 2013
              
Constant prepayment rate ("CPR") (2)
8.39% 11.62% 8.87% 11.11%13.71% 8.77% 12.79% 9.12%
Discount rate10.21% 10.24% 10.25% 10.29%11.06% 10.28% 10.80% 10.27%
 
(1)Weighted average rates for sales during the period for sales of loans with similar characteristics.
(2)Represents the expected lifetime average.


3234



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, 2013At June 30, 2014
  
Fair value of single family MSR$136,897
$108,869
Expected weighted-average life (in years)6.91
5.42
Constant prepayment rate (1)
11.63%14.97%
Impact on 10% adverse change$(6,893)
Impact on 25% adverse change$(14,523)
Impact on 25 basis points adverse change$(5,798)
Impact on 50 basis points adverse change$(12,097)
Discount rate10.50%10.70%
Impact on fair value of 100 basis points increase$(5,314)$(3,488)
Impact on fair value of 200 basis points increase$(10,232)$(6,761)
 
(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.

On June 30, 2014, the Company successfully closed the sale of the rights to service $2.96 billion in total unpaid principal balance of single family mortgage loans serviced for Fannie Mae, representing 24.3% of HomeStreet’s total single family mortgage loans serviced for others portfolio as of March 31, 2014. The sale resulted in a $4.7 million pre-tax increase in mortgage servicing income during the quarter. The Company expects to finalize the servicing transfer for these loans by October 1, 2014, and is subservicing these loans until the transfer date. These loans are excluded from the Company's MSR portfolio at June 30, 2014.

The changes in single family MSRs measured at fair value are as follows.
 
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Beginning balance$128,146
 $70,585
 $87,396
 $70,169
$149,646
 $102,678
 $153,128
 $87,396
Additions and amortization:       
Originations16,862
 14,121
 50,974
 31,442
11,827
 17,306
 19,720
 34,112
Purchases10
 6
 19
 65
3
 6
 5
 9
Sale of single family MSRs(43,248) 
 (43,248) 
Changes due to modeled amortization(1)
(5,221) (5,360) (16,896) (14,382)(7,109) (6,964) (13,077) (12,639)
Net additions and amortization11,651
 8,767
 34,097
 17,125
(38,527) 10,348
 (36,600) 21,482
Changes in fair value due to changes in model inputs and/or assumptions (2)
(2,900) (5,565) 15,404
 (13,507)(2,250) 15,120
 (7,659) 19,268
Ending balance$136,897
 $73,787
 $136,897
 $73,787
$108,869
 $128,146
 $108,869
 $128,146
 
(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. Includes pre-tax income of $5.7 million, excluding transaction costs, resulting from the sale of single family MSRs during the three months ended June 30, 2014.


35



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.


33



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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Beginning balance$9,239
 $7,655
 $8,097
 $7,112
$9,095
 $9,150
 $9,335
 $8,097
Origination597
 668
 2,652
 2,164
461
 512
 644
 2,055
Amortization(433) (598) (1,346) (1,551)(434) (423) (857) (913)
Ending balance$9,403
 $7,725
 $9,403
 $7,725
$9,122
 $9,239
 $9,122
 $9,239

At SeptemberJune 30, 20132014, the expected weighted-average life of the Company’s multifamily MSRs was 9.099.21 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)At September 30, 2013At June 30, 2014
  
Remainder of 2013$417
20141,566
Remainder of 2014$802
20151,402
1,510
20161,287
1,400
20171,162
1,278
2018 and thereafter3,569
20181,120
2019 and thereafter3,012
Carrying value of multifamily MSR$9,403
$9,122



34



NOTE 87–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.

In the ordinary course of business, theThe Company makes certain unfunded loan commitments as part of its residentiallending 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 generally in the form of a written confirmation fromand interest rate lock commitments on loans the Company intends to the sellerhold in its loans held for investment portfolio. The aggregate amount of a property that we will advance the specified funds enabling the buyer to complete the purchase of the property. Unfundedthese unrecognized unfunded loan commitments totaledexisting at $445.8 millionJune 30, 2014 ($380.3 million fixed-rate and $65.5 millionDecember 31, 2013 adjustable-rate commitments) atwas September 30, 2013$38.0 million and $768.918.4 million ($746.8 million fixed-rate and $22.1 million adjustable-rate commitments) at December 31, 2012., respectively.

In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. CommitmentsThese commitments, which primarily related to unused home equity and commercial real estate lines of credit and business banking funding lines totaled $112.2146.7 million and $91.1154.0 million at SeptemberJune 30, 20132014 and December 31, 20122013, respectively. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $97.2292.8 million and $34.5168.5 million at SeptemberJune 30, 20132014 and December 31, 20122013, 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 $200$242 thousand and $190$181 thousand at SeptemberJune 30, 20132014 and December 31, 20122013, respectively.


36



Guarantees

In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS®”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, and are no longer on the Company's consolidated statements of financial condition, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of SeptemberJune 30, 20132014 and December 31, 20122013, the total unpaid principal balance of loans sold under this program was $722.8$705.0 million and $727.1720.4 million, respectively. The Company’s reserve liability related to this arrangement totaled $2.0 million andat both $3.3 million at SeptemberJune 30, 20132014 and December 31, 20122013, respectively.. There were no actual losses incurred under this arrangement during the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013.

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 poolssells 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

1 DUS® is a registered trademark of Fannie Mae
35




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 $11.349.99 billion and $8.9211.89 billion as of SeptemberJune 30, 20132014 and December 31, 20122013, respectively. At SeptemberJune 30, 20132014 and December 31, 20122013, 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 $1.61.2 million and $2.01.3 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 SeptemberJune 30, 20132014, 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 SeptemberJune 30, 20132014.



37



NOTE 9–8–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 17,18, Fair Value Measurement within theour 20122013 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 resultsfair 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 certain 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-

36



basedmarket-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.


38



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 maturityObservable 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, including 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
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  
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 Policieswithin the 2012 Annual Report on of this Form 10-K10-Q..



Estimated fair value classified as Level 3.
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.


3739



Asset/Liability class  Valuation methodology, inputs and assumptions  Classification
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 76, 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 effective December 31, 2012.


Other real estate owned (“OREO”)  Fair value is based on appraised value of collateral.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 payableusing discounted cash flows based on demand at the reporting date.market rates and expected life.  
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.



3840



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, 2013 Level 1 Level 2 Level 3Fair Value at June 30, 2014 Level 1 Level 2 Level 3
              
Assets:              
Investment securities available for sale              
Mortgage backed securities:              
Residential$144,263
 $
 $144,263
 $
$110,266
 $
 $110,266
 $
Commercial13,720
 
 13,720
 
13,674
 
 13,674
 
Municipal bonds147,441
 
 147,441
 
125,813
 
 125,813
 
Collateralized mortgage obligations:              
Residential153,466
 
 153,466
 
56,767
 
 56,767
 
Commercial16,991
 
 16,991
 
16,021
 
 16,021
 
Corporate debt securities69,963
 
 69,963
 
72,420
 
 72,420
 
U.S. Treasury securities27,747
 
 27,747
 
42,010
 
 42,010
 
Single family mortgage servicing rights136,897
 
 
 136,897
108,869
 
 
 108,869
Single family loans held for sale385,110
 
 385,110
 
536,658
 
 536,658
 
Derivatives              
Forward sale commitments2,357
 
 2,357
 
1,473
 
 1,473
 
Interest rate swaptions136
 
 136
 
29
 
 29
 
Interest rate lock commitments13,753
 
 
 13,753
17,441
 
 
 17,441
Interest rate swaps4,611
 
 4,611
 
5,908
 
 5,908
 
Total assets$1,116,455
 $
 $965,805
 $150,650
$1,107,349
 $
 $981,039
 $126,310
Liabilities:              
Derivatives              
Forward sale commitments$10,871
 $
 $10,871
 $
$8,210
 $
 $8,210
 $
Interest rate lock commitments76
 
 
 76
35
 
 
 35
Interest rate swaps13,176
 
 13,176
 
5,137
 
 5,137
 
Total liabilities$24,123
 $
 $24,047
 $76
$13,382
 $
 $13,347
 $35



3941



(in thousands)Fair Value at December 31, 2012 Level 1 Level 2 Level 3Fair Value at December 31, 2013 Level 1 Level 2 Level 3
              
Assets:              
Investment securities available for sale              
Mortgage backed securities:              
Residential$62,853
 $
 $62,853
 $
$133,910
 $
 $133,910
 $
Commercial14,380
 
 14,380
 
13,433
 
 13,433
 
Municipal bonds129,175
 
 129,175
 
130,850
 
 130,850
 
Collateralized mortgage obligations:              
Residential170,199
 
 170,199
 
90,327
 
 90,327
 
Commercial9,043
 
 9,043
 
16,845
 
 16,845
 
Corporate debt securities68,866
 
 68,866
 
U.S. Treasury securities30,679
 
 30,679
 
27,452
 
 27,452
 
Single family mortgage servicing rights87,396
 
 
 87,396
153,128
 
 
 153,128
Single family loans held for sale607,578
 
 607,578
 
279,385
 
 279,385
 
Derivatives              
Forward sale commitments621
 
 621
 
3,630
 
 3,630
 
Interest rate swaptions858
 
 858
 
Interest rate lock commitments22,548
 
 
 22,548
6,012
 
 
 6,012
Interest rate swaps538
 
 538
 
1,088
 
 1,088
 
Total assets$1,135,010
 $
 $1,025,066
 $109,944
$925,784
 $
 $766,644
 $159,140
Liabilities:              
Derivatives              
Forward sale commitments$2,743
 $
 $2,743
 $
$578
 $
 $578
 $
Interest rate swaptions199
 
 199
 
Interest rate lock commitments20
 
 
 20
40
 
 
 40
Interest rate swaps9,358
 
 9,358
 
9,548
 
 9,548
 
Total liabilities$12,121
 $
 $12,101
 $20
$10,365
 $
 $10,325
 $40

There were no transfers between levels of the fair value hierarchy during the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights and as of December 31, 2012, 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 ninesix months ended SeptemberJune 30, 20132014 and 20122013, see Note 7,6, Mortgage Banking Operations. of this Form 10-Q.


42



The following table presents fair value changes and activity for level 3 interest rate lock commitments.
Three Months Ended June 30, Six Months Ended June 30,
(in thousands)Three Months Ended
September 30,
 Nine Months Ended
September 30,
2014 2013 2014 2013
          
Beginning balance, net$406
 $22,528
$10,094
 $20,842
 $5,972
 $22,528
Total realized/unrealized gains(1)
28,538
 102,231
34,495
 28,151
 54,662
 73,693
Settlements(15,267) (111,082)(27,183) (48,587) (43,228) (95,815)
Ending balance, net$13,677
 $13,677
$17,406
 $406
 $17,406
 $406

(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 statementstatements of operations. For the three and nine months ended September 30, 2013 thereThere were net unrealized (losses) gains of $17.1 million and $(550) thousand for the three months ended $13.3 millionJune 30, 2014 and $13.72013, respectively, and $26.9 million and $325 thousand of net unrealized gains (losses) for the six months ended June 30, 2014 and 2013, respectively, recognized on interest rate lock commitments outstanding at the beginning of the period and still outstanding at SeptemberJune 30, 2014 and 2013., respectively.
In the first quarter of 2013, the Company refined the valuation methodology used for interest rate lock commitments to reflect assumptions that the Company believes a market participant would consider under current market conditions. This change in

40



accounting estimate resulted in an increase in fair value of $4.3 million to the Company's interest rate lock commitments outstanding at March 31, 2013.

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, 2013At June 30, 2014
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted AverageFair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
                      
Interest rate lock commitments, net$13,677
 Income approach Fall out factor 0.5% 100.0% 16.4%$17,406
 Income approach Fall out factor 0.7% 82.8% 18.2%
  Value of servicing 0.36% 2.14% 0.98%  Value of servicing 0.59% 2.59% 1.39%

(dollars in thousands)At December 31, 2012
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock commitments, net$22,528
 Income Approach Fall out factor 0.4% 59.3% 16.8%
     Value of servicing 0.50% 2.18% 1.04%
The fair value of interest rate lock commitments decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in the other significant unobservable input.
(dollars in thousands)At December 31, 2013
Fair Value 
Valuation
Technique
 
Significant Unobservable
Input
 Low High Weighted Average
            
Interest rate lock commitments, net$5,972
 Income approach Fall out factor 0.5% 97.0% 17.8%
     Value of servicing 0.62% 2.65% 1.22%

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.

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. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property and the Company's experience with actual liquidation values. During the three months ended June 30, 2014, the Company used a fair value of collateral technique to apply an adjustment to the appraisal value of certain commercial loans held for investment using a range of discount rates of 6.3% to 68.1%, with a weighted average rate of 35.2%. During the six months ended June 30, 2014, the

43



Company used a range of discounts of 6.3% to 68.1%, with a weighted average rate of 24.4%. During the three and six months ended June 30, 2013, the Company did not apply any adjustments to the appraisal value of loans held for investment or OREO.

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 may increase or decrease an appraised value and can 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 were recorded at fair value during the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 and still held at the end of the respective reporting period.

Three Months Ended September 30, 2013Three Months Ended June 30, 2014
(in thousands)Fair Value of Assets Held at September 30, 2013 Level 1 Level 2 Level 3 Total Gains (Losses)Fair Value of Assets Held at June 30, 2014 Level 1 Level 2 Level 3 Total Gains (Losses)
                  
Loans held for investment(1)
$37,853
 $
 $
 $37,853
 $(760)$21,890
 $
 $
 $21,890
 $(899)
Other real estate owned(2)
1,847
 
 
 1,847
 (174)6,772
 
 
 6,772
 24
Total$39,700
 $
 $
 $39,700
 $(934)$28,662
 $
 $
 $28,662
 $(875)

 Three Months Ended September 30, 2012
(in thousands)Fair Value of Assets Held at September 30, 2012 Level 1 Level 2 Level 3 Total Losses
          
Loans held for investment(1)
$34,699
 $
 $
 $34,699
 $(1,817)
Other real estate owned(2)
5,738
 
 
 5,738
 (2,464)
Total$40,437
 $
 $
 $40,437
 $(4,281)



41



Nine Months Ended September 30, 2013Three Months Ended June 30, 2013
(in thousands)Fair Value of Assets Held at September 30, 2013 Level 1 Level 2 Level 3 Total Gains (Losses)Fair Value of Assets Held at June 30, 2013 Level 1 Level 2 Level 3 Total Gains (Losses)
                  
Loans held for investment(1)
$37,853
 $
 $
 $37,853
 $(1,510)$50,362
 $
 $
 $50,362
 $422
Other real estate owned(2)
10,398
 
 
 10,398
 (2,589)7,600
 
 
 7,600
 (339)
Total$48,251
 $
 $
 $48,251
 $(4,099)$57,962
 $
 $
 $57,962
 $83

Nine Months Ended September 30, 2012Six Months Ended June 30, 2014
(in thousands)Fair Value of Assets Held at September 30, 2012 Level 1 Level 2 Level 3 Total LossesFair Value of Assets Held at June 30, 2014 Level 1 Level 2 Level 3 Total Gains (Losses)
                  
Loans held for investment(1)
$35,659
 $
 $
 $35,659
 $(5,324)$21,890
 $
 $
 $21,890
 $(410)
Other real estate owned(2)
11,035
 
 
 11,035
 (5,554)6,772
 
 
 6,772
 24
Total$46,694
 $
 $
 $46,694
 $(10,878)$28,662
 $
 $
 $28,662
 $(386)

 Six Months Ended June 30, 2013
(in thousands)Fair Value of Assets Held at June 30, 2013 Level 1 Level 2 Level 3 Total Gains (Losses)
          
Loans held for investment(1)
$50,362
 $
 $
 $50,362
 $592
Other real estate owned(2)
7,600
 
 
 7,600
 (739)
Total$57,962
 $
 $
 $57,962
 $(147)
 
(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.

The following table presents significant Level 3 unobservable inputs used to measure fair value on a nonrecurring basis during the nine months ended September 30, 2013 and the three and nine months ended September 30, 2012 for assets still held at the end of the period. For the three months ended September 30, 2013 there were no significant unobservable inputs used to measure fair value on a nonrecurring basis.
(dollars in thousands)
Fair Value of Assets Held at September 30, 2013 (1)
 
Valuation
Technique
 
Significant Unobservable
Input
 
Nine Months Ended September 30,
 2013
   Low High Weighted Average
            
Loans held for investment$14,605
 Market approach 
Comparable sale adjustments(2)
 0% 45% 20%
 14,605
 Income approach Capitalization rate 6.4% 10.8% 8.2%
     Discount rate 8.2% 9.5% 8.9%
Other real estate owned$5,814
 Market approach 
Comparable sale adjustments(2)
 0% 50% 25%

(dollars in thousands)
Fair Value of Assets Held at September 30, 2012 (1)
 
Valuation
Technique
 
Significant Unobservable
Input
 
Three Months Ended September 30,
 2012
   Low High Weighted Average
            
Loans held for investment$34,699
 Market approach 
Comparable sale adjustments(2)
 3% 45% 24%
 10,462
 Income approach Capitalization rate 5.0% 9.0% 7.0%
Other real estate owned$5,738
 Market approach 
Comparable sale adjustments(2)
 1% 13% 7%



4244



(dollars in thousands)
Fair Value of Assets Held at September 30, 2012 (1)
 
Valuation
Technique
 
Significant Unobservable
Input
 
Nine Months Ended September 30,
 2012
   Low High Weighted Average
            
Loans held for investment$35,659
 Market approach 
Comparable sale adjustments(2)
 1% 45% 23%
     
Other discounts(3)
 28% 74% 51%
 10,975
 Income approach Capitalization rate 6.0% 11.0% 8.5%
Other real estate owned$11,035
 Market approach 
Comparable sale adjustments(2)
 0% 70% 35%
     
Other discounts(3)
 4% 64% 34%

(1)Assets that are valued using more than one valuation technique are presented within multiple categories for each valuation technique used. Excludes unobservable inputs that we consider, both individually and in the aggregate, to have been insignificant relative to our overall nonrecurring Level 3 measurements recorded during the period.
(2)Represents the range of net adjustments reflecting differences between a comparable sale and the property being appraised, expressed as an absolute value.
(3)Includes bulk sale discounts applied to the aggregate retail value of tract development properties, accelerated marketing period discounts and time-hold or other discounts applied to derive the “as is” market value of certain properties requiring a holding period before reaching a state of feasibility or completion (e.g., “upon completion” or "upon stabilization" value) and management discounts based on the Company's experience with actual liquidation values.

The Company's property appraisals are primarily based on the market approach and income approach methodologies, which consider recent sales of comparable properties, including their income generating characteristics, and then make adjustments to reflect the general assumptions that a market participant would make when analyzing the property for purchase. These adjustments may increase or decrease an appraised value and can vary significantly depending on the location, physical characteristics and income producing potential of each individual property. Additionally, 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 comparable sale adjustments. Given these variations, comparable sale adjustments are generally not a reliable indicator for how fair value will increase or decrease from period to period. Under certain circumstances, management discounts are applied based on specific characteristics of an individual property and the Company's experience with actual liquidation values.

In addition to the instruments disclosed in the table above, certain nonrecurring fair value measurements of residential
properties were 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.


43



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, 2013At June 30, 2014
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
                  
Assets:                  
Cash and cash equivalents$37,906
 $37,906
 $37,906
 $
 $
$74,991
 $74,991
 $74,991
 $
 $
Investment securities held to maturity17,995
 18,277
 
 18,277
 
Loans held for investment1,510,169
 1,525,432
 
 
 1,525,432
1,812,895
 1,878,817
 
 
 1,878,817
Loans held for sale - transferred from held for investment27,500
 28,443
 
 28,443
 
Loans held for sale – multifamily12,783
 12,783
 
 12,783
 
Mortgage servicing rights – multifamily9,403
 10,899
 
 
 10,899
9,122
 10,799
 
 
 10,799
Federal Home Loan Bank stock35,370
 35,370
 
 35,370
 
34,618
 34,618
 
 34,618
 
Liabilities:                  
Deposits$2,098,076
 $1,982,714
 $
 $1,982,714
 $
$2,417,712
 $2,300,855
 $
 $2,300,855
 $
Federal Home Loan Bank advances338,690
 341,555
 
 341,555
 
384,090
 386,995
 
 386,995
 
Securities sold under agreements to repurchase14,681
 14,681
 
 14,681
 
Long-term debt61,857
 60,239
 
 60,239
 
61,857
 60,242
 
 60,242
 
 
At December 31, 2012At December 31, 2013
(in thousands)
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
Carrying
Value
 
Fair
Value
 Level 1 Level 2 Level 3
                  
Assets:                  
Cash and cash equivalents$25,285
 $25,285
 $25,285
 $
 $
$33,908
 $33,908
 $33,908
 $
 $
Investment securities held to maturity17,133
 16,887
 
 16,887
 
Loans held for investment1,308,974
 1,340,882
 
 
 1,340,882
1,871,813
 1,900,349
 
 
 1,900,349
Loans held for sale – multifamily13,221
 14,810
 
 14,810
 
556
 556
 
 556
 
Mortgage servicing rights – multifamily8,097
 9,497
 
 
 9,497
9,335
 10,839
 
 
 10,839
Federal Home Loan Bank stock36,367
 36,367
 
 36,367
 
35,288
 35,288
 
 35,288
 
Liabilities:                  
Deposits$1,976,835
 $1,979,925
 $
 $1,979,925
 $
$2,210,821
 $2,058,533
 $
 $2,058,533
 $
Federal Home Loan Bank advances259,090
 263,209
 
 263,209
 
446,590
 449,109
 
 449,109
 
Long-term debt61,857
 60,241
 
 60,241
 
64,811
 63,849
 
 63,849
 

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 $440 thousand2.3 million and $216977 thousand at SeptemberJune 30, 20132014 and December 31, 20122013, respectively.



4445



NOTE 10–9–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share for the three and nine months ended September 30, 2013 and 2012.share.
 
For the Three Months Ended
September 30,
 For the Nine Months Ended
September 30,
Three Months Ended June 30, Six Months Ended June 30,
(in thousands, except share and per share data)2013 2012 2013 20122014 2013 2014 2013
              
Net income$1,662
 $21,991
 $24,670
 $60,628
$9,362
 $12,068
 $11,663
 $23,008
Weighted average shares:              
Basic weighted-average number of common shares outstanding14,388,559
 14,335,950
 14,374,943
 12,960,212
14,800,853
 14,376,580
 14,792,638
 14,368,135
Dilutive effect of outstanding common stock equivalents (1)
402,112
 363,082
 418,484
 454,263
154,145
 408,901
 163,441
 426,670
Diluted weighted-average number of common stock outstanding14,790,671
 14,699,032
 14,793,427
 13,414,475
14,954,998
 14,785,481
 14,956,079
 14,794,805
Earnings per share:              
Basic earnings per share$0.12
 $1.53
 $1.72
 $4.68
$0.63
 $0.84
 $0.79
 $1.60
Diluted earnings per share$0.11
 $1.50
 $1.67
 $4.52
$0.63
 $0.82
 $0.78
 $1.56
 
(1)
Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013 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 112,765106,266 and 50,978109,336 at SeptemberJune 30, 20132014 and 20122013, respectively.


NOTE 10–SHARE-BASED COMPENSATION PLANS:

For the three months ended June 30, 2014 and 2013, $337 thousand and $255 thousand of compensation costs, respectively, were recognized for share-based compensation awards. For the six months ended June 30, 2014 and 2013, $683 thousand and $535 thousand of compensation costs, respectively, was recognized for share-based compensation awards.

2014 Equity Incentive Plan

In May 2014, the shareholders approved the Company's 2014 Equity Incentive Plan (the “2014 EIP”). Under the 2014 EIP, all of the Company’s officers, employees, directors and/or consultants are eligible to receive awards. Awards which may be granted under the 2014 EIP include incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, unrestricted stock, performance share awards and performance compensation awards. The maximum amount of HomeStreet, Inc. common stock available for grant under the 2014 EIP is 900,000, which includes shares of common stock that were still available for issuance under the 2010 Plan and the 2011 Plan.


46



Nonqualified Stock Options

The Company grants nonqualified options to key senior management personnel. A summary of changes in nonqualified stock options granted for the six months ended June 30, 2014, is as follows.
 Number 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term (in yrs.)
 
Aggregate
Intrinsic Value (2)
(in thousands)
        
Options outstanding at December 31, 2013654,216
 $11.54
 8.1 $5,559
Cancelled or forfeited(9,688) 11.00
 7.6 71
Exercised(43,504) 2.98
 6.6 734
Options outstanding at June 30, 2014601,024
 12.16
 7.7 3,837
Options that are exercisable and expected to be exercisable (1)
597,647
 12.17
 7.7 3,813
Options exercisable365,171
 11.34
 7.6 2,599
(1)Adjusted for estimated forfeitures.
(2)Intrinsic value is the amount by which fair value of the underlying stock exceeds the exercise price.

Under this plan, 43,504 options have been exercised during the six months ended June 30, 2014, resulting in cash received and related income tax benefits totaling $130 thousand. At June 30, 2014, there was $700 thousand of total unrecognized compensation costs related to stock options. Compensation costs are recognized over the requisite service period, which typically is the vesting period. Unrecognized compensation costs are expected to be recognized over the remaining weighted-average requisite service period of 0.8 years.

Restricted Shares

The Company grants restricted shares to key senior management personnel and directors. A summary of the status of restricted shares follows.
 Number 
Weighted
Average
Grant Date Fair Value
    
Restricted shares outstanding at December 31, 201353,951
 $18.18
Granted74,645
 17.99
Vested(5,394) 11.00
Restricted shares outstanding at June 30, 2014123,202
 18.38
Nonvested at June 30, 2014123,202
 18.38

At June 30, 2014, there was $1.9 million of total unrecognized compensation costs related to nonvested restricted shares. Unrecognized compensation costs are generally expected to be recognized over a weighted average period of 2.5 years. Restricted shares granted to non-employee directors vest one-third at each one year anniversary from the grant date.

Certain restricted stock awards granted to senior management during the second quarter of 2014 contain both service conditions and performance conditions. Performance share units ("PSUs") are stock awards where the number of shares ultimately received by the employee depends on the company’s performance against specified targets and vest over a three-year period. The fair value of each PSU is determined on the grant date, based on the company’s stock price, and assumes that performance targets will be achieved. Over the performance period, the number of shares of stock that will be issued is adjusted upward or downward based upon the probability of achievement of performance targets. The ultimate number of shares issued and the related compensation cost recognized as expense will be based on a comparison of the final performance metrics to the specified targets. Compensation cost will be recognized over the requisite three-year service period on a straight-line basis and adjusted for changes in the probability that the performance targets will be achieved.


47



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.

As a result of a change in the manner in which management evaluates strategic decisions, commencing with the second quarter of 2013, the Company realigned its business segments and organized them into two lines of business: Commercial and Consumer Banking segment and Mortgage Banking segment. In conjunction with this realignment, the Company modified its internal reporting to provide discrete financial information to management for these two business segments. The information that follows has been revised to reflect the current business segments.

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

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 and business portfolio loans; non-deposit investment products; insurance products and cash management services. We originate residential and commercial 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 commercialmultifamily real estate loans including multifamily lending through our Fannie Mae DUS business, whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. This segment is also responsible for the management of the Company's portfolio of investment securities.

Mortgage Banking originates and purchases single family residential mortgage loans for sale in the secondary markets. We have become a rated originator and servicer of non-conforming jumbo loans, allowing us to sell these loans to other securitizers. We also purchase loans from Windermere Mortgage ServicesWMS 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. 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.


45



Financial highlights by operating segment were as follows.

 Three Months Ended September 30, 2013
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
      
Condensed income statement:     
Net interest income (1)
$4,493
 $15,919
 $20,412
(Reversal of) provision for credit losses
 (1,500) (1,500)
Noninterest income36,945
 1,229
 38,174
Noninterest expense44,539
 13,577
 58,116
Income (loss) before income taxes(3,101) 5,071
 1,970
Income tax expense (benefit)(911) 1,219
 308
Net income (loss)$(2,190) $3,852
 $1,662
Average assets$656,697
 $2,129,597
 $2,786,294


 Three Months Ended September 30, 2012
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
      
Condensed income statement:     
Net interest income (1)
$4,424
 $12,096
 $16,520
Provision for credit losses
 5,500
 5,500
Noninterest income66,617
 2,474
 69,091
Noninterest expense32,632
 13,302
 45,934
Income (loss) before income taxes38,409
 (4,232) 34,177
Income tax expense (benefit)14,090
 (1,904) 12,186
Net income (loss)$24,319
 $(2,328) $21,991
Average assets$670,715
 $1,772,975
 $2,443,690

Nine Months Ended September 30, 2013Three Months Ended June 30, 2014
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
          
Condensed income statement:          
Net interest income (1)
$12,375
 $40,687
 $53,062
$3,744
 $19,403
 $23,147
Provision for credit losses
 900
 900

 
 
Noninterest income149,517
 5,156
 154,673
47,036
 6,614
 53,650
Noninterest expense127,879
 42,748
 170,627
42,537
 20,434
 62,971
Income before income taxes34,013
 2,195
 36,208
8,243
 5,583
 13,826
Income tax expense (benefit)11,663
 (125) 11,538
Income tax expense2,634
 1,830
 4,464
Net income$22,350
 $2,320
 $24,670
$5,609
 $3,753
 $9,362
Average assets$641,336
 $1,996,713
 $2,638,049
$584,256
 $2,478,073
 $3,062,329



4648



Nine Months Ended September 30, 2012Three Months Ended June 30, 2013
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
          
Condensed income statement:          
Net interest income (1)
$9,697
 $34,454
 $44,151
$3,625
 $13,790
 $17,415
Provision for credit losses
 7,500
 7,500

 400
 400
Noninterest income158,832
 7,257
 166,089
54,780
 2,776
 57,556
Noninterest expense80,777
 46,848
 127,625
42,807
 13,905
 56,712
Income (loss) before income taxes87,752
 (12,637) 75,115
Income tax expense (benefit)16,935
 (2,448) 14,487
Net income (loss)$70,817
 $(10,189) $60,628
Income before income taxes15,598
 2,261
 17,859
Income tax expense5,510
 281
 5,791
Net income$10,088
 $1,980
 $12,068
Average assets$506,098
 $1,870,076
 $2,376,174
$581,361
 $2,018,573
 $2,599,934

 Six Months Ended June 30, 2014
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
      
Condensed income statement:     
Net interest income (1)
$6,223
 $39,636
 $45,859
(Reversal of) provision for credit losses
 (1,500) (1,500)
Noninterest income78,785
 9,572
 88,357
Noninterest expense79,335
 39,727
 119,062
Income before income taxes5,673
 10,981
 16,654
Income tax expense1,879
 3,112
 4,991
Net income$3,794
 $7,869
 $11,663
Average assets$508,109
 $2,534,399
 $3,042,508

 Six Months Ended June 30, 2013
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 Total
      
Condensed income statement:     
Net interest income (1)
$7,733
 $24,917
 $32,650
Provision for credit losses
 2,400
 2,400
Noninterest income110,387
 6,112
 116,499
Noninterest expense82,747
 29,764
 112,511
Income (loss) before income taxes35,373
 (1,135) 34,238
Income tax expense (benefit)12,046
 (816) 11,230
Net income (loss)$23,327
 $(319) $23,008
Average assets$593,817
 $1,954,068
 $2,547,885
 
(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.



49



NOTE 12–SUBSEQUENT EVENTS:

On November 1, 2013, the Company completed its acquisition of Fortune Bank and YNB Financial Services Corp. (“YNB”), the parent of Yakima National Bank. The Company acquired allhas evaluated subsequent events through the time of the voting equity interests of Fortune Bankfiling this Quarterly Report on Form 10-Q and YNB. Immediately following completion of the acquisitions, YNB was merged into HomeStreet, Inc. Additionally, Fortune Bank and Yakima National Bank were merged into HomeStreet Bank. The combined organization had approximately $3.10 billion in assets on a pro forma basis as of September 30, 2013.
The primary objective for the acquisitions is to grow the Company’s Commercial and Consumer Banking business. Additionally, the acquisition of Yakima National Bank expands the Company's geographic footprint, which is consistent with our ongoing growth strategy. The operating results of the Company for the three months ended September 30, 2013 do not include the operating results of Fortune Bank and YNB as the acquisition did not close until November 1, 2013. It is not practical to present financial information relatedhas concluded that there are no significant events that occurred subsequent to the acquisitions atbalance sheet date but prior to the filing of this time becausereport that would have a material impact on the fair value measurement of assets acquired and liabilities assumed has not been finalized.
On October 24, 2013, the Company announced that its board of directors approved a common stock dividend of $0.11 per share, payable on November 25, 2013 to shareholders of record as of November 4, 2013.consolidated financial statements.



4750



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. All statements other than statements of historical fact are “forward-looking statements” for the purposes of these provisions. 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.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 acquisitions;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;”
implementation of new capital requirements under the Basel III rules and related regulations;
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 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 completemaintain our pending acquisitionsdata security, including unauthorized electronic access, physical custody and effectively integrate those into our operations;inadvertent disclosure, and including potential reputational harm and litigation risks;
general economic conditions, either nationally or in our market area, including increases in mortgage interest rates, declines in housing refinance activities, employment trends, business contraction, consumer confidence, real estate values and other recessionary pressures;
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;
compliance with regulatory requirements, including laws and regulations such as those related to the Dodd-Frank Act and new rules being promulgated under that Act, 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 takingwhich took effect in

51



January 2014, as well as in monetary policies and economic trends and initiatives as those events affect our mortgage origination and servicing operations;

48



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.

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


4952



Summary Financial Data
 At or for the Quarter Ended 
At or for the Nine
Months Ended
 At or for the Quarter Ended 
At or for the Six
Months Ended
(dollars in thousands, except share data) Sept. 30,
2013
 Jun. 30,
2013
 Mar. 31,
2013
 Dec. 31,
2012
 Sept. 30,
2012
 Sept. 30,
2013
 Sept. 30,
2012
 Jun. 30,
2014
 Mar. 31,
2014
 Dec. 31,
2013
 Sept. 30,
2013
 Jun. 30,
2013
 Jun. 30,
2014
 Jun. 30,
2013
                            
Income statement data (for the period ended):                            
Net interest income $20,412
 $17,415
 $15,235
 $16,591
 $16,520
 $53,062
 $44,151
 $23,147
 $22,712
 $21,382
 $20,412
 $17,415
 $45,859
 $32,650
(Reversal of) provision for credit losses (1,500) 400
 2,000
 4,000
 5,500
 900
 7,500
Provision (reversal of provision) for credit losses 
 (1,500) 
 (1,500) 400
 (1,500) 2,400
Noninterest income 38,174
 57,556
 58,943
 71,932
 69,091
 154,673
 166,089
 53,650
 34,707
 36,072
 38,174
 57,556
 88,357
 116,499
Noninterest expense 58,116
 56,712
 55,799
 55,966
 45,934
 170,627
 127,625
 62,971
 56,091
 58,868
 58,116
 56,712
 119,062
 112,511
Net income before taxes 1,970
 17,859
 16,379
 28,557
 34,177
 36,208
 75,115
Income tax expense 308
 5,791
 5,439
 7,060
 12,186
 11,538
 14,487
Net income $1,662
 $12,068
 $10,940
 $21,497
 $21,991
 $24,670
 $60,628
Basic earnings per common
share (1)
 $0.12
 $0.84
 $0.76
 $1.50
 $1.53
 $1.72
 $4.68
Diluted earnings per common share (1)
 $0.11
 $0.82
 $0.74
 $1.46
 $1.50
 $1.67
 $4.52
Net income before tax expense (benefit) 13,826
 2,828
 (1,414) 1,970
 17,859
 16,654
 34,238
Income tax expense (benefit) 4,464
 527
 (553) 308
 5,791
 4,991
 11,230
Net income (loss) $9,362
 $2,301
 $(861) $1,662
 $12,068
 $11,663
 $23,008
Basic earnings (loss) per common share $0.63
 $0.16
 $(0.06) $0.12
 $0.84
 $0.79
 $1.60
Diluted earnings (loss) per common share $0.63
 $0.15
 $(0.06) $0.11
 $0.82
 $0.78
 $1.56
Common shares outstanding (1)
 14,422,354
 14,406,676
 14,400,206
 14,382,638
 14,354,972
 14,422,354
 14,354,972
 14,849,692
 14,846,519
 14,799,991
 14,422,354
 14,406,676
 14,849,692
 14,406,676
Weighted average common shares:                            
Basic 14,388,559
 14,376,580
 14,359,691
 14,371,120
 14,335,950
 14,374,943
 12,960,212
 14,800,853
 14,784,424
 14,523,405
 14,388,559
 14,376,580
 14,792,638
 14,368,135
Diluted 14,790,671
 14,785,481
 14,804,129
 14,714,166
 14,699,032
 14,793,427
 13,414,475
 14,954,998
 14,947,864
 14,523,405
 14,790,671
 14,785,481
 14,956,079
 14,794,805
Shareholders’ equity per share $18.60
 $18.62
 $18.78
 $18.34
 $16.82
 $18.60
 16.82
 $19.41
 $18.42
 $17.97
 $18.60
 $18.62
 $19.41
 18.62
Financial position (at period end):                            
Cash and cash equivalents $37,906
 $21,645
 $18,709
 $25,285
 $22,051
 $37,906
 $22,051
 $74,991
 $47,714
 $33,908
 $37,906
 $21,645
 $74,991
 $21,645
Investment securities available for sale 573,591
 538,164
 415,238
 416,329
 414,050
 573,591
 414,050
Investment securities 454,966
 446,639
 498,816
 574,894
 539,480
 454,966
 539,480
Loans held for sale 385,110
 471,191
 430,857
 620,799
 535,908
 385,110
 535,908
 549,440
 588,465
 279,941
 385,110
 471,191
 549,440
 471,191
Loans held for investment, net 1,510,169
 1,416,439
 1,358,982
 1,308,974
 1,268,703
 1,510,169
 1,268,703
 1,812,895
 1,662,623
 1,871,813
 1,510,169
 1,416,439
 1,812,895
 1,416,439
Mortgage servicing rights 146,300
 137,385
 111,828
 95,493
 81,512
 146,300
 81,512
 117,991
 158,741
 162,463
 146,300
 137,385
 117,991
 137,385
Other real estate owned 12,266
 11,949
 21,664
 23,941
 17,003
 12,266
 17,003
 11,083
 12,089
 12,911
 12,266
 11,949
 11,083
 11,949
Total assets 2,854,323
 2,776,124
 2,508,251
 2,631,230
 2,511,269
 2,854,323
 2,511,269
 3,235,676
 3,124,812
 3,066,054
 2,854,323
 2,776,124
 3,235,676
 2,776,124
Deposits 2,098,076
 1,963,123
 1,934,704
 1,976,835
 1,981,814
 2,098,076
 1,981,814
 2,417,712
 2,371,358
 2,210,821
 2,098,076
 1,963,123
 2,417,712
 1,963,123
FHLB advances 338,690
 409,490
 183,590
 259,090
 131,597
 338,690
 131,597
Federal Home Loan Bank advances 384,090
 346,590
 446,590
 338,690
 409,490
 384,090
 409,490
Repurchase agreements 14,681
 
 
 
 
 14,681
 
Shareholders’ equity 268,208
 268,321
 270,405
 263,762
 241,499
 268,208
 241,499
 288,249
 273,510
 265,926
 268,208
 268,321
 288,249
 268,321
Financial position (averages):                            
Investment securities available for sale $556,862
 $512,475
 $422,761
 $418,261
 $411,916
 $497,857
 $408,320
Investment securities $447,458
 $477,384
 $565,869
 $556,862
 $512,475
 $462,338
 $467,865
Loans held for investment 1,475,011
 1,397,219
 1,346,100
 1,297,615
 1,270,652
 1,406,582
 1,304,526
 1,766,788
 1,830,330
 1,732,955
 1,475,011
 1,397,219
 1,798,384
 1,371,801
Total interest-earning assets 2,474,397
 2,321,195
 2,244,563
 2,244,727
 2,187,059
 2,347,560
 2,140,383
 2,723,687
 2,654,078
 2,624,287
 2,474,397
 2,321,195
 2,689,075
 2,283,090
Total interest-bearing deposits 1,488,076
 1,527,732
 1,543,645
 1,609,075
 1,625,437
 1,519,615
 1,656,874
 1,900,681
 1,880,358
 1,662,180
 1,488,076
 1,527,732
 1,890,576
 1,535,644
FHLB advances 374,682
 307,296
 147,097
 122,516
 112,839
 277,192
 83,523
Federal Home Loan Bank advances 350,271
 323,832
 343,366
 374,682
 307,296
 337,125
 227,639
Repurchase agreements 
 10,913
 
 558
 18,478
 3,638
 23,597
 1,129
 
 
 
 10,913
 568
 5,487
Total interest-bearing liabilities 2,045,155
 1,917,098
 1,752,599
 1,794,006
 1,818,611
 1,906,023
 1,825,851
 2,313,937
 2,267,904
 2,232,456
 2,045,155
 1,917,098
 2,291,049
 1,835,302
Shareholders’ equity 271,286
 280,783
 274,355
 262,163
 231,361
 275,463
 193,308
 284,365
 272,596
 268,328
 271,286
 280,783
 278,513
 277,588

5053



Summary Financial Data (continued)
 At or for the Quarter Ended At or for the Nine
Months Ended
 At or for the Quarter Ended At or for the Six
Months Ended
 
(dollars in thousands, except share data) Sept. 30,
2013
 Jun. 30,
2013
 Mar. 31,
2013
 Dec. 31,
2012
 Sept. 30,
2012
 Sept. 30,
2013
 Sept. 30,
2012
 Jun. 30,
2014
 Mar. 31,
2014
 Dec. 31,
2013
 Sept. 30,
2013
 Jun. 30,
2013
 Jun. 30,
2014
 Jun. 30,
2013
 
                             
Financial performance:                             
Return on average common shareholders’
equity (2)
 2.45% 17.19% 15.95% 32.80% 38.02% 11.94% 41.82%
Return on average assets 0.24% 1.86% 1.75% 3.46% 3.60% 1.25% 3.40%
Return on average shareholders’
equity (1)
 13.17% 3.38% (1.28)% 2.45% 17.19% 8.38% 16.58% 
Return on average total assets 1.22% 0.30% (0.12)% 0.24% 1.86% 0.77% 1.81% 
Net interest
margin (3)(2)
 3.41% 3.10% 2.81%
(4) 
3.06% 3.12% 3.12%
(4) 
2.83% 3.48% 3.51% 3.34 % 3.41% 3.10% 3.49% 2.96%
(3) 
Efficiency ratio (5)(4)
 99.20% 75.65% 75.22% 63.22% 53.65% 82.14% 60.70% 82.00% 97.69% 102.46 % 99.20% 75.65% 88.71% 75.44% 
Asset quality:                             
Allowance for credit losses $24,894
 $27,858
 $28,594
 $27,751
 $27,627
 $24,894
 $27,627
 $22,168
 $22,317
 $24,089
 $24,894
 $27,858
 $22,168
 $27,858
 
Allowance for loan losses/total loans 1.61% 1.92% 2.05% 2.06% 2.12% 1.61% 2.12% 1.19%
(5) 
1.31%
(5) 
1.26 %
(5) 
1.61% 1.92% 1.19% 1.92% 
Allowance for loan losses/nonaccrual loans 92.30% 93.11% 88.40% 92.20% 71.80% 92.30% 71.80% 103.44% 96.95% 93.00 % 92.30% 93.11% 103.44% 93.11% 
Total nonaccrual
loans (6)
 $26,753
 $29,701
 $32,133
 $29,892
 $38,247
 $26,753
 $38,247
 $21,197
(7) 
$22,823
(7) 
$25,707
(7) 
$26,753
 $29,701
 $21,197
 $29,701
 
Nonaccrual loans/total loans 1.74% 2.06% 2.32% 2.24% 2.95% 1.74% 2.95% 1.16% 1.35% 1.36 % 1.74% 2.06% 1.16% 2.06% 
Other real estate owned $12,266
 $11,949
 $21,664
 $23,941
 $17,003
 $12,266
 $17,003
 $11,083
 $12,089
 $12,911
 $12,266
 $11,949
 $11,083
 $11,949
 
Total nonperforming assets $39,019
 $41,650
 $53,797
 $53,833
 $55,250
 $39,019
 $55,250
 $32,280
(7) 
$34,912
(7) 
$38,618
(7) 
$39,019
 $41,650
 $32,280
 $41,650
 
Nonperforming assets/total assets 1.37% 1.50% 2.14% 2.05% 2.20% 1.37% 2.20% 1.00% 1.12% 1.26 % 1.37% 1.50% 1.00% 1.50% 
Net charge-offs $1,464
 $1,136
 $1,157
 $3,876
 $4,998
 $3,757
 $22,673
 $149
 $272
 $805
 $1,464
 $1,136
 $421
 $2,293
 
Regulatory capital ratios for the Bank:           
 
           
 
 
Tier 1 leverage capital (to average assets) 10.85% 11.89% 11.97% 11.78% 10.86% 10.85% 10.86% 10.17% 9.94% 9.96 % 10.85% 11.89% 10.17% 11.89% 
Tier 1 risk-based capital (to risk-weighted assets) 17.19% 17.89% 19.21% 18.05% 16.76% 17.19% 16.76% 13.84% 13.99% 14.12 % 17.19% 17.89% 13.84% 17.89% 
Total risk-based capital (to risk-weighted assets) 18.44% 19.15% 20.47% 19.31% 18.01% 18.44% 18.01% 14.84% 15.04% 15.28 % 18.44% 19.15% 14.84% 19.15% 
Other data:           

 

           

 

 
Full-time equivalent employees (ending) 1,426
 1,309
 1,218
 1,099
 998
 1,426
 998
 1,546
 1,491
 1,502
 1,426
 1,309
 1,546
 1,309
 

(1)Share and per share data shown after giving effect to the 2-for-1 forward stock splits effective March 6, 2012 and November 5, 2012.
(2)Net earnings available to common shareholders divided by average common shareholders’ equity.
(3)(2)Net interest income divided by total average interest-earning assets on a tax equivalent basis.
(4)(3)
Net interest margin for the first quarter of 2013 included $1.4 million in interest expense related to the correction of the cumulative effect of an error in prior years, resulting from the under accrual of interest due on the Trust Preferred Securities ("TruPS") for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.06%3.08% for the quarter ended March 31, 2013 and 3.21% for the ninesix months ended SeptemberJune 30, 2013.
(5)(4)Noninterest expense divided by total revenue (net interest income and noninterest income).
(5)Includes acquired loans. Excluding acquired loans, allowance for loan losses/total loans is 1.31%, 1.46% and 1.40% at June 30, 2014, March 31, 2014 and December 31, 2013, respectively.
(6)Generally, loans are placed on nonaccrual status when they are 90 or more days past due.
(7)Includes $6.5 million, $6.6 million and $6.5 million of nonperforming loans at June 30, 2014, March 31, 2014 and December 31, 2013, respectively, that are guaranteed by the Small Business Administration ("SBA").


5154




 At or for the Quarter Ended At or for the Nine
Months Ended
 At or for the Quarter Ended At or for the Six
Months Ended
(in thousands) Sept. 30,
2013
 Jun. 30,
2013
 Mar. 31,
2013
 Dec. 31,
2012
 Sept. 30,
2012
 Sept. 30,
2013
 Sept. 30,
2012
 Jun. 30,
2014
 Mar. 31,
2014
 Dec. 31,
2013
 Sept. 30,
2013
 Jun. 30,
2013
 Jun. 30,
2014
 Jun. 30,
2013
                            
SUPPLEMENTAL DATA:                            
Loans serviced for others                            
Single family $11,286,244
 $10,404,613
 $9,701,396
 $8,870,688
 $8,109,669
 $11,286,244
 $8,109,669
 $9,895,074
 $12,198,479
 $11,795,621
 $11,286,244
 $10,404,613
 $9,895,074
 $10,404,613
Multifamily 722,767
 720,368
 737,007
 727,118
 760,820
 722,767
 760,820
 704,997
 721,464
 720,429
 722,767
 720,368
 704,997
 720,368
Other 50,629
 51,058
 52,825
 53,235
 53,617
 50,629
 53,617
 97,996
 99,340
 95,673
 50,629
 51,058
 97,996
 51,058
Total loans serviced for others $12,059,640
 $11,176,039
 $10,491,228
 $9,651,041
 $8,924,106
 $12,059,640
 $8,924,106
 $10,698,067
 $13,019,283
 $12,611,723
 $12,059,640
 $11,176,039
 $10,698,067
 $11,176,039
                            
Loan production volumes:                            
Single family mortgage closed
loans (1) (2)
 $1,187,061
 $1,307,286
 $1,192,156
 $1,518,971
 $1,368,238
 $3,686,503
 $3,149,196
 $1,100,704
 $674,283
 $773,146
 $1,187,061
 $1,307,286
 $1,774,987
 $2,499,442
Single family mortgage interest rate lock commitments(2)
 786,147
 1,423,290
 1,035,822
 1,254,954
 1,313,182
 3,245,259
 3,531,713
 1,201,665
 803,308
 662,015
 786,147
 1,423,290
 2,004,973
 2,459,112
Single family mortgage loans sold(2)
 1,326,888
 1,229,686
 1,360,344
 1,434,947
 1,238,879
 3,916,918
 2,735,893
 906,342
 619,913
 816,555
 1,326,888
 1,229,686
 1,526,255
 2,590,030
Multifamily mortgage originations 10,734
 14,790
 49,119
 40,244
 20,209
 74,643
 71,830
 23,105
 11,343
 16,325
 10,734
 14,790
 34,448
 63,909
Multifamily mortgage loans sold 21,998
 15,386
 50,587
 33,689
 26,515
 87,971
 85,116
 15,902
 6,263
 15,775
 21,998
 15,386
 22,165
 65,973

(1)Represents single family mortgage closed loanproduction volume designated for sale to the secondary market during each respective period.
(2)Includes loans originated by Windermere MortgageWMS Series Services LLC ("WMS") and purchased by HomeStreet Bank.


5255



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 20122013 Annual Report on Form 10-K.


Management’s Overview of ThirdSecond Quarter 20132014 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. (the "Company") is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides residentialmortgage and commercial loans, deposit products and services, non-deposit investment products, private banking and cash management services. Our primary loan products include single family residential mortgages, loans secured by commercial real estate, construction loans for residential and commercial real estate construction,projects, and commercial business 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 business is known as Windermere Mortgage Services Series LLC (“WMS LLC”).Services.

We generate revenue by earning “net interest income” and “noninterest income.” Net interest income is primarily the difference between our 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.

At SeptemberJune 30, 20132014, we had total assets of $2.85$3.24 billion,, net loans held for investment of $1.51$1.81 billion,, deposits of $2.1$2.42 billion and shareholders’ equity of $288.2 million.$268.2 million.

On August 15, 2013, the Company paid a common stock dividend of $0.11 per share to shareholders.

On October 25, 2013, the Company announced that its board of directors approved a common stock dividend of $0.11 per share, payable on November 25, 2013 to shareholders of record as of November 4, 2013.

On November 1, 2013, the Company completed its acquisition of Fortune Bank and YNB Financial Services Corp. (“YNB”), the parent of Yakima National Bank. Immediately following completion of the acquisitions, YNB was merged into HomeStreet, Inc. Additionally, Fortune Bank and Yakima National Bank were merged into HomeStreet Bank. The combined organization had approximately $3.10 billion in assets on a pro forma basis as of September 30, 2013.
The acquisition of the two banks, along with the pending acquisition of two retail deposit branches from AmericanWest Bank, increases the Company's total assets by approximately $290 million and the total number of HomeStreet Bank retail deposit branches to 30.

Results for the thirdsecond quarter of 2013 compared to third quarter of 20122014 reflect the continued growth of our mortgage banking business and investments to expand our commercial and consumer business. Since September 2012,June 2013, we have increased our lending capacity by adding loan officersorigination and operations personnel in single familyall of our lending commercial real estate lending, and commercial business lending.lines of business. We opened 17 mortgage lending offices, a newadded 21 home loan centers, one commercial lending officecenter, one residential construction center and three neweight retail deposit branches, two de novo bank branches. In addition, we expandedand six from acquisitions, to bring our range of services by adding a new private banking department.total home loan centers to 50, our total commercial centers to five and our total retail deposit branches to 31.

On January 1, 2015, the Company and the Bank will become subject to new capital standards commonly referred to as “Basel III” which raise our minimum capital requirements. For more on the Basel III requirements as they apply to us, please see “Capital Management – New Capital Regulations" within the Liquidity and Capital Resources section of this Form 10-Q. In preparation for the higher capital targets under these new regulatory requirements and to better diversify our balance sheet and improve our risk profile, we sold single family mortgage loans that previously were held for investment and sold single family mortgage servicing rights during the first half of the year.

During the quarter, we experienced changessold $210.7 million of loans that had been transferred in March from the held for investment portfolio into loans held for sale and recognized $3.9 million in pre-tax gain on single family mortgage origination and sale activities from the sales.

On June 30, 2014, the Company sold the rights to service $2.96 billion of single family mortgage loans serviced for Fannie Mae, representing 24.3% of HomeStreet’s total single family mortgage loans serviced for others portfolio as of March 31, 2014. The sale resulted in an increase of $4.7 million in pre-tax mortgage servicing income during the quarter, net of transaction costs. The Company expects to transfer the servicing of these loans to the purchaser by October 1, 2014, and is subservicing these loans on behalf of the purchaser until the transfer date; however, these loans are excluded from the Company's MSR portfolio at June 30, 2014.

In addition, in order to provide flexibility in the mortgage market associated with elevated mortgage interest rates. Significant decreasesevent that we decide to issue securities in mortgage refinancing activity were only partially offset bysupport of an acquisition or to provide capital for growth in the future, on April 29, 2014, the Company filed a slow-growing purchase mortgage market.shelf registration statement on Form S-3 providing for the potential issuance of up to $125 million of equity or debt securities. We expecthave no current plan to grow our purchase mortgage and overall market share as total mortgage market originations decline and the mortgage origination market continues to transition away from one dominated by mortgage refinancing, largely due to an increase in interest rates that has made refinancing less attractive in recent months. We continue to focus on the purchase mortgage market by developing additional targeted shared marketing relationships with builders, real estate agents and other real estate professionals and hiring loan officers who have proven track records in generating home purchase mortgage loans.issue securities under this shelf registration statement.


1 DUS® is a registered trademark of Fannie Mae
5356 




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. Despite substantial growth in home loan centers and mortgage production personnel, our production volume has been less than expected due in part to macroeconomic forces and sluggishness in our markets. In recent periods we have experienced very low levels of homes available for sale in many of the markets in which we operate. The lack of housing inventory has had a downward impact on the volume of mortgage loans that we originate.  Further, it has resulted in elevated costs, as a significant amount of loan processing and underwriting that we perform are to qualifying borrowers for mortgage loan transactions that never materialize. The lack of inventory of homes for sale may continue to have an adverse impact on mortgage loan volumes into the foreseeable future.

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 At or for the Three Months
Ended June 30,
 Percent Change At or for the Six Months
Ended June 30,
 Percent Change
(in thousands, except per share data and ratios) 2013 2012 2013 vs. 2012 2013 2012 2013 vs. 2012 2014 2013 2014 vs. 2013 2014 2013 2014 vs. 2013
                        
Selected statement of operations data                        
Total net revenue $58,586
 $85,611
 (32)% $207,735
 $210,240
 (1)% $76,797
 $74,971
 2 % $134,216
 $149,149
 (10)%
Total noninterest expense 58,116
 45,934
 27
 170,627
 127,625
 34
 62,971
 56,712
 11
 119,062
 112,511
 6
(Reversal of) provision for credit losses (1,500) 5,500
 NM
 900
 7,500
 (88)
Provision for credit losses 
 400
 (100) (1,500) 2,400
 (163)
Income tax expense 308
 12,186
 (97) 11,538
 14,487
 (20) 4,464
 5,791
 (23) 4,991
 11,230
 (56)
Net income $1,662
 $21,991
 (92) $24,670
 $60,628
 (59) $9,362
 $12,068
 (22)% $11,663
 $23,008
 (49)%
                        
Financial performance                        
Diluted earnings per common share $0.11
 $1.50
 (93)% $1.67
 $4.52
 (63)% $0.63
 $0.82
 

 $0.78
 $1.56
 

Return on average common shareholders’ equity 2.45% 38.02% NM
 11.94% 41.82% NM
 13.17% 17.19% 

 8.38% 16.58%  
Return on average assets 0.24% 3.60% NM
 1.25% 3.40% NM
 1.22% 1.86% 

 0.77% 1.81%  
Net interest margin 3.41% 3.12% NM
 3.12% 2.83% NM
 3.48% 3.10% 

 3.49% 2.96%
(1) 
 
                        
Capital ratios (Bank only)                        
Tier 1 leverage capital (to average assets) 10.85% 10.86% NM
 10.85% 10.86% NM
 10.17% 11.89%   10.17% 11.89%  
Tier 1 risk-based capital (to risk-weighted assets) 17.19% 16.76% NM
 17.19% 16.76% NM
 13.84% 17.89%   13.84% 17.89%  
Total risk-based capital (to risk-weighted assets) 18.44% 18.01% NM
 18.44% 18.01% NM
 14.84% 19.15%   14.84% 19.15%  
NM = Not meaningful            
(1)Net interest margin for the first quarter of 2013 included $1.4 million in interest expense related to the correction of the cumulative effect of an error in prior years, resulting from the under accrual of interest due on the TruPS for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.08% for the six months ended June 30, 2013.

For the thirdsecond quarter of 20132014, net income was $1.79.4 million, or $0.11$0.63 per diluted share, compared withto $22.012.1 million, or $1.50$0.82 per diluted share a year ago.for the second quarter of 2013. Return on equity was 13.17% for the thirdsecond quarter of 20132014 (on an annualized basis) was 2.45%, compared to 38.02%17.19% for the same period last year, while return on average assets was 1.22% for the thirdsecond quarter of 20132014 (on an annualized basis) was 0.24%, compared to 3.60%1.86% for the same period a year ago.last year.

Commercial and Consumer Banking Segment Results

Commercial and Consumer Banking segment net income increasedwas $3.8 million in the second quarter of 2014, compared to $2.0 million in the second quarter of 2013. Results for the second quarter of 2014 included a $3.9 million inpre-tax net gain on mortgage loan origination and sale activities related to the sale of mortgage loans previously transferred out of the held for investment portfolio.


57



Commercial and Consumer Banking segment net interest income was $19.4 million for the thirdsecond quarter of 2014, an increase of $5.6 million, or 40.7%, from $13.8 million for the second quarter of 2013, primarily due to higher average balances and yields on loans held for investment, primarily resulting from a net loss of $2.3 millionour acquisitions in the thirdfourth quarter of 2012, due to a reversal to the provision for credit losses and an increase in net interest income, which reflects improvements in our loan credit quality and in our deposit product and pricing strategy. The continued improvement in the composition of deposits was primarily the result of our successful efforts to attract transaction and savings deposit balances through effective brand marketing and the growth of our retail deposit branch network.2013.

Improved credit quality ofDue to a significant decrease in classified loan balances and lower charge-offs, the Company's loan portfolio resulted in a $1.5 million reversal to theCompany recorded no provision for credit losses in the thirdsecond quarter of 2014 compared to a provision of $400 thousand in the second quarter of 2013. Provision of $5.5 million was recordedNet charge-offs were $149 thousand in the thirdsecond quarter of 20122014. Net charge-offs were $1.5, a decrease of $987 thousand, or 86.9%, from $1.1 million in the thirdsecond quarter of 2013 compared to $5.0 million in the third quarter of 2012. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 1.61%1.19% of loans held for investment at SeptemberJune 30, 20132014 compared to 2.12%1.92% at SeptemberJune 30, 2012, reflecting2013, which primarily reflected the improved credit quality of the Company's loan portfolio. Nonperforming assets of $39.0$32.3 million,, or 1.37%1.00% of total assets at SeptemberJune 30, 20132014, were down significantly from SeptemberJune 30, 20122013 when nonperforming assets were $55.3$41.7 million,, or 2.20%1.50% of total assets.

Commercial and Consumer Banking segment noninterest expense of $20.4 million increased 2.1% to $13.6$6.5 million, or 47.0%, from $13.9 million in the thirdsecond quarter of 20122013, primarily related to increased salariescosts from fourth quarter 2013 acquisitions and related costs, reflecting the continued organic growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network. We added eight retail deposit branches, two de novo and six from acquisitions, and increased the segment's headcount by 25.8% during the twelve-month period.


54



Mortgage Banking Segment Results

Mortgage Banking segment recorded a net loss of $2.2income was $5.6 million in the thirdsecond quarter of 20132014, compared to net income of $24.3$10.1 million in the thirdsecond quarter of 20122013. The decrease in net income was primarily driven by substantiallythe result of lower mortgage interest rate lock commitment volumes and lower gain on sale margins.

Mortgage Banking noninterest income of $47.0 million decreased $7.7 million, or 14%, from $54.8 million in the second quarter of 2013, primarily due to a 15.6% decrease in mortgage interest rate lock commitment volumes and lower secondary market margins. Commitment volumevolumes declined mainly due to the rise in mortgage interest rates that causedbeginning in the second quarter of 2013, causing a significant decrease in refinancing activity that was only partially offset by a slow-growing purchase mortgage market.activity. At the same time, the mortgage market became substantially more competitive as lenders tried to secure a reliable flow of production through reduced prices. Closed loan volume was, however, substantially higher thancompetitive pricing. Included in noninterest income for the volumesecond quarter of new interest rate lock commitments. This imbalance in2014 is $4.7 million of pre-tax mortgage servicing income resulting from the quarter negatively affected earnings, as a majoritysale of our mortgage revenue is recognized at the date of interest rate lock, while a majority of our origination costs, including commissions, are recognized upon funding the loan.single family MSRs.

Mortgage Banking noninterest expense increased 36.5% to $44.5of $42.5 million decreased $270 thousand, or 0.6%, from the third quarter of 2012. The $11.9$42.8 million increase in noninterest expense primarily related to the addition of mortgage originators and mortgage fulfillment personnel as we grow our single family mortgage lending network.

Income Tax Expense

Our consolidated income tax expense was $308 thousand in the thirdsecond quarter of 2013 compared, primarily due to lower commission and incentive expense as closed loan volumes declined by 15.8%. The decrease in commission and incentive expense was mostly offset by higher expenses related to increased salary and related costs and general and administrative expenses resulting from overall growth in personnel and our expansion into new markets. We added $12.2 million21 inhome loan centers and increased the third quarter of 2012. Our estimated annual effective income tax rate was 31.9% as compared to an annual effective tax rate of 20.8% for 2012. The lower effective income tax rate in 2012 compared to 2013 primarily reflectedsegment's headcount by 13.7% during the benefit of a full reversal of deferred tax asset valuation allowances during 2012.twelve-month period.

Regulatory Matters

The Bank continued to remainremains well-capitalized, with a Tier 1 leverage capital ratio of 10.85% and total risk-based capital ratioratios at June 30, 2014 of 18.44%10.17% and 14.84%, respectively, compared with 11.89% and 19.15% at SeptemberJune 30, 2013The decline in the Bank's capital ratios from June 30, 2013 was primarily attributable to the fourth quarter 2013 cash acquisitions of Fortune Bank, Yakima National Bank and two branches from AmericanWest Bank, which resulted in $14.7 million of net intangible assets at June 30, 2014 which are not included as capital for regulatory purposes and resulted in an increase in average and risk-weighted assets, as well as overall growth in total risk-weighted assets.

On January 1, 2015, the Company and the Bank will become subject to new capital standards commonly referred to as “Basel III” which raise our minimum capital requirements. For more on the Basel III requirements as they apply to us, please see “Capital Management – New Capital Regulations" within the Liquidity and Capital Resources section of this Form 10-Q. In preparation for the higher capital targets under these new regulatory requirements and to better diversify our balance sheet and improve our risk profile, we sold single family mortgage loans that previously were held for investment and sold single family mortgage servicing rights during the first half of the year.


58



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 difficult, 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 MSRsmortgage servicing rights ("MSRs") and 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 theour 20122013 Annual Report on Form 10-K.


5559



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,Three Months Ended June 30,
2013 20122014 2013
(in thousands)
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
                      
Assets:                      
Interest-earning assets: (1)
                      
Cash & cash equivalents$37,671
 $17
 0.24% $50,056
 $24
 0.15%
Cash and cash equivalents$31,545
 $14
 0.18% $21,929
 $13
 0.24%
Investment securities556,862
 4,452
 3.20% 411,916
 3,013
 2.93%447,458
 3,264
 2.93% 512,475
 3,561
 2.78%
Loans held for sale404,853
 4,004
 3.96% 454,435
 4,083
 3.59%477,896
 4,649
 3.90% 389,572
 3,469
 3.56%
Loans held for investment1,475,011
 15,453
 4.18% 1,270,652
 14,464
 4.54%1,766,788
 18,792
 4.27% 1,397,219
 14,005
 4.01%
Total interest-earning assets2,474,397
 23,926
 3.88% 2,187,059
 21,584
 3.94%2,723,687
 26,719
 3.93% 2,321,195
 21,048
 3.63%
Noninterest-earning assets (2)
311,897
     256,631
    338,642
     278,739
    
Total assets$2,786,294
     $2,443,690
    $3,062,329
     $2,599,934
    
Liabilities and shareholders’ equity:                      
Deposits:                      
Interest-bearing demand accounts$254,277
 265
 0.41% $155,947
 128
 0.33%$276,887
 191
 0.28% $238,328
 233
 0.39%
Savings accounts123,444
 140
 0.45% 98,711
 114
 0.46%166,127
 218
 0.53% 112,937
 114
 0.40%
Money market accounts848,300
 1,060
 0.50% 655,123
 857
 0.52%979,610
 1,081
 0.44% 783,135
 973
 0.50%
Certificate accounts262,055
 663
 0.92% 715,656
 2,809
 1.56%478,057
 868
 0.73% 393,332
 1,047
 1.07%
Total interest-bearing deposits1,488,076
 2,128
 0.57% 1,625,437
 3,908
 0.96%1,900,681
 2,358
 0.50% 1,527,732
 2,367
 0.62%
FHLB advances374,682
 434
 0.46% 112,839
 297
 1.19%
Federal Home Loan Bank advances350,271
 444
 0.36% 307,296
 387
 0.50%
Securities sold under agreements to repurchase
 
 % 18,478
 19
 0.14%1,129
 1
 0.36% 10,913
 11
 0.40%
Long-term debt61,231
 274
 1.75% 61,857
 305
 1.97%61,856
 266
 1.72% 61,857
 283
 1.81%
Other borrowings121,166
 99
 0.31% 
 4
 %
 
 % 9,300
 5
 0.22%
Total interest-bearing liabilities2,045,155
 2,935
 0.57% 1,818,611
 4,533
 0.99%2,313,937
 3,069
 0.53% 1,917,098
 3,053
 0.64%
Noninterest-bearing liabilities469,853
     393,718
    464,027
     402,053
    
Total liabilities2,515,008
     2,212,329
    2,777,964
     2,319,151
    
Shareholders’ equity271,286
     231,361
    284,365
     280,783
    
Total liabilities and shareholders’ equity$2,786,294
     $2,443,690
    $3,062,329
     $2,599,934
    
Net interest income (3)
  $20,991
     $17,051
    $23,650
     $17,995
  
Net interest spread    3.31%     2.95%    3.40%     2.99%
Impact of noninterest-bearing sources    0.10%     0.17%    0.08%     0.11%
Net interest margin    3.41%     3.12%    3.48%     3.10%
 
(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 $579503 thousand and $531580 thousand for the quartersthree months ended SeptemberJune 30, 20132014 and SeptemberJune 30, 20122013, respectively. The estimated federal statutory tax rate was 35% for the periods presented.



5660



Nine Months Ended September 30,Six Months Ended June 30, 
2013 20122014 2013 
(in thousands)
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
Average
Balance
 Interest 
Average
Yield/Cost
 
Average
Balance
 Interest 
Average
Yield/Cost
 
                       
Assets:                       
Interest-earning assets: (1)
                       
Cash & cash equivalents$27,488
 $46
 0.26% $116,789
 $208
 0.24%
Cash and cash equivalents$32,400
 $32
 0.20% $22,312
 $30
 0.26% 
Investment securities497,857
 11,175
 2.99% 408,320
 8,358
 2.73%462,338
 6,864
 2.99% 467,865
 6,723
 2.87% 
Loans held for sale415,633
 11,218
 3.60% 310,748
 8,544
 3.67%395,953
 7,470
 3.77% 421,112
 7,214
 3.43% 
Loans held for investment1,406,582
 43,795
 4.13% 1,304,526
 43,906
 4.49%1,798,384
 38,687
 4.30% 1,371,801
 28,341
 4.14% 
Total interest-earning assets2,347,560
 66,234
 3.75% 2,140,383
 61,016
 3.80%2,689,075
 53,053
 3.98% 2,283,090
 42,308
 3.71% 
Noninterest-earning assets (2)
280,668
     235,791
    353,433
     264,795
     
Total assets$2,628,228
     $2,376,174
    $3,042,508
     $2,547,885
     
Liabilities and shareholders’ equity:                       
Deposits:                       
Interest-bearing demand accounts$224,942
 656
 0.39% $148,288
 368
 0.33%$261,401
 356
 0.27% $210,032
 391
 0.38% 
Savings accounts114,023
 358
 0.42% 85,376
 290
 0.45%162,854
 419
 0.52% 109,234
 218
 0.40% 
Money market accounts776,267
 2,890
 0.50% 592,195
 2,390
 0.54%952,770
 2,101
 0.44% 739,652
 1,830
 0.50% 
Certificate accounts404,383
 4,080
 1.24% 831,015
 9,937
 1.60%513,551
 1,842
 0.72% 476,726
 3,417
 1.45% 
Total interest-bearing deposits1,519,615
 7,984
 0.69% 1,656,874
 12,985
 1.05%1,890,576
 4,718
 0.50% 1,535,644
 5,856
 0.77% 
FHLB advances277,192
 1,113
 0.53% 83,523
 1,506
 2.40%
Federal Home Loan Bank advances337,125
 867
 0.52% 227,639
 680
 0.60% 
Securities sold under agreements to repurchase3,638
 11
 0.40% 23,597
 69
 0.39%568
 1
 0.36% 5,487
 11
 0.40% 
Long-term debt61,646
 2,274
(3) 
4.86%
(3) 
61,857
 1,041
 2.24%62,780
 581
 1.87% 61,857
 1,999
 6.43%
(3) 
Other borrowings43,932
 109
 0.31% 
 12
 %
 
 % 4,675
 10
 0.42% 
Total interest-bearing liabilities1,906,023
 11,491
 0.79% 1,825,851
 15,613
 1.14%2,291,049
 6,167
 0.54% 1,835,302
 8,556
 0.94% 
Noninterest-bearing liabilities446,742
     357,015
    472,946
     434,995
     
Total liabilities2,352,765
     2,182,866
    2,763,995
     2,270,297
     
Shareholders’ equity275,463
     193,308
    278,513
     277,588
     
Total liabilities and shareholders’ equity$2,628,228
     $2,376,174
    $3,042,508
     $2,547,885
     
Net interest income (4)
  $54,743
     $45,403
    $46,886
     $33,752
   
Net interest spread    2.96%     2.66%    3.44%     2.77% 
Impact of noninterest-bearing sources    0.16%     0.17%    0.05%     0.19% 
Net interest margin    3.12%
(3) 
    2.83%    3.49%     2.96%
(3) 

(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)
Interest expense for the nine months ended September 30, 2013 included $1.4 million recorded in the first quarter of 2013 included $1.4 million related to the correction of the cumulative effect of an immaterial error in prior years, resulting from the under accrual of interest due on our Trust Preferred Securitiesthe TruPS for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.21%.
3.08% for the six months ended June 30, 2013.
(4)
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.0 million and $1.1 million for the six months ended $1.7 millionJune 30, 2014 and $1.3 million for the nine months ended SeptemberJune 30, 2013 and September 30, 2012, respectively. The estimated federal statutory tax rate was 35% for the periods presented.


57



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 ainterest is received on nonaccrual loan is placed back on accrual status or paid off,loans, the accumulated interest collected on the loan is recognized atas an adjustment to the time

61



cost basis of the loan is removed from nonaccrual status.loan. The net increase/(decrease)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 $(232)157 thousand and $95174 thousand for the three months ended SeptemberJune 30, 20132014 and 20122013, respectively, and $257 thousand and $325 thousand for the six months ended $(557) thousandJune 30, 2014 and $(1.0)2013, respectively.

Net Income

Net income was $9.4 million for the ninethree months ended SeptemberJune 30, 2014, a decrease of $2.7 million, or 22.4%, from net income of $12.1 million for the three months ended June 30, 2013 and. For the first six months of 2014, net income was $11.7 million, a decrease of $11.3 million, or 49.3%, from $23.0 million for the first six months of 2013. The decline in net income mainly resulted from a decrease in noninterest income compared to the same periods in 20122013, respectively.primarily due to a significantly lower gain on mortgage loan origination and sale activities driven by lower single family interest rate lock commitments.

For the three months ended June 30, 2014, noninterest income decreased $3.9 million, or 6.8%, compared to the same period in 2013. Noninterest expense increased $6.3 million, or 11.0%, compared to the same period last year due to increased salary, occupancy, information technology and similar costs we incurred as we continue to expand our mortgage banking and commercial and consumer businesses. The decreases to net income was partially offset by a $5.7 million, or 32.9%, increase in net interest income in the three months ended June 30, 2014 mainly due to higher yields on higher average balances of loans held for investment. Included in net income for the second quarter of 2014 were a $4.7 million pre-tax net increase in mortgage servicing income resulting from the sale of MSRs and a $3.9 million pre-tax gain on single family mortgage origination and sale activities from the sale of loans that were originally held for investment.

Net Interest Income

Our earnings dependprofitability 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 ("TruPS")trust preferred securities and advances from the Federal Home Loan Bank of Seattle ("FHLB").

Net interest income on a tax equivalent basis was $21.0$23.7 million for the thirdsecond quarter of 20132014, an increase of $3.9$5.7 million,, or 23.1%31.4%, from $17.1$18.0 million for the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, net interest income was $54.7$46.9 million,, an increase of $9.3$13.1 million,, or 20.6%38.9%, from $45.4$33.8 million in for the same period last year.first six months of 2013. During the thirdsecond quarter of 20132014, total interest income increased $2.3$5.7 million from the thirdsecond quarter of 20122013, while total interest expense declined $1.6 millionwas relatively unchanged from the thirdsecond quarter of 20122013. The net interest margin for the thirdsecond quarter of 20132014 improved to 3.41%3.48% from 3.12%3.10% in the thirdsecond quarter of 20122013, and improved to 3.12%3.49% for the ninesix months ended SeptemberJune 30, 20132014 from 2.83%2.96% for the same period last year. ImprovementIncluded in interest income for the six months ended June 30, 2014 is $618 thousand in interest collected on three nonaccrual loans that were paid off during the period. Included in interest expense for the six months ended June 30, 2013 was $1.4 million related to the correction of the cumulative effect of an immaterial error in prior years, resulting from the under accrual of interest due on the TruPS for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.08%. The net interest margin increase from the thirdsecond quarter of 20122013 resulted from a 4230 basis point increase in yields on average interest-earning assets, mostly due to higher yields on higher average balances of portfolio loans, as well as an 11 basis point decline in our average interest-bearingthe cost of funds, due in large part to the re-pricing of maturing time deposits. This improvement was partially offset by a 6 basis point decline in our yield on interest-earning assets, largely due to increased balances of single family adjustable-rate mortgage loans.funds.

Total average interest-earning assets increased from the three and ninesix months ended SeptemberJune 30, 20122013, primarily as a result of growth in the investment securities portfolio and new portfolio loan originations, being partially offset by a decrease inaverage loans held for sale. The increase in average balances of portfolio loans reflects our year-over-year growth in loan production volumeinvestment, both from all of our commercialoriginations and consumer business lines.from fourth quarter 2013 acquisitions. Total average interest-bearing deposit balances increased from the prior periods mostly as a result of an increaseprimarily due to acquisition-related and organic growth in transaction and savings deposits, partially offset by a decline in higher-cost retail certificates of deposits.
Total interest income on a tax equivalent basis of $23.9$26.7 million in the thirdsecond quarter of 20132014 increased $2.3$5.7 million,, or 10.9%26.9%, from $21.6$21.0 million in the thirdsecond quarter of 20122013, primarily driven by higher average balances of portfolio loans and investment securities. The increase in interest income was also the result of higher yields on higher averageloans. Average balances of investment securities, the balances of whichtotal loans increased $144.9$457.9 million,, or 35.2%25.6%, in the third quarter of 2013 from the thirdsecond quarter of 2012.
These increases were partially offset by increased balances of lower-yielding single family adjustable-rate mortgage loans. Yields on portfolio loans decreased 36 basis points compared to the third quarter of 20122013. For the first ninesix months of 2013,2014, interest income was $66.2$53.1 million,, an increase of $5.2$10.7 million,, or 8.6%25.4%, from $61.0$42.3 million in the same period last year resulting from higher average balances of loans held for sale and held for investment and a higher average balance and yield on investment securities.investment.

Total interest expense of $2.9$3.1 million in the third quarter of 2013 decreased $1.6 million, or 35.3%, from $4.5 million in the third quarter of 2012. This decrease was primarily duerelatively unchanged compared to a $453.6 million, or 63.4%, decline in the average balance of higher-yielding certificates of deposit, partially offset by a $98.3 million, or 63.1%, increase in the average balance of lower-cost transaction and savings deposits. Also contributing to the decrease in interest expense in the thirdsecond quarter of 2013 compared to. Higher average balances of interest-bearing deposits in the thirdsecond quarter of 20122014 was the restructuring of FHLB advances, prepaying certain long-term advances and using short-term FHLB advances to meet short-term mortgage origination and sales funding needs, which contributed towere primarily offset by a 7312 basis point declinereduction in interest cost on FHLB advances.of interest-bearing deposits. For the first ninesix months of 2013,2014, interest expense was $11.5$6.2 million,, a decrease of $2.4 million, or 27.9%, from $8.6 million in the six months ended $4.1 millionJune 30, 2013, orreflecting a lower cost of funds on interest-bearing deposits. Included in interest expense for the six months ended 26.4%, from $15.6 millionJune 30, 2013 in the same period last year, primarily driven by a decline in the average balancewas expense of higher-cost certificates of deposit, partially offset by an increase$1.4 million recorded in the average balance of transaction and savings deposits.


5862



the first quarter of 2013 related to the correction of the cumulative effect of an immaterial error in prior years, resulting from the under accrual of interest due on the TruPS for which the Company had deferred the payment of interest.

Provision for Credit Losses

Improved credit qualityDue to a significant decrease in classified loan balances and lower charge-offs, we recorded no provision in the second quarter of the Company's loan portfolio resulted in2014, which followed a release of $1.5 million reversal to the provision for credit lossesof reserves in the thirdfirst quarter of 20132014, compared to a provision for credit losses of $5.5 million400 thousand recorded in the thirdsecond quarter of 2012. For the first nine2013 and $2.4 million during the six months ofended June 30, 2013. Nonaccrual loans declined to $21.2 million at 2013June 30, 2014, loan loss provision was $900 thousand compared to $7.5a decrease of $4.5 million, in the same period last year. Nonperforming assets ("NPAs") were $39.0 or 17.5%, from $25.7 million at September 30, 2013 compared to $53.8 million at December 31, 20122013. Nonaccrual loans as a percentage of $26.8 milliontotal loans was 1.16% at SeptemberJune 30, 20132014 decreased $3.1 million, or 10.5%, from $29.9 millioncompared to 1.36% at December 31, 20122013.

Net charge-offs of $1.5 million149 thousand in the thirdsecond quarter of 20132014 were down $3.5 million987 thousand from net charge-offs of $5.01.1 million in the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, net charge-offs were $3.8 million$421 thousand compared to $22.7$2.3 million in the same period last year. The decrease in net charge-offs in 2013 asthe three and six months ended June 30, 2014 compared to the same periods of 20122013 was primarily due to lower charge-offs on residentialsingle family and commercial construction loans during 2013.home equity loans. 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 inof this Form 10-Q.

Noninterest Income

Noninterest income was $38.2$53.7 million in the thirdsecond quarter of 20132014, a decrease of $30.9$3.9 million,, or 44.7%6.8%, from $69.1$57.6 million in the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, noninterest income was $154.7$88.4 million,, a decrease of $11.4$28.1 million,, or 6.9%24.2%, from $166.1$116.5 million in the same period last year. Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale activities andas 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 decrease in noninterest income in the thirdsecond quarter of 2014 compared to the second quarter of 2013 as compared to the third quarter of 2012was primarily the result of lower net gain on mortgage loan origination and sale revenue, primarilyactivities. This was due mostly to the resultsignificant reduction in mortgage refinance volumes driven by higher mortgage interest rates, partially offset by higher purchase mortgage volume from the expansion of a 40.1% decreaseour mortgage lending operations and an $8.0 million increase in interest rate lock commitments, mostly related to substantially lower refinancing activities.mortgage servicing income. Our single family mortgage interest rate lock commitments decreased 40.1% to $786.1 millionof $1.20 billion in the thirdsecond quarter of 2014 decreased 15.6% compared to $1.42 billion in the second quarter of 2013 compared to $1.31 billion. Included in noninterest income for the thirdsecond quarter of 20122014. were a $4.7 million pre-tax net increase in mortgage servicing income resulting from the sale of MSRs and a $3.9 million pre-tax gain on 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
Three Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Noninterest income                              
Net gain on mortgage loan origination and sale activities (1)
$33,491
 $65,336
 $(31,845) (49)% $139,870
 $141,683
 $(1,813) (1)%$41,794
 $52,424
 $(10,630) (20)% $67,304
 $106,379
 $(39,075) (37)%
Mortgage servicing income4,011
 506
 3,505
 693
 9,265
 15,470
 (6,205) (40)10,184
 2,183
 8,001
 367
 18,129
 5,255
 12,874
 245
(Loss) income from Windermere Mortgage Services Series LLC(550) 1,188
 (1,738) NM
 1,063
 3,748
 (2,685) (72)
Income from WMS Series LLC246
 993
 (747) (75) 53
 1,613
 (1,560) (97)
Loss on debt extinguishment
 
 
 NM
 
 (939) 939
 NM
11
 
 11
 NM
 (575) 
 (575) NM
Depositor and other retail banking fees791
 756
 35
 5
 2,273
 2,262
 11
 
917
 761
 156
 20
 1,732
 1,482
 250
 17
Insurance commissions242
 192
 50
 26
 612
 551
 61
 11
(Loss) gain on securities available for sale(184) 397
 (581) NM
 6
 1,349
 (1,343) (100)
Insurance agency commissions232
 190
 42
 22
 636
 370
 266
 72
Gain (loss) on securities available for sale(20) 238
 NM
 NM
 693
 190
 503
 265
Other373
 716
 (343) (48) 1,584
 1,965
 (381) (19)286
 767
 (481) (63) 385
 1,210
 (825) NM
Total noninterest income$38,174
 $69,091
 $(30,917) (45)% $154,673
 $166,089
 $(11,416) (7)%$53,650
 $57,556
 $(3,648) (6)% $88,357
 $116,499
 $(28,142) (24)%
NM = not meaningful      

       
      

       
(1)Single family and multifamily mortgage banking activities.


5963



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
Three Months Ended June 30, 
Dollar 
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Single family:                              
Servicing value and secondary marketing gains(1)
$23,076
 $56,142
 $(33,066) (59)% $110,760
 $120,471
 $(9,711) (8)%
Provision for repurchase losses(2)

 (526) 526
 (100) 
 (2,846) 2,846
 (100)
Net gain from secondary marketing activities23,076
 55,616
 (32,540) (59) 110,760
 117,625
 (6,865) (6)
Servicing value and secondary market gains(1)
$30,233
 $43,448
 $(13,215) (30)% $49,792
 $87,683
 $(37,891) (43)%
Loan origination and funding fees8,302
 8,680
 (378) (4) 24,363
 20,817
 3,546
 17
6,781
 8,267
 (1,486) (18) 11,542
 16,062
 (4,520) (28)
Total single family31,378
 64,296
 (32,918) (51) 135,123
 138,442
 (3,319) (2)37,014
 51,715
 (14,701) (28) 61,334
 103,745
 (42,411) (41)
Multifamily2,113
 1,040
 1,073
 103
 4,747
 3,241
 1,506
 46
693
 709
 (16) (2) 1,089
 2,634
 (1,545) (59)
Other4,087
 
 4,087
 NM
 4,881
 
 4,881
 NM
Net gain on mortgage loan origination and sale activities$33,491
 $65,336
 $(31,845) (49)% $139,870
 $141,683
 $(1,813) (1)%$41,794
 $52,424
 $(10,630) (20)% $67,304
 $106,379
 $(39,075) (37)%
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 the estimated fair value of the repurchase or indemnity obligation recognized on new loan sales.
(2)Represents changes in estimated probable futurethe Company's repurchase losses on previously sold loans.liability for loans that have been sold.

Net gain on mortgage loan origination and sale activities was $33.5 million for the third quarter of 2013, a decrease of $31.8 million, or 48.7%, from $65.3 million for the third quarter of 2012, primarily driven by lower mortgage loan origination and sale revenue, mostly due to an increase in mortgage interest rates that has led to substantially lower interest rate lock volume and lower profit margins.

For the first nine months of 2013, net gain on mortgage loan origination and sale activities was $139.9 million, a decrease of $1.8 million, or 1.3%, from $141.7 million in the same period last year. Significant decreases in mortgage refinance activities were partially offset by a slow growing mortgage purchase market and the expansion of our mortgage lending operations as we added approximately 80 mortgage production personnel during the first nine months of 2013.

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
Three Months Ended June 30, 
Dollar
Change
 
Percent
Change
 Six Months Ended June 30, 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Production volumes:               
Single family mortgage closed loan volume (1) (2)
$1,187,061
 $1,368,238
 $(181,177) (13)% $3,686,503
 $3,149,196
 $537,307
 17 %$1,100,704
 $1,307,286
 $(206,582) (16)% $1,774,987
 $2,499,442
 $(724,455) (29)%
Single family mortgage interest rate lock commitments (2)
786,147
 1,313,182
 (527,035) (40) 3,245,259
 3,531,713
 (286,454) (8)1,201,665
 1,423,290
 (221,625) (16) 2,004,973
 2,459,112
 (454,139) (18)
(1)Represents single family mortgage originations designated for sale during each respective period.
(2)Includes loans originated by Windermere MortgageWMS Series Services LLC ("WMS") and purchased by HomeStreet Bank.

During the thirdsecond quarter of 20132014, single family closed loan production decreased 13.2%15.8% and single family interest rate lock commitments decreased 40.1% as15.6% compared to the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, single family closed loan production increased 17.1%decreased 29.0% and single family interest rate lock commitments decreased 8.1% as18.5% compared to the same period last year. Our production mix continuedThese decreases were mainly the result of higher mortgage interest rates beginning in the second quarter of 2013 that led to shift to the purchasea reduction in refinance mortgage market duringactivity since then.

Net gain on mortgage loan origination and sale activities was $41.8 million for the thirdsecond quarter of 2014, a decrease of $10.6 million, or 20.3%, from $52.4 million for the second quarter of 2013, as. This decrease predominantly reflected substantially lower mortgage interest rate lock commitmentscommitment volumes and lower secondary market margins. Commitment volumes declined mainly due to the rise in mortgage interest rates beginning in the second quarter of 2013, causing a significant decrease in refinancing activity that was only partially offset by a slightly stronger purchase mortgage market. This impact was partially mitigated by the expansion of our mortgage lending operations as the number of loan officers grew by approximately 31.5% over the past twelve months. Included in net gain on mortgage loan origination and sale activities for the second quarter of 2014 was a $3.9 million pre-tax gain on single family mortgage origination and sale activities from the sale of loans that were comprised of 80% purchase and 20% refinance mortgage transactions.originally held for investment.

For the first six months of 2014, net gain on mortgage loan origination and sale activities was $67.3 million, a decrease of $39.1 million, or 36.7%, from $106.4 million in the same period last year. Significant decreases in mortgage refinance activities were partially offset by a slow growing purchase market and the expansion of our mortgage lending operations.

6064



Included in net gain on mortgage loan origination and sale activities for the first six months of 2014 was a $4.6 million pre-tax gain on single family mortgage origination and sale activities from the sale of 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 items of net gain on mortgage loan origination and sale activities. For further information on the Company's mortgage repurchase liability, see Note 7, Commitments, Guarantees and Contingencies in this Form 10-Q.
 Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)2013 2012 2013 2012
        
Effect of changes to the mortgage repurchase liability:       
Servicing value and secondary marketing gains(1)
$(505) $(492) $(1,513) $(776)
Provision for repurchase losses(2)

 (526) 
 (2,848)
 $(505) $(1,018) $(1,513) $(3,624)
 Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2014 2013 2014 2013
        
Effect of changes to the mortgage repurchase liability recorded in net gain on mortgage loan origination and sale activities:       
New loan sales (1)
$(313) $(472) $(552) $(1,008)
 $(313) $(472) $(552) $(1,008)
 
(1)Represents the estimated fair value of the repurchase or indemnity obligation recognized as a reduction of proceeds on new loan sales.
(2)Represents changes in estimated probable future repurchase losses on previously sold loans.

For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies in this Form 10-Q.
    
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
Three Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Servicing income, net:                              
Servicing fees and other$8,934
 $7,168
 $1,766
 25 % $24,497
 $20,310
 $4,187
 21 %$10,112
 $7,955
 $2,157
 27% $19,961
 $15,562
 $4,399
 28 %
Changes in fair value of MSRs due to modeled amortization (1)
(5,221) (5,360) 139
 (3) (16,896) (14,382) (2,514) 17
(7,109) (6,964) (145) 2
 (13,077) (12,639) (438) 3
Amortization(433) (598) 165
 (28) (1,347) (1,551) 204
 (13)(434) (423) (11) 3
 (858) (913) 55
 (6)
3,280
 1,210
 2,070
 171 % 6,254
 4,377
 1,877
 43 %2,569
 568
 2,001
 352
 6,026
 2,010
 4,016
 200
Risk management:                              
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2)
(2,900) (5,565) $2,665
 (48)% 15,403
 (13,507) $28,910
 (214)%(3,326)
(3) 
15,120
 (18,446) NM
 (8,735)
(3) 
19,268
 (28,003) NM
Net gain from derivatives economically hedging MSRs3,631
 4,861
 (1,230) (25) (12,392) 24,600
 (36,992) (150)
Net gain (loss) from derivatives economically hedging MSRs10,941
 (13,505) 24,446
 NM
 20,838
 (16,023) 36,861
 NM
731
 (704) 1,435
 NM
 3,011
 11,093
 (8,082) (73)7,615
 1,615
 6,000
 372
 12,103
 3,245
 8,858
 273
Mortgage servicing income$4,011
 $506
 $3,505
 693 % $9,265
 $15,470
 $(6,205) (40)%$10,184
 $2,183
 $8,001
 367% $18,129
 $5,255
 $12,874
 245 %
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 the three months ended June 30, 2014.

For the thirdsecond quarter of 20132014, mortgage servicing income was $4.010.2 million, an increase of $3.5$8.0 million, or 367%, from $506 thousand$2.2 million in the thirdsecond quarter of 20122013, primarily driven by increased servicing fees collected indue to the quarter onJune 30, 2014 sale of the Company'srights to service $2.96 billion of single family mortgage servicing and improvedloans serviced for Fannie Mae. The sale resulted in a $4.7 million, net of transaction costs, pre-tax increase in mortgage servicing rights ("MSR") risk management results.income during the quarter.

ForAlso contributing to the first nine months of 2013,increase in mortgage servicing income was $9.3 million, a decrease of $6.2 million from $15.5 million in the first nine months of 2012. This decrease was primarily due tois improved risk management results. MSR risk management results which representsrepresent 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

65



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

61



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 theour MSR risk management activities for the thirdsecond quarter of 20132014 was a gain of $731 thousand compared to a loss of $704 thousand in the third quarter of 2012. For the first nine months of 2013, the net performance of the MSR risk management activities was a gain of $3.0$7.6 million compared to a gain of $1.6 million in the $11.1 millionsecond quarter of 2013 for the same period last year.. The lowerhigher hedging gain in 20132014 largely reflects lowerreflected higher sensitivity to interest rates for the Company's MSRs, which enabledled the Company toreduce increase the notional amount of derivative instruments used to economically hedge MSRs. The lowerhigher notional amount of derivative instruments, along with a flattersteeper yield curve, resulted in lowerhigher net gains from MSR risk management, which negativelypositively impacted mortgage servicing income. In addition, MSR risk management results for 20132014 reflectreflected the impact on the fair value of MSRs due toof changes in model inputs and assumptions related to factors other than interest rate changes. Such factors included changes tohistorically low prepayment speeds experienced during the FHA streamlined refinance program and higher expected home values, bothsecond quarter of which generally lead to higher2014 resulting in lower projected prepayment speeds, andspeeds. Included in the gain for the second quarter of 2014 was a declinenet $4.7 million in pre-tax income resulting from MSR risk management activities in 2013.the sale of MSRs.

Mortgage servicing fees collected in the thirdsecond quarter of 20132014 were $8.9$10.1 million,, an increase of $1.8$2.2 million,, or 24.6%27.1%, from $7.2$8.0 million in the thirdsecond quarter of 20122013. Our loans serviced for others portfolio increased to $12.06was $10.70 billion at SeptemberJune 30, 20132014 from $9.65compared to $12.61 billion at December 31, 20122013 and $11.18 billion at June 30, 2013. The lower balance at quarter end was the result of the June 30, 2014 sale of the rights to service $8.922.96 billion at September 30, 2012.of single family mortgage loans. Mortgage servicing fees collected in future periods will be negatively impacted in the short term because the balance of the loans serviced for others portfolio was reduced as a consequence of this sale.

(Loss) incomeIncome from Windermere Mortgage ServicesWMS Series LLC in the thirdsecond quarter of 20132014 was a loss of $550$246 thousand compared to income of $1.2 million$993 thousand in the thirdsecond quarter of 20122013. The decrease in 20132014 was primarily due to decreaseda 35.2% decrease in interest rate lock commitments and a 40.1% decrease in closed loan volume, which were $110.7134.4 million and $192.9130.7 million, respectively, for the three months ended SeptemberJune 30, 20132014 compared to $224.1207.4 million and $268.4218.2 million, respectively, for the same period in 20122013.

Depositor and other retail banking fees for the three and ninesix months ended SeptemberJune 30, 2014 increased from the three and six months ended June 30, 2013 were relatively consistent with 2012 results., primarily driven by an increase in the number of transaction accounts as we grow our retail deposit branch network. 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
Three Months Ended
June 30,
 
Dollar 
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar 
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Fees:                              
Monthly maintenance and deposit-related fees$387
 $387
 $
  % $1,106
 $1,157
 $(51) (4)%$428
 $366
 $62
 17 % $818
 $719
 $99
 14 %
Debit Card/ATM fees381
 340
 41
 12
 1,104
 1,030
 74
 7
471
 373
 98
 26
 886
 723
 163
 23
Other fees23
 29
 (6) (21) 63
 75
 (12) (16)18
 22
 (4) (18) 28
 40
 (12) (30)
Total depositor and other retail banking fees$791
 $756
 $35
 5 % $2,273
 $2,262
 $11
  %$917
 $761
 $156
 20 % $1,732
 $1,482
 $250
 17 %

Noninterest Expense

Noninterest expense was $58.1$63.0 million in the thirdsecond quarter of 20132014, an increase of $12.2$6.3 million,, or 26.5%11.0%, from $45.9$56.7 million in the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, noninterest expense was $170.6$119.1 million,, an increase of $43.0$6.6 million,, or 33.7%5.8%, from $127.6$112.5 million for the same period last year. The increase in noninterest expense in the second quarter of 2014was primarily the result of increased salarya $2.0 million increase in salaries and related costscost, a $1.3 million increase in occupancy, and generala $1.3 million increase in information services. The increase in noninterest expense for the three and administrative expenses resulting fromsix months of 2014 compared to prior year was primarily a result of the integration of our acquisitions and an 18.1% growth in personnel as we continue to expandin connection with our continued expansion of our mortgage banking and commercial and consumer businesses. These additions to personnel were partially offset by attrition and position eliminations in mortgage production, mortgage operations, and in commercial lending and administration. Position eliminations beginning in the fourth quarter of 2013 were in response to a slowdown in mortgage activity as well as the integration of our acquisitions and were intended to improve efficiency and performance. The increases in noninterest expense were partially offset by a decrease in mortgage origination commissions and sales management incentives.


6266




Noninterest expense consisted of the following.
Three Months Ended
September 30,
 
Dollar 
Change
 
Percent
Change
 Nine Months Ended
September 30,
 
Dollar 
Change
 
Percent
Change
Three Months Ended
June 30,
 
Dollar 
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar 
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Noninterest expense                              
Salaries and related costs$39,689
 $31,573
 $8,116
 26 % $113,330
 $81,148
 $32,182
 40 %$40,606
 $38,579
 $2,027
 5 % $76,077
 $73,641
 $2,436
 3 %
General and administrative9,234
 7,148
 2,086
 29
 30,434
 19,304
 11,130
 58
11,145
 10,270
 875
 9
 21,267
 21,200
 67
 
Legal844
 312
 532
 171
 2,054
 1,471
 583
 40
542
 599
 (57) (10) 941
 1,210
 (269) (22)
Consulting884
 1,069
 (185) (17) 2,343
 1,746
 597
 34
603
 763
 (160) (21) 1,554
 1,459
 95
 7
Federal Deposit Insurance Corporation assessments227
 794
 (567) (71) 937
 2,751
 (1,814) (66)572
 143
 429
 300
 1,192
 710
 482
 68
Occupancy3,484
 2,279
 1,205
 53
 9,667
 6,160
 3,507
 57
4,675
 3,381
 1,294
 38
 9,107
 6,183
 2,924
 47
Information services3,552
 2,411
 1,141
 47
 10,122
 6,128
 3,994
 65
4,862
 3,574
 1,288
 36
 9,377
 6,570
 2,807
 43
Net cost of operation and sale of other real estate owned202
 348
 (146) (42) 1,740
 8,917
 (7,177) (80)(34) (597) 563
 (94) (453) 1,538
 (1,991) (129)
Total noninterest expense$58,116
 $45,934
 $12,182
 27 % $170,627
 $127,625
 $43,002
 34 %$62,971
 $56,712
 $6,259
 11 % $119,062
 $112,511
 $6,551
 6 %

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

Salaries and related costs were $39.7$40.6 million in the thirdsecond quarter of 20132014, an increase of $8.1$2.0 million,, or 25.7%5.3%, from $31.6$38.6 million in the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, salaries and related costs were $113.3$76.1 million,, an increase of $32.2$2.4 million,, or 39.7%3.3%, from $81.1$73.6 million for the same period last year. The increaseThese increases primarily resulted from a $7.2 million and $30.9 millionan 18.1% increase in salaries and related costs, including commissions, forfull-time equivalent employees at the third quarter and first nine months of 2013June 30, 2014, respectively, due compared to the overall growth in our mortgage lending and commercial and consumer business lines. At SeptemberJune 30, 2013, we had increased our full-time equivalent employeeslargely offset by 42.9%reduced mortgage origination commissions and incentives resulting from September 30, 2012.lower mortgage closed loan volume.

General and administrative expense was $9.2$11.1 million in the thirdsecond quarter of 20132014, an increase of $2.1 million,$875 thousand, or 29.2%8.5%, from $7.1$10.3 million in the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, general and administrative expenses were $30.4$21.3 million,, an increase of $11.1 million,$67 thousand, or 57.7%0.3%, from $19.3$21.2 million for the same period last year. These expenses include general office and equipment expense, marketing, taxes and insurance. The increase in general and administrative expense was primarily due to Company growth and increased marketing expenses.

Income Tax Expense

IncomeThe Company's income tax expense was $308 thousand$4.5 million in the thirdsecond quarter of 2014 compared to $5.8 million in the second quarter of 2013. For the first six months of 2014, income tax expense was $5.0 million compared to $12.2$11.2 million in for the third quarter of 2012.same period last year. Our estimated annual effective income tax rate was 31.9%32.3% and 30.0% for the three and six months ended June 30, 2014, respectively, as compared to an annual effective tax rate of 31.6% for 20.8%2013 for 2012. The lower. Our effective income tax rate in 2012 primarily reflected the benefitthree and six months ended June 30, 2014 differed from the Federal statutory tax rate of a full reversal35% due to state income taxes on income in Oregon, Hawaii, California and Idaho and tax-exempt interest income. Included in income tax expense for the first six months of deferred2014 is $406 thousand of discrete tax asset valuation allowances during 2012.items related to prior periods that were recorded in the first quarter of 2014.

Review of Financial Condition – Comparison of SeptemberJune 30, 20132014 to December 31, 20122013

Total assets were $2.85$3.24 billion at SeptemberJune 30, 20132014 and $2.63$3.07 billion at December 31, 20122013. The increase in total assets was primarily due to a $157.3$269.5 million increase in investment securities and a $201.2 million increase in portfolio loans held for sale, partially offset by a $235.7$58.9 million decrease in loans held for sale.investment and a $43.9 million decrease in investment securities. The change in loan balances was the result of the transfer of $310.5 million of single family mortgage loans out of the held for investment portfolio and into loans held for sale in March of this year and the subsequent sale of $266.8 million of these loans. The Company transferred $17.1 million of single family loans out of loans held for sale and into the portfolio at June 30, 2014.

Cash and cash equivalents was $37.9$75.0 million at SeptemberJune 30, 20132014 compared to $25.3$33.9 million at December 31, 20122013, an increase of $12.6$41.1 million,, or 49.9%121.2%.

Investment securities available for sale were $573.6$455.0 million at SeptemberJune 30, 20132014 compared to $416.3$498.8 million at December 31, 20122013, a decrease of $43.9 million, or 8.8%, primarily due to sales of securities.


67



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 $18.0 million at an increase of $157.3 millionJune 30, 2014, or 37.8%. The higher balance of our investment securities portfolio reflects management's decision in the second quarter of 2013which were designated as held to increase this component of the overall asset mix and to add corporate debt securities to the Company's portfolio. With the Company's improved credit position and excess capital, the investment in corporate debt securities provides diversification in the portfolio with minimal additional credit risk.maturity.

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

63



At September 30, 2013 At December 31, 2012At June 30, 2014 At December 31, 2013
(in thousands)Fair Value Percent Fair Value PercentFair Value Percent Fair Value Percent
              
Investment securities available for sale:              
Mortgage-backed securities:              
Residential$144,263
 25.2% $62,853
 15.1%$110,266
 25.2% $133,910
 27.8%
Commercial13,720
 2.4
 14,380
 3.5
13,674
 3.1
 13,433
 2.8
Municipal bonds147,441
 25.7
 129,175
 31.0
125,813
 28.8
 130,850
 27.2
Collateralized mortgage obligations:  
   
  
   
Residential153,466
 26.8
 170,199
 40.9
56,767
 13.0
 90,327
 18.8
Commercial16,991
 3.0
 9,043
 2.2
16,021
 3.7
 16,845
 3.5
Corporate debt securities69,963
 12.2
 
 
72,420
 16.6
 68,866
 14.3
U.S. Treasury securities27,747
 4.8
 30,679
 7.4
42,010
 9.6
 27,452
 5.7
Total investment securities available for sale$573,591
 100.0% $416,329
 100.0%$436,971
 100.0% $481,683
 100.0%
 
Loans held for sale were $385.1$549.4 million at SeptemberJune 30, 20132014 compared to $620.8$279.9 million at December 31, 20122013, a decreasean increase of $235.7$269.5 million,, or 38.0%96.3%. Loans held for sale include single family and multifamily residential loans, typically sold within 30 days of closing the loan. The decreaseincrease in the loans held for sale wasbalance is primarily the result of risingdue to increased single family mortgage interest rates and declining refinancingclosed loan volume coupled with low housing inventories that have constrainedas well as the purchasetransfer of $310.5 million of single family mortgage market.loans out of the loans held for investment portfolio and into loans held for sale in March of this year. During the first six months of 2014, the Company sold $266.8 million of these loans. The Company transferred $17.1 million of single family loans out of loans held for sale and into the loans held for investment portfolio at June 30, 2014.

Loans held for investment, net were $1.51$1.81 billion at SeptemberJune 30, 20132014 compared to $1.31$1.87 billion at December 31, 20122013, an increasea decrease of $201.2$58.9 million,, or 15.4%3.1%. Our single family loan portfolio increased $145.1decreased $155.7 million from December 31, 20122013, as the Company transferred $310.5 million of single family mortgage loans out of the portfolio and into loans held for sale in March of this year. Our construction loans, including commercial construction and residential construction, increased $88.8 million from December 31, 2013, primarily as a result of increasedfrom new originations of mortgages that exceed conventional conforming loan limits. Ourin our commercial real estate and multifamily loan balances increased a combinedresidential construction lending business.

Mortgage servicing rights were $63.4118.0 million fromat June 30, 2014 compared to $162.5 million at December 31, 20122013, a decrease of $44.5 million, or 27%. The decline in the size of our servicing portfolio was the result of a strategic decision to sell a portion of our single family MSRs to increase capital in preparation for compliance with the new Basel III regulatory capital standards. During the quarter, the Company sold the rights to service $2.96 billion as we continued to grow our commercial real estate lending business. These increases were partially offset by aof single family mortgage loans serviced for Fannie Mae, representing $12.0 million24.3% decrease in commercial businessof HomeStreet’s total single family mortgage loans serviced for others portfolio as unscheduled payoffs were greater than loan originations duringof June 30, 2014. The Company anticipates transferring the first nine monthsservicing of 2013.these loans to the purchaser by October 1, 2014, and will continue to service these mortgages as a subservicer for the purchaser until such time. These loans are excluded from the Company's MSR portfolio at June 30, 2014.


68



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, 2013 At December 31, 2012At June 30, 2014 At December 31, 2013
(in thousands)Amount Percent Amount PercentAmount Percent Amount Percent
              
Consumer loans              
Single family$818,992
 53.2% $673,865
 50.3%$749,204
 40.7% $904,913
 47.7%
Home equity129,785
 8.4
 136,746
 10.2
136,181
 7.4
 135,650
 7.1
948,777
 61.6
 810,611
 60.5
885,385
 48.1
 1,040,563
 54.8
Commercial loans              
Commercial real estate (1)
400,150
 26.0
 361,879
 27.0
476,411
 25.9
 477,642
 25.1
Multifamily42,187
 2.7
 17,012
 1.3
72,327
 3.9
 79,216
 4.2
Construction/land development79,435
 5.2
 71,033
 5.3
219,282
 11.9
 130,465
 6.9
Commercial business67,547
 4.5
 79,576
 5.9
185,177
 10.2
 171,054
 9.0
589,319
 38.4
 529,500
 39.5
953,197
 51.9
 858,377
 45.2
1,538,096
 100.0% 1,340,111
 100.0%1,838,582
 100.0% 1,898,940
 100.0%
Net deferred loan fees and costs(3,233)   (3,576)  (3,761)   (3,219)  
1,534,863
   1,336,535
  1,834,821
   1,895,721
  
Allowance for loan losses(24,694)   (27,561)  (21,926)   (23,908)  
$1,510,169
   $1,308,974
  $1,812,895
   $1,871,813
  
 
(1)
SeptemberJune 30, 20132014 and December 31, 20122013 balances comprised of $95.3143.8 million and $94.9156.7 million of owner occupied loans, respectively, and $304.9332.6 million and $267.0320.9 million of non-owner occupied loans, respectively.

Accounts receivable and other assetsDeposits was $128.9 millionwere $2.42 billion at SeptemberJune 30, 20132014 compared to $88.8 million$2.21 billion at December 31, 20122013, an increase of $40.1 million, or 45.2%. This increase was primarily due to a $10.6 million investment in an affordable

64



housing project and an increase in cash provided to counterparties as collateral for derivative positions used to hedge our mortgage servicing rights and mortgage banking activities. A receivable is recorded for the amount of cash delivered as collateral.

Deposits were $2.10 billion at September 30, 2013 compared to $1.98 billion at December 31, 2012, an increase of $121.2$206.9 million, or 6.1%9.4%. This increase was due to higher balances of transaction and savings deposits, which were $1.42$1.72 billion at SeptemberJune 30, 20132014, an increase of $375.2$186.2 million,, or 35.9%12.1%, from $1.05$1.54 billion at December 31, 20122013. Largely offsetting, reflecting the increases in transactionorganic growth and savings deposits was the managed reductionexpansion of certificatesour branch banking network. Certificates of deposit balances which were $460.2$457.5 million at SeptemberJune 30, 20132014, a decrease of $195.2$56.9 million,, or 30%11.1%, from $655.5$514.4 million at December 31, 20122013. This improvement in the composition of deposits was primarily the result of our successful efforts to attract transaction and savings deposit balances through effective brand marketing.

The following table details the composition of our depositsDeposit balances by dollar amount and as a percentage of our total deposits.deposits were as follows for the periods indicated:

(in thousands) At September 30, 2013 At December 31, 2012 At June 30, 2014 At December 31, 2013
 Amount Percent Amount Percent Amount Percent Amount Percent
                
Deposits by Product:        
Noninterest-bearing accounts - checking and savings $134,725
 6% $83,563
 4% $235,844
 9.8% $199,943
 9.0%
Interest-bearing transaction and savings deposits:                
NOW accounts 272,029
 13
 174,699
 9
 324,604
 13.4
 262,138
 11.9
Statement savings accounts due on demand 135,428
 7
 103,932
 5
 166,851
 6.9
 156,181
 7.1
Money market accounts due on demand 879,122
 42
 683,906
 35
 996,473
 41.2
 919,322
 41.6
Total interest-bearing transaction and savings deposits 1,286,579
 62
 962,537
 49
 1,487,928
 61.5
 1,337,641
 60.6
Total transaction and savings deposits 1,421,304
 68
 1,046,100
 53
 1,723,772
 71.3
 1,537,584
 69.6
Certificates of deposit 460,223
 22
 655,467
 33
 457,529
 18.9
 514,400
 23.3
Noninterest-bearing accounts - other 216,549
 10
 275,268
 14
 236,411
 9.8
 158,837
 7.1
Total deposits $2,098,076
 100% $1,976,835
 100% $2,417,712
 100.0% $2,210,821
 100.0%

Federal Home Loan Bank advances were $338.7$384.1 million at SeptemberJune 30, 20132014 compared to $259.1$446.6 million at December 31, 20122013, an increasea decrease of $79.6$62.5 million,, or 30.7%14.0%. The increase was the result of higher overall asset balances, as the Company uses these borrowings to primarily fund our mortgage banking and securities investment activities.


69



Accounts payable and other liabilitiesLong-term debt were $87.5was $61.9 million at SeptemberJune 30, 20132014 compared to $69.7$64.8 million at December 31, 20122013, an increasea decrease of $17.8$3.0 million,, or 25.6%4.6%. This increase was primarily due to the change in the fair value of derivatives used for MSR risk management, partially offset byDuring the first quarter 2013 payment of $13.52014, we redeemed $3.0 million of TruPS that were acquired as part of the acquisition of YNB in net deferred interest payable due on its outstanding TruPS.2013.

Shareholders’ Equity

Shareholders' equity was $268.2$288.2 million at SeptemberJune 30, 20132014 compared with $263.8to $265.9 million at December 31, 20122013. This increase included net income of $11.7 million and other comprehensive income of $10.8 million recognized during the $24.7 millionsix months ended June 30, 2014, partially offset by a comprehensive lossdividend payments of $18.3$1.6 million recognized during the nine months ended September 30, 2013. Thefirst quarter of 2014. Other comprehensive lossincome represents unrealized lossesgains in the valuation of our investment securities portfolio at SeptemberJune 30, 20132014 as a result of the increase in interest rates experienced in the latter part of the second quarter of 2013..

On August 29, 2013, the Company paid a common stock dividend of $0.11 per share payable to shareholders of record as of August 5, 2013.

As a result of the above, shareholders’Shareholders’ equity, on a per share basis, increased towas $18.6019.41 per share at SeptemberJune 30, 20132014, up from $18.34compared to $17.97 per share at December 31, 20122013.


65



Return on Equity and Assets

The following table presents certain information regarding our returns on average equity and average total assets. Return on equity ratios for the periods shown may not be comparable due to the impact and timing of the Company's initial public offering of common stock completed in February 2012 and changes in the annual effective income tax rate between periods. During 2012, the Company benefited from the full reversal of its deferred tax asset valuation allowances.
 
At or for the Three Months
Ended September 30,
 At or for the Nine Months
Ended September 30,
At or for the Three Months
Ended June 30,
 At or for the Six Months
Ended June 30,
2013 2012 2013 20122014 2013 2014 2013
              
Return on assets (1)
0.24% 3.60% 1.25% 3.40%1.22% 1.86% 0.77% 1.81%
Return on equity (2)
2.45% 38.02% 11.94% 41.82%13.17% 17.19% 8.38% 16.58%
Equity to assets ratio (3)
9.74% 9.47% 10.48% 8.14%9.29% 10.80% 9.15% 10.89%
 
(1)Net income (annualized) divided by average total assets (annualized).assets.
(2)Net incomeearnings (loss) available to common shareholders (annualized) divided by average equity (annualized).common shareholders’ equity.
(3)Average equity divided by average total assets.

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.

As a resultThis process is dynamic and is based on management's current view of a change in the manner in which management evaluates strategic decisions, commencingCompany's operations and is not necessarily comparable with the second quarter of 2013, the Company realigned itssimilar information for other financial institutions. We define our business segments by product type and organized them into two lines of business: Commercialcustomer segment. If the management structure or the allocation process changes, allocations, transfers and Consumer Banking and Mortgage Banking. In conjunction with this realignment, the Company modified its internal reporting to provide discrete financial information to management for these two business segments.assignments may change. The information that follows has been revised to reflect the current business segments.

A description of the Company's business segments and the products and services that they providemanner in which financial information is as follows.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 and business portfolio loans; non-deposit investment products; insurance products and cash management services. We originate residential and commercial 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 commercialmultifamily real estate loans including multifamily lending through our Fannie Mae DUS business, whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. As of SeptemberJune 30, 20132014, our bank branch network consists of 2331 branches primarily in the Pacific Northwest and Hawaii. At SeptemberJune 30, 20132014 and December 31, 20122013, our transaction and savings deposits totaled $1.42$1.72 billion and $1.05$1.54 billion, respectively, and our loan portfolio totaled $1.511.81 billion and $1.311.87 billion, respectively. This segment is also responsible for the management of the Company's portfolio of investment securities.


6670



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
Three Months Ended
June 30,
  
Change
 
Percent
Change
 Six Months Ended
June 30,
 

Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Net interest income$15,919
 $12,096
 $3,823
 32 % $40,687
 $34,454
 $6,233
 18 %$19,403
 $13,790
 $5,613
 41 % $39,636
 $24,917
 $14,719
 59 %
(Reversal of) provision for credit losses(1,500) 5,500
 (7,000) NM
 900
 7,500
 (6,600) (88)
Provision for credit losses
 400
 (400) (100) (1,500) 2,400
 (3,900) NM
Noninterest income1,229
 2,474
 (1,245) (50) 5,156
 7,257
 (2,101) (29)6,614
 2,776
 3,838
 138
 9,572
 6,112
 3,460
 57
Noninterest expense13,577
 13,302
 275
 2
 42,748
 46,848
 (4,100) (9)20,434
 13,905
 6,529
 47
 39,727
 29,764
 9,963
 33
Income (loss) before income taxes5,071
 (4,232) 9,303
 NM
 2,195
 (12,637) 14,832
 NM
Income (loss) before income tax expense (benefit)5,583
 2,261
 3,322
 147
 10,981
 (1,135) 12,116
 NM
Income tax expense (benefit)1,219
 (1,904) 3,123
 NM
 (125) (2,448) 2,323
 (95)1,830
 281
 1,549
 551
 3,112
 (816) 3,928
 NM
Net income (loss)$3,852
 $(2,328) $6,180
 NM
 $2,320
 $(10,189) $12,509
 NM
$3,753
 $1,980
 $1,773
 90 % $7,869
 $(319) $8,188
 NM
                              
Average assets$2,129,597
 $1,772,975
 $356,622
 20 % $1,996,713
 $1,870,076
 $126,637
 7 %$2,478,073
 $2,018,573
 $459,500
 23 % $2,534,399
 $1,954,068
 $580,331
 30 %
Pre-tax pre-provision profit (loss) (1)
3,571
 1,268
 2,303
 182
 3,095
 (5,137) 8,232
 NM
Efficiency ratio (2)
79.18% 91.30% NM
 NM
 93.25% 112.32% NM
 NM
Efficiency ratio (1)
78.54% 83.94%     80.73% 95.92%    
Full-time equivalent employees (ending)504
 377
 NM
 34
 504
 377
 NM
 34
599
 476
 123
 26
 599
 476
 123
 26
Multifamily net gain on mortgage loan origination and sale activity$2,113
 $1,040
 1,073
 103
 $4,747
 $3,241
 1,506
 46
$693
 $709
 $(16) (2) $1,089
 $2,634
 $(1,545) (59)
                              
Production volumes:                              
Multifamily mortgage originations10,734
 20,209
 (9,475) (47) 74,643
 71,830
 2,813
 4
23,105
 14,790
 8,315
 56
 34,448
 63,909
 (29,461) (46)
Multifamily mortgage loans sold21,998
 26,515
 (4,517) (17) 87,971
 85,116
 2,855
 3
$15,902
 $15,386
 $516
 3 % $22,165
 $65,973
 $(43,808) (66)%
NM = not meaningful                              

(1)
Pre-tax pre-provision profit is total net revenue (net interest income and noninterest income) less noninterest expense. The Company believes that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.
(2)
Noninterest expense divided by total net revenue (net interest income and noninterest income).

Commercial and Consumer Banking net income was $3.9$3.8 million for the thirdsecond quarter of 20132014, improved by $1.8 million from net income of $2.0 million for the $6.2second quarter of 2013. For the first six months of 2014, Commercial and Consumer Banking net income was $7.9 million, improved by $8.2 million, from a net loss of $319 thousand for the first six months of 2013. The increase in net income in the $2.3second quarter of 2014 was primarily the result of a $5.6 million increase in net interest income, resulting from higher average balances of interest-earning assets related to our fourth quarter 2013 acquisitions, as well as higher yields on loans held for investment. Included in net income for the thirdsecond quarter of 2012. For the first nine months of 2013, Commercial and Consumer Banking had net income of $2.3 million, improved by $12.5 million2014 from a net loss of $10.2 million for the first nine months of 2012. Improved credit quality of the Company's loan portfolio resulted inwas a $1.53.9 million reversalpre-tax gain on single family mortgage origination and sale activities from the sale of loans that were originally held for investment.
Due to thea significant decrease in classified loan balances and lower charge-offs, we recorded no provision for credit losses in the thirdsecond quarter of 20132014, which followed a release of $1.5 million of reserves in the first quarter of 2014, compared to a provision of $5.5 million400 thousand in the thirdsecond quarter of 2012. Additionally, the increase in net income in 2013 wasand $2.4 million during the result of an increase in net interest income, which reflects improvements in our deposit product and pricing strategy. That strategy resulted in our reducing higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits.six months ended June 30, 2013.



67



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
Three Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Servicing income, net:                              
Servicing fees and other$789
 $1,017
 $(228) (22)% $2,341
 $2,569
 $(228) (9)%$1,017
 $739
 $278
 38% $1,907
 $1,551
 $356
 23 %
Amortization of multifamily MSRs(433) (598) 165
 (28) (1,347) (1,551) 204
 (13)(434) (423) (11) 3
 (858) (913) 55
 (6)
Commercial mortgage servicing income$356
 $419
 $(63) (15)% $994
 $1,018
 $(24) (2)%$583
 $316
 $267
 84% $1,049
 $638
 $411
 64 %


71




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

(in thousands)At September 30,
2013
 At December 31,
2012
At June 30,
2014
 At December 31,
2013
      
Commercial      
Multifamily$722,767
 $727,118
$704,997
 $720,429
Other50,629
 53,235
97,996
 95,673
Total commercial loans serviced for others$773,396
 $780,353
$802,993
 $816,102

Commercial and Consumer Banking segment noninterest expense of $13.6$20.4 million increased $275 thousand,$6.5 million, or 2.1%47.0%, from $13.3$13.9 million in the thirdsecond quarter of 20122013, primarily due to increased salaries and related costs, reflecting the growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network.network, including growth through acquisitions.


Mortgage Banking Segment

Mortgage Banking originates and purchases single family residential mortgage loans for sale in the secondary markets. We have become a rated originator and servicer of non-conforming jumbo loans, allowing us to sell these loans to other securitizers. We also purchase loans from Windermere Mortgage ServicesWMS Series LLC through a correspondent arrangement between HomeStreet Bank andwith 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. 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.


6872



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
Three Months Ended
June 30,
 Change 
Percent
Change
 Six Months Ended
June 30,
 
 
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Net interest income$4,493
 $4,424
 $69
 2 % $12,375
 $9,697
 $2,678
 28 %$3,744
 $3,625
 $119
 3 % $6,223
 $7,733
 $(1,510) (20)%
Noninterest income36,945
 66,617
 (29,672) (45) 149,517
 158,832
 (9,315) (6)47,036
 54,780
 (7,744) (14) 78,785
 110,387
 (31,602) (29)
Noninterest expense44,539
 32,632
 11,907
 36
 127,879
 80,777
 47,102
 58
42,537
 42,807
 (270) (1) 79,335
 82,747
 (3,412) (4)
(Loss) income before income taxes(3,101) 38,409
 (41,510) NM
 34,013
 87,752
 (53,739) (61)
Income tax (benefit) expense(911) 14,090
 (15,001) NM
 11,663
 16,935
 (5,272) (31)
Net (loss) income$(2,190) $24,319
 $(26,509) NM
 $22,350
 $70,817
 $(48,467) (68)
Income before income tax expense8,243
 15,598
 (7,355) (47) 5,673
 35,373
 (29,700) (84)
Income tax expense2,634
 5,510
 (2,876) (52) 1,879
 12,046
 (10,167) (84)
Net income$5,609
 $10,088
 $(4,479) (44)% $3,794
 $23,327
 $(19,533) (84)%
    
              
          
Average assets$656,697
 $670,715
 $(14,018) (2)% $641,336
 $506,098
 $135,238
 27 %$584,256
 $581,361
 $2,895
  % $508,109
 $593,817
 $(85,708) (14)%
Efficiency ratio (1)
107.48% 45.93% NM
 NM
 78.99% 47.93% NM
 NM
83.77% 73.29%     93.33% 70.05%    
Full-time equivalent employees (ending)922
 621
 NM
 48
 922
 621
 NM
 48
947
 833
 114
 14
 947
 833
 114
 14
Production volumes for sale to the secondary market:                              
Single family mortgage closed loan volume (2)(3)
1,187,061
 1,368,238
 (181,177) (13) 3,686,503
 3,149,196
 537,307
 17
$1,100,704
 $1,307,286
 $(206,582) (16) $1,774,987
 $2,499,442
 $(724,455) (29)
Single family mortgage interest rate lock commitments(2)
786,147
 1,313,182
 (527,035) (40) 3,245,259
 3,531,713
 (286,454) (8)1,201,665
 1,423,290
 (221,625) (16) 2,004,973
 2,459,112
 (454,139) (18)
Single family mortgage loans sold(2)
1,326,888
 1,238,879
 88,009
 7
 3,916,918
 2,735,893
 1,181,025
 43
$906,342
 $1,229,686
 $(323,344) (26)% $1,526,255
 $2,590,030
 $(1,063,775) (41)%
(1)
Noninterest expense divided by total net revenue (net interest income and noninterest income).
(2)
Includes loans originated by Windermere MortgageWMS Series Services LLC ("WMS") 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 lossincome was $2.2$5.6 million for the thirdsecond quarter of 20132014, a decrease of $26.5$4.5 million or 44.4% from net income of $24.3$10.1 million for the thirdsecond quarter of 20122013. For the first ninesix months of 2013,2014, Mortgage Banking net income was $22.4$3.8 million,, a decrease of $48.5$19.5 million,, or 68.4%83.7%, from net income of $70.8$23.3 million for the first ninesix months of 2012.2013. The decrease in Mortgage Banking net income for the thirdsecond quarter of 20132014 was driven primarily by higher mortgage interest rates that led to a sharp decrease in interest rate lock commitment volume as a substantial amountprimarily due to higher mortgage interest rates which began in the latter part of the gain on loan origination and sale activities is recognized at the time of interest rate lock, as well as the imbalance between the volume of interest rate lock commitments and closed loans. In periods where the volume of closed loans significantly exceeds the volume of interest rate lock commitments, noninterest expense will be higher relative to noninterest income because variable costs, notably commissions and incentives, are recognized at the time of closing the loan.  In the thirdsecond quarter of 2013, single family mortgage closed loans of $1.19 billion were 51.0% greater than interest rate lock commitments of $786.1 million.2013.


6973



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) 2013 2012 2013 2012
         
Net gain on mortgage loan origination and sale activities:(1)
        
Single family:        
Servicing value and secondary marketing gains(2)
 $23,076
 $56,142
 $110,760
 $120,471
Provision for repurchase losses(3)
 
 (526) 
 (2,846)
Net gain from secondary marketing activities 23,076
 55,616
 110,760
 117,625
Loan origination and funding fees 8,302
 8,680
 24,363
 20,817
Total mortgage banking net gain on mortgage loan origination and sale activities(1)
 $31,378
 $64,296
 $135,123
 $138,442
         
Composite Margin (in basis points):        
Servicing value and secondary marketing gains / interest rate lock commitments(4)
 294
 424
 328
 333
Loan origination and funding fees / retail mortgage originations(5)
 81
 77
 77
 83
Composite Margin 375
 501
 405
 416
  Three Months Ended
June 30,
 Six Months Ended
June 30,
(in thousands) 2014 2013 2014 2013
         
Net gain on mortgage loan origination and sale activities:(1)
        
Single family:        
Servicing value and secondary market gains(2)
 $30,233
 $43,448
 $49,792
 $87,683
Loan origination and funding fees 6,781
 8,267
 11,542
 16,062
Total mortgage banking net gain on mortgage loan origination and sale activities(1)
 $37,014
 $51,715
 $61,334
 $103,745
(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.
(3)
Represents changes in estimated probable future repurchase losses on previously sold loans.
(4)
Servicing value and secondary marketing gains have been aggregated and are stated as a percentage of interest rate lock commitments. In previous quarters, the value of originated mortgage servicing rights was presented as a separate component of the composite margin and stated as a percentage of mortgage loans sold. Prior periods have been revised to conform to the current presentation.
(5)
Loan origination and funding fees is stated as a percentage of mortgage originations from the retail channel and excludes mortgage loans purchased from WMS.

Net gain on mortgage loan origination and sale activities was $31.437.0 million for the thirdsecond quarter of 20132014, a decrease of $32.9$14.7 million,, or 51.2%28.4%, from $64.3$51.7 million in the thirdsecond quarter of 20122013. This decrease is primarily the result of the 40.1%a 15.6% decrease in interest rate lock commitments, which was heavilymainly driven by an increase in mortgage interest rates thatwhich began in the latter part of the second quarter of 2013, which led to a decrease in refinance mortgage volume, and thea shift to a purchase mortgage-dominated market.

Due to differences in the timing of revenue recognition between components of the gain on loan origination and sale activities, the Company analyzes the profitability of these activities using a 'Composite Margin,' which is comprised of the ratios of the components to their respective populations of interest rate lock commitments and closed loans. The Composite Margin for the third quarter of 2013 was 375 basis points, down from 501 basis points in the third quarter of 2012. The decrease from the prior year is primarily the result of increased price competition resulting from lower industry application volume and the shift to a purchase mortgage-dominated market. In addition, due to the impact of changes in the FHA mortgage insurance program, we experienced a reduction in FHA-insured mortgage loan originations that historically have had higher profit margins on their origination and sale.

70



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
Three Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
 Six Months Ended
June 30,
 
Dollar
Change
 
Percent
Change
(in thousands)2013 2012 2013 2012 2014 2013 2014 2013 
                              
Servicing income, net:                              
Servicing fees and other$8,145
 $6,151
 $1,994
 32 % $22,156
 $17,741
 $4,415
 25 %$9,095
 $7,216
 $1,879
 26 % $18,054
 $14,011
 $4,043
 29 %
Changes in fair value of MSRs due to modeled amortization (1)
(5,221) (5,360) 139
 (3) (16,896) (14,382) (2,514) 17
(7,109) (6,964) (145) 2
 (13,077) (12,639) (438) 3
2,924
 791
 2,133
 270 % 5,260
 3,359
 (1,226) (36)%1,986
 252
 1,734
 688
 4,977
 1,372
 3,605
 263
Risk management:                              
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2)
(2,900) (5,565) $2,665
 (48)% 15,403
 (13,507) $28,910
 (214)%(3,326)
(3 
) 
15,120
 $(18,446) (122) (8,735)
(3 
) 
19,268
 $(28,003) (145)
Net gain from derivatives economically hedging MSRs3,631
 4,861
 (1,230) (25) (12,392) 24,600
 (36,992) (150)10,941
 (13,505) 24,446
 (181) 20,838
 (16,023) 36,861
 (230)
731
 (704) 1,435
 NM
 3,011
 11,093
 (9,658) (87)7,615
 1,615
 6,000
 372
 12,103
 3,245
 8,858
 273
Mortgage servicing income$3,655
 $87
 $3,568
 NM
 $8,271
 $14,452
 $(10,884) (75)%
NM = not meaningful               
Mortgage Banking servicing income$9,601
 $1,867
 $7,734
 414 % $17,080
 $4,617
 $12,463
 270 %
(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 the three months ended June 30, 2014.
Single family mortgage servicing income of $3.7$9.6 million in the thirdsecond quarter of 20132014 increased $3.67.7 million, or 414%, from $1.9 million in the second quarter of 2013. Included in servicing income for the second quarter of 2014 is $4.7 million of pre-tax income recognized from the sale of single family MSRs. The increase compared to the thirdsecond quarter of 20122013. This increase was primarilyalso due to improved risk management results and increased servicing fees collected in the quarter on the Company's single family mortgage servicing and improved mortgage servicing rights ("MSR") risk management results.collected. 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. 

Single
74



For the first six months of 2014, single family mortgage servicing income of $8.3$17.1 million increased $12.5 million, or 269.9%, from $4.6 million for the first ninesix months of 2013, decreased $10.9 million from the first nine months primarily as a result of 2012, primarily due toimproved risk management activities.results.
Single family mortgage servicing fees collected in the thirdsecond quarter of 2013increased$2.0 million2014, increased $1.9 million, or 32.4%26.0%, from the thirdsecond quarter of 20122013 resulting primarily from growth in the portfolio of single family loans serviced for others. TheAs a result of the June 30, 2014 sale of single family MSRs, the portfolio of single family loans serviced for others increaseddecreased to $9.9 billion at $11.29 billionJune 30, 2014 at quarter end compared to $8.87$10.4 billion at December 31, 2012 and $8.11 billion at SeptemberJune 30, 2012.2013. Mortgage servicing fees collected in future periods will be negatively impacted in the short term because the balance of the loans serviced for others portfolio was reduced as a consequence of this sale.

Single family loans serviced for others consisted of the following.

(in thousands)At September 30,
2013
 At December 31,
2012
At June 30,
2014
 At December 31,
2013
      
Single family      
U.S. government and agency$10,950,086
 $8,508,458
$9,308,096
 $11,467,853
Other336,158
 362,230
586,978
 327,768
Total single family loans serviced for others$11,286,244
 $8,870,688
$9,895,074
 $11,795,621

Mortgage Banking noninterest expense of $44.5$42.5 million increased $11.9 million, or 36.5%, from $32.6 million in the thirdsecond quarter of 20122014 decreased $270 thousand, or 0.6%, from $42.8 million in the second quarter of 2013, primarily due to lower commission and incentive expense as closed loan volumes declined 15.8% from the second quarter of 2013. This increasedecrease was primarily attributablepartially offset by higher expenses related to increased salariessalary and related costs due to our continued growth in loan production personnel and general and administrative expenses resulting from our expansion ininto new markets.

71



Mortgage Banking net loss of $2.2 million for the third quarter of 2013 was driven primarily by the sharp decrease in interest rate lock commitment volume, as a substantial amount of the gain on loan origination and sale activities is recognized at the time of rate lock, as well as the imbalance between the volume of interest rate lock commitments and closed loans.  In periods where the volume of closed loans significantly exceeds the volume of interest rate lock commitments, noninterest expense will be higher relative to noninterest income because variable costs, notably commissions and incentives, are recognized at the time of closing the loan. In the third quarter of 2013, single family mortgage closed loans of $1.19 billion were 51.0% greater than interest rate lock commitments of $786.1 million.

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 but are not limited to 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 20122013 Annual Report on Form 10-K, as well as Note 13,14, Commitments, Guarantees and Contingencies within thein our 20122013 Annual Report on Form 10-K and Note 8,7, 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 20122013 Annual Report on Form 10-K.

75



Credit Risk Management

The following discussion highlights developments since December 31, 20122013 and should be read in conjunction with the Credit Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 20122013 Annual Report on Form 10-K.

Asset Quality and Nonperforming Assets

Nonperforming assets ("NPAs") were $39.0$32.3 million, and $53.8 million at September 30, 2013 and December 31, 2012, respectively. NPAs at September 30, 2013 represented 1.37% or 1.00% of total assets at June 30, 2014, compared to 2.05%$38.6 million, or 1.26% of total assets at December 31, 20122013. Nonaccrual loans of $26.8$21.2 million,, or 1.74%1.16% of total loans at SeptemberJune 30, 20132014, decreased$3.1 $4.5 million, or 17.5%, from $25.7 million, or 10.5% from $29.9 million, or 2.24%1.36% of total loans at December 31, 20122013. OREO balances of $12.3$11.1 million at SeptemberJune 30, 2013declined$11.7 million2014, decreased $1.8 million, or 48.8%14.2%, from $23.9$12.9 million at December 31, 20122013. Net charge-offs during the three and ninesix months ended SeptemberJune 30, 20132014 were $1.5 million$149 thousand and $3.8 million,$421 thousand, respectively, compared with $5.0$1.1 million and $22.7$2.3 million during the three and ninesix months ended SeptemberJune 30, 2012,2013, respectively.

At SeptemberJune 30, 20132014, our loans held for investment portfolio, excluding the allowance for loan losses, was $1.53$1.83 billion,, an increase a decrease of $198.3$60.9 million from December 31, 20122013, while the. The allowance for loan losses decreased to $24.7$21.9 million,, or 1.61%1.19% of loans held for investment, compared to $27.623.9 million, or 2.06%1.26% of loans held for investment at December 31, 20122013, reflecting the improved credit quality of the Company's loan portfolio..

Improved credit quality ofDue to a significant decrease in classified loan balances and lower charge-offs, the Company's loan portfolio resulted in aCompany recorded $1.5 millionno reversal to the provision for credit losses in the thirdsecond quarter of 20132014, compared to a provision of $5.5 million400 thousand in the thirdsecond quarter of 20122013. OurFor the six months ended June 30, 2014, we had a release of reserves of $1.5 million, compared to a provision for credit losses of $2.4 million for the ninesix months ended September 30, 2013 was $900 thousand. For the three and nine months ended September 30, 2012, our provision for credit losses was $5.5 million and $7.5 million, respectively. Net charge-offs in the quarter totaled $1.5 million, down from $5.0 million of net charge-offs in the third quarter of 2012. Of the $1.5 million in net charge-offs during the quarter, $967 thousand had been specifically reserved as of June 30, 2013.2013.

72




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, 2013At June 30, 2014
(in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
          
Impaired loans:          
Loans with no related allowance recorded$74,169
 $88,951
 $
$73,616
 $89,210
 $
Loans with an allowance recorded40,798
 41,163
 2,958
43,396
 44,172
 2,528
Total$114,967
 $130,114
 $2,958
$117,012
(1) 
$133,382
 $2,528
At December 31, 2012At December 31, 2013
(in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
          
Impaired loans:          
Loans with no related allowance recorded$53,615
 $67,262
 $
$81,301
 $112,795
 $
Loans with an allowance recorded70,350
 72,220
 6,368
38,568
 38,959
 2,571
Total$123,965
 $139,482
 $6,368
$119,869
(1) 
$151,754
 $2,571
(1)
Includes $67.8 million and $70.3 million in single family performing troubled debt restructurings ("TDRs") at June 30, 2014 and December 31, 2013, respectively.

The Company had 190227 impaired loans totaling $115.0117.0 million at SeptemberJune 30, 20132014 and 167216 impaired loans totaling $124.0119.9 million at December 31, 20122013. The average recorded investment in these loans for the three and ninesix months ended SeptemberJune 30, 20132014 was $122.2$117.4 million and $123.5$118.2 million, respectively, compared with $130.8$127.6 million and $154.7$126.4 million for the three and ninesix months ended SeptemberJune 30, 2012.2013, respectively. Impaired loans of $40.8$43.4 million at September 30, 2013 and $38.6 million had a valuation allowance of $2.5 million and $2.6 million at $3.0 millionJune 30, 2014. At and December 31, 20122013, impaired loans of $70.4 million had a valuation allowance of $6.4 million.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

76



Allowance for Loan Losses within Part II, Item 7 Management's Discussion and Analysis in our 20122013 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, 2013 At December 31, 2012At June 30, 2014 At December 31, 2013
(in thousands)Amount 
Percent of
Allowance
to Total
Allowance
 
Loan Category
as a % of
Total Loans
 Amount 
Percent of
Allowance
to Total
Allowance
 
Loan Category
as a % of
Total Loans
Amount 
Percent of
Allowance
to Total
Allowance
 
Loan Category
as a % of
Total Loans
 Amount 
Percent of
Allowance
to Total
Allowance
 
Loan Category
as a % of
Total Loans
                      
Consumer loans                      
Single family$12,132
 48.7% 53.2% $13,388
 48.2% 50.3%$9,111
 41.1% 40.7% $11,990
 49.8% 47.7%
Home equity4,636
 18.6% 8.4% 4,648
 16.7% 10.2%3,517
 15.9
 7.4
 3,987
 16.6
 7.1
16,768
 67.3% 61.6% 18,036
 64.9% 60.5%12,628
 57.0
 48.1
 15,977
 66.4
 54.8
Commercial loans                      
Commercial real estate4,468
 17.9% 26.0% 5,312
 19.1% 27.0%4,063
 18.3
 25.9
 4,012
 16.7
 25.2
Multifamily770
 3.1% 2.7% 622
 2.2% 1.3%887
 4.0
 3.9
 942
 3.9
 4.2
Construction/land development1,392
 5.6% 5.2% 1,580
 5.7% 5.3%2,418
 10.9
 11.9
 1,414
 5.9
 6.9
Commercial business1,496
 6.1% 4.5% 2,201
 8.1% 5.9%2,172
 9.8
 10.2
 1,744
 7.1
 8.9
8,126
 32.7% 38.4% 9,715
 35.1% 39.5%9,540
 43.0
 51.9
 8,112
 33.6
 45.2
Total allowance for credit losses$24,894
 100.0% 100.0% $27,751
 100.0% 100.0%$22,168
 100.0% 100.0% $24,089
 100.0% 100.0%



7377



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,Three Months Ended June 30, Six Months Ended June 30,
(in thousands)2013 2012 2013 20122014 2013 2014 2013
              
Allowance at the beginning of period$27,858
 $27,125
 $27,751
 $42,800
$22,317
 $28,594
 $24,089
 $27,751
(Reversal of) provision for loan losses(1,500) 5,500
 900
 7,500
Provision for loan losses
 400
 (1,500) 2,400
Recoveries:              
Consumer              
Single family179
 22
 425
 455
25
 171
 41
 246
Home equity273
 121
 526
 398
236
 156
 326
 253
452
 143
 951
 853
261
 327
 367
 499
Commercial              
Commercial real estate
 130
 
 258
100
 
 156
 
Construction/land development348
 193
 699
 835
46
 281
 62
 351
Commercial business25
 631
 173
 717
63
 36
 147
 148
373
 954
 872
 1,810
209
 317
 365
 499
Total recoveries825
 1,097
 1,823
 2,663
470
 644
 732
 998
Charge-offs:              
Consumer              
Single family(606) (1,363) (2,468) (3,889)(172) (1,141) (283) (1,862)
Home equity(377) (1,078) (1,515) (3,577)(136) (299) (559) (1,138)
(983) (2,441) (3,983) (7,466)(308) (1,440) (842) (3,000)
Commercial              
Commercial real estate(1,306) (1,757) (1,449) (3,474)(23) (340) (23) (143)
Construction/land development
 (1,823) (148) (13,858)
 
 
 (148)
Commercial business
 (74) 
 (538)(288) 
 (288) 
(1,306) (3,654) (1,597) (17,870)(311) (340) (311) (291)
Total charge-offs(2,289) (6,095) (5,580) (25,336)(619) (1,780) (1,153) (3,291)
(Charge-offs), net of recoveries(1,464) (4,998) (3,757) (22,673)(149) (1,136) (421) (2,293)
Balance at end of period$24,894
 $27,627
 $24,894
 $27,627
$22,168
 $27,858
 $22,168
 $27,858




7478



The following table presents the composition of TDRs by accrual and nonaccrual status.
 
At September 30, 2013At June 30, 2014
(in thousands)Accrual Nonaccrual TotalAccrual Nonaccrual Total
          
Consumer          
Single family (1)
$71,686
 $4,819
 $76,505
$69,779
 $1,461
 $71,240
Home equity2,426
 132
 2,558
2,394
 
 2,394
74,112
 4,951
 79,063
72,173
 1,461
 73,634
Commercial          
Commercial real estate20,385
 
 20,385
21,401
 2,735
 24,136
Multifamily3,190
 
 3,190
3,125
 
 3,125
Construction/land development3,122
 3,544
 6,666
5,843
 
 5,843
Commercial business120
 
 120
302
 9
 311
26,817
 3,544
 30,361
30,671
 2,744
 33,415
$100,929
 $8,495
 $109,424
$102,844
 $4,205
 $107,049
 
At December 31, 2012At December 31, 2013
(in thousands)Accrual Nonaccrual TotalAccrual Nonaccrual Total
          
Consumer          
Single family (1)
$67,483
 $3,931
 $71,414
$70,304
 $4,017
 $74,321
Home equity2,288
 465
 2,753
2,558
 86
 2,644
69,771
 4,396
 74,167
72,862
 4,103
 76,965
Commercial          
Commercial real estate21,071
 770
 21,841
19,620
 628
 20,248
Multifamily3,221
 
 3,221
3,163
 
 3,163
Construction/land development6,365
 5,042
 11,407
6,148
 
 6,148
Commercial business147
 
 147
112
 
 112
30,804
 5,812
 36,616
29,043
 628
 29,671
$100,575
 $10,208
 $110,783
$101,905
 $4,731
 $106,636

(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $19.0 million and $17.8 million, at $17.6 millionJune 30, 2014 and $13.1 million, at September 30, 2013 and December 31, 2012,2013, respectively.



75



The followingCompany had 210 loan relationships classified as troubled debt restructurings (“TDRs”) totaling $107.0 million at June 30, 2014 with related unfunded commitments of $52 thousand. The Company had 204 loan relationships classified as TDRs totaling $106.6 million at December 31, 2013 with related unfunded commitments of $47 thousand. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables present information about TDRs by loan portfolio segment and loan class.
 At September 30, 2013
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 Related cumulative charge-offs
        
Consumer loans       
Single family (1)
       
 Interest rate reduction 151
 $75,155
 $3,504
 Payment restructure 8
 1,350
 
   159
 $76,505
 $3,504
Home equity       
 Interest rate reduction 20
 $2,384
 $25
 Payment restructure 5
 174
 
   25
 $2,558
 $25
Total consumer       
 Interest rate reduction 171
 $77,539
 $3,529
 Payment restructure 13
 1,524
 
   184
 $79,063
 $3,529
Commercial loans       
Commercial real estate       
 Interest rate reduction 2
 $5,779
 $1,884
 Forgiveness of principal 1
 14,606
 1,000
   3
 $20,385
 $2,884
Multifamily       
 Interest rate reduction 2
 $3,190
 $
   2
 $3,190
 $
Construction/land development       
 Interest rate reduction 3
 $6,254
 $7,063
 Forgiveness of principal 1
 412
 49
   4
 $6,666
 $7,112
Commercial business       
 Payment restructure 1
 120
 68
   1
 $120
 $68
Total commercial       
 Interest rate reduction 7
 $15,223
 $8,947
 Payment restructure 1
 120
 68
 Forgiveness of principal 2
 15,018
 1,049
   10
 $30,361
 $10,064
Total loans       
 Interest rate reduction 178
 $92,762
 $12,476
 Payment restructure 14
 1,644
 68
 Forgiveness of principal 2
 15,018
 1,049
   194
 $109,424
 $13,593

(1)above.
Includes loan balances insured by the FHA or guaranteed by the VA of $17.6 million at September 30, 2013.


7679



 At December 31, 2012
(dollars in thousands)Concession type 
Number of loan
relationships
 
Recorded
investment
 Related cumulative charge-offs
        
Consumer loans       
Single family (1)
       
 Interest rate reduction 118 $70,042
 $3,647
 Payment restructure 8 1,372
 
   126 $71,414
 $3,647
Home equity       
 Interest rate reduction 19 $2,577
 $176
 Payment restructure 5 176
 
   24 $2,753
 $176
Total consumer       
 Interest rate reduction 137 $72,619
 $3,823
 Payment restructure 13 1,548
 
   150 $74,167
 $3,823
Commercial loans       
Commercial real estate       
 Interest rate reduction 2 $6,071
 $1,884
 Payment restructure 1 15,770
 
   3 $21,841
 $1,884
Multifamily       
 Interest rate reduction 2 $3,221
 $
   2 $3,221
 $
Construction/land development       
 Interest rate reduction 4 $10,753
 $7,065
 Forgiveness of principal 2 654
 43
   6 $11,407
 $7,108
Commercial business       
 Payment restructure 1 $147
 $68
   1 $147
 $68
Total commercial       
 Interest rate reduction 8 $20,045
 $8,949
 Payment restructure 2 15,917
 68
 Forgiveness of principal 2 654
 43
   12 $36,616
 $9,060
Total loans       
 Interest rate reduction 145 $92,664
 $12,772
 Payment restructure 15 17,465
 68
 Forgiveness of principal 2 654
 43
   162 $110,783
 $12,883

(1)
Includes loan balances insured by the FHA or guaranteed by the VA of $13.1 million at December 31, 2012.


77



Delinquent loans and other real estate owned by loan type consisted of the following.
 
At September 30, 2013At June 30, 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
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$10,359
 $5,170
 $12,648
 $43,762
 $71,939
 $5,494
$10,967
 $3,943
 $6,988
 $32,032
(1) 
$53,930
 $3,205
Home equity554
 100
 2,295
 
 2,949
 
209
 368
 1,166
 
 1,743
 
10,913
 5,270
 14,943
 43,762
 74,888
 5,494
11,176
 4,311
 8,154
 32,032
 55,673
 3,205
Commercial loans                      
Commercial real estate
 
 6,861
 
 6,861
 

 
 9,871
 
 9,871
 2,040
Construction/land development
 
 3,544
 
 3,544
 5,815

 72
 
 
 72
 5,838
Commercial business
 
 1,405
 
 1,405
 957
759
 837
 3,172
 
 4,768
 

 
 11,810
 
 11,810
 6,772
759
 909
 13,043
 
 14,711
 7,878
Total$10,913
 $5,270
 $26,753
 $43,762
 $86,698
 $12,266
$11,935
 $5,220
 $21,197
 $32,032
 $70,384
 $11,083
 
(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, 2012At December 31, 2013
(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
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$11,916
 $4,732
 $13,304
 $40,658
 $70,610
 $4,071
$6,466
 $4,901
 $8,861
 $46,811
(1) 
$67,039
 $5,246
Home equity787
 242
 2,970
 
 3,999
 
375
 75
 1,846
 
 2,296
 
12,703
 4,974
 16,274
 40,658
 74,609
 4,071
6,841
 4,976
 10,707
 46,811
 69,335
 5,246
Commercial loans                      
Commercial real estate
 
 6,403
 
 6,403
 10,283

 
 12,257
 
 12,257
 1,688
Construction/land development
 
 5,042
 
 5,042
 9,587

 
 
 
 
 5,977
Commercial business
 
 2,173
 
 2,173
 

 
 2,743
 
 2,743
 

 
 13,618
 
 13,618
 19,870

 
 15,000
 
 15,000
 7,665
Total$12,703
 $4,974
 $29,892
 $40,658
 $88,227
 $23,941
$6,841
 $4,976
 $25,707
 $46,811
 $84,335
 $12,911
 
(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 ManagementResources

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 offrom depositors, funding loan commitments, 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 HomeStreetthe Bank
have established liquidity guidelines and operating practicesplans that involve the assessment ofdetail the sources and uses of cash as well as collateral maintained at the Federal Reserve Bank and FHLB. The overall liquidity position is projected on a short-term and long-term basis to manage liquidity risk. Furthermore, the projected liquidity position is analyzed and reviewed using stress scenarios on a semi-annual basis to identify potential adverse impacts to off-balance sheet capacity and to ensure operational preparedness.liquidity.

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

7880




HomeStreet, Inc.

The main source of liquidity for the CompanyHomeStreet, Inc. is proceeds from dividends from the Bank and HomeStreet Capital Corporation.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. The Company’sHomeStreet, 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 SeptemberJune 30, 20132014, our primary liquidity ratio was 36.8%35.2% compared to 43.9%26.9% at December 31, 20122013.

At SeptemberJune 30, 20132014 and December 31, 20122013, the Bank had available borrowing capacity of $91.4166.4 million and $55.7228.5 million from the FHLB, and $382.8393.5 million and $124.3332.7 million from the Federal Reserve Bank of San Francisco, respectively.

Our lending agreement with the FHLB permits it to refuse to make advances during periods in which an “event of default” (as defined in that agreement) exists. An event of default occurs when the FHLB gives notice to the Bank of an intention to take any of a list of permissible actions following the occurrence of specified events or conditions affecting the Bank. The Bank is not aware of any potential event of default at the present time.

Cash ManagementFlows

For the ninesix months ended SeptemberJune 30, 20132014, cash and cash equivalents increased $12.641.1 million, compared to a decrease of $241.33.6 million for the ninesix months ended SeptemberJune 30, 20122013. 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 ninesix months ended SeptemberJune 30, 2014, net cash of $236.2 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 six months ended June 30, 2013, net cash of $258.2115.1 million was provided by operating activities, as proceeds from the sale of loans held for sale were largely offset by cash used to fund the production of loans held for sale. 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, 2012, net cash of $336.1 million was used in operating activities, primarily to fund the production of loans held for sale.

Cash flows from investing activities

The Company's investing activities primarily include available-for-sale securities and loans originated andas held for investment. For the ninesix months ended SeptemberJune 30, 2014, net cash of $122.0 million was provided by investing activities, resulting from the sale of loans originated as held for investment and the sale of investment securities, primarily offset by the funding of portfolio loans. The Company elected to sell single-family mortgage loans to provide additional liquidity to support the commercial loan portfolio growth and to reduce the concentration of single-family mortgage loans in the portfolio. For the six months ended June 30, 2013, net cash of $447.7256.3 million was used in investing activities, as the Company increased the balances of its investment securities portfolio and its loans held for investment portfolio. For the nine months ended September 30, 2012, net cash of $39.0 million was used in investing activities, as we used the proceeds from our stock issuance to purchase available-for-sale securities. Net purchases in our investment securities portfolio were $232.6 million during that period, reflecting management's decision during the quarter to increase this component of the overall asset mix.


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Cash flows from financing activities

The Company's financing activities are primarily related to customer deposits and net proceeds from the FHLB. For the ninesix months ended SeptemberJune 30, 2014, net cash of $155.4 million was provided by financing activities, primarily driven by a $206.9 million growth in deposits, partially offset by net repayments of FHLB advances of $62.5 million. For the six months ended June 30, 2013, net cash of $202.1137.6 million was provided by financing activities. We had net proceeds of $79.6$150.4 million of FHLB advances as the Company grew its investment securities portfolio by $157.3$121.8 million and its loans held for investment portfolio by $201.2$107.5 million,, both of which require additional wholesale funding. The decline of customer deposits due to the maturity of certificates of deposit was partially offset by increased transaction and savings deposits. For the nine months ended September 30, 2012, net cash of $133.9 million was provided by financing activities as the Company had

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net proceeds of $87.8 million from the issuance of common stock, mostly through our initial public offering, which we used to purchase available-for-sale investment securities.

Capital Management

Federally insured depository institutions, such as the Bank, are required to maintain a minimum level of regulatory capital. The FDIC regulations recognize two types, or tiers, of capital: “core capital,” or Tier 1 capital, and “supplementary capital,” or Tier 2 capital. The FDIC currently measures a bank’s capital using (1) Tier 1 leverage ratio, (2) Tier 1 risk-based capital ratio and (3) Total risk-based capital ratio. In order to qualify as “well capitalized,” a bank must have a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% 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 Tier 1 risk-based capital ratio of at least 4.0% 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.

At SeptemberJune 30, 20132014, the Bank wasBank's capital ratios continued to meet the regulatory capital category of “well capitalized” underas defined by the FDIC regulatory requirements.FDIC’s prompt corrective action rules.

The following tables present the Bank’s capital amounts and ratios.
At September 30, 2013At June 30, 2014
Actual 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Actual 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
(in thousands)Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
                      
Tier 1 leverage capital
(to average assets)
$302,959
 10.85% $111,691
 4.0% $139,614
 5.0%$307,110
 10.17% $120,739
 4.0% $150,924
 5.0%
Tier 1 risk-based capital
(to risk-weighted assets)
302,959
 17.19% 70,505
 4.0% 105,757
 6.0%307,110
 13.84% 88,760
 4.0% 133,140
 6.0%
Total risk-based capital
(to risk-weighted assets)
325,027
 18.44% 141,010
 8.0% 176,262
 10.0%$329,277
 14.84% $177,520
 8.0% $221,900
 10.0%

At December 31, 2012At December 31, 2013
Actual For Minimum Capital
Adequacy Purposes
 To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
Actual For Minimum Capital
Adequacy Purposes
 To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
(in thousands)Amount Ratio Amount Ratio Amount RatioAmount Ratio Amount Ratio Amount Ratio
                      
Tier 1 leverage capital
(to average assets)
$286,963
 11.78% $97,466
 4.0% $121,833
 5.0%$291,673
 9.96% $117,182
 4.0% $146,478
 5.0%
Tier 1 risk-based capital
(to risk-weighted assets)
286,963
 18.05% 63,596
 4.0% 95,394
 6.0%291,673
 14.12% 81,708
 4.0% 122,562
 6.0%
Total risk-based capital
(to risk-weighted assets)
306,934
 19.31% 127,192
 8.0% 158,991
 10.0%$315,762
 15.28% $163,415
 8.0% $204,269
 10.0%


Basel III
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New Capital Regulations

In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.

Under the Rules, both the Company and the Bank will be required to meet certain minimum capital requirements. The Rules implement a new capital ratio of common equity Tier 1 capital to risk-based assets. 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 expect to elect this one-time option to exclude certain components of AOCI. Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of at least 4.5%. In addition, both the Company and the Bank are required to have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of at least 6.0%

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and a total risk-based ratio of at least 8.0%. BothIn 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, equal towhich is at least 2.5%. above each of the preceding common equity Tier 1 capital ratios, 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 prompt corrective action rules, which apply to the Bank but not the Company, are modified to include a common equity Tier 1 risk-based ratio and to increase certain other capital requirements for the various thresholds. For example, the requirements for the Bank to be considered well-capitalized under the Rules are a 5.0% Tier 1 leverage ratio, a 6.5% common equity Tier 1 risk-based ratio, an 8.0% Tier 1 risk-based capital ratio and a 10.0% total risk-based capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively.

The Rules modify 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.

As a result, the Company will not be required to exclude our outstanding trust preferred securities from our Tier 1 capital calculations.
The Rules make changes in the methods of calculating certain risk-based assets, which in turn affects the calculation of risk-basedrisk- 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 credit 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.

The Company and the Bank are generally required to begin compliance with the Rules on January 1, 2015. The conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019. Certain calculations under the Rules will also have phase-in periods. We believe that the current capital levels of the Company and the Bank are in compliance with the standards under the Rules including the conservation buffer.

buffer as of the effective date, and we have taken additional steps, including the sale of MSRs in the quarter ended June 30, 2014, to increase our capital to prepare for compliance with these new standards.
Accounting Developments

See the Consolidated Financial Statements—Note 1, Summary of Significant Accounting Policies for a discussion of Accounting Developments.

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ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

For aThe following discussion ofhighlights developments since December 31, 2013 and should be read in conjunction with the quantitative and qualitative disclosures about market risk, seeMarketRisk Management discussion within Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk Market Risk Managementin our 20122013 Annual Report on Form 10-K. Since December 31, 2013, there have been no material changes in the types of risk management instruments we use or in our hedging strategies.

During the six months ending June 30, 2014, the Company undertook certain actions in order to adjust the interest rate risk sensitivity of its balance sheet. Specifically, the Company reduced the interest rate sensitivity of its available-for-sale investment securities and held-for-investment loan portfolios and extended the maturity of a portion of its FHLB borrowings. As a result of these combined actions, the estimated sensitivity of net interest income is positively correlated with changes in interest rates, meaning an increase (decrease) in interest rates would result in an increase (decrease) in net interest income.

Market risk is defined as the sensitivity of income, fair value measurements and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risks that we are exposed to are price and interest rate risks. Price risk is defined as the risk to current or anticipated earnings or capital arising from changes in the value of either assets or liabilities that are entered into as part of distributing or managing risk. Interest rate risk is defined as risk to current or anticipated earnings or capital arising from movements in interest rates.

For the Company, price and interest rate risks arise from the financial instruments and positions we hold. This includes loans, mortgage servicing rights, investment securities, deposits, borrowings, long-term debt and derivative financial instruments. Due to the nature of our operations, we are not subject to foreign currency exchange or commodity price risk. Our real estate loan portfolio is subject to risks associated with the local economies of our various markets and, in particular, the regional economy of the Pacific Northwest and, to a growing extent, California.

Our price and interest rate risks are managed by the Bank’s Asset/Liability Management Committee ("ALCO"), a management committee that identifies and manages the sensitivity of earnings or capital to changing interest rates to achieve our overall financial objectives. ALCO is a management-level committee whose members include the Chief Investment Officer, acting as the chair, the Chief Executive Officer and other members of management. The committee meets monthly and is responsible for:
understanding the nature and level of the Company's interest rate risk and interest rate sensitivity;
assessing how that risk fits within our overall business strategies;
ensuring an appropriate level of rigor and sophistication in the risk management process for the overall level of risk;
complying with and reviewing the asset/liability management policy;
formulating and implementing strategies to improve balance sheet mix and earnings.

The Finance Committee of the Bank's Board provides oversight of the asset/liability management process, reviews the results of interest rate risk analysis and approves relevant policies.

The spread between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative dollar amounts of these assets and liabilities are the principal items affecting net interest income. Changes in net interest spread (interest rate risk) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), customer options (option risk) and changes in the shape of the yield curve (time-sensitive risk). We manage the available-for-sale investment securities portfolio while maintaining a balance between risk and return. The Company's funding strategy is to grow core deposits while we efficiently supplement using wholesale borrowings.

We estimate the sensitivity of our net interest income to changes in market interest rates using an interest rate simulation model that includes assumptions related to the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments for multiple interest rate change scenarios. Interest rate sensitivity depends on certain repricing characteristics in our interest-earnings assets and interest-bearing liabilities, including the maturity structure of assets and liabilities and their repricing characteristics during the periods of changes in market interest rates. Effective interest rate risk management seeks to ensure both assets and liabilities respond to changes in interest rates within an acceptable timeframe, minimizing the impact of interest rate changes on net interest income and capital. Interest rate sensitivity is measured as the difference between the

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volume of assets and liabilities, at a point in time, that are subject to repricing at various time horizons, known as interest rate sensitivity gaps.

The following table presents sensitivity gaps for these different intervals.
 June 30, 2014
(dollars in thousands)
3 Mos.
or Less
 
More Than
3 Mos.
to 6 Mos.
 
More Than
6 Mos.
to 12 Mos.
 
More Than
12 Mos.
to 3 Yrs.
 
More Than
3 Yrs.
to 5 Yrs.
 
More Than
5 Yrs.
 
Non-Rate-
Sensitive
 Total
                
Interest-earning assets:               
Cash & cash equivalents$74,991
 $
 $
 $
 $
 $
 $
 $74,991
FHLB Stock
 
 
 
 
 34,618
 
 34,618
Investment securities(1)
10,835
 6,828
 11,253
 85,071
 40,094
 300,885
 
 454,966
Mortgage loans held for sale549,440
 
 
 
 
 
 
 549,440
Loans held for investment(1)
542,832
 116,243
 206,364
 414,976
 299,567
 254,839
 
 1,834,821
Total interest-earning assets1,178,098
 123,071
 217,617
 500,047
 339,661
 590,342
 
 2,948,836
Non-interest-earning assets
 
 
 
 
 
 286,840
 286,840
Total assets$1,178,098
 $123,071
 $217,617
 $500,047
 $339,661
 $590,342
 $286,840
 $3,235,676
Interest-bearing liabilities:               
NOW accounts (2)
$324,604
 $
 $
 $
 $
 $
 $
 $324,604
Statement savings accounts(2)
166,851
 
 
 
 
 
 
 166,851
Money market accounts(2)
996,473
 
 
 
 
 
 
 996,473
Certificates of deposit183,434
 80,799
 55,190
 124,439
 13,667
 
 
 457,529
FHLB advances288,500
 30,000
 
 50,000
 
 15,590
 
 384,090
Securities sold under agreements to repurchase14,681
 
 
 
 
 
 
 14,681
Long-term debt (3)
61,857
 
 
 
 
 
 
 61,857
Total interest-bearing liabilities2,036,400
 110,799
 55,190
 174,439
 13,667
 15,590
 
 2,406,085
Non-interest bearing liabilities
 
 
 
 
 
 541,342
 541,342
Equity
 
 
 
 
 
 288,249
 288,249
Total liabilities and shareholders’ equity$2,036,400
 $110,799
 $55,190
 $174,439
 $13,667
 $15,590
 $829,591
 $3,235,676
Interest sensitivity gap$(858,302) $12,272
 $162,427
 $325,608
 $325,994
 $574,752
    
Cumulative interest sensitivity gap$(858,302) $(846,030) $(683,603) $(357,995) $(32,001) $542,751
    
Cumulative interest sensitivity gap as a percentage of total assets(26.5)% (26.1)% (21.1)% (11.1)% (1.0)% 16.8%    
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities57.9 % 60.6 % 69.0 % 84.9 % 98.7 % 122.6%    
(1)Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.
(2)Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.
(3)
Based on contractual maturity.

As of June 30, 2014, the Bank was asset sensitive overall, but liability sensitive in the "three months or less" period. The positive gap in the interest rate sensitivity analysis indicates that our net interest income would rise in the long term if market interest rates increase and generally fall in the long term if market interest rates decline.

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Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.

The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of June 30, 2014 and December 31, 2013 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates and no change in the composition or size of the balance sheet.
  June 30, 2014 December 31, 2013
Change in Interest Rates
(basis points)
 Percentage Change
 
Net Interest Income (1)
 
Net Portfolio Value (2)
 
Net Interest Income (1)
 
Net Portfolio Value (2)
         
+200 1.0 % (11.6)% (4.4)% (21.2)%
+100 0.5
 (4.0) (1.6) (10.9)
-100 (3.3) (3.9) (1.9) 7.8
-200 (7.1)% (6.1)% (3.0)% 6.7 %
(1)This percentage change represents the impact to net interest income and servicing income for a one-year period, assuming there is no change in the structure of the balance sheet.
(2)This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.

At June 30, 2014, we believe our net interest income sensitivity did not exhibit a strong bias to either an increase in interest rates or a decline in interest rates. During the six months ended June 30, 2014, the Company has reduced the interest rate sensitivity of its assets and increased the interest rate sensitivity of its liabilities. It is expected that, as interest rates change, net interest income will be positively correlated with rate movements, i.e. an increase (decrease) in interest rates would result in an increase (decrease) in net interest income. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposits.

ITEM 4CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company carried out an evaluation, with the participation of our management, and under the supervision of our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20132014.

Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20132014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II – OTHER INFORMATION
 
ITEM 1LEGAL PROCEEDINGS

Because the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with various state and federal lending laws, we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory violations. We are also subject to legal proceedings in the ordinary course of business related to employment matters. We do not expect that these proceedings, taken as a whole, will have a material adverse effect on our business, financial position or our results of operations. There are currently no matters that, in the opinion of management, would have a material adverse effect on our consolidated financial position, results of operation or liquidity, or for which there would be a reasonable possibility of such a material adverse effectloss based on information known at this time.

ITEM 1ARISK FACTORS
An investment
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the Company is speculative and involves a high degree of risk. The risks faced by us described below represent some of the material risks you should carefully consider before making an investment decision. If any of these risks occur, our business, capital, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the price of our common stock could decline significantly and you could lose all or a part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also become important factors that materially and adversely affect our business, capital, liquidity, financial condition and results of operations. You should carefully consider the following risk factors, together with the other information containedelsewhere in this Report and other documents we file with the SEC, before making an investment decision about the Company.report.

Fluctuations in interest rates could adversely affect the value of our assets and reduce our net interest income and noninterest income, thereby adversely affecting our earnings and profitability.

Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. ChangesIncreases in interest rates may reducein early 2014 reduced our mortgage revenues in large part by drastically reducing the market for refinancings, which wouldhas negatively impactimpacted our noninterest income and, to a lesser extent, our net interest income, and may impactas well as demand for our residential loan products and the revenue realized on the sale of loans. Our earnings are also dependent on the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in market interest rates impact the rates earned on loans and investment securities and the rates paid on deposits and borrowings and may negatively impact our ability to attract deposits, make loans and achieve satisfactory interest rate spreads, which could adversely affect our financial condition or results of operations. In addition, changes to market interest rates may impact the level of loans, deposits and investments and the credit quality of existing loans.

OurIn addition, our securities portfolio includes securities that are insured or guaranteed by U.S. government agencies or government-sponsored enterprises and other securities that are sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of shareholders' equity until realized upon sale. As a result, futureFuture interest rate fluctuations may impact the value of these securities and as a result, shareholders' equity, causing material fluctuations from quarter to quarter. Failure to hold our securities until maturity or until market conditions are favorable for a sale could adversely affect our financial condition.

A significant portion of our noninterest income is derived from originating residential mortgage loans and selling them into the secondary market. That business has benefited from a long period of historically low interest rates. To the extent interest rates continue to rise, particularly if they rise substantially, we may experience a further reduction in mortgage financing and refinancing of new home purchases.purchases and refinancing. These factors have and may in the future further negatively affectaffected our mortgage loan origination volume and our noninterest income in the past and may do so again in the future.

Current economic conditions continue to pose significant challenges for us and could adversely affect our noninterest income.financial condition and results of operations.

Our mortgage servicing rights carryDespite recent improvements in the economy and increases in interest rate risk because the total amount of servicing fees earned, as well as changesrates, we are continuing to operate in fair-market value, fluctuate based on expected loan prepayments (affecting the expected average life of a portfolio of residential mortgage servicing rights). The rate of prepayment of residential mortgage loans mayan uncertain economic environment, including sluggish national and global conditions, accompanied by high unemployment and very low interest rates. Financial institutions continue to be influencedaffected by changing national and regional economic trends, such as recessions or depressedconditions in the real estate and financial markets, as well as the difference between interest rates on existing residential mortgage loans relative to prevailing residential mortgage rates. Changes in prepayment rates are therefore difficult for us to predict. An increasealong with an arduous and changing regulatory climate. Recent improvements in the general levelhousing market may not continue, and a return to a recessionary economy could result in financial stress on our borrowers that may result in volatility in home prices, increased foreclosures and significant write-downs of interest rates mayasset values, all of which would adversely affect the abilityour financial condition and results of some borrowers to pay the interest and principal of their obligations. During periods of declining interest rates, many residential borrowersoperations.


8387



refinance their mortgage loans. The loan administration fee income related to the residential mortgage loan servicing rights corresponding to a mortgage loan deceases as mortgage loans are prepaid. Consequently, the fair value of portfolios of residential mortgage loan servicing rights tend to decrease during periods of declining interest rates, because greater prepayments can be expected and, as a result, the amount of loan administration income received also decreases.

A change in federal monetary policy could adversely impact our mortgage banking revenues.

The Federal Reserve System or Federal Reserve is responsible for regulating the supply of money in the United States, and as a result its monetary policies strongly influence our costs of funds for lending and investing as well as the rate of return we are able to earn on those loans and investments, both of which impact our net interest income and net interest margin. The Federal Reserve Board's interest rate policies can also materially affect the value of financial instruments we hold, including debt securities and mortgage servicing rights, or MSRs. These monetary policies can also negatively impact our borrowers, which in turn may increase the risk that they will be unable to pay their loans according to the terms or at all. We have no control over the monetary policies of the Federal Reserve Board and cannot predict when changes are expected or what the magnitude of such changes may be.

As a result of the Federal Reserve Board's concerns regarding continued slow economic growth, the Federal Reserve Board's Open Market Committee expanded its standing monetary policy, known as “quantitative easing,” in September 2012 to provide for a purchases by the Federal Reserve of up to $40 billion per month of mortgage-backed securities in the secondary market and up to $45 billion per month of longer-term United States Treasury securities. This program, which is intended to bolster the U.S. economy by retaining relatively low interest rates to promote increased spending, was adopted in 2008 and originally provided for the repurchase of only treasury securities. The inclusion of mortgage-backed securities was intended to have the effect of maintaining historically low mortgage interest rates. Because a substantial portion of our revenues and our net income historically have been, and in the foreseeable future are expected to be, derived from gain on the origination and sale of mortgage loans and on the continuing servicing of those loans, the Federal Reserve Board's policy may have had, and for so long as the program continues, may continue to have, the effect of supporting higher revenues than might otherwise be available. Contrarily, a reduction in or termination of this policy, absent a significant rebound in employment and real wages, would likely reduce mortgage originations throughout the United States, including ours. Recent speculation regarding potential changes in this policy has led to volatility in the financial markets and may have been a factor in increasing mortgage interest rates, reducing the overall demand in the market for mortgage loan origination. An actual reduction or termination of the quantitative easing program would likely further raise interest rates, which could reduce our mortgage origination revenues and in turn have a material adverse impact upon our business.

We may incur significant losses as a result of ineffective hedging of interest rate risk related to our loans sold with a reservation of servicing rights.

Both the value our single family mortgage servicing rights, or MSRs, and the value of our single family loans held for sale changes with fluctuations in interest rates, among other things, reflecting the changing expectations of mortgage prepayment activity. To mitigate potential losses of fair value of single family loans held for sale and MSRs related to changes in interest rates, we actively hedge this risk with financial derivative instruments. Hedging is a complex process, requiring sophisticated models, experienced and skilled personnel and continual monitoring. Changes in the value of our hedging instruments may not correlate with changes in the value of our single family loans held for sale and MSRs, and we could incur a net valuation loss as a result of our hedging activities. Following the expansion of our single family mortgage operations in early 2012 through the addition of a significant number of single family mortgage origination personnel, the volume of our single family loans held for sale and MSRs has increased. The increase in volume in turn increases our exposure to the risks associated with the impact of interest rate fluctuations on single family loans held for sale and MSRs.

A substantial portion of our revenue is derived from residential mortgage lending which is a market sector that has significant volatility and is facing significant regulatory changes which take effect in January 2014.

A substantial portion of our consolidated net revenues (net interest income plus noninterest income) are derived from originating and selling residential mortgages. Residential mortgage lending in general has experienced substantial volatility in recent periods. Moreover, a significant increase in interest rates, which we experienced in the second quarter of 2013, may materially and adversely affect our future loan origination volume, margins, and the value of the collateral securing our outstanding loans, may increase rates of borrower default, and may otherwise adversely affect our business.


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Difficult market conditions have adversely affected and may continue to have an adverse effect on our business.

During the period from early 2008 through most of 2011, the United States economy in general, and the financial institutions sector in particular, experienced a severe downturn owing to a number of factors that affected virtually every aspect of our business. While these conditions have moderated, uncertainty continues to affect our business, and thus raises risk as to our ability to maintain profitability at current levels.

In particular, we may face risks related to market conditions that may negatively impact our business opportunities and plans, such as:
uncertainty relatedMarket developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities;
Regulatory scrutiny of the industry could increase, leading to increasedharsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and aggressive governmental enforcement inincrease our exposure to the financial sector generallyjudicial system and the mortgage banking business specifically, including increased costs of compliance;plaintiff’s bar;
theThe models we use to assess the creditworthiness of our customers may prove less reliable than we had anticipated in predicting future behaviors which may impair our ability to make good underwriting decisions;
If our forecasts of economic conditions and other economic predictions are not accurate, we may face challenges in accurately estimating the ability of our borrowers to repay their loans if our forecastsloans;
Further erosion in the fiscal condition of economic conditionsthe U.S. Treasury may lead to new taxes limiting the ability of the Company to pursue growth and other economic predictions are not accurate;
increases in FDIC insurance premiums duereturn profits to depletion of that agency's insurance funds;
restrictions in our ability to engage in routine funding transactions due to the commercial soundness of other financial institutions and government sponsored entities ("GSEs");shareholders; and
uncertainty regarding futureFuture political developments and fiscal policy.policy decisions may create uncertainty in the marketplace.

If recovery from the economic recession slows or if we experience another recessionary dip, our ability to access capital and our business, financial condition and results of operations may be adversely impacted.
We have been rapidly increasing the growth of our mortgage banking business through hiring of additional loan officers and support personnel, and the costs associated with that growth may not keep pace with the anticipated increase in our revenues.
Beginning in February of 2012, we have hired a substantial number of mortgage loan personnel, including large groups of employees previously affiliated with MetLife Home Loans.In addition to increasing our exposure to a more volatile segment of our business, the rapid expansion of our single family mortgage loan operations through hiring a large number of additional employees in our traditional markets and in additional Western states involves significant expense and exposes us to potential additional risks, including:
Expenses related to hiring and training a large number of new employees;
Higher compensation costs relative to production in the initial months of new employment;
Increased compliance costs;
Costs associated with opening new offices that may be needed to provide for the new employees;
New state laws and regulations to which we have not been previously subject;
Diversion of management's attention from the daily operations of other aspects of the business;
The potential of litigation related from prior employers related to the portability of their employees;
The potential loss of other key employees.

We cannot give assurance that these costs and other risks will be fully offset or mitigated by increased revenue generated by the expansion in this business line in the near future, or at all.
Efforts to integrate future acquisitions could consume significant resources.

In addition to our recently announced acquisitions of Fortune Bank, Yakima National Bank and agreements to acquire two retail branches of AmericanWest Bank, which are expected to close in the fourth quarter of 2013, we may seek out other acquisitions in the near future as we look for ways to continue to grow our business and our market share. These acquisitions and pending acquisitions and any other future acquisition we may undertake involve numerous risks related to the integration of the acquired assets or entity into HomeStreet or HomeStreet Bank, including risks that arise after the transaction is completed. These risks include:
difficulties in integrating the operations, technologies, and personnel of the acquired companies;
difficulties in implementing internal controls over financial reporting;
diversion of management's attention from normal daily operations of the business;
inability to maintain the key business relationships and the reputations of acquired businesses;

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entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
responsibility for the liabilities of acquired businesses;
inability to maintain our internal standards, controls, procedures and policies at the acquired companies or businesses; and
potential loss of key employees of the acquired companies.
Difficulties in integrating any or all of these acquisitions may increase our costs and adversely impact our financial condition and results of operations.
We cannot assure you that we will remain profitable.

We have sustained significant losses in the past and cannot guarantee that we will remain profitable or be able to maintain the level of profit we are currently experiencing. Many factors determine whether or not we will be profitable in a given quarter, and our ability to remain profitable is threatened by a myriad of issues, including:
Increased costs from growth through acquisition of new loan officers, originators and servicing personnel as well as the acquisition of other entities such as Fortune and Yakima National Bank could exceed the income growth anticipated from these opportunities, especially in the short term as these new hires and new acquisitions are integrated into our business;
Changes in the interest rate environment may limit our ability to make loans, decrease our net interest income and noninterest income, reduce demand for loans, increase the cost of deposits and otherwise negatively impact our financial situation;
Volatility in mortgage markets, which is driven by factors outside of our control such as interest rate changes, housing inventory and general economic conditions, may negatively impact our ability to originate loans and change the fair value of our existing loans;
Changes in governmental sponsored entities and their ability to buy our loans in the secondary market may have significant changes in our ability to recognize income on sale of our loans to third parties;
Competition in the mortgage market industry may drive down the interest rates we are able to offer while at the same time changes in the cost structures and fees of governmental sponsored entities to whom we sell many of these loans may compress our margins and reduce our net income and profitability; and
Our hedging strategies to offset risks related to interest rate changes may not prove to be successful and may result in unanticipated losses for the Company.
These and other factors may limit our ability to generate revenue in excess of our costs in any given quarter, which in turn may result in a lower rate of profitability or even substantial losses for the Company.
HomeStreet, Inc. primarily relies on dividends from the Bank and payment of dividends by the Bank may be limited by applicable laws and regulations.

HomeStreet, Inc. is a separate legal entity from the Bank, and although we do receive some dividends from HomeStreet Capital Corporation, the primary source of our funds from which we service our debt, pay dividends to our shareholders and otherwise satisfy our obligations is dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations, as well as by our policy of retaining a significant portion of our earnings to support the Bank's operations. If the Bank cannot pay dividends to us, we may be limited in our ability to service our debts, fund the Company's operations and pay dividends to the Company's shareholders.

The significant concentration of real estate secured loans in our portfolio has had and may continue to have a negative impact on our asset quality and profitability.

Substantially all of our loans are secured by real property. Our real estate secured lending is generally sensitive to national, regional and local economic conditions, making loss levels difficult to predict. Declines in real estate sales and prices, significant increases in interest rates, and a degeneration in prevailing economic conditions may result in higher than expected loan delinquencies, foreclosures, problem loans, OREO, net charge-offs and provisions for credit and OREO losses. Although real estate prices have recently increased in markets in which we operate, if market values were to decline again, the collateral for our loans may provide less security and our ability to recover the principal, interest and costs due on defaulted loans by selling the underlying real estate will be diminished, leaving us more likely to suffer additional losses on defaulted loans. Such declines may have a greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more geographically diversified.

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Worsening conditions in the real estate market and higher than normal delinquency and default rates on loans could cause other adverse consequences for us, including:
the reduction of cash flows and capital resources, as we are required to make cash advances to meet contractual obligations to investors, process foreclosures, and maintain, repair and market foreclosed properties;
declining mortgage servicing fee revenues;
increasing loan servicing costs;
declining fair value on our mortgage servicing rights; and
declining fair values and liquidity of securities held in our investment portfolio that are collateralized by mortgage obligations.

Our allowance for loan losses may prove inadequate or we may be negatively affected by credit risk exposures. Future additions to our allowance for loan losses will reduce our earnings.

Our business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an allowance for loan losses to provide for defaults and nonperformance, which represents management's best estimate of probable incurred losses inherent in the loan portfolio. Management's estimate is the result of our continuing evaluation of specific credit risks and loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, industry concentrations and other factors that may indicate future loan losses. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our nonperforming loans and OREO reflect operating difficulties of individual borrowers and weaknesses in the economies of the markets we serve. This allowance may not be adequate to cover actual losses, and future provisions for losses could materially and adversely affect our financial condition, results of operations and cash flows.

In addition, we are currently pursuing a strategy of growth through acquisition, including the acquisitions of Fortune Bank, Yakima National Bank and the pending acquisitions of two branches of AmericanWest Bank. Upon the closing of those acquisitions, we have added and will be adding loans held by the acquired company or branch to our books. Although we review loan quality as part of our diligence in considering any acquisition, the addition of such loans may increase our credit risk exposure, requiring an increase in our allowance for loan losses or we may experience adverse effects to our financial condition, results of operations and cash flows stemming from losses on those additional loans.

If we breach any of the representations or warranties we make to a purchaser when we sell mortgage loans, we may be liable to the purchaser for unpaid principal and interest on the loan.

When we sell mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our loan sale agreements require us to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may be required to repurchase such loan and record a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have any remedies available to us against a third party for such losses, or the remedies available to us may not be as broad as the remedies available to the purchaser of the mortgage loan against us. In addition, if there are remedies against a third party available to us, we face further risk that such third party may not have the financial capacity to perform remedies that otherwise may be available to us. Therefore, if a purchaser enforces remedies against us, we may not be able to recover our losses from a third party and may be required to bear the full amount of the related loss. If repurchase and indemnity demands increase, our liquidity, results of operations and financial condition will be adversely affected.

If we breach any representations and warranties or fail to follow guidelines when originating a FHA/HUD-insured loan or a VA-guaranteed loan, we may lose the insurance or guarantee on the loan and suffer losses and/or pay penalties.

We originate and purchase, sell and thereafter service single family loans that are insured by FHA/HUD or guaranteed by the VA. We certify to the FHA/HUD and the VA that the loans meet their requirements and guidelines. The FHA/HUD and VA audit loans that are insured or guaranteed under their programs, including audits of our processes and procedures as well as individual loan documentation. Violations of guidelines can result in monetary penalties or require us to provide indemnifications against loss or loans declared ineligible for their programs. In the past, monetary penalties and losses from indemnifications have not created material losses to the Bank. As a result of the housing crisis, the FHA/HUD has stepped up enforcement initiatives. In addition to regular FHA/HUD audits, HUD's Inspector General has become active in enforcing FHA regulations with respect to individual loans and has partnered with the Department of Justice ("DOJ") in filing lawsuits against lenders for systemic violations. The penalties resulting from such lawsuits can be much more severe, since systemic violations

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can be applied to groups of loans and penalties may be subject to treble damages. The DOJ has used the Federal False Claims Act in prosecuting these lawsuits. Because of our significant origination of FHA/HUD insured and VA guaranteed loans, if the DOJ were to find potential violations by the Bank, we could be subject to material monetary penalties and/or losses, and may even be subject to lawsuits alleging systemic violations which could result in treble damages.

Changes in fee structures by third party loan purchasers and mortgage insurers may decrease the margin we can recognize on conforming home loans and may adversely impact our results of operations.
Recently, certain third party loan purchasers have revised their fee structures and increased the costs of doing business with them. For example, certain purchasers of conforming loans, including Fannie Mae and Freddie Mac, raised costs for guarantor fees and other required fees and payments. Additionally, the FHA raised costs for premiums and and extended the period for which private mortgage insurance is required on a loan purchased by them. These changes increased the cost of selling conforming loans to third party loan purchasers which in turn decreases our margin and negatively impacts our profitability. Additional changes in the future from third party loan purchasers may have a negative impact on our ability to originate loans to be sold because of the increased costs of such loans and may decrease our profitability with respect to loans held for sale. In addition, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these third party loan purchasers could negatively impact our results of business, operations and cash flows.
We may face risk of loss if we purchase loans from a seller that fails to satisfy its indemnification obligations.

We generally receive representations and warranties from the originators and sellers from whom we purchase loans and servicing rights such that if a loan defaults and there has been a breach of such representations and warranties, we may be able to pursue a remedy against the seller of the loan for the unpaid principal and interest on the defaulted loan. However, if the originator and/or seller breach such representations and warranties and does not have the financial capacity to pay the related damages, we may be subject to the risk of loss for such loan as the originator or seller may not be able to pay such damages or repurchase loans when called upon by us to do so. Currently, we only purchase loans from Windermere Mortgage Services Series LLC, an affiliated business arrangement with certain Windermere real estate brokerage franchise owners.

The proposed restructuring or eliminationreplacement of Fannie Mae and Freddie Mac and changes in existing government-sponsored and federal mortgage programs could negativelyadversely affect our business.

We originate and purchase, sell and thereafter service single family and multifamily mortgages under the Fannie Mae, and to a lesser extent the Freddie Mac single family purchase programs and the Fannie Mae multifamily DUS program. Since the nationwide downturn in residential mortgage lending that began in 2007 and the placement of Fannie Mae and Freddie Mac into conservatorship, Congress and various executive branch agencies have offered a wide range of proposals aimed at restructuring these agencies. The Obama administration has called for scaling back the role of the U.S. government in, and promoting the return of private capital to, the mortgage markets and the reduction of the role of Fannie Mae and Freddie Mac in the mortgage markets by, among other things, reducing conforming loan limits, increasing guarantee fees and requiring larger down payments by borrowers with the ultimate goal of winding down Fannie Mae and Freddie Mac.

In August 2012,One of the Treasury Department entered into amendmentsleading proposals being debated in Congress would eliminate Fannie Mae and Freddie Mac and replace them with a government-regulated cooperative authorized to its senior preferred stock purchase agreementsissue mortgage-backed securities with eacha governmental guarantee. Other proposals have suggested privatizing Fannie Mae and Freddie Mac. We cannot predict how or when Congress will act in response to these or other proposals. However, any restructuring or replacement of Fannie Mae and Freddie Mac that require those agencies to reducerestricts the amount of mortgage assets they hold, setting a cap of $650 billion for December 31, 2012 and requiring a decrease of at least 15% per year for each year thereafter, to a minimum of $250 billion, as a step toward winding down those agencies. Most recently, the House Financial Services Committee recommended legislation that would wind down Fannie Mae and Freddie Mac with the expectation that a private market would emerge tocurrent loan purchase bundle and resell conforming loans into the secondary market in their stead, subject to oversight and regulation from the federal government.

Whether or not such a private market would emerge is unknown. We cannot predict whether or not this or any other proposed legislation will pass, when or if a dismantling of Fannie Mae and Freddie Mac may occur, what the future of the mortgage market might be as a following a dismantling of Fannie Mae and Freddie Mac, or how such legislation or any alternative legislation that may be proposed might impact our business. Moreover, we cannot predict what regulation may apply to private third party loan purchasers following a move away from government sponsored entities as the largest entities that purchase, bundle and securitize loans, although the Dodd-Frank Act already imposes a requirement that private securitizers of mortgage and other asset backed securities retain, subject to certain exemptions, not less than five percent of the credit risk of the mortgages or other assets backing the securities.

While there is no clarity on what will ultimately happen to Fannie Mae and Freddie Mac, any dismantlingprograms of those entities or any other legislation that calls for the restructuring of Fannie those entities in such a way that restricts their loan purchase programs, may have a material adverse effect on our ability to originate loans and sell those loans to third party purchasers, which in turn would have a material adverse effect on our business and results of operations. Moreover, we have recorded on our balance sheet an intangible asset (mortgage servicing rights, or MSRs) relating to our right to service single and multifamily loans sold to Fannie Mae and Freddie Mac. That MSR asset was valued at $146.3$118.0 million at SeptemberJune 30, 2013

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and $95.5 million at December 31, 20122014. Changes in the policies and operations of Fannie Mae'sMae and Freddie Mac's policies and operationsMac or any replacement for or successor to those entities that adversely affect our single family residential loan and DUS mortgage servicing assets may require us to record impairment charges to the value of these assets, and significant impairment charges could be material and adversely affect our business.

ThroughIn addition, our wholly owned subsidiary HomeStreet Capital Corporation, we participate as a lenderability to generate income through mortgage sales to institutional investors depends in part on programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of mortgage-backed securities in the DUS program. Fannie Mae delegates responsibility for originating,secondary market. Any discontinuation of, or significant reduction in, the operation of those programs could have a material adverse effect on our loan origination and mortgage sales as well as our results of operations. Also, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these entities could negatively impact our results of business, operations and servicing mortgages,cash flows.

We may need to increase our capital to be prepared to comply with more stringent capital requirements under Basel III beginning on January 1, 2015.

In July 2013, the U.S. federal banking regulators (including the Federal Reserve and we assume a limitedFDIC) jointly announced the adoption of new rules relating to capital standards requirements, including requirements contemplated by Section 171 of the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. A substantial portion of these rules will apply to both the riskCompany and the Bank beginning in January 2015. As part of loss duringthese new rules, both the remaining termCompany and the Bank will be required to have a common equity Tier 1

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capital ratio of 4.5%, have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition, both the Company and the Bank will be required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%, which means in effect that in order to prevent certain regulatory restrictions, the common equity Tier 1 capital ratio requirement will be 7.0%, the Tier 1 risk-based ratio requirement will be 8.5% and the total risk-based ratio requirement will be 10.5%. In this regard, any institution that does not meet the conservation buffer will be subject to restrictions on each commercialcertain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The requirement for a conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019.

Additional prompt corrective action rules will apply to the Bank, including higher ratio requirements for the Bank to be considered well-capitalized. The new rules also modify the manner for determining when certain capital elements are included in the ratio calculations. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, banking organizations that are not required to use advanced approaches, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio.

In addition, deductions include, for example, the requirement that mortgage loanservicing rights, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from the new common equity Tier 1 capital to the extent that any one such category exceeds 10% of new common equity Tier 1 capital, or all such categories in the aggregate exceed 15% of  new common equity Tier 1 capital. Maintaining higher capital levels may result in lower profits for the Company as we sellwill not be able to Fannie Mae.grow our lending as quickly as we might otherwise be able to do if we were to maintain lower capital levels. See “Regulation and Supervision of Home Street Bank - Capital and Prompt Corrective Action Requirements - New Capital Regulations” in Item 1 of our Form 10-K for the year ended December 31, 2013 previously filed with the SEC.

The sale of approximately 24% of our MSR portfolio in the second quarter of 2014 was consummated in part to facilitate balance sheet and capital management in preparation for Basel III. The application of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such requirements.

We are subject to extensive regulation that has restricted and could furthermay restrict our activities, including declaring cash dividends or capital distributions, and imposeimposes financial requirements or limitations on the conduct of our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities, including the FDIC, the Washington Department of Financial Institutions and the Federal Reserve, and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations to which we are subject are evolving and change frequently. Changes to those laws, rules and regulations are also sometimes retroactively applied. Furthermore, the on-site examination cycle for an institution in our circumstances is frequent and extensive. Examination findings by the regulatory agencies may result in adverse consequences to the Company or the Bank. We have, in the past, been subject to specific regulatory orders that constrained our business and required us to take measures that investors may have deemed undesirable, and we may again in the future be subject to such orders if banking regulators were to determine that our operations require such restrictions. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the authority to restrict our operations, adversely reclassify our assets, determine the level of deposit premiums assessed and require us to increase our allowance for loan losses.

The Dodd-Frank Act is expected to increase our costs of operations increase our regulatory and legal risks and may have a material negative effect on us.

The Dodd-Frank Act significantly changeschanged the laws as they apply to financial institutions and revisesrevised and expandsexpanded the rulemaking, supervisory and enforcement authority of federal banking regulators. It is also expected to have a material impact on our relationships with current and future customers.

Some of these changes arewere effective immediately, though many are being phased in gradually. In addition, the statute in many instances calls for regulatory rulemaking to implement its provisions. While some provisions are now being implemented, such
as the Basel III capital standards which take effect beginning on January 1, 2015, not all of whichthe regulations called for by
Dodd-Frank have been completed or are in effect, so the precise contours of the law and its effects on us cannot yet be fully understood. The provisions of the Dodd-Frank Act and the subsequent exercise by regulators of their revised and expanded powers thereunder could materially and negatively impact the profitability of our business, the value of assets we hold or the

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collateral available for our loans, require changes to business practices or force us to discontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk. For example, the Dodd-Frank Act imposes a requirement that private securitizers of mortgage and other asset backed securities retain, subject to certain exemptions, not less than five percent of the credit risk of the mortgages or other assets backing the securities. See “Regulation and Supervision” in Part I - Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2012.

We will be subject to more stringent capital requirements.

On July 2, 2013 previously filed with the U.S. federal banking regulators (including the Federal Reserve and FDIC) jointly announced the adoption of new rules relating to capital standards requirements, including requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. A substantial portion of these rules will apply to both the Company and the Bank beginning in January 2015. As part of these new rules, both the Company and the Bank will be required to have a common equity Tier 1 capital ratio of 4.5%, have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition, both the Company and the Bank will be required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%, which in effect brings the common equity Tier 1 capital ratio requirement to 7% to preclude regulatory restrictions on specified operations. In this regard, any 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. Additional prompt corrective action rules will apply to the Bank, including higher ratio requirements for the Bank to be considered well-capitalized. The new rules also modify the manner for determining when certain capital elements are included in the ration calculations. Maintaining higher capital levels may result in lower profits for the Company as we will not be able to grow our lending as quickly as we might otherwise be able to do if we were to maintain lower capital levels.

We have in the past and may again in the future be subject to certain specific regulatory constraints on the activities of the Bank and the Company, which could result in us not being as profitable as banks that are not subject to such conditions.

Between 2009 and 2013, both the Bank and the Company operated under specific regulatory restrictions on their operations. These restrictions were intended to preserve and strengthen the Bank's capital adequacy and improve its asset quality, among other things,

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and limited our ability to pay cash dividends or to renew or incur debt. The Bank operated under a cease and desist order from May 8, 2009 until March 26, 2012, when that order was replaced with a memorandum of understanding (“MOU”). On December 27, 2012, the FDIC determined that the MOU was no longer necessary and, as a result, terminated the MOU. Additionally, the Company, which was subject to a cease and desist order since May 8, 2009, had such order terminated effective March 26, 2013. However, we cannot offer assurances that we can avoid the adverse conditions that caused us to fall below desirable performance levels, and if that were to happen, we may again become subject to more stringent regulatory orders and other regulatory enforcement actions.SEC.

New federal and state legislation, case law or regulatory action may negatively impact our business.

Enacted legislation, including the Dodd-Frank Act, as well as future federal and state legislation, case law and regulations could require us to revise our operations and change certain business practices, impose additional costs, reduce our revenue and earnings and otherwise adversely impact our business, financial condition and results of operations. For instance,

Recent legislation and court decisions with precedential value could allow judges to modify the terms of residential mortgages in bankruptcy proceedings and could hinder our ability to foreclose promptly on defaulted mortgage loans or expand assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in our being held responsible for violations in the mortgage loan origination process.
Congress and various regulatory authorities have proposed programs that would require a reduction in principal balances of “underwater” residential mortgages, which if implemented would tend to reduce loan servicing income and which might adversely affect the carrying values of portfolio loans.
Recent court cases in Oregon and Washington have challenged whether Mortgage Electronic Registration Systems, Inc. (“MERS”) meets the statutory definition of deed of trust beneficiary under applicable state laws. Based.  While the Oregon Supreme Court has ruled on decisions handed down by courtsthe appeal of several lower-court MERS cases, enough ambiguity exists in Oregon,the ruling that we and other servicers of MERS relatedMERS-related loans have elected to foreclose primarily through judicial procedures in Oregon, resulting in increased foreclosure costs, longer foreclosure timelines and additional delays.   If the Oregon case law is upheld on appeal, and/state courts in  Washington or if the Washington courtsother states where we do significant business issue a similar decisiondecisions in the cases pending before them, our foreclosure costs and foreclosure timelines may continue to increase, which in turn, could increase our single family loan delinquencies, servicing costs, and adversely affect our cost of doing business and results of operationsoperations.

We cannot offer assurances as to which,These or other judicial decisions or legislative actions, if any, of these initiatives may be adoptedupheld or if adopted, to what extent they would affect our business. Any such initiativesimplemented, may limit our ability to take actions that may be essential to preserve the value of the mortgage loans we service or hold for investment. Any restriction on our ability to foreclose on a loan, any requirement that we forego a portion of the amount otherwise due on a loan or any requirement that we modify any original loan terms may require us to advance principal, interest, tax and insurance payments, which would negatively impact our business, financial condition, liquidity and results of operations. Given the relatively high percentage of our business that derives from originating residential mortgages, any such actions are likely to have a significant impact on our business, and the effects we experience will likely be disproportionately high in comparison to financial institutions whose residential mortgage lending is more attenuated.

In addition, while these legislative and regulatory proposals and courts decisions generally have focused primarily, if not exclusively, on residential mortgage origination and servicing, other laws and regulations may be enacted that affect the manner in which we do business and the products and services that we provide, restrict our ability to growthgrow through acquisition, restrict our ability to compete in our current business or expand into any new business, and impose additional fees, assessments or taxes on us or increase our regulatory oversight. For example,

New CFPB regulations which took effect in January 2014 may negatively impact our residential mortgage loan business and compliance risk.

Our consumer business, including our mortgage, credit card, and other consumer lending and non-lending businesses, may be adversely affected by the policies enacted or regulations adopted by the Consumer Financial Protection Bureau (CFPB) which has broad rulemaking authority over consumer financial products and services. In January 2014 new federal regulations promulgated by the CFPB took effect which impact how we originate and service residential mortgage loans. The new regulations, among other things, require mortgage lenders to assess and document a borrower’s ability to repay their mortgage loan. The regulations provide borrowers the ability to challenge foreclosures and sue for damages based on allegations that the lender failed to meet the standard for determining the borrower’s ability to repay their loan. While the regulations include presumptions in favor of the lender based on certain loan underwriting criteria, it is uncertain how these presumptions will be construed and applied by courts in the event of litigation. The ultimate impact of these new regulations on the lender’s enforcement of its loan documents in the event of a loan default, and the cost and expense of doing so, is uncertain, but may be

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significant. In addition, the secondary market demand for loans that do not fall within the presumptively safest category of a “qualified mortgage” as defined by the CFPB is uncertain.

The new regulations also require changes to certain loan servicing procedures and practices. The new servicing rules will, among other things, result in increased foreclosure costs and longer foreclosure timelines in the event of loan default, and failure to comply with the new servicing rules may result in additional litigation and compliance risk.

The CFPB recently proposed additional rules under the Home Mortgage Disclosure Act (“HMDA”) that are intended to improve information reported about the residential mortgage market and increase disclosure about consumer access to mortgage credit. As drafted, the proposed updates to the HMDA increase the types of dwelling-secured loans that would be subject to the disclosure requirements of the rule and expands the categories of information that financial institutions such as the Bank would be required to report with respect to such loans and such borrowers, including potentially sensitive customer information. If implemented, these changes would increase our compliance costs due to the need for additional resources to meet the enhanced disclosure requirements, including additional personnel and training costs as well as informational systems to allow the Bank to properly capture and report the additional mandated information. In addition, because of the anticipated volume of new data that would be required to be reported under the updated rules, the Bank would face an increased risk of errors in the information. More importantly, because of the sensitive nature of some of the additional customer information to be included in such reports, the Bank would face a higher potential for a security breach resulting in the disclosure of sensitive customer information in the event the HMDA reporting files were obtained by an unauthorized party.

While the full impact of CFPB's activities on our business is still unknown, however, we anticipate that the proposed rule change under the HMDA and other CFPB actions that may follow may increase our compliance costs and require changes in our business practices as a result of new regulations and requirements and could limit the products and services we are able to provide to customers. We are unable to predict whether U.S. federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could adversely affect our cost of doing business and profitability. See “Regulation and Supervision - Regulation and Supervision” in Part I- Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2012.2013 previously filed with the SEC.

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Our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and we use estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation.

An important information technology systems provider was previously identifiedA portion of our assets are carried on the balance sheet at fair value, including investment securities available for sale, mortgage servicing rights related to single family loans and single family loans held for sale. Generally, for assets that are reported at fair value, we use quoted market prices or internal valuation models that utilize observable market data inputs to estimate their fair value. In certain cases, observable market prices and data may not be readily available or their availability may be diminished due to market conditions. We use financial models to value certain of these assets. These models are complex and use asset-specific collateral data and market inputs for interest rates. Although we have processes and procedures in place governing internal valuation models and their testing and calibration, such assumptions are complex as having internal control deficiencies, andwe must make judgments about the persistenceeffect of matters that are inherently uncertain. Different assumptions could result in significant changes in valuation, which in turn could affect earnings or recurrenceresult in significant changes in the dollar amount of such issues could give rise to significant risks toassets reported on the balance sheet.

HomeStreet, Inc. primarily relies on dividends from the Bank and payment of dividends by the Company.Bank may be limited by applicable laws and regulations.

In the first quarter of 2012 and again in the second quarter of 2013, we were notified that the provider of one of the Bank's critical information technology and transaction processing systems was identified as posingHomeStreet, Inc. is a significant risk to banking operations for that vendor's clients. That vendor encountered a significant cyber-attack and related computer fraud, and there have been indications that in the absence of a prompt remediation of known and unknown deficiencies, that vendor's systems may create enhanced risk for users.
The Bank does not use this system that was the subject of the cyber-attack; however,separate legal entity from the Bank, uses this vendor for a wide varietyand although we do receive some dividends from HomeStreet Capital Corporation, the primary source of important functions,our funds from which we service our debt, pay dividends to our shareholders and given their progress in remediating these issues,otherwise satisfy our obligations is dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and subject to the vendor's continued progress, we have plans to increase our reliance on this vendor and its products and services. Our Board of Directors,regulations, as well as the Bank's Boardby our policy of Directors, were briefed on this development and are provided quarterly updates on the vendor's remediation efforts. Although the vendor believed all of the outstanding actions had been completed by March 31, 2013, a subsequent assessment found those remediation activities had not been wholly effective. If these concerns are not addressed effectively, the Bank could experience a number of potentially materially adverse consequences, including:
greater than normal exposure to compliance problems, which could lead to adverse regulatory actions, including potential enforcement actions;
the need to replace one or more of our information systems providers, which could lead to increased costs, disruptions in our relationships with one or more customers, management distractions, and other difficulties;
potential claims by customers, including class action claims, resulting from actual or alleged compromises of consumer or business financial information;
difficulties in maintaining an adequate system of internal controls and procedures and internal control over financial reporting;
the loss of confidence of one or more of our customers, or reputational harm associated with the use of these systems, particularly if our customers experience actual difficulties, losses or attacks; and
a dispute with this vendor over the adequacy of the products and services for which we contracted, potentially including increases in legal fees and other litigation costs.

A failure in or breach of our security systems or infrastructure, or those of our third party vendors and other service providers, resulting from cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Those parties also may attempt to fraudulently induce employees, customers, or other users of our systems to disclose confidential information in order to gain access to our data or that of our customers. Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks, either managed directly by us or through our data processing vendors. In addition, to access our products and services, our customers may use personal smartphones, tablet PC's, and other mobile devices that are beyond our control systems. Although we believe we have robust information security procedures and controls, our technologies, systems, networks, and our customers' devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of Company or our customers' confidential, proprietary and other information, or otherwise disrupt the Company's or its customers' or other third parties' business operations.

Third parties with which we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

To date we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks and losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel, our expanding operations and the outsourcing ofretaining a significant portion of our businessearnings to support the Bank's operations. AsNew capital rules will also impose more stringent capital requirements to maintain “well capitalized” status which may additionally impact the Bank’s ability to pay dividends to the Company. See “Regulation of Home Street Bank - Capital and Prompt Corrective Action Requirements - New Capital Rules” in Item 1 of our Form 10-K for the year ended December 31, 2013 previously filed with the SEC. If the Bank cannot pay dividends to us, we may be limited in our ability to service our debts, fund the Company's operations and pay dividends to the Company's shareholders. While the Company has made special dividend distributions to its public shareholders in recent quarters, the Company has not adopted a result, cyber-securitydividend policy and the continued development and enhancementboard of our controls, processes and practices designeddirectors determined that it is in the best interests of the shareholders not to protect customer information, our systems, computers, software, data and networks from attack, damagedeclare a dividend to be paid in the second

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and third quarters of 2014. As such, our dividends are not regular and are subject to restriction due to cash flow limitations, capital requirements, capital needs of the business or unauthorized accessother factors.

We cannot assure you that we will remain profitable.

We have sustained significant losses in the past and our profitability has declined in recent quarters. We cannot guarantee that we will remain profitable or be able to maintain the level of profit we are currently experiencing. Many factors determine whether or not we will be profitable, and our ability to remain profitable is threatened by a prioritymyriad of issues, including:

Further increases in interest rates may continue to limit our ability to make loans, decrease our net interest income and noninterest income, reduce demand for loans, increase the cost of deposits and otherwise negatively impact our financial situation;
Volatility in mortgage markets, which is driven by factors outside of our control such as interest rate changes, housing inventory and general economic conditions, may negatively impact our ability to originate loans and change the fair value of our existing loans and servicing rights;
Changes in regulations that impact the Company or the Bank and may limit our ability to offer certain products or services or may increase our costs of compliance;
Increased costs from growth through acquisition could exceed the income growth anticipated from these opportunities, especially in the short term as these acquisitions are integrated into our business;
Changes in government-sponsored enterprises and their ability to insure or to buy our loans in the secondary market may result in significant changes in our ability to recognize income on sale of our loans to third parties;
Competition in the mortgage market industry may drive down the interest rates we are able to offer on our mortgages, which will negatively impact our net interest income;
Changes in the cost structures and fees of government-sponsored enterprises to whom we sell many of these loans may compress our margins and reduce our net income and profitability; and
Our hedging strategies to offset risks related to interest rate changes may not prove to be successful and may result in unanticipated losses for the Company. As cyber threats

These and other factors may limit our ability to generate revenue in excess of our costs, which in turn may result in a lower rate of profitability or even substantial losses for the Company.

We have been pursuing an aggressive growth strategy within both our single family mortgage banking and Commercial Bank business segments through hiring of additional personnel, and the costs associated with that growth may not keep pace with the anticipated increase in our revenues.

Beginning in February of 2012, we have hired a substantial number of loan and support personnel in both our traditional markets and in additional Western states and we expect to continue to evolve,grow our business through opportunistic hiring of additional loan origination and servicing personnel.In addition to increasing our exposure to a more volatile single family mortgage banking segment of our business by increasing the number of originators of such loans, the aggressive growth strategy for both the single family Mortgage Banking segment and the Commercial and Consumer Banking segment of our business exposes us to potential additional risks, including:

Expenses related to hiring and training a large number of new employees;
Higher compensation costs relative to production in the initial months of new employment;
Increased compliance costs;
Costs associated with opening new offices that may be needed to provide for the new employees;
New state laws and regulations to which we have not been previously subject;
Diversion of management’s attention from the daily operations of other aspects of the business;
The potential of litigation related from prior employers related to the portability of their employees;
The potential loss of our investment in new employees who are terminated or seek to leave the Company prior to being profitable to us;
The potential loss of other key employees.


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We cannot give assurance that these costs and other risks will be fully offset or mitigated by potentially increased revenue generated by the expansion in this business line in the near future, or at all.

Future acquisitions could consume significant resources, present significant challenges in integration and may not be successful.

In the fourth quarter of 2013 we completed our acquisitions of Fortune Bank, Yakima National Bank and the two retail branches of AmericanWest Bank. While we consider those acquisitions to be substantially integrated, we may seek out other acquisitions in the near future as we look for ways to continue to grow our business and our market share. Any future acquisition we may undertake may involve numerous risks related to the investigation and consideration of the potential
acquisition, the costs of undertaking such a transaction and, if we are successful in closing such transaction, the risks inherent in the integration of the acquired assets or entity into HomeStreet or HomeStreet Bank, including risks that arise after the transaction is completed. These risks include:

Diversion of management's attention from normal daily operations of the business;
Costs incurred in the process of vetting potential acquisition candidates which may not be recouped by the Company;
Difficulties in integrating the operations, technologies, and personnel of the acquired companies;
Difficulties in implementing internal controls over financial reporting;
Inability to maintain the key business relationships and the reputations of acquired businesses;
Entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
Potential responsibility for the liabilities of acquired businesses;
Inability to maintain our internal standards, controls, procedures and policies at the acquired companies or businesses; and
Potential loss of key employees of the acquired companies.

Difficulties in pursuing or integrating any new acquisitions may increase our costs and adversely impact our financial condition and results of operations. Further, even if we successfully address these factors and are successful in closing the transaction and integrating the systems together, we may nonetheless experience customer losses, or we may fail to grow the acquired businesses as we intend.

Federal, state and local consumer protection laws may restrict our ability to offer and/ or increase our risk of liability with respect to certain products and services and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain practices considered “predatory” or “unfair and deceptive”.” These laws prohibit practices such as steering borrowers away from more affordable products, failing to disclose key features, limitations, or costs related to products and services, selling unnecessary insurance to borrowers, repeatedly refinancing loans, imposing excessive fees for overdrafts, and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans or engage in deceptive practices, but these laws and regulations create the potential for liability with respect to our lending, servicing, loan investment and deposit taking activities. As we offer products and services to customers in additional states, we may become subject to additional state and local laws designed to protect consumers. The additional laws and regulations may increase our cost of doing business, and ultimately may prevent us from making certain loans, offering certain products, and may cause us to reduce the average percentage rate or the points and fees on loans and other products and services that we do provide.

The significant concentration of real estate secured loans in our portfolio has had and may continue to have a negative impact on our asset quality and profitability.

Substantially all of our loans are secured by real property. Our real estate secured lending is generally sensitive to national, regional and local economic conditions, making loss levels difficult to predict. Declines in real estate sales and prices, significant increases in interest rates, and a degeneration in prevailing economic conditions may result in higher than expected loan delinquencies, foreclosures, problem loans, OREO, net charge-offs and provisions for credit and OREO losses. Although real estate prices are stable in the markets in which we operate, if market values decline, the collateral for our loans may provide less security and our ability to recover the principal, interest and costs due on defaulted loans by selling the underlying real estate will be diminished, leaving us more likely to suffer additional losses on defaulted loans. Such declines may have a

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greater effect on our earnings and capital than on the earnings and capital of financial institutions whose loan portfolios are more geographically diversified.

Worsening conditions in the real estate market and higher than normal delinquency and default rates on loans could cause other adverse consequences for us, including:

The reduction of cash flows and capital resources, as we are required to make cash advances to meet contractual obligations to investors, process foreclosures, and maintain, repair and market foreclosed properties;
Declining mortgage servicing fee revenues because we recognize these revenues only upon collection;
Increasing loan servicing costs;
Declining fair value on our mortgage servicing rights; and
Declining fair values and liquidity of securities held in our investment portfolio that are collateralized by mortgage obligations.
Our allowance for loan losses may prove inadequate or we may be requirednegatively affected by credit risk exposures. Future additions to expend significant additional resources to insure, to continue to modify or enhance our protective measures or to investigate and remediate important information security vulnerabilities.allowance for loan losses will reduce our earnings.

Disruptions or failuresOur business depends on the creditworthiness of our customers. As with most financial institutions, we maintain an allowance for loan losses to provide for defaults and nonperformance, which represents management's best estimate of probable incurred losses inherent in the physical infrastructure or operating systemsloan portfolio. Management's estimate is the result of our continuing evaluation of specific credit risks and loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, industry concentrations and other factors that support our businesses and customers, or cyber-attacks or security breachesmay indicate future loan losses. The determination of the networks, systems or devices thatappropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our customers usenonperforming loans and OREO reflect operating difficulties of individual borrowers and weaknesses in the economies of the markets we serve. This allowance may not be adequate to access our productscover actual losses, and services could result in customer attrition, financialfuture provisions for losses the inability of our customers to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially and adversely affect our financial condition, results of operations and cash flows.
In addition, as a result of our acquisitions of Fortune Bank, Yakima National Bank and two branches of AmericanWest Bank in the second half of 2013, we have added the loans previously held by the acquired companies or financial condition.

The network and computer systems on whichrelated to the acquired branches to our books. Any future acquisitions we depend could fail or experience security breaches.

Our computer systems could be vulnerable to unforeseen problems. Becausemay make will have a similar result. Although we conduct areview loan quality as part of our business overdue diligence in considering any acquisition, the Internet and outsource several critical functionsaddition of such loans may increase our credit risk exposure, requiring an increase in our allowance for loan losses or we may experience adverse effects to third parties, operations will depend on our ability, as well as the ability of third-party service providers, to protect computer systems and network infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations could have a material adverse effect on our business, financial condition, and results of operations.

In addition, a significant barrier to online financial transactions is the secure transmission of confidential information over public networks. Our Internet banking system reliesoperations and cash flows stemming from losses on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms our third-party service providers use to protect customer transaction data. If any such compromise of security were to occur, it could have a material adverse effect on our business, financial condition and results of operations.those additional loans.

Our real estate lending also exposes us to environmental liabilities.

In the course of our business, it is necessary to foreclose and take title to real estate, which could subject us to environmental liabilities with respect to these properties. Hazardous substances or waste, contaminants, pollutants or sources thereof may be discovered on properties during our ownership or after a sale to a third party. We could be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances or chemical releases at such properties. The costs associated with investigation or remediation activities could be substantial and could substantially exceed the value of the real property. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. We may be unable to recover costs from any third party. These occurrences may materially reduce the value of the affected property, and we may find it difficult or impossible to use or sell the property prior to or following any environmental remediation. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

We may be required to recognize impairment with respect to investment securities, includingA failure in or breach of our security systems or infrastructure, or those of our third party vendors and other service providers, resulting from cyber-attacks, could disrupt our businesses, result in the FHLB stock we hold.disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.

Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declinesInformation security risks for financial institutions have generally increased in the fair market value of these securities. We evaluate the securities portfolio for any other than temporary impairment each reporting period. In addition, as a condition of membership in the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based,recent years in part upon the outstanding principal balance of advances from the FHLB. Our FHLB stock is carried at cost and is subject to recoverability testing under applicable accounting standards. Future negative changes to the financial conditionbecause of the FHLB may require usproliferation of new technologies, the use of the Internet and telecommunications technologies to recognize an impairment charge with respect to such holdings. The FHLB is currently subject to a Consent Order issued by its primary regulator,conduct financial transactions, and the Federal Housing Finance Agency.

increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. Those parties

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The strengthalso may attempt to fraudulently induce employees, customers, or other users of our systems to disclose confidential information in order to gain access to our data or that of our customers. Our operations rely on the secure processing, transmission and stabilitystorage of confidential information in our computer systems and networks, either managed directly by us or through our data processing vendors. In addition, to access our products and services, our customers may use personal smartphones, tablet PCs, and other financial institutionsmobile devices that are beyond our control systems. Although we believe we have robust information security procedures and controls, we are heavily reliant on our third party vendors, and our vendors’ or our own
our technologies, systems, networks and our customers' devices may adversely affectbecome the target of cyber-attacks, computer viruses, malicious code, unauthorized access, hackers or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of Company or our business.customers' confidential, proprietary and other information, or otherwise disrupt the Company's or its customers' or other third parties' business operations.

Our counterparty risk exposure is affected by the actions and creditworthiness of other financial institutionsThird parties with which we do business. Negative impactsbusiness or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints. In addition, some of our counterpartyprimary third party service providers may be subject to enhanced regulatory scrutiny due to regulatory findings during examinations of such service provider(s) conducted by federal regulators. While we have and will subject such vendor(s) to higher scrutiny and monitor any corrective measures that the vendor(s) are or would undertake, we are not able to fully mitigate any risk which could result from a breach or other operational failure caused by this, or any other vendor’s breach.

To date we are not aware of any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks and losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel, our expanding operations and the outsourcing of a significant portion of our business operations. As a result, cybersecurity and the continued development and enhancement of our controls, processes and practices designed to protect customer information, our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for the Company. As cyber threats continue to evolve, we may be required to expend significant additional resources to insure, to continue to modify or enhance our protective measures or to investigate and remediate important information security vulnerabilities, however, our measures may be insufficient to prevent physical .and electronic break-ins, denial of service and other cyber-attacks or security breaches.

Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber-attacks or security breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition, financial institutionslosses, the inability of our customers to transact business with us, violations of applicable privacy and other laws, regulatory fines, penalties or intervention, additional regulatory scrutiny, reputational damage, litigation, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially and adversely affect our results of operations or financial condition.

The network and computer systems on which we depend could fail or experience security breaches.

Our computer systems could be vulnerable to unforeseen problems. Because we conduct a part of our business over the Internet and outsource several critical functions to third parties, operations will depend on our ability, as well as the ability of third-party service providers, to protect computer systems and network infrastructure against damage from fire, power loss, telecommunications failure, physical break-ins or similar catastrophic events. Any damage or failure that causes interruptions in operations may compromise our ability to engageperform critical functions in routine funding transactions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Many of these types of transactions can expose us to credit risk in the event of default by a direct or indirect counterparty or client.

If other financial institutions in our markets dispose of real estate collateral at below-market or distressed prices, such actions may increase our lossestimely manner and could have a material adverse effect on our business, financial condition and results of operations as well as our reputation and customer or vendor relationships.

In addition, a significant barrier to online financial transactions is the secure transmission of confidential information over public networks. Our Internet banking system relies on encryption and authentication technology to provide the security and authentication necessary to effect secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms our third-party service providers use to protect customer transaction data. If any such compromise of security were to occur, it could have a material adverse effect on our business, financial condition and results of operations.

Our accounting policiesThe failure to protect our customers’ confidential information and methodsprivacy could adversely affect our business.
We are fundamentalsubject to howstate and federal privacy regulations and confidentiality obligations that, among other things restrict the use and dissemination of, and access to, the information that we reportproduce, store or maintain in the course of our business. We also

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have contractual obligations to protect certain confidential information we obtain from our existing vendors and customers. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information, and in some instances may impose indemnity obligations on us relating to unlawful or unauthorized disclosure of any such information.
The actions we may take in order to promote compliance with these obligations vary by business segment and may change over time, but may include, among other things:
training and educating our employees and independent contractors regarding our obligations relating to confidential information;
monitoring changes in state or federal privacy and compliance requirements;
drafting and enforcing appropriate contractual provisions into any contract that raises proprietary and confidentiality issues;
maintaining secure storage facilities and protocols for tangible records;
physically and technologically securing access to electronic information; and
in the event of a security breach, providing credit monitoring or other services to affected customers.
If we do not properly comply with privacy regulations and protect confidential information, we could experience adverse consequences, including regulatory sanctions, penalties or fines, increase compliance costs, litigation and damage to our reputation, which in turn could result in decreased revenues and loss of customers, all of which would have a material adverse effect on our business, financial condition and results of operations, and we use estimates in determining the fair value of certain of our assets, which estimates may prove to be imprecise and result in significant changes in valuation.

A portion of our assets are carried on the balance sheet at fair value, including investment securities available for sale, mortgage servicing rights related to single family loans and single family loans held for sale. Generally, for assets that are reported at fair value, we use quoted market prices or internal valuation models that utilize observable market data inputs to estimate their fair value. In certain cases, observable market prices and data may not be readily available or their availability may be diminished due to market conditions. We use financial models to value certain of these assets. These models are complex and use asset-specific collateral data and market inputs for interest rates. Although we have processes and procedures in place governing internal valuation models and their testing and calibration, such assumptions are complex as we must make judgments about the effect of matters that are inherently uncertain. Different assumptions could result in significant changes in valuation, which in turn could affect earnings or result in significant changes in the dollar amount of assets reported on the balance sheet.

operations.
Our operations could be interrupted if our third-party service and technology providers experience difficulty, terminate their services or fail to comply with banking regulations

We depend, and will continue to depend, to a significant extent, on a number of relationships with third-party service and technology providers. Specifically, we receive core systems processing, essential web hosting and other Internet systems and deposit and other processing services from third-party service providers. If these third-party service providers, or if any parties to whom our third party service providers have subcontracted services, experience difficulties or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted and our operating expenses may be materially increased. If an interruption were to continue for a significant period of time, our business financial condition and results of operations could be materially adversely affected.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many national vendors provide turn-key services to community banks, such as internetInternet banking and remote deposit capture that allow smaller banks to compete with institutions that have substantially greater resources to invest in technological improvements. We may not be able, however, to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

We may be required to recognize impairment with respect to investment securities, including the FHLB stock we hold.

Our securities portfolio currently includes securities with unrecognized losses. We may continue to observe declines in the fair market value of these securities. We evaluate the securities portfolio for any other than temporary impairment each reporting period. In addition, becauseas a condition of membership in the FHLB, we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. Our FHLB stock is carried at cost and is subject to recoverability testing under applicable accounting standards. Future negative changes to the financial condition of the demand for technology-driven products, banks are increasingly contractingFHLB may require us to recognize an impairment charge with third party vendorsrespect to provide data processing and core banking functions.such holdings. The use of technology-related products, services, delivery channels and processes exposesFHLB is currently subject to a bank to various risks, particularly transaction, strategic, reputation and compliance risks. There can be no assurance that we will be able to successfully manageConsent Order issued by its primary regulator, the risks associated with our increased dependency on technology.Federal Housing Finance Agency.


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A change in federal monetary policy could adversely impact our mortgage banking revenues.

The Federal stateReserve is responsible for regulating the supply of money in the United States, and local consumeras a result its monetary policies strongly influence our costs of funds for lending lawsand investing as well as the rate of return we are able to earn on those loans and investments, both of which impact our net interest income and net interest margin. The Federal Reserve Board's interest rate policies can also materially affect the value of financial instruments we hold, including debt securities and mortgage servicing rights, or MSRs. These monetary policies can also negatively impact our borrowers, which in turn may restrictincrease the risk that they will be unable to pay their loans according to the terms or be unable to pay their loans at all. We have no control over the monetary policies of the Federal Reserve Board and cannot predict when changes are expected or what the magnitude of such changes may be.

As a result of the Federal Reserve Board's concerns regarding continued slow economic growth, the Federal Reserve Board, in 2008 implemented its standing monetary policy known as “quantitative easing,” a program involving the purchase of mortgage backed securities and United States Treasury securities, the volume of which has been aligned with specific economic targets or measures intended to bolster the U.S. economy. As the Federal Reserve Board, through the Federal Open Market Committee (the “Committee”), monitors economic performance, the volume of the quantitative easing program continues to be incrementally reduced. The Committee has stated that if incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

Because a substantial portion of our revenues and our net income historically have been, and in the foreseeable future are expected to be, derived from gain on the origination and sale of mortgage loans and on the continuing servicing of those loans, the Federal Reserve Board's monetary policies may have had, and for so long as the program continues, may continue to have, the effect of supporting higher revenues than might otherwise be available. Contrarily, a reduction in or termination of this policy, absent a significant rebound in employment and real wages, would likely reduce mortgage originations throughout the United States, including ours. Continued reduction or termination of the quantitative easing program may likely further raise interest rates, which could reduce our mortgage origination revenues and in turn have a material adverse impact upon our business.

A substantial portion of our revenue is derived from residential mortgage lending which is a market sector that experiences significant volatility.

A substantial portion of our consolidated net revenues (net interest income plus noninterest income) are derived from originating and selling residential mortgages. Residential mortgage lending in general has experienced substantial volatility in recent periods. An increase in interest rates in the second quarter of 2013 resulted in a significant adverse impact on our business and financial results due primarily to a related decrease in volume of loan originations, especially refinancings. Any future additional increase in interest rates may further materially and adversely affect our future loan origination volume, margins, and the value of the collateral securing our outstanding loans, may increase rates of borrower default, and may otherwise adversely affect our business. Additionally, in recent periods we have experienced very low levels of homes available for sale in many of the markets in which we operate. The lack of housing inventory has had a downward impact on the volume of mortgage loans that we originate.  Further, it has resulted in elevated costs, as a significant amount of loan processing and underwriting that we perform are to qualifying borrowers for mortgage loan transactions that never materialize. The lack of inventory of homes for sale may continue to have an adverse impact on mortgage loan volumes into the foreseeable future.

We may incur losses due to changes in prepayment rates.

Our mortgage servicing rights carry interest rate risk because the total amount of servicing fees earned, as well as changes in fair-market value, fluctuate based on expected loan prepayments (affecting the expected average life of a portfolio of residential mortgage servicing rights). The rate of prepayment of residential mortgage loans may be influenced by changing national and regional economic trends, such as recessions or depressed real estate markets, as well as the difference between interest rates on existing residential mortgage loans relative to prevailing residential mortgage rates. Changes in prepayment rates are therefore difficult for us to predict. An increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest and principal of their obligations. During periods of declining interest rates, many residential borrowers refinance their mortgage loans. The loan administration fee income (related to the residential mortgage loan servicing rights corresponding to a mortgage loan) decreases as mortgage loans are prepaid. Consequently, the fair value of portfolios of residential mortgage loan servicing rights tend to decrease during periods of declining interest rates, because greater prepayments can be expected and, as a result, the amount of loan administration income received also decreases.

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We may incur significant losses as a result of ineffective hedging of interest rate risk related to our loans sold with a reservation of servicing rights.

Both the value our single family mortgage servicing rights, or MSRs, and the value of our single family loans held for sale changes with fluctuations in interest rates, among other things, reflecting the changing expectations of mortgage prepayment activity. To mitigate potential losses of fair value of single family loans held for sale and MSRs related to changes in interest rates, we actively hedge this risk with financial derivative instruments. Hedging is a complex process, requiring sophisticated models, experienced and skilled personnel and continual monitoring. Changes in the value of our hedging instruments may not correlate with changes in the value of our single family loans held for sale and MSRs, and we could incur a net valuation loss as a result of our hedging activities. Following the expansion of our single family mortgage operations in early 2012 through the addition of a significant number of single family mortgage origination personnel, the volume of our single family loans held for sale and MSRs has increased. The increase in volume in turn increases our exposure to the risks associated with the impact of interest rate fluctuations on single family loans held for sale and MSRs.

Changes in fee structures by third party loan purchasers and mortgage insurers may decrease our loan production volume and the margin we can recognize on conforming home loans, and may adversely impact our results of operations.

Certain third party loan purchasers revised their fee structures in the third quarter of 2013 and increased the costs of doing business with them. For example, certain purchasers of conforming loans, including Fannie Mae and Freddie Mac, raised costs of guarantee fees and other required fees and payments. These changes increased the cost of mortgages to consumers and the cost of selling conforming loans to third party loan purchasers which in turn decreased our margin and negatively impacted our profitability. Additionally, the FHA raised costs for premiums and extended the period for which private mortgage insurance is required on a loan purchased by them. Additional changes in the future from third party loan purchasers may have a negative impact on our ability to originate or increaseloans to be sold because of the increased costs of such loans and may decrease our risk of liabilityprofitability with respect to loans held for sale. In addition, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these third party loan purchasers could negatively impact our results of business, operations and cash flows.

If we breach any of the representations or warranties we make to a purchaser or securitizer of our mortgage loans or MSRs, we may be liable to the purchaser or securitizer for certain costs and damages.

When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and could increase our costthe manner in which they were originated. Our agreements require us to repurchase mortgage loans if we have breached any of doing business.

Federal, statethese representations or warranties, in which case we may be required to repurchase such loan and local lawsrecord a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have been adoptedany remedies available to us against a third party for such losses, or the remedies available to us may not be as broad as the remedies available to the purchaser of the mortgage loan against us. In addition, if there are remedies against a third party available to us, we face further risk that are intendedsuch third party may not have the financial capacity to eliminate certain lending practices considered “predatory” or “unfair and deceptive practices.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insuranceperform remedies that otherwise may be available to borrowers, repeatedly refinancing loans, and making loans withoutus. Therefore, if a reasonable expectation that the borrowers willpurchaser enforces remedies against us, we may not be able to repayrecover our losses from a third party and may be required to bear the full amount of the related loss.

In addition, in connection with the sale of a significant amount of our MSRs to SunTrust Mortgage, Inc., we agreed to indemnify SunTrust Mortgage, Inc. for prepayment of a certain amount of those loans. In the event the holders of such loans prepay the loans, irrespectivewe may be required to reimburse SunTrust Mortgage, Inc. for a certain portion of the anticipated MSR value of the underlying property. It is our policy not to make predatorythat loan.

If repurchase and indemnity demands increase on loans or engageMSRs that we sell from our portfolios, our liquidity, results of operations and financial condition will be adversely affected.

If we breach any representations or warranties or fail to follow guidelines when originating a FHA/HUD-insured loan or a VA-guaranteed loan, we may lose the insurance or guarantee on the loan and suffer losses, pay penalties, and/or be subjected to litigation from the federal government.

We originate and purchase, sell and thereafter service single family loans that are insured by FHA/HUD or guaranteed by the VA. We certify to the FHA/HUD and the VA that the loans meet their requirements and guidelines. The FHA/HUD and VA audit loans that are insured or guaranteed under their programs, including audits of our processes and procedures as well as individual loan documentation. Violations of guidelines can result in deceptive practices, but these laws createmonetary penalties or require us to provide indemnifications against loss or loans declared ineligible for their programs. In the potential for liabilitypast, monetary penalties and losses from

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indemnifications have not created material losses to the Bank. As a result of the housing crisis, the FHA/HUD has stepped up enforcement initiatives. In addition to regular FHA/HUD audits, HUD's Inspector General has become active in enforcing FHA regulations with respect to our lending, servicing, loan investment and deposit taking activities. They increase our cost of doing business, and ultimately may prevent us from making certainindividual loans and causehas partnered with the Department of Justice ("DOJ") in filing lawsuits against lenders for systemic violations. The penalties resulting from such lawsuits can be much more severe, since systemic violations can be applied to groups of loans and penalties may be subject to treble damages. The DOJ has used the Federal False Claims Act and other federal laws and regulations in prosecuting these lawsuits. Because of our significant origination of FHA/HUD insured and VA guaranteed loans, if the DOJ were to find potential violations by the Bank, we could be subject to material monetary penalties and/or losses, and may even be subject to lawsuits alleging systemic violations which could result in treble damages.

We may face risk of loss if we purchase loans from a seller that fails to satisfy its indemnification obligations.

We generally receive representations and warranties from the originators and sellers from whom we purchase loans and servicing rights such that if a loan defaults and there has been a breach of such representations and warranties, we may be able to pursue a remedy against the seller of the loan for the unpaid principal and interest on the defaulted loan. However, if the originator and/or seller breach such representations and warranties and does not have the financial capacity to pay the related damages, we may be subject to the risk of loss for such loan as the originator or seller may not be able to pay such damages or repurchase loans when called upon by us to reduce the average percentage rate or the points and fees ondo so. Currently, we only purchase loans that we do make.from WMS Series LLC, an affiliated business arrangement with certain Windermere real estate brokerage franchise owners.

Some provisions of our articles of incorporation and bylaws and certain provisions of Washington law may deter takeover attempts, which may limit the opportunity of our shareholders to sell their shares at a favorable price.

Some provisions of our articles of incorporation and bylaws may have the effect of deterring or delaying attempts by our shareholders to remove or replace management, to commence proxy contests, or to effect changes in control. These provisions include:
a classified board of directors so that only approximately one third of our board of directors is elected each year;
elimination of cumulative voting in the election of directors;
procedures for advance notification of shareholder nominations and proposals;
the ability of our board of directors to amend our bylaws without shareholder approval; and
the ability of our board of directors to issue shares of preferred stock without shareholder approval upon the terms and conditions and with the rights, privileges and preferences as the board of directors may determine.

In addition, as a Washington corporation, we are subject to Washington law which imposes restrictions on some transactions between a corporation and certain significant shareholders. These provisions, alone or together, could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.




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ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5OTHER INFORMATION

Not applicable.


9599



ITEM 6EXHIBITS

EXHIBIT INDEX
 
Exhibit  
Number  Description
   
31.1  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
   
31.2 
Certification of Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1)
   
32  
Certification of Periodic Financial Report by Principal Executive Officer and Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.(2)
   
101.INS  
XBRL Instance Document(3)(4)
   
101.SCH  
XBRL Taxonomy Extension Schema Document(3)
   
101.CAL  
XBRL Taxonomy Extension Calculation Linkbase Document(3)
   
101.DEF  
XBRL Taxonomy Extension Label Linkbase Document(3)
   
101.LAB  
XBRL Taxonomy Extension Presentation Linkbase Document(3)
   
101.PRE  
XBRL Taxonomy Extension Definitions Linkbase Document(3)
 
(1)Filed herewith.
(2)This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
(3)As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.
(4)
Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 20132014, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013, (ii) the Consolidated Statements of Financial Condition as of SeptemberJune 30, 20132014, and December 31, 20122013, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20132014 and 20122013, (iv) the Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20132014 and 20122013, and (v) the Notes to Consolidated Financial Statements.


96100



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, on NovemberAugust 7, 20132014.
 
 HomeStreet, Inc.
   
 By:/s/ Mark K. Mason
  Mark K. Mason
  President and Chief Executive Officer



 HomeStreet, Inc.
   
 By:/s/ Cory D. Stewart
  Cory D. Stewart
  
Executive Vice President and
Chief Accounting Officer
  


97101