HMST-2014.3.31-10Q
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: March 31, 2014
Commission file number: 001-35424
________________________________
HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
________________________________
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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:
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Large Accelerated Filer | | o | Accelerated Filer | | x |
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Non-accelerated Filer | | o | Smaller Reporting Company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of outstanding shares of the registrant's common stock as of April 30, 2014 was 14,849,692.
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PART I – FINANCIAL INFORMATION | |
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ITEM 1 | FINANCIAL STATEMENTS | |
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ITEM 2 | | |
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ITEM 3 | | |
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ITEM 4 | | |
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ITEM 1 | | |
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ITEM 1A | | |
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ITEM 6 | | |
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Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to “HomeStreet,” “we,” “our,” “us” or the “Company” refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank (“Bank”), HomeStreet Capital Corporation and other direct and indirect subsidiaries of HomeStreet, Inc.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
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| | | | | | | | |
(in thousands, except share data) | | March 31, 2014 | | December 31, 2013 |
| | | | |
ASSETS | | | | |
Cash and cash equivalents (including interest-bearing instruments of $19,428 and $9,436) | | $ | 47,714 |
| | $ | 33,908 |
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Investment securities (includes $428,536 and $481,683 carried at fair value) | | 446,639 |
| | 498,816 |
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Loans held for sale (includes $321,307 and $279,385 carried at fair value) | | 588,465 |
| | 279,941 |
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Loans held for investment (net of allowance for loan losses of $22,127 and $23,908) | | 1,662,623 |
| | 1,871,813 |
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Mortgage servicing rights (includes $149,646 and $153,128 carried at fair value) | | 158,741 |
| | 162,463 |
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Other real estate owned | | 12,089 |
| | 12,911 |
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Federal Home Loan Bank stock, at cost | | 34,958 |
| | 35,288 |
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Premises and equipment, net | | 40,894 |
| | 36,612 |
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Goodwill | | 12,063 |
| | 12,063 |
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Other assets | | 120,626 |
| | 122,239 |
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Total assets | | $ | 3,124,812 |
| | $ | 3,066,054 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Liabilities: | | | | |
Deposits | | $ | 2,371,358 |
| | $ | 2,210,821 |
|
Federal Home Loan Bank advances | | 346,590 |
| | 446,590 |
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Accounts payable and other liabilities | | 71,498 |
| | 77,906 |
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Long-term debt | | 61,856 |
| | 64,811 |
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Total liabilities | | 2,851,302 |
| | 2,800,128 |
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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, 14,846,519 shares and 14,799,991 shares | | 511 |
| | 511 |
|
Additional paid-in capital | | 95,271 |
| | 94,474 |
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Retained earnings | | 183,610 |
| | 182,935 |
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Accumulated other comprehensive income | | (5,882 | ) | | (11,994 | ) |
Total shareholders' equity | | 273,510 |
| | 265,926 |
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Total liabilities and shareholders' equity | | $ | 3,124,812 |
| | $ | 3,066,054 |
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See accompanying notes to interim consolidated financial statements (unaudited).
HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in thousands, except share data) | 2014 | | 2013 |
| | | |
Interest income: | | | |
Loans | $ | 22,683 |
| | $ | 18,049 |
|
Investment securities | 2,970 |
| | 2,659 |
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Other | 157 |
| | 30 |
|
| 25,810 |
| | 20,738 |
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Interest expense: | | | |
Deposits | 2,360 |
| | 3,489 |
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Federal Home Loan Bank advances | 413 |
| | 292 |
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Long-term debt | 315 |
| | 1,717 |
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Other | 10 |
| | 5 |
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| 3,098 |
| | 5,503 |
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Net interest income | 22,712 |
| | 15,235 |
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Provision (reversal of provision) for credit losses | (1,500 | ) | | 2,000 |
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Net interest income after provision for credit losses | 24,212 |
| | 13,235 |
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Noninterest income: | | | |
Net gain on mortgage loan origination and sale activities | 25,510 |
| | 53,955 |
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Mortgage servicing income | 7,945 |
| | 3,072 |
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(Loss) income from WMS Series LLC | (193 | ) | | 620 |
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Loss on debt extinguishment | (586 | ) | | — |
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Depositor and other retail banking fees | 815 |
| | 721 |
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Insurance agency commissions | 404 |
| | 180 |
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Gain (loss) on sale of investment securities available for sale (includes unrealized gain (loss) reclassified from accumulated other comprehensive income of $713 and $(48)) | 713 |
| | (48 | ) |
Other | 99 |
| | 443 |
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| 34,707 |
| | 58,943 |
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Noninterest expense: | | | |
Salaries and related costs | 35,471 |
| | 35,062 |
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General and administrative | 10,122 |
| | 10,930 |
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Legal | 399 |
| | 611 |
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Consulting | 951 |
| | 696 |
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Federal Deposit Insurance Corporation assessments | 620 |
| | 567 |
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Occupancy | 4,432 |
| | 2,802 |
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Information services | 4,515 |
| | 2,996 |
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Net cost of operation and sale of other real estate owned | (419 | ) | | 2,135 |
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| 56,091 |
| | 55,799 |
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Income before income taxes | 2,828 |
| | 16,379 |
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Income tax expense (includes reclassification adjustments of $250 and $(17)) | 527 |
| | 5,439 |
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NET INCOME | $ | 2,301 |
| | $ | 10,940 |
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Basic income per share | $ | 0.16 |
| | $ | 0.76 |
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Diluted income per share | $ | 0.15 |
| | $ | 0.74 |
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Basic weighted average number of shares outstanding | 14,784,424 |
| | 14,359,691 |
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Diluted weighted average number of shares outstanding | 14,947,864 |
| | 14,804,129 |
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See accompanying notes to interim consolidated financial statements (unaudited).
HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Net income | $ | 2,301 |
| | $ | 10,940 |
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Other comprehensive income (loss), net of tax: | | | |
Unrealized gain (loss) on investment securities available for sale: | | | |
Unrealized holding gain (loss) arising during the period, net of tax expense of $3,541 and $1,746 | 6,575 |
| | (3,243 | ) |
Reclassification adjustment for net gains included in net income, net of tax expense (benefit) of $250 and $(17) | (463 | ) | | 31 |
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Other comprehensive income (loss) | 6,112 |
| | (3,212 | ) |
Comprehensive income | $ | 8,413 |
| | $ | 7,728 |
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See accompanying notes to interim consolidated financial statements (unaudited).
HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
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(in thousands, except share data) | Number of shares | | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Total |
| | | | | | | | | | | |
Balance, January 1, 2013 | 14,382,638 |
| | $ | 511 |
| | $ | 90,189 |
| | $ | 163,872 |
| | $ | 9,190 |
| | $ | 263,762 |
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Net income | — |
| | — |
| | — |
| | 10,940 |
| | — |
| | 10,940 |
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Dividends declared ($0.11 per share) | — |
| | — |
| | — |
| | (1,583 | ) | | — |
| | (1,583 | ) |
Share-based compensation expense | — |
| | — |
| | 456 |
| | — |
| | — |
| | 456 |
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Common stock issued | 17,568 |
| | — |
| | 42 |
| | — |
| | — |
| | 42 |
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Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (3,212 | ) | | (3,212 | ) |
Balance, March 31, 2013 | 14,400,206 |
| | $ | 511 |
| | $ | 90,687 |
| | $ | 173,229 |
| | $ | 5,978 |
| | $ | 270,405 |
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| | | | | | | | | | | |
Balance, January 1, 2014 | 14,799,991 |
| | $ | 511 |
| | $ | 94,474 |
| | $ | 182,935 |
| | $ | (11,994 | ) | | $ | 265,926 |
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Net income | — |
| | — |
| | — |
| | 2,301 |
| | — |
| | 2,301 |
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Dividends declared ($0.11 per share) | — |
| | — |
| | — |
| | (1,626 | ) | | — |
| | (1,626 | ) |
Share-based compensation expense | — |
| | — |
| | 736 |
| | — |
| | — |
| | 736 |
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Common stock issued | 46,528 |
| | — |
| | 61 |
| | — |
| | — |
| | 61 |
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Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 6,112 |
| | 6,112 |
|
Balance, March 31, 2014 | 14,846,519 |
| | $ | 511 |
| | $ | 95,271 |
| | $ | 183,610 |
| | $ | (5,882 | ) | | $ | 273,510 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 2,301 |
| | $ | 10,940 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation, amortization and accretion | 4,418 |
| | 2,501 |
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(Reversal of) provision for credit losses | (1,500 | ) | | 2,000 |
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(Reversal of) provision for losses on other real estate owned | (19 | ) | | 638 |
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Fair value adjustment of loans held for sale | (3,254 | ) | | 13,034 |
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Origination of mortgage servicing rights | (8,076 | ) | | (18,349 | ) |
Change in fair value of mortgage servicing rights | 11,377 |
| | 1,528 |
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Net (loss) gain on sale of investment securities | (713 | ) | | 48 |
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Net fair value adjustment and gain on sale of other real estate owned | (468 | ) | | (108 | ) |
Loss on early retirement of long-term debt | 586 |
| | — |
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Net deferred income tax (benefit) expense | (1,008 | ) | | 1,374 |
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Share-based compensation expense | 476 |
| | 343 |
|
Origination of loans held for sale | (676,630 | ) | | (1,431,625 | ) |
Proceeds from sale of loans originated as held for sale | 625,747 |
| | 1,608,533 |
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Cash used by changes in operating assets and liabilities: | | | |
Decrease (increase) in other assets | 1,869 |
| | (3,405 | ) |
Decrease in accounts payable and other liabilities | (9,140 | ) | | (19,652 | ) |
Net cash provided by (used in) operating activities | (54,034 | ) | | 167,800 |
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| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchase of investment securities | — |
| | (29,013 | ) |
Proceeds from sale of investment securities | 54,305 |
| | 15,754 |
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Principal repayments and maturities of investment securities | 6,200 |
| | 8,029 |
|
Proceeds from sale of other real estate owned | 2,949 |
| | 2,225 |
|
Proceeds from sale of loans originated as held for investment | 56,079 |
| | — |
|
Mortgage servicing rights purchased from others | (2 | ) | | (4 | ) |
Capital expenditures related to other real estate owned | — |
| | (22 | ) |
Origination of loans held for investment and principal repayments, net | (101,841 | ) | | (51,524 | ) |
Property and equipment purchased | (5,871 | ) | | (2,675 | ) |
Net cash (used in) provided by investing activities | 11,819 |
| | (57,230 | ) |
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| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Increase (decrease) in deposits, net | $ | 160,537 |
| | $ | (42,131 | ) |
Proceeds from Federal Home Loan Bank advances | 966,300 |
| | 1,569,042 |
|
Repayment of Federal Home Loan Bank advances | (1,066,300 | ) | | (1,644,542 | ) |
Proceeds from Federal Home Loan Bank stock repurchase | 330 |
| | 330 |
|
Repayment of long-term debt | (3,541 | ) | | — |
|
Dividends paid | (1,626 | ) | | — |
|
Proceeds from stock issuance, net | 61 |
| | 42 |
|
Excess tax benefits related to the exercise of stock options | 260 |
| | 113 |
|
Net cash provided by (used in) financing activities | 56,021 |
| | (117,146 | ) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 13,806 |
| | (6,576 | ) |
CASH AND CASH EQUIVALENTS: | | | |
Beginning of year | 33,908 |
| | 25,285 |
|
End of period | $ | 47,714 |
| | $ | 18,709 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Cash paid during the period for: | | | |
Interest | $ | 3,572 |
| | $ | 17,880 |
|
Federal and state income taxes | — |
| | 5,442 |
|
Non-cash activities: | | | |
Loans held for investment foreclosed and transferred to other real estate owned | 2,007 |
| | 3,303 |
|
Loans transferred from held for investment to held for sale | 310,455 |
| | — |
|
Ginnie Mae loans recognized with the right to repurchase, net | $ | 473 |
| | $ | 3,132 |
|
See accompanying notes to interim consolidated financial statements (unaudited).
HomeStreet, Inc. and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
HomeStreet, Inc. and its wholly owned subsidiaries (the “Company”) is a diversified financial services company serving customers primarily in the Pacific Northwest, California and Hawaii. The Company is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. The consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation and HomeStreet Bank (the “Bank”), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, 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 our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (“2013 Annual Report on Form 10-K”).
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 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 three months ended March 31, 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. The effective tax rate for the three months ended March 31, 2014, excluding the effect of these discrete items, was 33.0%.
NOTE 2–INVESTMENT SECURITIES:
The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
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| | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | |
Mortgage-backed securities: | | | | | | | |
Residential | $ | 122,576 |
| | $ | 313 |
| | $ | (2,786 | ) | | $ | 120,103 |
|
Commercial | 13,299 |
| | 297 |
| | — |
| | 13,596 |
|
Municipal bonds | 126,716 |
| | 901 |
| | (2,756 | ) | | 124,861 |
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Collateralized mortgage obligations: | | | | | | |
|
Residential | 62,200 |
| | 53 |
| | (1,716 | ) | | 60,537 |
|
Commercial | 12,015 |
| | — |
| | (376 | ) | | 11,639 |
|
Corporate debt securities | 75,052 |
| | 4 |
| | (4,252 | ) | | 70,804 |
|
U.S. Treasury securities | 26,987 |
| | 9 |
| | — |
| | 26,996 |
|
| $ | 438,845 |
| | $ | 1,577 |
| | $ | (11,886 | ) | | $ | 428,536 |
|
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| | | | | | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value |
| | | | | | | |
Mortgage-backed securities: | | | | | | | |
Residential | $ | 137,602 |
| | $ | 187 |
| | $ | (3,879 | ) | | $ | 133,910 |
|
Commercial | 13,391 |
| | 45 |
| | (3 | ) | | 13,433 |
|
Municipal bonds | 136,937 |
| | 185 |
| | (6,272 | ) | | 130,850 |
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Collateralized mortgage obligations: | | | | | | |
|
Residential | 93,112 |
| | 85 |
| | (2,870 | ) | | 90,327 |
|
Commercial | 17,333 |
| | — |
| | (488 | ) | | 16,845 |
|
Corporate debt securities | 75,542 |
| | — |
| | (6,676 | ) | | 68,866 |
|
U.S. Treasury securities | 27,478 |
| | 1 |
| | (27 | ) | | 27,452 |
|
| $ | 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 March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, substantially all securities held had ratings available by external ratings agencies.
Investment securities available for sale that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.
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| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
| Less than 12 months | | 12 months or more | | Total |
(in thousands) | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value |
| | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | $ | (2,710 | ) | | $ | 92,269 |
| | $ | (77 | ) | | $ | 6,293 |
| | $ | (2,787 | ) | | $ | 98,562 |
|
Municipal bonds | (2,536 | ) | | 74,561 |
| | (220 | ) | | 4,254 |
| | (2,756 | ) | | 78,815 |
|
Collateralized mortgage obligations: | | | | | | | | | | | |
Residential | (1,000 | ) | | 27,233 |
| | (716 | ) | | 19,540 |
| | (1,716 | ) | | 46,773 |
|
Commercial | — |
| | — |
| | (376 | ) | | 11,639 |
| | (376 | ) | | 11,639 |
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Corporate debt securities | (4,251 | ) | | 70,538 |
| | — |
| | — |
| | (4,251 | ) | | 70,538 |
|
| $ | (10,497 | ) | | $ | 264,601 |
| | $ | (1,389 | ) | | $ | 41,726 |
| | $ | (11,886 | ) | | $ | 306,327 |
|
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| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 |
| Less than 12 months | | 12 months or more | | Total |
(in thousands) | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value | | Gross unrealized losses | | Fair value |
| | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | |
Residential | $ | (3,767 | ) | | $ | 98,717 |
| | $ | (112 | ) | | $ | 6,728 |
| | $ | (3,879 | ) | | $ | 105,445 |
|
Commercial | (3 | ) | | 7,661 |
| | — |
| | — |
| | (3 | ) | | 7,661 |
|
Municipal bonds | (5,991 | ) | | 106,985 |
| | (281 | ) | | 3,490 |
| | (6,272 | ) | | 110,475 |
|
Collateralized mortgage obligations: | | | | | | | | |
|
| |
|
|
Residential | (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 | (27 | ) | | 25,452 |
| | — |
| | — |
| | (27 | ) | | 25,452 |
|
| $ | (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 issuer- or industry-specific credit event. As of March 31, 2014 and December 31, 2013, the present value of the cash flows expected to be collected on all of the Company debt securities was greater than amortized cost of those securities. In addition, as of March 31, 2014 and December 31, 2013, 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 equity securities as of March 31, 2014 and December 31, 2013.
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 March 31, 2014 |
| Within one year | | After one year through five years | | After five years through ten years | | After ten years | | Total |
(in thousands) | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield |
| | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | |
Residential | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 120,103 |
| | 1.84 | % | | $ | 120,103 |
| | 1.84 | % |
Commercial | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,596 |
| | 4.30 |
| | 13,596 |
| | 4.30 |
|
Municipal bonds | — |
| | — |
| | — |
| | — |
| | 19,393 |
| | 3.45 |
| | 105,467 |
| | 4.25 |
| | 124,860 |
| | 4.12 |
|
Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | |
Residential | — |
| | — |
| | — |
| | — |
| | 4,312 |
| | 2.08 |
| | 56,225 |
| | 2.14 |
| | 60,537 |
| | 2.14 |
|
Commercial | — |
| | — |
| | — |
| | — |
| | 5,350 |
| | 1.90 |
| | 6,289 |
| | 1.49 |
| | 11,639 |
| | 1.68 |
|
Corporate debt securities | — |
| | — |
| | — |
| | — |
| | 40,634 |
| | 3.35 |
| | 30,171 |
| | 3.81 |
| | 70,805 |
| | 3.54 |
|
U.S. Treasury securities | 1,001 |
| | 0.18 |
| | 25,995 |
| | 0.28 |
| | — |
| | — |
| | — |
| | — |
| | 26,996 |
| | 0.28 |
|
Total available for sale | $ | 1,001 |
| | 0.18 | % | | $ | 25,995 |
| | 0.28 | % | | $ | 69,689 |
| | 3.19 | % | | $ | 331,851 |
| | 2.93 | % | | $ | 428,536 |
| | 2.80 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 |
| Within one year | | After one year through five years | | After five years through ten years | | After ten years | | Total |
(in thousands) | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield | | Fair Value | | Weighted Average Yield |
| | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | |
Residential | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 10,581 |
| | 1.63 | % | | $ | 123,329 |
| | 1.82 | % | | $ | 133,910 |
| | 1.81 | % |
Commercial | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13,433 |
| | 4.51 |
| | 13,433 |
| | 4.51 |
|
Municipal bonds | — |
| | — |
| | — |
| | — |
| | 19,598 |
| | 3.51 |
| | 111,252 |
| | 4.29 |
| | 130,850 |
| | 4.17 |
|
Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | |
Residential | — |
| | — |
| | — |
| | — |
| | 19,987 |
| | 2.31 |
| | 70,340 |
| | 2.17 |
| | 90,327 |
| | 2.20 |
|
Commercial | — |
| | — |
| | — |
| | — |
| | 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 securities | 1,001 |
| | 0.18 |
| | 26,451 |
| | 0.30 |
| | — |
| | — |
| | — |
| | — |
| | 27,452 |
| | 0.29 |
|
Total available for sale | $ | 1,001 |
| | 0.18 | % | | $ | 26,451 |
| | 0.30 | % | | $ | 88,284 |
| | 2.84 | % | | $ | 365,947 |
| | 2.92 | % | | $ | 481,683 |
| | 2.75 | % |
Sales of investment securities available for sale were as follows.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Proceeds | $ | 54,305 |
| | $ | 15,754 |
|
Gross gains | 777 |
| | 4 |
|
Gross losses | (64 | ) | | (52 | ) |
There were $45.0 million and $47.3 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013 there were $36.6 million and $37.7 million, respectively, of securities pledged to secure derivatives in a liability position.
Tax-exempt interest income on securities available for sale totaling $921 thousand and $1.3 million for the three months ended March 31, 2014 and 2013, respectively, was recorded in the Company's consolidated statements of operations.
NOTE 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 6, Loans and Credit Quality within our 2013 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:
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Consumer loans | | | |
Single family | $ | 668,277 |
| | $ | 904,913 |
|
Home equity | 134,882 |
| | 135,650 |
|
| 803,159 |
| | 1,040,563 |
|
Commercial loans | | | |
Commercial real estate | 480,200 |
| | 477,642 |
|
Multifamily | 71,278 |
| | 79,216 |
|
Construction/land development | 162,717 |
| | 130,465 |
|
Commercial business | 171,080 |
| | 171,054 |
|
| 885,275 |
| | 858,377 |
|
| 1,688,434 |
| | 1,898,940 |
|
Net deferred loan fees and discounts | (3,684 | ) | | (3,219 | ) |
| 1,684,750 |
| | 1,895,721 |
|
Allowance for loan losses | (22,127 | ) | | (23,908 | ) |
| $ | 1,662,623 |
| | $ | 1,871,813 |
|
Loans in the amount of $880.3 million and $800.5 million at March 31, 2014 and December 31, 2013, 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.
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. At March 31, 2014 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 27.7% and 24.1% 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 37.3% and 21.2% of the total portfolio, respectively. These loans were mostly located within the metropolitan area of Puget Sound, 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 March 31, 2014. In addition to the allowance for loan losses, the Company maintains a separate allowance for losses related to unfunded loan commitments, and this amount is included in accounts payable and other liabilities on the consolidated statements of financial condition. Collectively, these allowances are referred to as the allowance for credit losses.
For further information on the policies that govern the determination of the allowance for loan losses levels, see Note 1, Summary of Significant Accounting Policies within our 2013 Annual Report on Form 10-K.
Activity in the allowance for credit losses was as follows.
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2014 | | 2013 |
| | | | |
Allowance for credit losses (roll-forward): | | | | |
Beginning balance | | $ | 24,089 |
| | $ | 27,751 |
|
Provision (reversal of provision) for credit losses | | (1,500 | ) | | 2,000 |
|
(Charge-offs), net of recoveries | | (272 | ) | | (1,157 | ) |
Ending balance | | $ | 22,317 |
| | $ | 28,594 |
|
Components: | | | | |
Allowance for loan losses | | $ | 22,127 |
| | $ | 28,405 |
|
Allowance for unfunded commitments | | 190 |
| | 189 |
|
Allowance for credit losses | | $ | 22,317 |
| | $ | 28,594 |
|
Activity in the allowance for credit losses by loan portfolio and loan class was as follows.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
(in thousands) | Beginning balance | | Charge-offs | | Recoveries | | (Reversal of) Provision | | Ending balance |
| | | | | | | | | |
Consumer loans | | | | | | | | | |
Single family | $ | 11,990 |
| | $ | (111 | ) | | $ | 16 |
| | $ | (2,489 | ) | | $ | 9,406 |
|
Home equity | 3,987 |
| | (423 | ) | | 90 |
| | 228 |
| | 3,882 |
|
| 15,977 |
| | (534 | ) | | 106 |
| | (2,261 | ) | | 13,288 |
|
Commercial loans | | | | | | | | | |
Commercial real estate | 4,012 |
| | — |
| | 56 |
| | 241 |
| | 4,309 |
|
Multifamily | 942 |
| | — |
| | — |
| | 23 |
| | 965 |
|
Construction/land development | 1,414 |
| | — |
| | 16 |
| | 573 |
| | 2,003 |
|
Commercial business | 1,744 |
| | — |
| | 84 |
| | (76 | ) | | 1,752 |
|
| 8,112 |
| | — |
| | 156 |
| | 761 |
| | 9,029 |
|
Total allowance for credit losses | $ | 24,089 |
| | $ | (534 | ) | | $ | 262 |
| | $ | (1,500 | ) | | $ | 22,317 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
(in thousands) | Beginning balance | | Charge-offs | | Recoveries | | (Reversal of) Provision | | Ending balance |
| | | | | | | | | |
Consumer loans | | | | | | | | | |
Single family | $ | 13,388 |
| | $ | (721 | ) | | $ | 75 |
| | $ | 1,736 |
| | $ | 14,478 |
|
Home equity | 4,648 |
| | (839 | ) | | 97 |
| | 802 |
| | 4,708 |
|
| 18,036 |
| | (1,560 | ) | | 172 |
| | 2,538 |
| | 19,186 |
|
Commercial loans | | | | | | | | | |
Commercial real estate | 5,312 |
| | 197 |
| | — |
| | 449 |
| | 5,958 |
|
Multifamily | 622 |
| | — |
| | — |
| | 13 |
| | 635 |
|
Construction/land development | 1,580 |
| | (148 | ) | | 70 |
| | (608 | ) | | 894 |
|
Commercial business | 2,201 |
| | — |
| | 112 |
| | (392 | ) | | 1,921 |
|
| 9,715 |
| | 49 |
| | 182 |
| | (538 | ) | | 9,408 |
|
Total allowance for credit losses | $ | 27,751 |
| | $ | (1,511 | ) | | $ | 354 |
| | $ | 2,000 |
| | $ | 28,594 |
|
The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Allowance: collectively evaluated for impairment | | Allowance: individually evaluated for impairment | | Total | | Loans: collectively evaluated for impairment | | Loans: individually evaluated for impairment | | Total |
| | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Single family | $ | 8,419 |
| | $ | 987 |
| | $ | 9,406 |
| | $ | 597,108 |
| | $ | 71,169 |
| | $ | 668,277 |
|
Home equity | 3,801 |
| | 81 |
| | 3,882 |
| | 132,344 |
| | 2,538 |
| | 134,882 |
|
| 12,220 |
| | 1,068 |
| | 13,288 |
| | 729,452 |
| | 73,707 |
| | 803,159 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | 4,260 |
| | 49 |
| | 4,309 |
| | 447,940 |
| | 32,260 |
| | 480,200 |
|
Multifamily | 556 |
| | 409 |
| | 965 |
| | 68,133 |
| | 3,145 |
| | 71,278 |
|
Construction/land development | 2,003 |
| | — |
| | 2,003 |
| | 156,810 |
| | 5,907 |
| | 162,717 |
|
Commercial business | 1,368 |
| | 384 |
| | 1,752 |
| | 168,263 |
| | 2,817 |
| | 171,080 |
|
| 8,187 |
| | 842 |
| | 9,029 |
| | 841,146 |
| | 44,129 |
| | 885,275 |
|
Total | $ | 20,407 |
| | $ | 1,910 |
| | $ | 22,317 |
| | $ | 1,570,598 |
| | $ | 117,836 |
| | $ | 1,688,434 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At 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 |
| | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Single family | $ | 10,632 |
| | $ | 1,358 |
| | $ | 11,990 |
| | $ | 831,730 |
| | $ | 73,183 |
| | $ | 904,913 |
|
Home equity | 3,903 |
| | 84 |
| | 3,987 |
| | 133,006 |
| | 2,644 |
| | 135,650 |
|
| 14,535 |
| | 1,442 |
| | 15,977 |
| | 964,736 |
| | 75,827 |
| | 1,040,563 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | 4,012 |
| | — |
| | 4,012 |
| | 445,766 |
| | 31,876 |
| | 477,642 |
|
Multifamily | 515 |
| | 427 |
| | 942 |
| | 76,053 |
| | 3,163 |
| | 79,216 |
|
Construction/land development | 1,414 |
| | — |
| | 1,414 |
| | 124,317 |
| | 6,148 |
| | 130,465 |
|
Commercial business | 1,042 |
| | 702 |
| | 1,744 |
| | 168,199 |
| | 2,855 |
| | 171,054 |
|
| 6,983 |
| | 1,129 |
| | 8,112 |
| | 814,335 |
| | 44,042 |
| | 858,377 |
|
Total | $ | 21,518 |
| | $ | 2,571 |
| | $ | 24,089 |
| | $ | 1,779,071 |
| | $ | 119,869 |
| | $ | 1,898,940 |
|
Impaired Loans
The following tables present impaired loans by loan portfolio segment and loan class.
|
| | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Recorded investment (1) | | Unpaid principal balance (2) | | Related allowance |
| | | | | |
With no related allowance recorded: | | | | | |
Consumer loans | | | | | |
Single family | $ | 37,002 |
| | $ | 39,115 |
| | $ | — |
|
Home equity | 1,834 |
| | 1,910 |
| | — |
|
| 38,836 |
| | 41,025 |
| | — |
|
Commercial loans | | | | | |
Commercial real estate | 27,716 |
| | 31,017 |
| | — |
|
Multifamily | 508 |
| | 508 |
| | — |
|
Construction/land development | 5,907 |
| | 15,058 |
| | — |
|
Commercial business | 964 |
| | 1,833 |
| | — |
|
| 35,095 |
| | 48,416 |
| | — |
|
| $ | 73,931 |
| | $ | 89,441 |
| | $ | — |
|
With an allowance recorded: | | | | | |
Consumer loans | | | | | |
Single family | $ | 34,167 |
| | $ | 34,225 |
| | $ | 987 |
|
Home equity | 704 |
| | 704 |
| | 81 |
|
| 34,871 |
| | 34,929 |
| | 1,068 |
|
Commercial loans | | | | | |
Commercial real estate | 4,544 |
| | 4,716 |
| | 49 |
|
Multifamily | 2,637 |
| | 2,814 |
| | 409 |
|
Construction/land development | — |
| | — |
| | — |
|
Commercial business | 1,853 |
| | 2,195 |
| | 384 |
|
| 9,034 |
| | 9,725 |
| | 842 |
|
| $ | 43,905 |
| | $ | 44,654 |
| | $ | 1,910 |
|
Total: | | | | | |
Consumer loans | | | | | |
Single family(3) | $ | 71,169 |
| | $ | 73,340 |
| | $ | 987 |
|
Home equity | 2,538 |
| | 2,614 |
| | 81 |
|
| 73,707 |
| | 75,954 |
| | 1,068 |
|
Commercial loans | | | | | |
Commercial real estate | 32,260 |
| | 35,733 |
| | 49 |
|
Multifamily | 3,145 |
| | 3,322 |
| | 409 |
|
Construction/land development | 5,907 |
| | 15,058 |
| | — |
|
Commercial business | 2,817 |
| | 4,028 |
| | 384 |
|
| 44,129 |
| | 58,141 |
| | 842 |
|
Total impaired loans | $ | 117,836 |
| | $ | 134,095 |
| | $ | 1,910 |
|
| |
(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 $70.6 million in performing TDRs. |
|
| | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Recorded investment (1) | | Unpaid principal balance (2) | | Related allowance |
| | | | | |
With no related allowance recorded: | | | | | |
Consumer loans | | | | | |
Single family | $ | 39,341 |
| | $ | 41,935 |
| | $ | — |
|
Home equity | 1,895 |
| | 1,968 |
| | — |
|
| 41,236 |
| | 43,903 |
| | — |
|
Commercial loans | | | | | |
Commercial real estate | 31,876 |
| | 45,921 |
| | — |
|
Multifamily | 508 |
| | 508 |
| | — |
|
Construction/land development | 6,148 |
| | 15,299 |
| | — |
|
Commercial business | 1,533 |
| | 7,164 |
| | — |
|
| 40,065 |
| | 68,892 |
| | — |
|
| $ | 81,301 |
| | $ | 112,795 |
| | $ | — |
|
With an allowance recorded: | | | | | |
Consumer loans | | | | | |
Single family | $ | 33,842 |
| | $ | 33,900 |
| | $ | 1,358 |
|
Home equity | 749 |
| | 749 |
| | 84 |
|
| 34,591 |
| | 34,649 |
| | 1,442 |
|
Commercial loans | | | | | |
Multifamily | 2,655 |
| | 2,832 |
| | 427 |
|
Commercial business | 1,322 |
| | 1,478 |
| | 702 |
|
| 3,977 |
| | 4,310 |
| | 1,129 |
|
| $ | 38,568 |
| | $ | 38,959 |
| | $ | 2,571 |
|
Total: | | | | | |
Consumer loans | | | | | |
Single family(3) | $ | 73,183 |
| | $ | 75,835 |
| | $ | 1,358 |
|
Home equity | 2,644 |
| | 2,717 |
| | 84 |
|
| 75,827 |
| | 78,552 |
| | 1,442 |
|
Commercial loans | | | | | |
Commercial real estate | 31,876 |
| | 45,921 |
| | — |
|
Multifamily | 3,163 |
| | 3,340 |
| | 427 |
|
Construction/land development | 6,148 |
| | 15,299 |
| | — |
|
Commercial business | 2,855 |
| | 8,642 |
| | 702 |
|
| 44,042 |
| | 73,202 |
| | 1,129 |
|
Total impaired loans | $ | 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. |
The following table provides the average recorded investment in impaired loans by portfolio segment and class.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Consumer loans | | | |
Single family | $ | 72,176 |
| | $ | 76,155 |
|
Home equity | 2,591 |
| | 3,595 |
|
| 74,767 |
| | 79,750 |
|
Commercial loans | | | |
Commercial real estate | 32,068 |
| | 28,093 |
|
Multifamily | 3,154 |
| | 3,216 |
|
Construction/land development | 6,027 |
| | 11,683 |
|
Commercial business | 2,836 |
| | 2,147 |
|
| 44,085 |
| | 45,139 |
|
| $ | 118,852 |
| | $ | 124,889 |
|
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 March 31, 2014 |
(in thousands) | Pass | | Watch | | Special mention | | Substandard | | Total |
| | | | | | | | | |
Consumer loans | | | | | | | | | |
Single family | $ | 636,480 |
| | $ | 861 |
| | $ | 12,533 |
| | $ | 18,403 |
| | $ | 668,277 |
|
Home equity | 133,334 |
| | 124 |
| | 346 |
| | 1,078 |
| | 134,882 |
|
| 769,814 |
| | 985 |
| | 12,879 |
| | 19,481 |
| | 803,159 |
|
Commercial loans | | | | | | | | | |
Commercial real estate | 373,301 |
| | 59,517 |
| | 39,695 |
| | 7,687 |
| | 480,200 |
|
Multifamily | 66,596 |
| | 1,537 |
| | 3,145 |
| | — |
| | 71,278 |
|
Construction/land development | 153,246 |
| | 6,344 |
| | — |
| | 3,127 |
| | 162,717 |
|
Commercial business | 154,493 |
| | 11,553 |
| | 481 |
| | 4,553 |
| | 171,080 |
|
| 747,636 |
| | 78,951 |
| | 43,321 |
| | 15,367 |
| | 885,275 |
|
| $ | 1,517,450 |
| | $ | 79,936 |
| | $ | 56,200 |
| | $ | 34,848 |
| | $ | 1,688,434 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 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 equity | 132,086 |
| | 1,442 |
| | 276 |
| | 1,846 |
| | 135,650 |
|
| 949,963 |
| | 55,153 |
| | 13,022 |
| | 22,425 |
| | 1,040,563 |
|
Commercial loans | | | | | | | | | |
Commercial real estate | 368,817 |
| | 63,579 |
| | 37,758 |
| | 7,488 |
| | 477,642 |
|
Multifamily | 74,509 |
| | 1,544 |
| | 3,163 |
| | — |
| | 79,216 |
|
Construction/land development | 121,026 |
| | 3,414 |
| | 2,895 |
| | 3,130 |
| | 130,465 |
|
Commercial business | 145,760 |
| | 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 March 31, 2014 and December 31, 2013, none of the Company's loans were rated Doubtful or Loss. The total amount of adversely classified assets was $46.9 million and $50.6 million as of March 31, 2014 and December 31, 2013, respectively. For a detailed discussion on credit quality indicators used by management, see Note 6, Loans and Credit Quality within our 2013 Annual Report on Form 10-K.
Nonaccrual and Past Due Loans
Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. Loans whose repayments are insured by the Federal Housing Authority ("FHA") or guaranteed by the Department of Veterans' Affairs ("VA") are generally maintained on accrual status even if 90 days or more past due.
The following table presents an aging analysis of past due loans by loan portfolio segment and loan class.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | 30-59 days past due | | 60-89 days past due | | 90 days or more past due | | Total past due | | Current | | Total loans | | 90 days or more past due and accruing(1) |
| | | | | | | | | | | | | |
Consumer loans | | | | | | | | | | | | | |
Single family | $ | 7,547 |
| | $ | 4,117 |
| | $ | 44,794 |
| | $ | 56,458 |
| | $ | 611,819 |
| | $ | 668,277 |
| | $ | 37,852 |
|
Home equity | 117 |
| | 314 |
| | 1,078 |
| | 1,509 |
| | 133,373 |
| | 134,882 |
| | — |
|
| 7,664 |
| | 4,431 |
| | 45,872 |
| | 57,967 |
| | 745,192 |
| | 803,159 |
| | 37,852 |
|
Commercial loans | | | | | | | | | | | | | |
Commercial real estate | 208 |
| | — |
| | 12,192 |
| | 12,400 |
| | 467,800 |
| | 480,200 |
| | — |
|
Multifamily | — |
| | — |
| | — |
| | — |
| | 71,278 |
| | 71,278 |
| | — |
|
Construction/land development | — |
| | — |
| | — |
| | — |
| | 162,717 |
| | 162,717 |
| | — |
|
Commercial business | — |
| | — |
| | 2,621 |
| | 2,621 |
| | 168,459 |
| | 171,080 |
| | 10 |
|
| 208 |
| | — |
| | 14,813 |
| | 15,021 |
| | 870,254 |
| | 885,275 |
| | 10 |
|
| $ | 7,872 |
| | $ | 4,431 |
| | $ | 60,685 |
| | $ | 72,988 |
| | $ | 1,615,446 |
| | $ | 1,688,434 |
| | $ | 37,862 |
|
| |
(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, 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 equity | 375 |
| | 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. |
The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.
|
| | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Accrual | | Nonaccrual | | Total |
| | | | | |
Consumer loans | | | | | |
Single family | $ | 661,335 |
| | $ | 6,942 |
| | $ | 668,277 |
|
Home equity | 133,804 |
| | 1,078 |
| | 134,882 |
|
| 795,139 |
| | 8,020 |
| | 803,159 |
|
Commercial loans | | | | | |
Commercial real estate | 468,008 |
| | 12,192 |
| | 480,200 |
|
Multifamily | 71,278 |
| | — |
| | 71,278 |
|
Construction/land development | 162,717 |
| | — |
| | 162,717 |
|
Commercial business | 168,469 |
| | 2,611 |
| | 171,080 |
|
| 870,472 |
| | 14,803 |
| | 885,275 |
|
| $ | 1,665,611 |
| | $ | 22,823 |
| (1) | $ | 1,688,434 |
|
|
| | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Accrual | | Nonaccrual | | Total |
| | | | | |
Consumer loans | | | | | |
Single family | $ | 896,052 |
| | $ | 8,861 |
| | $ | 904,913 |
|
Home equity | 133,804 |
| | 1,846 |
| | 135,650 |
|
| 1,029,856 |
| | 10,707 |
| | 1,040,563 |
|
Commercial loans | | | | | |
Commercial real estate | 465,385 |
| | 12,257 |
| | 477,642 |
|
Multifamily | 79,216 |
| | — |
| | 79,216 |
|
Construction/land development | 130,465 |
| | — |
| | 130,465 |
|
Commercial business | 168,311 |
| | 2,743 |
| | 171,054 |
|
| 843,377 |
| | 15,000 |
| | 858,377 |
|
| $ | 1,873,233 |
| | $ | 25,707 |
| (1) | $ | 1,898,940 |
|
| |
(1) | Includes $6.6 million and $6.5 million of nonperforming loans at March 31, 2014 and December 31, 2013, respectively, that are guaranteed by the SBA. |
The following tables present information about TDR activity during the periods presented.
|
| | | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
(dollars in thousands) | Concession type | | Number of loan modifications | | Recorded investment | | Related charge- offs |
| | | | | | | |
Consumer loans | | | | | | | |
Single family | | | | | | | |
| Interest rate reduction | | 9 |
| | $ | 1,757 |
| | $ | — |
|
| Payment restructure | | 2 |
| | 365 |
| | — |
|
Total consumer | | | | | | | |
| Interest rate reduction | | 9 |
| | 1,757 |
| | — |
|
| Payment restructure | | 2 |
| | 365 |
| | — |
|
| | | 11 |
| | 2,122 |
| | — |
|
| | | | | | | |
Commercial loans | | | | | | | |
Commercial real estate | | | | | | | |
| Payment restructure | | 1 |
| | 2,156 |
| | — |
|
Commercial business | | | | | | | |
| Interest rate reduction | | 2 |
| | 117 |
| | — |
|
Total commercial | | | | | | | |
| Interest rate reduction | | 2 |
| | 117 |
| | — |
|
| Payment restructure | | 1 |
| | 2,156 |
| | — |
|
| | | 3 |
| | 2,273 |
| | — |
|
Total loans | | | | | | | |
| Interest rate reduction | | 11 |
| | 1,874 |
| | — |
|
| Payment restructure | | 3 |
| | 2,521 |
| | — |
|
| | | 14 |
| | $ | 4,395 |
| | $ | — |
|
|
| | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
(dollars in thousands) | Concession type | | Number of loan modifications | | Recorded investment | | Related charge- offs |
| | | | | | | |
Consumer loans | | | | | | | |
Single family | | | | | | | |
| Interest rate reduction | | 27 |
| | $ | 5,841 |
| | $ | — |
|
Home equity | | | | | | | |
| Interest rate reduction | | 3 |
| | 171 |
| | — |
|
Total consumer | | | | | | | |
| Interest rate reduction | | 30 |
| | 6,012 |
| | — |
|
Total loans | | | | | | | |
| Interest rate reduction | | 30 |
| | $ | 6,012 |
| | $ | — |
|
The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the three months ended March 31, 2014 and 2013, 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 March 31, |
| 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 family | 2 |
| | $ | 303 |
| | 6 |
| | $ | 1,423 |
|
Home equity | 1 |
| | 190 |
| | 1 |
| | 22 |
|
| 3 |
| | 493 |
| | 7 |
| | 1,445 |
|
Commercial loans | | | | | | | |
Commercial real estate | — |
| | — |
| | 1 |
| | 770 |
|
| — |
| | — |
| | 1 |
| | 770 |
|
| 3 |
| | $ | 493 |
| | 8 |
| | $ | 2,215 |
|
NOTE 4–DEPOSITS:
Deposit balances, including stated rates, were as follows.
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Noninterest-bearing accounts | $ | 431,538 |
| | $ | 322,952 |
|
NOW accounts, 0.00% to 1.00% at March 31, 2014 and 0.00% to 0.75% at December 31, 2013 | 285,104 |
| | 297,966 |
|
Statement savings accounts, due on demand, 0.00% to 1.99% at March 31, 2014 and 0.20% to 2.00% at December 31, 2013 | 163,819 |
| | 156,181 |
|
Money market accounts, due on demand, 0.00% to 1.45% at March 31, 2014 and 0.00% to 1.50% at December 31, 2013 | 956,189 |
| | 919,322 |
|
Certificates of deposit, 0.05% to 3.80% at March 31, 2014 and 0.10% to 3.80% at December 31, 2013 | 534,708 |
| | 514,400 |
|
| $ | 2,371,358 |
| | $ | 2,210,821 |
|
There were $2.3 million in public funds included in deposits as of March 31, 2014 and none at December 31, 2013.
Interest expense on deposits was as follows.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
NOW accounts | $ | 260 |
| | $ | 158 |
|
Statement savings accounts | 200 |
| | 104 |
|
Money market accounts | 1,021 |
| | 857 |
|
Certificates of deposit | 879 |
| | 2,370 |
|
| $ | 2,360 |
| | $ | 3,489 |
|
The weighted-average interest rates on certificates of deposit at each of March 31, 2014 and December 31, 2013 was 0.71%.
Certificates of deposit outstanding mature as follows.
|
| | | |
(in thousands) | At March 31, 2014 |
| |
Within one year | $ | 396,220 |
|
One to two years | 74,602 |
|
Two to three years | 48,774 |
|
Three to four years | 12,581 |
|
Four to five years | 2,531 |
|
| $ | 534,708 |
|
The aggregate amount of time deposits in denominations of $100 thousand or more at March 31, 2014 and December 31, 2013 was $237.8 million and $216.5 million, respectively. The aggregate amount of time deposits in denominations of more than $250 thousand at March 31, 2014 and December 31, 2013 was $25.0 million and $26.3 million, respectively. There were $158.4 million and $144.3 million of brokered deposits at March 31, 2014 and December 31, 2013, respectively.
NOTE 5–DERIVATIVES AND HEDGING ACTIVITIES:
To reduce the risk of significant interest rate fluctuations on the value of certain assets and liabilities, such as certain mortgage loans held for sale or mortgage servicing rights ("MSRs"), the Company utilizes derivatives, such as forward sale commitments, futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy. Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments. We held no derivatives designated as cash flow or foreign currency hedge instruments at March 31, 2014 or December 31, 2013. Derivatives are reported at their respective fair values in the 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 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 2, Investment Securities of this Form 10-Q for further information on securities collateral pledged. At March 31, 2014 and December 31, 2013, 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 12, Derivatives and Hedging Activities within our 2013 Annual Report on Form 10-K.
The notional amounts and fair values for derivatives consist of the following.
|
| | | | | | | | | | | |
| At March 31, 2014 |
| Notional amount | | Fair value derivatives |
(in thousands) | | | Asset | | Liability |
| | | | | |
Forward sale commitments | $ | 837,935 |
| | $ | 999 |
| | $ | (1,064 | ) |
Interest rate swaptions | 110,000 |
| | 26 |
| | — |
|
Interest rate lock commitments | 422,215 |
| | 10,124 |
| | (30 | ) |
Interest rate swaps | 550,513 |
| | 2,328 |
| | (5,640 | ) |
Total derivatives before netting | $ | 1,920,663 |
| | 13,477 |
| | (6,734 | ) |
Netting adjustments | | | (1,921 | ) | | 1,921 |
|
Carrying value on consolidated statements of financial condition | | | $ | 11,556 |
| | $ | (4,813 | ) |
|
| | | | | | | | | | | |
| At December 31, 2013 |
| Notional amount | | Fair value derivatives |
(in thousands) | | | Asset | | Liability |
| | | | | |
Forward sale commitments | $ | 526,382 |
| | $ | 3,630 |
| | $ | (578 | ) |
Interest rate swaptions | 110,000 |
| | 858 |
| | (199 | ) |
Interest rate lock commitments | 261,070 |
| | 6,012 |
| | (40 | ) |
Interest rate swaps | 508,004 |
| | 1,088 |
| | (9,548 | ) |
Total derivatives before netting | $ | 1,405,456 |
| | 11,588 |
| | (10,365 | ) |
Netting adjustments | | | (1,363 | ) | | 1,363 |
|
Carrying value on consolidated statements of financial condition | | | $ | 10,225 |
| | $ | (9,002 | ) |
The following tables present gross and net information about derivative instruments.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Gross fair value | | Netting adjustments | | Carrying value | | Cash collateral paid (1) | | Securities pledged | | Net amount |
| | | | | | | | | | | |
Derivative assets: | | | | | | | | | | | |
Forward sale commitments | $ | 999 |
| | $ | (724 | ) | | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 275 |
|
Interest rate swaps / swaptions | 2,354 |
| | (1,197 | ) | | 1,157 |
| | — |
| | — |
| | 1,157 |
|
Total derivatives subject to legally enforceable master netting agreements | 3,353 |
| | (1,921 | ) | | 1,432 |
| | — |
| | — |
| | 1,432 |
|
Interest rate lock commitments | 10,124 |
| | — |
| | 10,124 |
| | — |
| | — |
| | 10,124 |
|
Total derivative assets | $ | 13,477 |
| | $ | (1,921 | ) | | $ | 11,556 |
| | $ | — |
| | $ | — |
| | $ | 11,556 |
|
| | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | |
Forward sale commitments | $ | (1,064 | ) | | $ | 724 |
| | $ | (340 | ) | | $ | 144 |
| | $ | 176 |
| | $ | (20 | ) |
Interest rate swaps | (5,640 | ) | | 1,197 |
| | (4,443 | ) | | 4,443 |
| | — |
| | — |
|
Total derivatives subject to legally enforceable master netting agreements | (6,704 | ) | | 1,921 |
| | (4,783 | ) | | 4,587 |
| | 176 |
| | (20 | ) |
Interest rate lock commitments | (30 | ) | | — |
| | (30 | ) | | — |
| | — |
| | (30 | ) |
Total derivative liabilities | $ | (6,734 | ) | | $ | 1,921 |
| | $ | (4,813 | ) | | $ | 4,587 |
| | $ | 176 |
| | $ | (50 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Gross fair value | | Netting adjustments | | Carrying value | | Cash collateral paid (1) | | Securities pledged | | Net amount |
| | | | | | | | | | | |
Derivative assets: | | | | | | | | | | | |
Forward sale commitments | $ | 3,630 |
| | $ | (33 | ) | | $ | 3,597 |
| | $ | — |
| | $ | — |
| | $ | 3,597 |
|
Interest rate swaps | 1,946 |
| | (1,330 | ) | | 616 |
| | — |
| | — |
| | 616 |
|
Total derivatives subject to legally enforceable master netting agreements | 5,576 |
| | (1,363 | ) | | 4,213 |
| | — |
| | — |
| | 4,213 |
|
Interest rate lock commitments | 6,012 |
| | — |
| | 6,012 |
| | — |
| | — |
| | 6,012 |
|
Total derivative assets | $ | 11,588 |
| | $ | (1,363 | ) | | $ | 10,225 |
| | $ | — |
| | $ | — |
| | $ | 10,225 |
|
| | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | |
Forward sale commitments | $ | (578 | ) | | $ | 33 |
| | $ | (545 | ) | | $ | 115 |
| | $ | 410 |
| | $ | (20 | ) |
Interest rate swaps | (9,747 | ) | | 1,330 |
| | (8,417 | ) | | 8,376 |
| | 41 |
| | — |
|
Total derivatives subject to legally enforceable master netting agreements | (10,325 | ) | | 1,363 |
| | (8,962 | ) | | 8,491 |
| | 451 |
| | (20 | ) |
Interest rate lock commitments | (40 | ) | | — |
| | (40 | ) | | — |
| | — |
| | (40 | ) |
Total derivative liabilities | $ | (10,365 | ) | | $ | 1,363 |
| | $ | (9,002 | ) | | $ | 8,491 |
| | $ | 451 |
| | $ | (60 | ) |
| |
(1) | Excludes cash collateral of $19.0 million and $18.5 million at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013. |
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 $31 thousand for each of the three months ended March 31, 2014 and 2013, 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 March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Recognized in noninterest income: | | | |
Net loss on mortgage loan origination and sale activities (1) | $ | (1,434 | ) | | $ | (1,365 | ) |
Mortgage servicing income (loss) (2) | 9,897 |
| | (2,518 | ) |
| $ | 8,463 |
| | $ | (3,883 | ) |
| |
(1) | Comprised of interest rate lock commitments ("IRLCs") and forward contracts used as an economic hedge of IRLCs and single family mortgage loans held for sale. |
| |
(2) | Comprised of interest rate swaps, interest rate swaptions and forward contracts used as an economic hedge of single family MSRs. |
NOTE 6–MORTGAGE BANKING OPERATIONS:
Loans held for sale consisted of the following.
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Single family | $ | 582,934 |
| (1) | $ | 279,385 |
|
Multifamily | 5,531 |
| | 556 |
|
| $ | 588,465 |
| | $ | 279,941 |
|
| |
(1) | 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 quarter and sold $56.1 million of these loans before quarter-end. |
Loans sold consisted of the following.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Single family | $ | 619,913 |
| | $ | 1,360,344 |
|
Multifamily | 6,263 |
| | 50,587 |
|
| $ | 626,176 |
| | $ | 1,410,931 |
|
Net gain on mortgage loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Single family: | | | |
Servicing value and secondary market gains(1) | $ | 19,559 |
| | $ | 44,235 |
|
Loan origination and funding fees | 4,761 |
| | 7,795 |
|
Total single family | 24,320 |
| | 52,030 |
|
Multifamily | 396 |
| | 1,925 |
|
Other | 794 |
| | — |
|
Total net gain on mortgage loan origination and sale activities | $ | 25,510 |
| | $ | 53,955 |
|
| |
(1) | Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold. |
The Company’s portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the consolidated statements of financial condition as they are not assets of the Company. The composition of loans serviced for others is presented below at the unpaid principal balance.
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Single family | | | |
U.S. government and agency | $ | 11,817,857 |
| | $ | 11,467,853 |
|
Other | 380,622 |
| | 327,768 |
|
| 12,198,479 |
| | 11,795,621 |
|
Commercial | | | |
Multifamily | 721,464 |
| | 720,429 |
|
Other | 99,340 |
| | 95,673 |
|
| 820,804 |
| | 816,102 |
|
Total loans serviced for others | $ | 13,019,283 |
| | $ | 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 7, Commitments, Guarantees and Contingencies in this Form 10-Q. The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Balance, beginning of period | $ | 1,260 |
| | $ | 1,955 |
|
Additions (1) | 239 |
| | 536 |
|
Realized losses (2) | (357 | ) | | (516 | ) |
Balance, end of period | $ | 1,142 |
| | $ | 1,975 |
|
| |
(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 $11.4 million and $7.1 million were recorded in other assets as of March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $14.8 million and $14.3 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.
Revenue from mortgage servicing, including the effects of derivative risk management instruments, consisted of the following.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Servicing income, net: | | | |
Servicing fees and other | $ | 9,849 |
| | $ | 7,607 |
|
Changes in fair value of single family MSRs due to modeled amortization (1) | (5,968 | ) | | (5,675 | ) |
Amortization of multifamily MSRs | (424 | ) | | (490 | ) |
| 3,457 |
| | 1,442 |
|
Risk management, single family MSRs: | | | |
Changes in fair value due to changes in model inputs and/or assumptions (2) | (5,409 | ) | | 4,148 |
|
Net gain (loss) from derivatives economically hedging MSR | 9,897 |
| | (2,518 | ) |
| 4,488 |
| | 1,630 |
|
Mortgage servicing income | $ | 7,945 |
| | $ | 3,072 |
|
| |
(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. |
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 March 31, |
(rates per annum) (1) | 2014 | | 2013 |
| | | |
Constant prepayment rate ("CPR") (2) | 11.39 | % | | 9.43 | % |
Discount rate | 10.42 | % | | 10.26 | % |
| |
(1) | Weighted average rates for sales during the period for sales of loans with similar characteristics. |
| |
(2) | Represents the expected lifetime average. |
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 March 31, 2014 |
| |
Fair value of single family MSR | $ | 149,646 |
|
Expected weighted-average life (in years) | 6.51 |
|
Constant prepayment rate (1) | 11.72 | % |
Impact on 25 basis points adverse change | $ | (5,031 | ) |
Impact on 50 basis points adverse change | $ | (11,112 | ) |
Discount rate | 10.50 | % |
Impact on fair value of 100 basis points increase | $ | (5,404 | ) |
Impact on fair value of 200 basis points increase | $ | (10,441 | ) |
| |
(1) | Represents the expected lifetime average. |
These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, the Company’s methodology for estimating the fair value of MSRs is highly sensitive to changes in key assumptions. For example, actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value resulting from changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, decreases in market interest rates may provide an incentive to refinance; however, this may also indicate a slowing economy and an increase in the unemployment rate, which reduces the number of borrowers who qualify for refinancing), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time.
The changes in single family MSRs measured at fair value are as follows.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Beginning balance | $ | 153,128 |
| | $ | 87,396 |
|
Originations | 7,893 |
| | 16,806 |
|
Purchases | 2 |
| | 3 |
|
Changes due to modeled amortization(1) | (5,968 | ) | | (5,675 | ) |
Net additions and amortization | 1,927 |
| | 11,134 |
|
Changes in fair value due to changes in model inputs and/or assumptions (2) | (5,409 | ) | | 4,148 |
|
Ending balance | $ | 149,646 |
| | $ | 102,678 |
|
| |
(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. |
MSRs resulting from the sale of multifamily loans are subsequently carried at the lower of amortized cost or fair value. Multifamily MSRs are recorded at fair value and are amortized in proportion to, and over, the estimated period the net servicing income will be collected.
The changes in multifamily MSRs measured at the lower of amortized cost or fair value were as follows.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Beginning balance | $ | 9,335 |
| | $ | 8,097 |
|
Origination | 183 |
| | 1,543 |
|
Amortization | (423 | ) | | (490 | ) |
Ending balance | $ | 9,095 |
| | $ | 9,150 |
|
At March 31, 2014, the expected weighted-average life of the Company’s multifamily MSRs was 8.95 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
|
| | | |
(in thousands) | At March 31, 2014 |
| |
Remainder of 2014 | $ | 1,204 |
|
2015 | 1,468 |
|
2016 | 1,354 |
|
2017 | 1,232 |
|
2018 | 1,074 |
|
2019 and thereafter | 2,763 |
|
Carrying value of multifamily MSR | $ | 9,095 |
|
NOTE 7–COMMITMENTS, GUARANTEES AND CONTINGENCIES:
Commitments
Commitments to extend credit are agreements to lend to customers in accordance with predetermined contractual provisions. These commitments may be for specific periods or contain termination clauses and may require the payment of a fee by the borrower. The total amounts of unused commitments do not necessarily represent future credit exposure or cash requirements in that commitments may expire without being drawn upon.
The Company makes certain unfunded loan commitments as part of its lending activities that have not been recognized in the Company’s financial statements. These include commitments to extend credit made as part of the Company's mortgage lending activities and interest rate lock commitments on loans the Company intends to hold in its loans held for investment portfolio. The aggregate amount of these unrecognized unfunded loan commitments existing at March 31, 2014 and December 31, 2013 was $24.8 million and $18.4 million, respectively.
In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. These commitments, which primarily related to unused home equity and business banking funding lines totaled $156.3 million and $154.0 million at March 31, 2014 and December 31, 2013, respectively. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $247.7 million and $168.5 million at March 31, 2014 and December 31, 2013, 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 $190 thousand and $181 thousand at March 31, 2014 and December 31, 2013, respectively.
Guarantees
In the ordinary course of business, the Company sells loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS"®)1 that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the program, the DUS lender is contractually responsible for the first 5% of losses and then shares equally in the remainder of losses with Fannie Mae with a maximum lender loss of 20% of the original principal balance of each DUS loan. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of March 31, 2014 and December 31, 2013, the total unpaid principal balance of loans sold under this program was $721.5 million and $720.4 million, respectively. The Company’s reserve liability related to this arrangement totaled $1.9 million and $2.0 million at March 31, 2014 and December 31, 2013, respectively. There were no actual losses incurred under this arrangement during the three months ended March 31, 2014 and 2013.
Mortgage repurchase liability
In the ordinary course of business, the Company sells residential mortgage loans to GSEs that include the mortgage loans in GSE-guaranteed mortgage securitizations. In addition, the Company sells FHA-insured and VA-guaranteed mortgage loans that are sold to Ginnie Mae and are used to back Ginnie Mae-guaranteed securities. The Company has made representations and warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud.
These obligations expose the Company to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance that it may receive. Generally, the maximum amount of future payments the Company would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain circumstances, accrued and unpaid interest on such loans and certain expenses.
The Company does not typically receive repurchase requests from Ginnie Mae, FHA or VA. As an originator of FHA-insured or VA-guaranteed loans, the Company is responsible for obtaining the insurance with FHA or the guarantee with the VA. If loans are later found not to meet the requirements of FHA or VA, through required internal quality control reviews or through agency audits, the Company may be required to indemnify FHA or VA against losses. The loans remain in Ginnie Mae pools unless and until they are repurchased by the Company. In general, once a FHA or VA loan becomes 90 days past due, the Company repurchases the FHA or VA residential mortgage loan to minimize the cost of interest advances on the loan. If the loan is cured through borrower efforts or through loss mitigation activities, the loan may be resold into a Ginnie Mae pool. The Company's liability for mortgage loan repurchase losses incorporates probable losses associated with such indemnification.
|
| | |
1 DUS® is a registered trademark of Fannie Mae | 34 | |
The total unpaid principal balance of loans sold that were subject to the terms and conditions of these representations and warranties totaled $12.30 billion and $11.89 billion as of March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, the Company had recorded a mortgage repurchase liability, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $1.1 million and $1.3 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 March 31, 2014, 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 March 31, 2014.
NOTE 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 18, Fair Value Measurement within our 2013 Annual Report on Form 10-K.
Valuation Processes
The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. The Finance Committee provides oversight and approves the Company’s Asset/Liability Management Policy ("ALMP"). The Company's ALMP governs, among other things, the application and control of the valuation models used to measure fair value. On a quarterly basis, the Company’s Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Board review significant modeling variables used to measure the fair value of the Company’s financial instruments, including the significant inputs used in the valuation of single family MSRs. Additionally, at least annually ALCO obtains an independent review of the MSR valuation process and procedures, including a review of the model architecture and the valuation assumptions. The Company obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value estimate and the reasonableness of the assumptions used in measuring fair value.
The Company’s real estate valuations are overseen by the Company’s appraisal department, which is independent of the Company’s lending and credit administration functions. The appraisal department maintains the Company’s appraisal policy and recommends changes to the policy subject to approval by the Company’s Loan Committee and the Credit Committee of the Board. The Company’s appraisals are prepared by independent third-party appraisers and the Company’s internal appraisers. Single family appraisals are generally reviewed by the Company’s single family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as commercial real estate appraisals, are reviewed by the Company’s appraisal department.
We obtain pricing from third party service providers for determining the fair value of a substantial portion of our investment securities available for sale. We have processes in place to evaluate such third party pricing services to ensure information obtained and valuation techniques used are appropriate. For fair value measurements obtained from third party services, we monitor and review the results to ensure the values are reasonable and in line with market experience for similar classes of securities. While the inputs used by the pricing vendor in determining fair value are not provided, and therefore unavailable for our review, we do perform certain procedures to validate the values received, including comparisons to other sources of valuation (if available), comparisons to other independent market data and a variance analysis of prices by Company personnel that are not responsible for the performance of the investment securities.
Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors
may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.
The following table summarizes the fair value measurement methodologies, including significant inputs and assumptions, and classification of the Company’s assets and liabilities.
|
| | | | |
Asset/Liability class | | Valuation methodology, inputs and assumptions | | Classification |
Cash and cash equivalents | | Carrying value is a reasonable estimate of fair value based on the short-term nature of the instruments. | | Estimated fair value classified as Level 1. |
Investment securities 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 |
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 Policies in this Form 10-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. |
|
| | | | |
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 6, Mortgage Banking Operations in 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.
Level 2 recurring fair value measurement prior to December 31, 2012. |
Other real estate owned (“OREO”) | | Fair value is based on appraised value of collateral, less the estimated cost to sell. See discussion of "loans held for investment, collateral dependent" above for further information on appraisals. | | Carried at lower of amortized cost or fair value of collateral (Level 3), less the estimated cost to sell. |
Federal Home Loan Bank stock | | Carrying value approximates fair value as FHLB stock can only be purchased or redeemed at par value. | | Carried at par value. Estimated fair value classified as Level 2. |
Deposits | | | | |
Demand deposits | | Fair value is estimated as the amount payable on demand at the reporting date. | | Carried at historical cost. Estimated fair value classified as Level 2. |
Fixed-maturity certificates of deposit | | Fair value is estimated using discounted cash flows based on market rates currently offered for deposits of similar remaining time to maturity. | | Carried at historical cost. Estimated fair value classified as Level 2. |
Federal Home Loan Bank advances | | Fair value is estimated using discounted cash flows based on rates currently available for advances with similar terms and remaining time to maturity. | | Carried at historical cost. Estimated fair value classified as Level 2. |
Long-term debt | | Fair value is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity. | | Carried at historical cost. Estimated fair value classified as Level 2. |
The following table presents the levels of the fair value hierarchy for the Company’s assets and liabilities measured at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | |
(in thousands) | Fair Value at March 31, 2014 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
Assets: | | | | | | | |
Investment securities available for sale | | | | | | | |
Mortgage backed securities: | | | | | | | |
Residential | $ | 120,103 |
| | $ | — |
| | $ | 120,103 |
| | $ | — |
|
Commercial | 13,596 |
| | — |
| | 13,596 |
| | — |
|
Municipal bonds | 124,861 |
| | — |
| | 124,861 |
| | — |
|
Collateralized mortgage obligations: | | | | | | | |
Residential | 60,537 |
| | — |
| | 60,537 |
| | — |
|
Commercial | 11,639 |
| | — |
| | 11,639 |
| | — |
|
Corporate debt securities | 70,804 |
| | — |
| | 70,804 |
| | — |
|
U.S. Treasury securities | 26,996 |
| | — |
| | 26,996 |
| | — |
|
Single family mortgage servicing rights | 149,646 |
| | — |
| | — |
| | 149,646 |
|
Single family loans held for sale | 321,307 |
| | — |
| | 321,307 |
| | — |
|
Derivatives | | | | | | | |
Forward sale commitments | 999 |
| | — |
| | 999 |
| | — |
|
Interest rate swaptions | 26 |
| | — |
| | 26 |
| | — |
|
Interest rate lock commitments | 10,124 |
| | — |
| | — |
| | 10,124 |
|
Interest rate swaps | 2,328 |
| | — |
| | 2,328 |
| | — |
|
Total assets | $ | 912,966 |
| | $ | — |
| | $ | 753,196 |
| | $ | 159,770 |
|
Liabilities: | | | | | | | |
Derivatives | | | | | | | |
Forward sale commitments | $ | 1,064 |
| | $ | — |
| | $ | 1,064 |
| | $ | — |
|
Interest rate lock commitments | 30 |
| | — |
| | — |
| | 30 |
|
Interest rate swaps | 5,640 |
| | — |
| | 5,640 |
| | — |
|
Total liabilities | $ | 6,734 |
| | $ | — |
| | $ | 6,704 |
| | $ | 30 |
|
|
| | | | | | | | | | | | | | | |
(in thousands) | Fair Value at December 31, 2013 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
Assets: | | | | | | | |
Investment securities available for sale | | | | | | | |
Mortgage backed securities: | | | | | | | |
Residential | $ | 133,910 |
| | $ | — |
| | $ | 133,910 |
| | $ | — |
|
Commercial | 13,433 |
| | — |
| | 13,433 |
| | — |
|
Municipal bonds | 130,850 |
| | — |
| | 130,850 |
| | — |
|
Collateralized mortgage obligations: | | | | | | | |
Residential | 90,327 |
| | — |
| | 90,327 |
| | — |
|
Commercial | 16,845 |
| | — |
| | 16,845 |
| | — |
|
Corporate debt securities | 68,866 |
| | — |
| | 68,866 |
| | — |
|
U.S. Treasury securities | 27,452 |
| | — |
| | 27,452 |
| | — |
|
Single family mortgage servicing rights | 153,128 |
| | — |
| | — |
| | 153,128 |
|
Single family loans held for sale | 279,385 |
| | — |
| | 279,385 |
| | — |
|
Derivatives | | | | | | | |
Forward sale commitments | 3,630 |
| | — |
| | 3,630 |
| | — |
|
Interest rate swaptions | 858 |
| | — |
| | 858 |
| | — |
|
Interest rate lock commitments | 6,012 |
| | — |
| | — |
| | 6,012 |
|
Interest rate swaps | 1,088 |
| | — |
| | 1,088 |
| | — |
|
Total assets | $ | 925,784 |
| | $ | — |
| | $ | 766,644 |
| | $ | 159,140 |
|
Liabilities: | | | | | | | |
Derivatives | | | | | | | |
Forward sale commitments | $ | 578 |
| | $ | — |
| | $ | 578 |
| | $ | — |
|
Interest rate swaptions | 199 |
| | — |
| | 199 |
| | — |
|
Interest rate lock commitments | 40 |
| | — |
| | — |
| | 40 |
|
Interest rate swaps | 9,548 |
| | — |
| | 9,548 |
| | — |
|
Total liabilities | $ | 10,365 |
| | $ | — |
| | $ | 10,325 |
| | $ | 40 |
|
There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2014 and 2013.
Level 3 Recurring Fair Value Measurements
The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three months ended March 31, 2014 and 2013, see Note 6, Mortgage Banking Operations in this Form 10-Q.
The following table presents fair value changes and activity for level 3 interest rate lock commitments.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Beginning balance, net | $ | 5,972 |
| | $ | 22,528 |
|
Total realized/unrealized gains(1) | 20,167 |
| | 45,542 |
|
Settlements | (16,045 | ) | | (47,228 | ) |
Ending balance, net | $ | 10,094 |
| | $ | 20,842 |
|
| |
(1) | All realized and unrealized gains and losses are recognized in earnings as net gain from mortgage loan origination and sale activities on the consolidated statements of operations. For the three months ended March 31, 2014 and 2013, there were net unrealized (losses) gains of $9.8 million and $20.0 million, respectively, recognized on interest rate lock commitments still outstanding at March 31, 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 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 March 31, 2014 |
Fair Value | | Valuation Technique | | Significant Unobservable Input | | Low | | High | | Weighted Average |
| | | | | | | | | | | |
Interest rate lock commitments, net | $ | 10,094 |
| | Income approach | | Fall out factor | | 0.6% | | 77.1% | | 16.8% |
| | | | | Value of servicing | | 0.68% | | 2.51% | | 1.14% |
|
| | | | | | | | | | | | | |
(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 appraisals of real estate property, which use the market approach and income approach methodologies.
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 March 31, 2014, the Company used a fair value of collateral technique to apply an adjustment to the appraisal value of certain loans held for investment using a range of discount rates of 17.2% to 32.5%, with a weighted average rate of 18.7%. During the three months ended March 31, 2013, the Company used a fair value of collateral technique to apply an adjustment to the appraisal value of certain OREO using a discount rate of 17.5%.
Residential properties are generally based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.
These adjustments 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 months ended March 31, 2014 and 2013 and still held at the end of the respective reporting period.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
(in thousands) | Fair Value of Assets Held at March 31, 2014 | | Level 1 | | Level 2 | | Level 3 | | Total Gains (Losses) |
| | | | | | | | | |
Loans held for investment(1) | $ | 23,036 |
| | $ | — |
| | $ | — |
| | $ | 23,036 |
| | $ | 629 |
|
Other real estate owned(2) | 6,772 |
| | — |
| | — |
| | 6,772 |
| | 24 |
|
Total | $ | 29,808 |
| | $ | — |
| | $ | — |
| | $ | 29,808 |
| | $ | 653 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
(in thousands) | Fair Value of Assets Held at March 31, 2013 | | Level 1 | | Level 2 | | Level 3 | | Total Losses |
| | | | | | | | | |
Loans held for investment(1) | $ | 34,744 |
| | $ | — |
| | $ | — |
| | $ | 34,744 |
| | $ | (156 | ) |
Other real estate owned(2) | 12,728 |
| | — |
| | — |
| | 12,728 |
| | (2,670 | ) |
Total | $ | 47,472 |
| | $ | — |
| | $ | — |
| | $ | 47,472 |
| | $ | (2,826 | ) |
| |
(1) | Represents the carrying value of loans for which adjustments are based on the fair value of the collateral. |
| |
(2) | Represents other real estate owned where an updated fair value of collateral is used to adjust the carrying amount subsequent to the initial classification as other real estate owned. |
Fair Value of Financial Instruments
The following presents the carrying value, estimated fair value and the levels of the fair value hierarchy for the Company’s financial instruments other than assets and liabilities measured at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 47,714 |
| | $ | 47,714 |
| | $ | 47,714 |
| | $ | — |
| | $ | — |
|
Loans held for investment | 1,662,623 |
| | 1,687,911 |
| | — |
| | — |
| | 1,687,911 |
|
Loans held for sale - transferred from held for investment | 261,627 |
| | 267,323 |
| | — |
| | 267,323 |
| | — |
|
Loans held for sale – multifamily | 5,531 |
| | 5,531 |
| | — |
| | 5,531 |
| | — |
|
Mortgage servicing rights – multifamily | 9,095 |
| | 10,659 |
| | — |
| | — |
| | 10,659 |
|
Federal Home Loan Bank stock | 34,958 |
| | 34,958 |
| | — |
| | 34,958 |
| | — |
|
Liabilities: | | | | | | | | | |
Deposits | $ | 2,371,358 |
| | $ | 2,235,854 |
| | $ | — |
| | $ | 2,235,854 |
| | $ | — |
|
Federal Home Loan Bank advances | 346,590 |
| | 349,296 |
| | — |
| | 349,296 |
| | — |
|
Long-term debt | 61,856 |
| | 60,242 |
| | — |
| | 60,242 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 33,908 |
| | $ | 33,908 |
| | $ | 33,908 |
| | $ | — |
| | $ | — |
|
Loans held for investment | 1,871,813 |
| | 1,900,349 |
| | — |
| | — |
| | 1,900,349 |
|
Loans held for sale – multifamily | 556 |
| | 556 |
| | — |
| | 556 |
| | — |
|
Mortgage servicing rights – multifamily | 9,335 |
| | 10,839 |
| | — |
| | — |
| | 10,839 |
|
Federal Home Loan Bank stock | 35,288 |
| | 35,288 |
| | — |
| | 35,288 |
| | — |
|
Liabilities: | | | | | | | | | |
Deposits | $ | 2,210,821 |
| | $ | 2,058,533 |
| | $ | — |
| | $ | 2,058,533 |
| | $ | — |
|
Federal Home Loan Bank advances | 446,590 |
| | 449,109 |
| | — |
| | 449,109 |
| | — |
|
Long-term debt | 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 $2.1 million and $977 thousand at March 31, 2014 and December 31, 2013, respectively.
NOTE 9–EARNINGS PER SHARE:
The following table summarizes the calculation of earnings per share.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands, except share and per share data) | 2014 | | 2013 |
| | | |
Net income | $ | 2,301 |
| | $ | 10,940 |
|
Weighted average shares: | | | |
Basic weighted-average number of common shares outstanding | 14,784,424 |
| | 14,359,691 |
|
Dilutive effect of outstanding common stock equivalents (1) | 163,440 |
| | 444,438 |
|
Diluted weighted-average number of common stock outstanding | 14,947,864 |
| | 14,804,129 |
|
Earnings per share: | | | |
Basic earnings per share | $ | 0.16 |
| | $ | 0.76 |
|
Diluted earnings per share | $ | 0.15 |
| | $ | 0.74 |
|
| |
(1) | Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three months ended March 31, 2014 and 2013 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 106,266 and 97,426 at March 31, 2014 and 2013, respectively. |
NOTE 10–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 commercial 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 purchase loans from WMS Series LLC through a correspondent arrangement with that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. A small percentage of our loans are brokered 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 servicing rights within this business segment.
Financial highlights by operating segment were as follows.
|
| | | | | | | | | | | |
| Three Months Ended March 31, 2014 |
(in thousands) | Mortgage Banking | | Commercial and Consumer Banking | | Total |
| | | | | |
Condensed income statement: | | | | | |
Net interest income (1) | $ | 2,479 |
| | $ | 20,233 |
| | $ | 22,712 |
|
(Reversal of) provision for credit losses | — |
| | (1,500 | ) | | (1,500 | ) |
Noninterest income | 33,454 |
| | 1,253 |
| | 34,707 |
|
Noninterest expense | 37,428 |
| | 18,663 |
| | 56,091 |
|
Income (loss) before income taxes | (1,495 | ) | | 4,323 |
| | 2,828 |
|
Income tax expense (benefit) | (463 | ) | | 990 |
| | 527 |
|
Net income (loss) | $ | (1,032 | ) | | $ | 3,333 |
| | $ | 2,301 |
|
Average assets | $ | 457,598 |
| | $ | 2,564,868 |
| | $ | 3,022,466 |
|
|
| | | | | | | | | | | |
| Three Months Ended March 31, 2013 |
(in thousands) | Mortgage Banking | | Commercial and Consumer Banking | | Total |
| | | | | |
Condensed income statement: | | | | | |
Net interest income (1) | $ | 4,108 |
| | $ | 11,127 |
| | $ | 15,235 |
|
Provision for credit losses | — |
| | 2,000 |
| | 2,000 |
|
Noninterest income | 56,553 |
| | 2,390 |
| | 58,943 |
|
Noninterest expense | 40,113 |
| | 15,686 |
| | 55,799 |
|
Income (loss) before income taxes | 20,548 |
| | (4,169 | ) | | 16,379 |
|
Income tax expense (benefit) | 6,794 |
| | (1,355 | ) | | 5,439 |
|
Net income (loss) | $ | 13,754 |
| | $ | (2,814 | ) | | $ | 10,940 |
|
Average assets | $ | 621,005 |
| | $ | 1,874,253 |
| | $ | 2,495,258 |
|
| |
(1) | Net interest income is the difference between interest earned on assets and the cost of liabilities to fund those assets. Interest earned includes actual interest earned on segment assets and, if the segment has excess liabilities, interest credits for providing funding to the other segment. The cost of liabilities includes interest expense on segment liabilities and, if the segment does not have enough liabilities to fund its assets, a funding charge based on the cost of excess liabilities from another segment. |
NOTE 11–SUBSEQUENT EVENTS:
On April 29, 2014, the Company filed on Form S-3 a shelf registration providing for the potential issuance of up to $125 million of equity or debt securities. We filed at this time since it is efficient to file a shelf registration soon after the annual filing of our Form 10-K. We have no current plan to issue securities under this shelf registration statement. We have filed a registration statement to provide flexibility in the event that we decide to issue securities in support of an acquisition or to provide capital for growth in the future.
On March 5, 2014, the Company announced its intent to sell a portion of its single family residential loan portfolio on a servicing retained basis. The loans were comprised of both fixed-rate and adjustable-rate residential mortgage loans. The Company sold $56.1 million of the fixed-rate residential mortgage loans before quarter-end, while an additional $31 million of these loans settled in April. Approximately $155 million of the adjustable-rate loans settled in April and we expect more to settle in May. The mortgage loans included in these sales are located in Washington, Oregon, Idaho and Hawaii.
For the past four quarters, the Company has paid a special cash dividend. As a consequence of lower earnings in recent quarters and to preserve capital for future growth, HomeStreet, Inc.'s board of directors has suspended the payment of special dividends.
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, and we may take actions that differ from our current plans and expectations. All statements other than statements of historical fact are “forward-looking statements” for the purposes of these provisions, including:
| |
• | any projections of revenues, estimated operating expenses or other financial items; |
| |
• | any statements of the plans and objectives of management for future operations or programs; |
| |
• | any statements regarding future operations, plans, or regulatory or shareholder approvals; |
| |
• | any statements concerning proposed new products or services; |
| |
• | any statements regarding pending or future mergers, acquisitions or other transactions; and |
| |
• | any statement regarding future economic conditions or performance, and any statement of assumption underlying any of the foregoing. |
These and other forward looking statements are, among other things, attempts to predict the future and, as such, may not come to pass. A wide variety of events, circumstances and conditions may cause us to fall short of management's expectations as expressed herein, or to deviate from the plans and intentions we have described in this report. Some of the factors that may cause us to fall short of expectations or to deviate from our intended courses of action include:
| |
• | the qualifying disclosures and other factors referenced in this Form 10-Q including, but not limited to, those listed under Item 1A “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations;” |
| |
• | our ability to 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 maintain our data security, including unauthorized electronic access, physical custody and 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 which took effect in January 2014, as well as in monetary policies and economic trends and initiatives as those events affect our mortgage origination and servicing operations; |
| |
• | compliance with requirements of investors and/or government-owned or sponsored entities, including Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (the “FHA”) the Department of Housing and Urban Development (“HUD”) and the Department of Veterans' Affairs (the “VA”); |
| |
• | costs associated with the integration of new personnel from growth through acquisitions and hiring initiatives, including increased salary costs, as well as time and attention from our management team that is needed to 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 |
Unless required by law, we do not intend to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q.
Except as otherwise noted, references to “we,” “our,” “us” or “the Company” refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes.
You may review a copy of this 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.
Summary Financial Data
|
| | | | | | | | | | | | | | | | | | | | |
| | At or for the Quarter Ended |
(dollars in thousands, except share data) | | Mar. 31, 2014 | | Dec. 31, 2013 | | Sept. 30, 2013 | | Jun. 30, 2013 | | Mar. 31, 2013 |
| | | | | | | | | | |
Income statement data (for the period ended): | | | | | | | | | | |
Net interest income | | $ | 22,712 |
| | $ | 21,382 |
| | $ | 20,412 |
| | $ | 17,415 |
| | $ | 15,235 |
|
Provision (reversal of provision) for credit losses | | (1,500 | ) | | — |
| | (1,500 | ) | | 400 |
| | 2,000 |
|
Noninterest income | | 34,707 |
| | 36,072 |
| | 38,174 |
| | 57,556 |
| | 58,943 |
|
Noninterest expense | | 56,091 |
| | 58,868 |
| | 58,116 |
| | 56,712 |
| | 55,799 |
|
Net income before tax expense (benefit) | | 2,828 |
| | (1,414 | ) | | 1,970 |
| | 17,859 |
| | 16,379 |
|
Income tax expense (benefit) | | 527 |
| | (553 | ) | | 308 |
| | 5,791 |
| | 5,439 |
|
Net income (loss) | | $ | 2,301 |
| | $ | (861 | ) | | $ | 1,662 |
| | $ | 12,068 |
| | $ | 10,940 |
|
Basic earnings (loss) per common share | | $ | 0.16 |
| | $ | (0.06 | ) | | $ | 0.12 |
| | $ | 0.84 |
| | $ | 0.76 |
|
Diluted earnings (loss) per common share | | $ | 0.15 |
| | $ | (0.06 | ) | | $ | 0.11 |
| | $ | 0.82 |
| | $ | 0.74 |
|
Common shares outstanding | | 14,846,519 |
| | 14,799,991 |
| | 14,422,354 |
| | 14,406,676 |
| | 14,400,206 |
|
Weighted average common shares: | | | | | | | | | | |
Basic | | 14,784,424 |
| | 14,523,405 |
| | 14,388,559 |
| | 14,376,580 |
| | 14,359,691 |
|
Diluted | | 14,947,864 |
| | 14,523,405 |
| | 14,790,671 |
| | 14,785,481 |
| | 14,804,129 |
|
Shareholders’ equity per share | | $ | 18.42 |
| | $ | 17.97 |
| | $ | 18.60 |
| | $ | 18.62 |
| | $ | 18.78 |
|
Financial position (at period end): | | | | | | | | | | |
Cash and cash equivalents | | $ | 47,714 |
| | $ | 33,908 |
| | $ | 37,906 |
| | $ | 21,645 |
| | $ | 18,709 |
|
Investment securities | | 446,639 |
| | 498,816 |
| | 574,894 |
| | 539,480 |
| | 416,561 |
|
Loans held for sale | | 588,465 |
| | 279,941 |
| | 385,110 |
| | 471,191 |
| | 430,857 |
|
Loans held for investment, net | | 1,662,623 |
| | 1,871,813 |
| | 1,510,169 |
| | 1,416,439 |
| | 1,358,982 |
|
Mortgage servicing rights | | 158,741 |
| | 162,463 |
| | 146,300 |
| | 137,385 |
| | 111,828 |
|
Other real estate owned | | 12,089 |
| | 12,911 |
| | 12,266 |
| | 11,949 |
| | 21,664 |
|
Total assets | | 3,124,812 |
| | 3,066,054 |
| | 2,854,323 |
| | 2,776,124 |
| | 2,508,251 |
|
Deposits | | 2,371,358 |
| | 2,210,821 |
| | 2,098,076 |
| | 1,963,123 |
| | 1,934,704 |
|
Federal Home Loan Bank advances | | 346,590 |
| | 446,590 |
| | 338,690 |
| | 409,490 |
| | 183,590 |
|
Shareholders’ equity | | 273,510 |
| | 265,926 |
| | 268,208 |
| | 268,321 |
| | 270,405 |
|
Financial position (averages): | | | | | | | | | | |
Investment securities | | $ | 477,384 |
| | $ | 565,869 |
| | $ | 556,862 |
| | $ | 512,475 |
| | $ | 422,761 |
|
Loans held for investment | | 1,830,330 |
| | 1,732,955 |
| | 1,475,011 |
| | 1,397,219 |
| | 1,346,100 |
|
Total interest-earning assets | | 2,654,078 |
| | 2,624,287 |
| | 2,474,397 |
| | 2,321,195 |
| | 2,244,563 |
|
Total interest-bearing deposits | | 1,880,358 |
| | 1,662,180 |
| | 1,488,076 |
| | 1,527,732 |
| | 1,543,645 |
|
Federal Home Loan Bank advances | | 323,832 |
| | 343,366 |
| | 374,682 |
| | 307,296 |
| | 147,097 |
|
Repurchase agreements | | — |
| | — |
| | — |
| | 10,913 |
| | — |
|
Total interest-bearing liabilities | | 2,267,904 |
| | 2,232,456 |
| | 2,045,155 |
| | 1,917,098 |
| | 1,752,599 |
|
Shareholders’ equity | | 272,596 |
| | 268,328 |
| | 271,286 |
| | 280,783 |
| | 274,355 |
|
Summary Financial Data (continued)
|
| | | | | | | | | | | | | | | | | | | | | |
| | At or for the Quarter Ended | |
(dollars in thousands, except share data) | | Mar. 31, 2014 | | Dec. 31, 2013 | | Sept. 30, 2013 | | Jun. 30, 2013 | | Mar. 31, 2013 | |
| | | | | | | | | | | |
Financial performance: | | | | | | | | | | | |
Return on average shareholders’ equity (1) | | 3.38 | % | | (1.28 | )% | | 2.45 | % | | 17.19 | % | | 15.95 | % | |
Return on average total assets | | 0.30 | % | | (0.12 | )% | | 0.24 | % | | 1.86 | % | | 1.75 | % | |
Net interest margin (2) | | 3.51 | % | | 3.34 | % | | 3.41 | % | | 3.10 | % | | 2.81 | % | (3) |
Efficiency ratio (4) | | 97.69 | % | | 102.46 | % | | 99.20 | % | | 75.65 | % | | 75.22 | % | |
Asset quality: | | | | | | | | | | | |
Allowance for credit losses | | $ | 22,317 |
| | $ | 24,089 |
| | $ | 24,894 |
| | $ | 27,858 |
| | $ | 28,594 |
| |
Allowance for loan losses/total loans | | 1.31 | % | (5) | 1.26 | % | (5) | 1.61 | % | | 1.92 | % | | 2.05 | % | |
Allowance for loan losses/nonaccrual loans | | 96.95 | % | | 93.00 | % | | 92.30 | % | | 93.11 | % | | 88.40 | % | |
Total nonaccrual loans (6) | | $ | 22,823 |
| (7) | $ | 25,707 |
| (7) | $ | 26,753 |
| | $ | 29,701 |
| | $ | 32,133 |
| |
Nonaccrual loans/total loans | | 1.35 | % | | 1.36 | % | | 1.74 | % | | 2.06 | % | | 2.32 | % | |
Other real estate owned | | $ | 12,089 |
| | $ | 12,911 |
| | $ | 12,266 |
| | $ | 11,949 |
| | $ | 21,664 |
| |
Total nonperforming assets | | $ | 34,912 |
| (7) | $ | 38,618 |
| (7) | $ | 39,019 |
| | $ | 41,650 |
| | $ | 53,797 |
| |
Nonperforming assets/total assets | | 1.12 | % | | 1.26 | % | | 1.37 | % | | 1.50 | % | | 2.14 | % | |
Net charge-offs | | $ | 272 |
| | $ | 805 |
| | $ | 1,464 |
| | $ | 1,136 |
| | $ | 1,157 |
| |
Regulatory capital ratios for the Bank: | | | | | | | | | | | |
Tier 1 leverage capital (to average assets) | | 9.94 | % | | 9.96 | % | | 10.85 | % | | 11.89 | % | | 11.97 | % | |
Tier 1 risk-based capital (to risk-weighted assets) | | 13.99 | % | | 14.12 | % | | 17.19 | % | | 17.89 | % | | 19.21 | % | |
Total risk-based capital (to risk-weighted assets) | | 15.04 | % | | 15.28 | % | | 18.44 | % | | 19.15 | % | | 20.47 | % | |
Other data: | | | | | | | | | | | |
Full-time equivalent employees (ending) | | 1,491 |
| | 1,502 |
| | 1,426 |
| | 1,309 |
| | 1,218 |
| |
| |
(1) | Net earnings available to common shareholders divided by average shareholders’ equity. |
| |
(2) | Net interest income divided by total average interest-earning assets on a tax equivalent basis. |
| |
(3) | 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% for the quarter ended March 31, 2013. |
| |
(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 1.46% and 1.40% at March 31, 2014 and December 31, 2013. |
| |
(6) | Generally, loans are placed on nonaccrual status when they are 90 or more days past due. |
| |
(7) | Includes $6.6 million and $6.5 million of nonperforming loans at March 31, 2014 and December 31, 2013, respectively, that are guaranteed by the Small Business Administration ("SBA"). |
|
| | | | | | | | | | | | | | | | | | | | |
| | At or for the Quarter Ended |
(in thousands) | | Mar. 31, 2014 | | Dec. 31, 2013 | | Sept. 30, 2013 | | Jun. 30, 2013 | | Mar. 31, 2013 |
| | | | | | | | | | |
SUPPLEMENTAL DATA: | | | | | | | | | | |
Loans serviced for others | | | | | | | | | | |
Single family | | $ | 12,198,479 |
| | $ | 11,795,621 |
| | $ | 11,286,244 |
| | $ | 10,404,613 |
| | $ | 9,701,396 |
|
Multifamily | | 721,464 |
| | 720,429 |
| | 722,767 |
| | 720,368 |
| | 737,007 |
|
Other | | 99,340 |
| | 95,673 |
| | 50,629 |
| | 51,058 |
| | 52,825 |
|
Total loans serviced for others | | $ | 13,019,283 |
| | $ | 12,611,723 |
| | $ | 12,059,640 |
| | $ | 11,176,039 |
| | $ | 10,491,228 |
|
| | | | | | | | | | |
Loan production volumes: | | | | | | | | | | |
Single family mortgage closed loans (1) (2) | | $ | 675,754 |
| | $ | 773,146 |
| | $ | 1,187,061 |
| | $ | 1,307,286 |
| | $ | 1,192,156 |
|
Single family mortgage interest rate lock commitments(2) | | 803,308 |
| | 662,015 |
| | 786,147 |
| | 1,423,290 |
| | 1,035,822 |
|
Single family mortgage loans sold(2) | | 619,913 |
| | 816,555 |
| | 1,326,888 |
| | 1,229,686 |
| | 1,360,344 |
|
Multifamily mortgage originations | | 11,343 |
| | 16,325 |
| | 10,734 |
| | 14,790 |
| | 49,119 |
|
Multifamily mortgage loans sold | | 6,263 |
| | 15,775 |
| | 21,998 |
| | 15,386 |
| | 50,587 |
|
| |
(1) | Represents single family mortgage production volume designated for sale to the secondary market during each respective period. |
| |
(2) | Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank. |
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 2013 Annual Report on Form 10-K.
Management’s Overview of First Quarter 2014 Financial Performance
We are a diversified financial services company founded in 1921 and headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides mortgage 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 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"®)1 in 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.
We generate revenue by earning “net interest income” and “noninterest income.” Net interest income is primarily the difference between interest income earned on loans and investment securities less the interest we pay on deposits and other borrowings. We earn noninterest income from the origination, sale and servicing of loans and from fees earned on deposit services and investment and insurance sales.
At March 31, 2014, we had total assets of $3.12 billion, net loans held for investment of $1.66 billion, deposits of $2.37 billion and shareholders’ equity of $273.5 million.
For the past four quarters, the Company has paid a special cash dividend. As a consequence of lower earnings in recent quarters and to preserve capital for future growth, HomeStreet, Inc.'s board of directors has suspended the payment of special dividends.
Results for the first quarter of 2014 reflect the continued growth of our mortgage banking business and investments to expand our commercial and consumer business. Since March 2013, we have increased our lending capacity by adding loan origination and operations personnel in all of our lending lines of business. We added 18 home loan centers and seven retail deposit branches to bring our total home loan centers to 46 and our total retail deposit branches to 30.
During the quarter, 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; bolstering our processing, compliance and risk management capabilities; and working to successfully integrate the businesses acquired during 2013. 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.
|
| | |
1 DUS® is a registered trademark of Fannie Mae | 51 | |
Consolidated Financial Performance
|
| | | | | | | | | | | |
| | At or for the Three Months Ended March 31, | | Percent Change |
(in thousands, except per share data and ratios) | | 2014 | | 2013 | | 2014 vs. 2013 |
| | | | | | |
Selected statement of operations data | | | | | | |
Total net revenue | | $ | 57,419 |
| | $ | 74,178 |
| | (23 | )% |
Total noninterest expense | | 56,091 |
| | 55,799 |
| | 1 |
|
Provision for credit losses | | (1,500 | ) | | 2,000 |
| | NM |
|
Income tax expense | | 527 |
| | 5,439 |
| | (90 | ) |
Net income | | $ | 2,301 |
| | $ | 10,940 |
| | (79 | )% |
| | | | | | |
Financial performance | | | | | | |
Diluted earnings per common share | | $ | 0.15 |
| | $ | 0.74 |
| |
|
|
Return on average common shareholders’ equity | | 3.38 | % | | 15.95 | % | |
|
|
Return on average assets | | 0.30 | % | | 1.75 | % | |
|
|
Net interest margin | | 3.51 | % | | 2.81 | % | (1) |
|
|
| | | | | | |
Capital ratios (Bank only) | | | | | | |
Tier 1 leverage capital (to average assets) | | 9.94 | % | | 11.97 | % | | |
Tier 1 risk-based capital (to risk-weighted assets) | | 13.99 | % | | 19.21 | % | | |
Total risk-based capital (to risk-weighted assets) | | 15.04 | % | | 20.47 | % | | |
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 3.06% for the quarter ended March 31, 2013. |
For the first quarter of 2014, net income was $2.3 million, or $0.15 per diluted share, compared to $10.9 million, or $0.74 per diluted share for the first quarter of 2013. Return on equity was 3.38% for the first quarter of 2014 (on an annualized basis), compared to 15.95% for the same period last year, while return on average assets was 0.30% for the first quarter of 2014 (on an annualized basis), compared to 1.75% for the same period last year.
Commercial and Consumer Banking Segment Results
Net income for the Commercial and Consumer Banking segment was $3.3 million in the first quarter of 2014, compared to a net loss of $2.8 million in the first quarter of 2013.
Commercial and Consumer Banking segment net interest income was $20.2 million for the first quarter of 2014, an increase of $9.1 million, or 81.8%, from $11.1 million for the first quarter of 2013, primarily due to higher average balances of portfolio loans and investment securities, as well as improved composition of deposit balances, which was primarily the result of improved deposit product and pricing strategies that included reducing our higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits.
The Company released $1.5 million of reserves in the first quarter of 2014 compared to a provision of $2.0 million in the first quarter of 2013. The release of $1.5 million of reserves was due to the quarter-over-quarter net decline of $177.2 million in unimpaired portfolio loan balances, 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 quarter, and sold $56.1 million of these loans before quarter-end. Net charge-offs were $272 thousand in the first quarter of 2014 compared to $1.2 million in the first quarter of 2013. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 1.31% of loans held for investment at March 31, 2014 compared to 2.05% at March 31, 2013,which primarily reflected the improved credit quality of the Company's
loan portfolio. Nonperforming assets of $34.9 million, or 1.12% of total assets at March 31, 2014 were down significantly from March 31, 2013 when nonperforming assets were $53.8 million, or 2.14% of total assets.
Commercial and Consumer Banking segment noninterest expense of $18.7 million increased $3.0 million, or 19.0%, from $15.7 million in the first quarter of 2013, primarily related to increased costs related to continued growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network. Included in noninterest expense in the first quarter of 2014 was $823 thousand of acquisition-related costs.
Mortgage Banking Segment Results
Net loss for the Mortgage Banking segment was $1.0 million in the first quarter of 2014, compared to net income of $13.8 million in the first quarter of 2013. The decrease in net income was primarily the result of substantially lower mortgage interest rate lock commitment volumes and lower gain on sale margins.
Mortgage Banking noninterest income of $33.5 million decreased $23.1 million, or 41%, from $56.6 million in the first quarter of 2013, primarily due to decreased mortgage interest rate lock commitment volumes and gain on sale 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. At the same time, the mortgage market became substantially more competitive as lenders tried to secure a reliable flow of production through competitive pricing.
Mortgage Banking noninterest expense of $37.4 million decreased $2.7 million, or 6.7%, from $40.1 million in the first quarter of 2013, primarily due to lower commission and incentive expense as closed loan volumes declined. This decrease was partially 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, primarily in California.
Regulatory Matters
The Bank remains well-capitalized, with Tier 1 leverage and total risk-based capital ratios at March 31, 2014 of 9.94% and 15.04%, respectively, compared with 11.97% and 20.47% at March 31, 2013. The decline in the Bank's capital ratios from March 31, 2013 was primarily attributable to the fourth quarter 2013 cash acquisitions of Fortune Bank, Yakima National Bank and two branches from AmericanWest Bank, which created $13.7 million of net intangible assets at March 31, 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.
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 mortgage servicing rights ("MSRs") and other real estate owned ("OREO") |
These policies and estimates are described in further detail in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies within our 2013 Annual Report on Form 10-K.
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 March 31, | |
| 2014 | | 2013 | |
(in thousands) | Average Balance | | Interest | | Average Yield/Cost | | Average Balance | | Interest | | Average Yield/Cost | |
| | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Interest-earning assets: (1) | | | | | | | | | | | | |
Cash and cash equivalents | $ | 33,264 |
| | $ | 17 |
| | 0.21 | % | | $ | 22,700 |
| | $ | 16 |
| | 0.29 | % | |
Investment securities | 477,384 |
| | 3,600 |
| | 3.02 | % | | 422,761 |
| | 3,161 |
| | 2.99 | % | |
Loans held for sale | 313,100 |
| | 2,821 |
| | 3.60 | % | | 453,002 |
| | 3,745 |
| | 3.31 | % | |
Loans held for investment | 1,830,330 |
| | 19,895 |
| | 4.37 | % | | 1,346,100 |
| | 14,337 |
| | 4.28 | % | |
Total interest-earning assets | 2,654,078 |
| | 26,333 |
| | 3.99 | % | | 2,244,563 |
| | 21,259 |
| | 3.80 | % | |
Noninterest-earning assets (2) | 368,388 |
| | | | | | 250,695 |
| | | | | |
Total assets | $ | 3,022,466 |
| | | | | | $ | 2,495,258 |
| | | | | |
Liabilities and shareholders’ equity: | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | |
Interest-bearing demand accounts | $ | 245,743 |
| | 165 |
| | 0.27 | % | | $ | 181,421 |
| | 158 |
| | 0.35 | % | |
Savings accounts | 159,544 |
| | 201 |
| | 0.51 | % | | 105,490 |
| | 104 |
| | 0.40 | % | |
Money market accounts | 925,631 |
| | 1,020 |
| | 0.45 | % | | 695,688 |
| | 857 |
| | 0.50 | % | |
Certificate accounts | 549,440 |
| | 974 |
| | 0.72 | % | | 561,046 |
| | 2,370 |
| | 1.71 | % | |
Total interest-bearing deposits | 1,880,358 |
| | 2,360 |
| | 0.51 | % | | 1,543,645 |
| | 3,489 |
| | 0.92 | % | |
Federal Home Loan Bank advances | 323,832 |
| | 423 |
| | 0.51 | % | | 147,097 |
| | 292 |
| | 0.80 | % | |
Securities sold under agreements to repurchase | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | |
Long-term debt | 63,714 |
| | 315 |
| | 1.98 | % | | 61,857 |
| | 1,717 |
| (3) | 11.10 | % | (3) |
Other borrowings | — |
| | — |
| | — | % | | — |
| | 4 |
| | — | % | |
Total interest-bearing liabilities | 2,267,904 |
| | 3,098 |
| | 0.55 | % | | 1,752,599 |
| | 5,502 |
| | 1.27 | % | |
Noninterest-bearing liabilities | 481,966 |
| | | | | | 468,304 |
| | | | | |
Total liabilities | 2,749,870 |
| | | | | | 2,220,903 |
| | | | | |
Shareholders’ equity | 272,596 |
| | | | | | 274,355 |
| | | | | |
Total liabilities and shareholders’ equity | $ | 3,022,466 |
| | | | | | $ | 2,495,258 |
| | | | | |
Net interest income (4) | | | $ | 23,235 |
| | | | | | $ | 15,757 |
| | | |
Net interest spread | | | | | 3.44 | % | | | | | | 2.53 | % | |
Impact of noninterest-bearing sources | | | | | 0.07 | % | | | | | | 0.28 | % | |
Net interest margin | | | | | 3.51 | % | | | | | | 2.81 | % | (3) |
| |
(1) | The average balances of nonaccrual assets and related income, if any, are included in their respective categories. |
| |
(2) | Includes loan balances that have been foreclosed and are now reclassified to OREO. |
| |
(3) | Interest expense for 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 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 3.06%. |
| |
(4) | Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $523 thousand and $522 thousand for the quarters ended March 31, 2014 and March 31, 2013, respectively. The estimated federal statutory tax rate was 35% for the periods presented. |
Interest on Nonaccrual Loans
We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual status, we reverse the accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Additionally, if interest is received on nonaccrual loans, the interest collected on the loan is recognized as an adjustment to the cost basis of the loan. The net decrease to interest income due to adjustments made for nonaccrual loans, including the effect of additional interest income that would have been recorded during the period if the loans had been accruing, was $100 thousand and $151 thousand for the three months ended March 31, 2014 and 2013, respectively.
Net Income
Net income was $2.3 million for the three months ended March 31, 2014, a decrease of $8.6 million, or 79.0%, compared to net income of $10.9 million for the three months ended March 31, 2013. The decline in net income mainly resulted from a $24.2 million, or 41.1%, decrease in noninterest income compared to the same period in 2013, primarily due to a significantly lower gain on mortgage loan origination and sale activities resulting from a decline in single family mortgage loan production compared to the record production that the Company experienced in 2012 and continuing into the first quarter of 2013. This decrease was partially offset by a $7.5 million, or 49%, increase in net interest income in the three months ended March 31, 2014 mainly due to higher yields on higher average balances of interest-earning assets.
Net Interest Income
Our profitability depends significantly on net interest income, which is the difference between income earned on our interest-earning assets, primarily loans and investment securities, and interest paid on interest-bearing liabilities. Our interest-bearing liabilities consist primarily of deposits and borrowed funds, including our outstanding trust preferred securities and advances from the Federal Home Loan Bank ("FHLB").
Net interest income on a tax equivalent basis was $23.2 million for the first quarter of 2014, an increase of $7.5 million, or 47.5%, from $15.8 million for the first quarter of 2013. During the first quarter of 2014, total interest income increased $5.1 million from the first quarter of 2013, while total interest expense decreased $2.4 million from the first quarter of 2013. The net interest margin for the first quarter of 2014 improved to 3.51% from 2.81% in the first quarter of 2013. Included in interest income for the first quarter of 2014 is $483 thousand in interest collected on two nonaccrual loans that were paid off during the quarter. Included in interest expense for the first quarter of 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 3.06%. The net interest margin increase from the first quarter of 2013 was primarily impacted by a substantial decline in the cost of interest-bearing deposits as certificates of deposit matured and re-priced, and also benefited from a 19 basis point increase in yields on average interest-earning assets.
Total average interest-earning assets of $2.65 billion for the three months ended March 31, 2014 increased $409.5 million, or 18.2%, from $2.24 billion for the three months ended March 31, 2013, primarily as a result of growth in portfolio loans, both from originations and from fourth quarter 2013 acquisitions, and in the investment securities portfolio, partially offset by a decrease in loans held for sale. Total average interest-bearing deposit balances increased from the prior periods primarily due to acquisition-related growth in transaction and savings deposits, partially offset by a decline in higher-cost retail certificates of deposit which reflected the execution of our deposit product and pricing strategies. Additionally, we increased our net interest income through increased commercial portfolio lending as we continued to grow our Commercial and Consumer Banking segment.
Total interest income on a tax equivalent basis of $26.3 million in the first quarter of 2014 increased $5.1 million, or 23.9%, from $21.3 million in the first quarter of 2013, primarily driven by higher average balances of portfolio loans and investment securities. Average balance of loans held for investment increased by $484.2 million, or 36.0%, and the average balance of investment securities increased by $54.6 million, or 12.9%, from the first quarter of 2013. These increases were partially offset by a decrease in the average balance of loans held for sale, which decreased $139.9 million, or 30.9%, compared to the first quarter of 2013.
Total interest expense of $3.1 million in the first quarter of 2014 decreased $2.4 million, or 43.7%, from $5.5 million in the first quarter of 2013. The higher interest expense in he first quarter of 2013 was primarily due to interest expense of $1.4 million recorded in 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.
Additionally, interest expense decreased in the first quarter of 2014 due to a $11.6 million, or 2.1%, reduction in the average balance of higher-yielding certificates of deposit, partially offset by an increase in lower cost transaction and savings deposits as we expand our deposit branch network.
Provision for Credit Losses
We released $1.5 million of reserves in the first quarter of 2014 compared to a provision of $2.0 million in the first quarter of 2013. The release of $1.5 million of reserves was due to the quarter-over-quarter net decline of $177.2 million in unimpaired portfolio loan balances, 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 quarter and sold $56 million of these loans before quarter-end. Nonaccrual loans declined to $22.8 million at March 31, 2014, a decrease of $2.9 million, or 11.2%, from $25.7 million at December 31, 2013. Nonaccrual loans as a percentage of total loans was 1.35% at March 31, 2014 compared to 1.36% at December 31, 2013.
Net charge-offs of $272 thousand in the first quarter of 2014 were down $885 thousand from net charge-offs of $1.2 million in the first quarter of 2013. The decrease in net charge-offs in the first quarter of 2014 compared to the same period of 2013 was primarily due to lower charge-offs on single family and home equity loans during the first quarter of 2014. 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 in this Form 10-Q.
Noninterest Income
Noninterest income was $34.7 million in the first quarter of 2014, a decrease of $24.2 million, or 41%, from $58.9 million in the first quarter of 2013. Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale as well as mortgage servicing activities. The level of our mortgage banking activity fluctuates and is influenced by mortgage interest rates, the economy, employment and housing supply and affordability, among other factors. The decrease in noninterest income in the first quarter of 2014 compared to the first quarter of 2013 was primarily the result of lower net gain on mortgage loan origination and sale activities, mostly related to substantially lower refinancing activities that resulted mainly from increased mortgage interest rates, partially offset by new lending volume from the expansion of our mortgage lending operations. Our single family mortgage interest rate lock commitments of $803.3 million in the first quarter of 2014 decreased 22.4% compared to $1.04 billion in the first quarter of 2013.
Noninterest income consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Noninterest income | | | | | | | |
Net gain on mortgage loan origination and sale activities (1) | $ | 25,510 |
| | $ | 53,955 |
| | $ | (28,445 | ) | | (53 | )% |
Mortgage servicing income | 7,945 |
| | 3,072 |
| | 4,873 |
| | 159 |
|
Income from WMS Series LLC | (193 | ) | | 620 |
| | (813 | ) | | NM |
|
Gain on debt extinguishment | (586 | ) | | — |
| | (586 | ) | | NM |
|
Depositor and other retail banking fees | 815 |
| | 721 |
| | 94 |
| | 13 |
|
Insurance agency commissions | 404 |
| | 180 |
| | 224 |
| | 124 |
|
Gain (loss) on securities available for sale | 713 |
| | (48 | ) | | 761 |
| | NM |
|
Other | 99 |
| | 443 |
| | (344 | ) | | (78 | ) |
Total noninterest income | $ | 34,707 |
| | $ | 58,943 |
| | $ | (24,236 | ) | | (41 | )% |
NM = not meaningful | | | | | | |
|
|
| |
(1) | Single family and multifamily mortgage banking activities. |
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 March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Single family: | | | | | | | |
Servicing value and secondary market gains(1) | $ | 19,559 |
| | $ | 44,235 |
| | $ | (24,676 | ) | | (56 | )% |
Loan origination and funding fees | 4,761 |
| | 7,795 |
| | (3,034 | ) | | (39 | ) |
Total single family | 24,320 |
| | 52,030 |
| | (27,710 | ) | | (53 | ) |
Multifamily | 396 |
| | 1,925 |
| | (1,529 | ) | | (79 | ) |
Other | 794 |
| | — |
| | 794 |
| | NM |
|
Net gain on mortgage loan origination and sale activities | $ | 25,510 |
| | $ | 53,955 |
| | $ | (28,445 | ) | | (53 | )% |
NM = not meaningful | | | | | | | |
| |
(1) | Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold. |
Single family production volumes related to loans designated for sale consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Single family mortgage closed loan volume (1) (2) | $ | 675,754 |
| | $ | 1,192,156 |
| | $ | (516,402 | ) | | (43 | )% |
Single family mortgage interest rate lock commitments (2) | 803,308 |
| | 1,035,822 |
| | (232,514 | ) | | (22 | ) |
| |
(1) | Represents single family mortgage originations designated for sale during each respective period. |
| |
(2) | Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank. |
During the first quarter of 2014, single family closed loan production decreased 43.3% and single family interest rate lock commitments decreased 22.4% compared to the first quarter of 2013 mainly as a result of higher mortgage interest rates beginning in the second quarter of 2013.
Net gain on mortgage loan origination and sale activities was $25.5 million for the first quarter of 2014, a decrease of $28.4 million, or 52.7%, from $54.0 million for the first quarter of 2013. This decrease predominantly reflected substantially lower mortgage interest rate lock commitment 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 25% over the past twelve months.
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 March 31, |
(in thousands) | 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) | $ | (239 | ) | | $ | (536 | ) |
| $ | (239 | ) | | $ | (536 | ) |
| |
(1) | Represents the estimated fair value of the repurchase or indemnity obligation recognized as a reduction of proceeds on new loan sales. |
Mortgage servicing income consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Servicing income, net: | | | | | | | |
Servicing fees and other | $ | 9,849 |
| | $ | 7,607 |
| | $ | 2,242 |
| | 29 | % |
Changes in fair value of MSRs due to modeled amortization (1) | (5,968 | ) | | (5,675 | ) | | (293 | ) | | 5 |
|
Amortization | (424 | ) | | (490 | ) | | 66 |
| | (13 | ) |
| 3,457 |
| | 1,442 |
| | 2,015 |
| | 140 |
|
Risk management: | | | | | | | |
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2) | (5,409 | ) | | 4,148 |
| | (9,557 | ) | | (230 | ) |
Net gain (loss) from derivatives economically hedging MSRs | 9,897 |
| | (2,518 | ) | | 12,415 |
| | (493 | ) |
| 4,488 |
| | 1,630 |
| | 2,858 |
| | 175 |
|
Mortgage servicing income | $ | 7,945 |
| | $ | 3,072 |
| | $ | 4,873 |
| | 159 | % |
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. |
For the first quarter of 2014, mortgage servicing income was $7.9 million, an increase of $4.9 million, or 159% from $3.1 million in the first quarter of 2013, primarily due to growth in the Company's mortgage servicing portfolio and improved risk management results. MSR risk management results represent changes in the fair value of single family MSRs due to changes in model inputs and assumptions net of the gain/(loss) from derivatives economically hedging MSRs. The fair value of MSRs is sensitive to changes in interest rates, primarily due to the effect on prepayment speeds. MSRs typically decrease in value when interest rates decline because declining interest rates tend to increase mortgage prepayment speeds and therefore reduce the expected life of the net servicing cash flows of the MSR asset. Certain other changes in MSR fair value relate to factors other than interest rate changes and are generally not within the scope of the Company's MSR economic hedging strategy. These factors may include but are not limited to the impact of changes to the housing price index, the level of home sales activity, changes to mortgage spreads, valuation discount rates, costs to service and policy changes by U.S. government agencies.
The net performance of our MSR risk management activities for the first quarter of 2014 was a gain of $4.5 million compared to a gain of $1.6 million in the first quarter of 2013. The higher gain in 2014 largely reflected higher sensitivity to interest rates for the Company's MSRs, which led the Company to increase the notional amount of derivative instruments used to economically hedge MSRs. The higher notional amount of derivative instruments, along with a steeper yield curve, resulted in higher net gains from MSR risk management, which positively impacted mortgage servicing income. In addition, MSR risk management results for 2014 reflected the impact on the fair value of MSRs of changes in model inputs and assumptions
related to historically low prepayment speeds experienced during the first quarter of 2014 resulting in lower projected prepayment speeds.
Mortgage servicing fees collected in the first quarter of 2014 were $9.8 million, an increase of $2.2 million, or 29.5%, from $7.6 million in the first quarter of 2013, primarily as a result of the increase in the loans serviced for others portfolio. Our loans serviced for others portfolio increased to $13.02 billion at March 31, 2014 from $12.61 billion at December 31, 2013 and $10.49 billion at March 31, 2013, mostly as a result of the sale of portfolio loans on a servicing retained basis.
(Loss) income from WMS Series LLC in the first quarter of 2014 was a loss of $193 thousand compared to income of $620 thousand in the first quarter of 2013. The decrease in 2014 was primarily due to a 37% decrease in interest rate lock commitments and a 52% decrease in closed loan volume, which were $97.0 million and $85.8 million, respectively, for the three months ended March 31, 2014 compared to $154.5 million and $180.4 million, respectively, for the same period in 2013.
Depositor and other retail banking fees for the three months ended March 31, 2014 increased $94 thousand from the three months ended March 31, 2013, 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 March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Fees: | | | | | | | |
Monthly maintenance and deposit-related fees | $ | 390 |
| | $ | 353 |
| | $ | 37 |
| | 10 | % |
Debit Card/ATM fees | 415 |
| | 350 |
| | 65 |
| | 19 |
|
Other fees | 10 |
| | 18 |
| | (8 | ) | | (44 | ) |
Total depositor and other retail banking fees | $ | 815 |
| | $ | 721 |
| | $ | 94 |
| | 13 | % |
Noninterest Expense
Noninterest expense was $56.1 million in the first quarter of 2014, an increase of $292 thousand, or 0.5%, from $55.8 million in the first quarter of 2013. The increase in noninterest expense was primarily the result of a $1.6 million increase in occupancy, a $1.5 million increase in information services, a $409 thousand increase in salaries and related costs, and $823 thousand of acquisition-related costs, all primarily a result of the integration of our acquisitions and a 22.4% growth in personnel in 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 and 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 and significantly lower other real estate owned ("OREO") expenses, which was a gain of $419 thousand in the first quarter of 2014, a decrease of $2.6 million from OREO expense of $2.1 million in the first quarter of 2013.
Noninterest expense consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Noninterest expense | | | | | | | |
Salaries and related costs | $ | 35,471 |
| | $ | 35,062 |
| | $ | 409 |
| | 1 | % |
General and administrative | 10,122 |
| | 10,930 |
| | (808 | ) | | (7 | ) |
Legal | 399 |
| | 611 |
| | (212 | ) | | (35 | ) |
Consulting | 951 |
| | 696 |
| | 255 |
| | 37 |
|
Federal Deposit Insurance Corporation assessments | 620 |
| | 567 |
| | 53 |
| | 9 |
|
Occupancy | 4,432 |
| | 2,802 |
| | 1,630 |
| | 58 |
|
Information services | 4,515 |
| | 2,996 |
| | 1,519 |
| | 51 |
|
Net cost of operation and sale of other real estate owned | (419 | ) | | 2,135 |
| | (2,554 | ) | | (120 | ) |
Total noninterest expense | $ | 56,091 |
| | $ | 55,799 |
| | $ | 292 |
| | 1 | % |
The significant components of our noninterest expense are described in greater detail, as follows.
Salaries and related costs were $35.5 million in the first quarter of 2014, an increase of $409 thousand, or 1.2%, from $35.1 million in the first quarter of 2013. The increase primarily resulted from a 22.4% increase in full-time equivalent employees at March 31, 2014 compared to March 31, 2013, largely offset by reduced mortgage origination commissions and incentives resulting from an overall slowdown in mortgage volumes.
General and administrative expense was $10.1 million in the first quarter of 2014, a decrease of $808 thousand, or 7.4%, from $10.9 million in the first quarter of 2013. These expenses include general office and equipment expense, marketing, taxes and insurance.
Income Tax Expense
The Company's income tax expense was $527 thousand in the first quarter of 2014 compared to $5.4 million in the first quarter of 2013. Our effective income tax rate was 18.6% as compared to an annual effective tax rate of 31.6% for 2013. Our effective income tax rate in the first quarter of 2014 differed from the Federal statutory tax rate of 35% due to state income taxes on income in Oregon, Hawaii, California and Idaho, tax-exempt interest income and $406 thousand of discrete tax items related to prior periods. The estimated annual effective tax rate for the three months ended March 31, 2014, excluding the effect of these discrete items, is approximately 33.0%. For a detailed discussion of the discrete tax items related to prior periods, see Note 1, Summary of Significant Accounting Policies - Recent Accounting Developments, in this Form 10-Q.
Review of Financial Condition – Comparison of March 31, 2014 to December 31, 2013
Total assets were $3.12 billion at March 31, 2014 and $3.07 billion at December 31, 2013. The increase in total assets was primarily due to a $308.5 million increase in loans held for sale, partially offset by a $209.2 million decrease in portfolio loans and a $52.2 million decrease in investment securities. The change in loan balances was the result of the Company's decision to transfer $310.5 million of single family mortgage loans out of the portfolio and into loans held for sale in March of this quarter.
Cash and cash equivalents was $47.7 million at March 31, 2014 compared to $33.9 million at December 31, 2013, an increase of $13.8 million, or 40.7%.
Investment securities were $446.6 million at March 31, 2014 compared to $498.8 million at December 31, 2013, a decrease of $52.2 million, or 10.5%, primarily due to sales of securities during the quarter.
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 $18.1 million at March 31, 2014, which were designated as held to maturity.
The following table details the composition of our investment securities available for sale by dollar amount and as a percentage of the total securities portfolio.
|
| | | | | | | | | | | | | |
| At March 31, 2014 | | At December 31, 2013 |
(in thousands) | Fair Value | | Percent | | Fair Value | | Percent |
| | | | | | | |
Investment securities available for sale: | | | | | | | |
Mortgage-backed securities: | | | | | | | |
Residential | $ | 120,103 |
| | 28.0 | % | | $ | 133,910 |
| | 27.8 | % |
Commercial | 13,596 |
| | 3.2 |
| | 13,433 |
| | 2.8 |
|
Municipal bonds | 124,861 |
| | 29.1 |
| | 130,850 |
| | 27.2 |
|
Collateralized mortgage obligations: | | |
| | | |
|
Residential | 60,537 |
| | 14.1 |
| | 90,327 |
| | 18.8 |
|
Commercial | 11,639 |
| | 2.7 |
| | 16,845 |
| | 3.5 |
|
Corporate debt securities | 70,804 |
| | 16.5 |
| | 68,866 |
| | 14.3 |
|
U.S. Treasury securities | 26,996 |
| | 6.3 |
| | 27,452 |
| | 5.7 |
|
Total investment securities available for sale | $ | 428,536 |
| | 100.0 | % | | $ | 481,683 |
| | 100.0 | % |
Loans held for sale were $588.5 million at March 31, 2014 compared to $279.9 million at December 31, 2013, an increase of $308.5 million, or 110.2%. Loans held for sale include single family and multifamily residential loans, typically sold within 30 days of closing the loan. The increase in the loans held for sale balance is primarily due to the transfer of $310.5 million of single family mortgage loans out of the portfolio and into loans held for sale in March of this quarter. The Company sold $56.1 million of these loans before quarter-end.
Loans held for investment, net were $1.66 billion at March 31, 2014 compared to $1.87 billion at December 31, 2013, a decrease of $209.2 million, or 11.2%. Our single family loan portfolio decreased $236.6 million from December 31, 2013, 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 quarter. The Company sold $56.1 million of the $310.5 million in loans in March. Our commercial construction loans, including residential construction, increased $32.3 million from December 31, 2013, primarily from new originations in our commercial real estate and residential construction lending business.
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 March 31, 2014 | | At December 31, 2013 |
(in thousands) | Amount | | Percent | | Amount | | Percent |
| | | | | | | |
Consumer loans | | | | | | | |
Single family | $ | 668,277 |
| | 39.6 | % | | $ | 904,913 |
| | 47.7 | % |
Home equity | 134,882 |
| | 8.0 |
| | 135,650 |
| | 7.1 |
|
| 803,159 |
| | 47.6 |
| | 1,040,563 |
| | 54.8 |
|
Commercial loans | | | | | | | |
Commercial real estate (1) | 480,200 |
| | 28.4 |
| | 477,642 |
| | 25.1 |
|
Multifamily | 71,278 |
| | 4.2 |
| | 79,216 |
| | 4.2 |
|
Construction/land development | 162,717 |
| | 9.6 |
| | 130,465 |
| | 6.9 |
|
Commercial business | 171,080 |
| | 10.2 |
| | 171,054 |
| | 9.0 |
|
| 885,275 |
| | 52.4 |
| | 858,377 |
| | 45.2 |
|
| 1,688,434 |
| | 100.0 | % | | 1,898,940 |
| | 100.0 | % |
Net deferred loan fees and costs | (3,684 | ) | | | | (3,219 | ) | | |
| 1,684,750 |
| | | | 1,895,721 |
| | |
Allowance for loan losses | (22,127 | ) | | | | (23,908 | ) | | |
| $ | 1,662,623 |
| | | | $ | 1,871,813 |
| | |
| |
(1) | March 31, 2014 and December 31, 2013 balances comprised of $144.7 million and $156.7 million of owner occupied loans, respectively, and $335.5 million and $320.9 million of non-owner occupied loans, respectively. |
Deposits were $2.37 billion at March 31, 2014 compared to $2.21 billion at December 31, 2013, an increase of $160.5 million or 7.3%. This increase was due to higher balances of transaction and savings deposits, which were $1.62 billion at March 31, 2014, an increase of $87.2 million, or 5.7%, from $1.54 billion at December 31, 2013, reflecting the organic growth and expansion of our branch banking network. Certificates of deposit balances were $534.7 million at March 31, 2014, an increase of $20.3 million, or 3.9%, from $514.4 million at December 31, 2013.
Deposit balances by dollar amount and as a percentage of our total deposits were as follows for the periods indicated:
|
| | | | | | | | | | | | | | |
(in thousands) | | At March 31, 2014 | | At December 31, 2013 |
| | Amount | | Percent | | Amount | | Percent |
| | | | | | | | |
Noninterest-bearing accounts - checking and savings | | $ | 219,677 |
| | 9.3 | % | | $ | 199,943 |
| | 9.0 | % |
Interest-bearing transaction and savings deposits: | | | | | | | | |
NOW accounts | | 285,104 |
| | 12.0 |
| | 262,138 |
| | 11.9 |
|
Statement savings accounts due on demand | | 163,819 |
| | 6.9 |
| | 156,181 |
| | 7.1 |
|
Money market accounts due on demand | | 956,189 |
| | 40.3 |
| | 919,322 |
| | 41.6 |
|
Total interest-bearing transaction and savings deposits | | 1,405,112 |
| | 59.2 |
| | 1,337,641 |
| | 60.6 |
|
Total transaction and savings deposits | | 1,624,789 |
| | 68.5 |
| | 1,537,584 |
| | 69.6 |
|
Certificates of deposit | | 534,708 |
| | 22.5 |
| | 514,400 |
| | 23.3 |
|
Noninterest-bearing accounts - other | | 211,861 |
| | 9.0 |
| | 158,837 |
| | 7.1 |
|
Total deposits | | $ | 2,371,358 |
| | 100.0 | % | | $ | 2,210,821 |
| | 100.0 | % |
Federal Home Loan Bank advances were $346.6 million at March 31, 2014 compared to $446.6 million at December 31, 2013, a decrease of $100.0 million, or 22.4%. The Company uses these borrowings to primarily fund our mortgage banking and securities investment activities.
Accounts payable and other liabilities were $71.5 million at March 31, 2014 compared to $77.9 million at December 31, 2013, a decrease of $6.4 million, or 8.2%. This decrease was primarily due to the change in the fair value of derivatives used for MSR risk management.
Long-term debt was $61.9 million at March 31, 2014 compared to $64.8 million at December 31, 2013, a decrease of $3.0 million, or 4.6%. During the quarter, we redeemed $3.0 million of TruPS that were acquired as part of the acquisition of YNB in 2013.
Shareholders’ Equity
Shareholders' equity was $273.5 million at March 31, 2014 compared to $265.9 million at December 31, 2013. This increase included net income of $2.3 million and other comprehensive income of $6.1 million recognized during the three months ended March 31, 2014, partially offset by and dividends declared of $1.6 million during the three months ended March 31, 2014. Other comprehensive income represents unrealized gains in the valuation of our investment securities portfolio at March 31, 2014.
Shareholders’ equity, on a per share basis, was $18.42 per share at March 31, 2014, compared to $17.97 per share at December 31, 2013.
Return on Equity and Assets
The following table presents certain information regarding our returns on average equity and average total assets.
|
| | | | | |
| At or for the Three Months Ended March 31, |
| 2014 | | 2013 |
| | | |
Return on assets (1) | 0.30 | % | | 1.75 | % |
Return on equity (2) | 3.38 | % | | 15.95 | % |
Equity to assets ratio (3) | 9.02 | % | | 11.00 | % |
| |
(1) | Net income (annualized) divided by average total assets. |
| |
(2) | Net earnings (loss) available to common shareholders (annualized) divided by average common shareholders’ equity. |
| |
(3) | Average equity divided by average total assets. |
Business Segments
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.
This process is dynamic and is based on management's current view of the Company's operations and is not necessarily comparable with similar information for other financial institutions. We define our business segments by product type and customer segment. If the management structure or the allocation process changes, allocations, transfers and assignments may change.
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 commercial lending centers, and through ATMs, online, mobile and telephone banking. These products and services include deposit products; residential, consumer and business portfolio loans; 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 commercial 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 March 31, 2014, our bank branch network consists of 30 branches in the Pacific Northwest and Hawaii. At March 31, 2014 and December 31, 2013, our transaction and savings deposits totaled $1.62 billion and $1.54 billion, respectively, and our loan portfolio totaled $1.66 billion and $1.87 billion, respectively. This segment is also responsible for the management of the Company's portfolio of investment securities.
Commercial and Consumer Banking segment results are detailed below.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Net interest income | $ | 20,233 |
| | $ | 11,127 |
| | $ | 9,106 |
| | 82 | % |
Provision for credit losses | (1,500 | ) | | 2,000 |
| | (3,500 | ) | | NM |
|
Noninterest income | 1,253 |
| | 2,390 |
| | (1,137 | ) | | (48 | ) |
Noninterest expense | 18,663 |
| | 15,686 |
| | 2,977 |
| | 19 |
|
Income (loss) before income tax expense (benefit) | 4,323 |
| | (4,169 | ) | | 8,492 |
| | NM |
|
Income tax expense (benefit) | 990 |
| | (1,355 | ) | | 2,345 |
| | NM |
|
Net income (loss) | $ | 3,333 |
| | $ | (2,814 | ) | | $ | 6,147 |
| | NM |
|
| | | | | | | |
Average assets | $ | 2,564,868 |
| | $ | 1,874,253 |
| | $ | 690,615 |
| | 37 | % |
Efficiency ratio (1) | 86.86 | % | | 116.05 | % | | | | |
Full-time equivalent employees (ending) | 588 |
| | 439 |
| | 149 |
| | 34 |
|
Multifamily net gain on mortgage loan origination and sale activity | $ | 396 |
| | $ | 1,925 |
| | (1,529 | ) | | (79 | ) |
| | | | | | | |
Production volumes: | | | | | | | |
Multifamily mortgage originations | 11,343 |
| | 49,119 |
| | (37,776 | ) | | (77 | ) |
Multifamily mortgage loans sold | 6,263 |
| | 50,587 |
| | (44,324 | ) | | (88 | ) |
NM = not meaningful | | | | | | | |
| |
(1) | Noninterest expense divided by total net revenue (net interest income and noninterest income). |
Commercial and Consumer Banking net income was $3.3 million for the first quarter of 2014, improved by $6.1 million from a net loss of $2.8 million for the first quarter of 2013. The increase in net income in the first quarter of 2014 was primarily the result of a $9.1 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 portfolio loans and improvements in our deposit product and pricing strategy. That strategy included reducing our higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits. The Company released $1.5 million of reserves in the first quarter of 2014 compared to a provision of $2.0 million in the first quarter of 2013. The release of $1.5 million of reserves was due to a quarter-over-quarter net decline of $177.2 million in unimpaired portfolio loan balances, which was the result of management's decision to sell $310.5 million of single family mortgage portfolio loans. The Company sold $56.1 million of the $310.5 million in loans in March.
Commercial and Consumer Banking segment servicing income consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Servicing income, net: | | | | | | | |
Servicing fees and other | $ | 890 |
| | $ | 812 |
| | $ | 78 |
| | 10 | % |
Amortization of multifamily MSRs | (424 | ) | | (490 | ) | | 66 |
| | (13 | ) |
Commercial mortgage servicing income | $ | 466 |
| | $ | 322 |
| | $ | 144 |
| | 45 | % |
Commercial and Consumer Banking segment loans serviced for others consisted of the following.
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Commercial | | | |
Multifamily | $ | 721,464 |
| | $ | 737,007 |
|
Other | 99,340 |
| | 52,825 |
|
Total commercial loans serviced for others | $ | 820,804 |
| | $ | 789,832 |
|
Commercial and Consumer Banking segment noninterest expense of $18.7 million increased $3.0 million, or 19.0%, from $15.7 million in the first quarter of 2013, 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, including growth through acquisitions. Included in noninterest expense in the first quarter of 2014 was $823 thousand of acquisition-related costs.
Mortgage Banking Segment
Mortgage Banking originates and purchases single family residential mortgage loans for sale to investors in the secondary market. We also purchase loans from WMS Series LLC through a correspondent arrangement between HomeStreet Bank and 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. A small percentage of our loans are brokered 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 servicing rights within this business segment.
Mortgage Banking segment results are detailed below.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Net interest income | $ | 2,479 |
| | $ | 4,108 |
| | $ | (1,629 | ) | | (40 | )% |
Noninterest income | 33,454 |
| | 56,553 |
| | (23,099 | ) | | (41 | ) |
Noninterest expense | 37,428 |
| | 40,113 |
| | (2,685 | ) | | (7 | ) |
Income before income tax expense(benefit) | (1,495 | ) | | 20,548 |
| | (22,043 | ) | | NM |
|
Income tax (benefit) expense | (463 | ) | | 6,794 |
| | (7,257 | ) | | NM |
|
Net (loss) income | $ | (1,032 | ) | | $ | 13,754 |
| | $ | (14,786 | ) | | NM |
|
| | | | |
| | |
Average assets | $ | 457,598 |
| | $ | 621,005 |
| | $ | (163,407 | ) | | (26 | )% |
Efficiency ratio (1) | 104.16 | % | | 66.13 | % | | | | |
Full-time equivalent employees (ending) | 903 |
| | 779 |
| | 124 |
| | 16 |
|
Production volumes for sale to the secondary market: | | | | | | | |
Single family mortgage closed loan volume (2)(3) | $ | 675,754 |
| | $ | 1,192,156 |
| | $ | (516,402 | ) | | (43 | ) |
Single family mortgage interest rate lock commitments(2) | 803,308 |
| | 1,035,822 |
| | (232,514 | ) | | (22 | ) |
Single family mortgage loans sold(2) | 619,913 |
| | 1,360,344 |
| | (740,431 | ) | | (54 | ) |
| |
(1) | Noninterest expense divided by total net revenue (net interest income and noninterest income). |
| |
(2) | Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank. |
| |
(3) | Represents single family mortgage production volume designated for sale to the secondary market during each respective period. |
Mortgage Banking net loss was $1.0 million for the first quarter of 2014, a decrease of $14.8 million from net income of $13.8 million for the first quarter of 2013. The decrease in Mortgage Banking net income for the first quarter of 2014 was driven primarily by higher mortgage interest rates that led to a sharp decrease in interest rate lock commitment volume primarily due to higher mortgage interest rates which began in the latter part of the second quarter of 2013.
Mortgage Banking net gain on sale to the secondary market is detailed in the following table.
|
| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2014 | | 2013 |
| | | | |
Net gain on mortgage loan origination and sale activities:(1) | | | | |
Single family: | | | | |
Servicing value and secondary market gains(2) | | $ | 19,559 |
| | $ | 44,235 |
|
Loan origination and funding fees | | 4,761 |
| | 7,795 |
|
Total mortgage banking net gain on mortgage loan origination and sale activities(1) | | $ | 24,320 |
| | $ | 52,030 |
|
| |
(1) | Excludes inter-segment activities. |
| |
(2) | Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and the estimated fair value of the repurchase or indemnity obligation recognized on new loan sales. |
Net gain on mortgage loan origination and sale activities was $24.3 million for the first quarter of 2014, a decrease of $27.7 million, or 53.3%, from $52.0 million in the first quarter of 2013. This decrease is primarily the result of a 22.4% decrease in interest rate lock commitments, which was mainly driven by an increase in mortgage interest rates which began in the latter part of the second quarter of 2013, which led to a decrease in refinance mortgage volume, and a shift to a purchase mortgage-dominated market.
Mortgage Banking servicing income consisted of the following.
|
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Dollar Change | | Percent Change |
(in thousands) | 2014 | | 2013 | | |
| | | | | | | |
Servicing income, net: | | | | | | | |
Servicing fees and other | $ | 8,959 |
| | $ | 6,795 |
| | $ | 2,164 |
| | 32 | % |
Changes in fair value of MSRs due to modeled amortization (1) | (5,968 | ) | | (5,675 | ) | | (293 | ) | | 5 |
|
| 2,991 |
| | 1,120 |
| | 1,871 |
| | 167 |
|
Risk management: | | | | | | | |
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2) | (5,409 | ) | | 4,148 |
| | $ | (9,557 | ) | | NM |
|
Net gain from derivatives economically hedging MSRs | 9,897 |
| | (2,518 | ) | | 12,415 |
| | NM |
|
| 4,488 |
| | 1,630 |
| | 2,858 |
| | 175 |
|
Mortgage Banking servicing income | $ | 7,479 |
| | $ | 2,750 |
| | $ | 4,729 |
| | 172 | % |
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. |
Single family mortgage servicing income of $7.5 million in the first quarter of 2014 increased $4.7 million from $2.8 million in the first quarter of 2013. This increase was primarily due to increased servicing fees collected on the Company's single family mortgages and improved MSR risk management results. 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 family mortgage servicing fees collected in the first quarter of 2014 increased $2.2 million, or 31.8%, from the first quarter of 2013 primarily as a result of growth in the portfolio of single family loans serviced for others, which increased to $12.20 billion at March 31, 2014 compared to $11.80 billion at December 31, 2013 and $9.70 billion at March 31, 2013. The growth in the servicing portfolio is the result of the sale of portfolio loans on a servicing retained basis.
Single family loans serviced for others consisted of the following.
|
| | | | | | | |
(in thousands) | At March 31, 2014 | | At December 31, 2013 |
| | | |
Single family | | | |
U.S. government and agency | $ | 11,817,857 |
| | $ | 11,467,853 |
|
Other | 380,622 |
| | 327,768 |
|
Total single family loans serviced for others | $ | 12,198,479 |
| | $ | 11,795,621 |
|
Mortgage Banking noninterest expense of $37.4 million in the first quarter of 2014 decreased $2.7 million, or 6.7%, from $40.1 million in the first quarter of 2013, primarily due to lower commission and incentive expense as closed loan volumes declined 43.3% from the first quarter of 2013. This decrease was partially offset by higher expenses related to increased salary and related costs and general and administrative expenses resulting from our expansion into new markets, primarily in California.
Off-Balance Sheet Arrangements
In the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.
For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the Off-Balance Sheet Arrangements and Commitments, Guarantees and Contingencies discussions within Part II, Item 7 Management's Discussion and Analysis in our 2013 Annual Report on Form 10-K, as well as Note 14, Commitments, Guarantees and Contingencies in our 2013 Annual Report on Form 10-K and Note 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 2013 Annual Report on Form 10-K.
Credit Risk Management
The following discussion highlights developments since December 31, 2013 and should be read in conjunction with the Credit Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 2013 Annual Report on Form 10-K.
Asset Quality and Nonperforming Assets
Nonperforming assets ("NPAs") were $34.9 million, or 1.12% of total assets at March 31, 2014, compared to $38.6 million, or 1.26% of total assets at December 31, 2013, respectively. Nonaccrual loans of $22.8 million, or 1.35% of total loans at March 31, 2014, declined $2.9 million, or 11.2% from $25.7 million, or 1.36% of total loans at December 31, 2013. OREO balances of $12.1 million at March 31, 2014 declined $822 thousand, or 6.4%, from $12.9 million at December 31, 2013. Net charge-offs during the first quarter of 2014 were $272 thousand compared to $1.2 million during the first quarter of 2013.
At March 31, 2014, our loans held for investment portfolio, excluding the allowance for loan losses, was $1.68 billion, a decrease of $211.0 million from December 31, 2013. The allowance for loan losses decreased to $22.1 million, or 1.31% of loans held for investment, compared to $23.9 million, or 1.26% of loans held for investment at December 31, 2013.
The Company released $1.5 million of reserves in the first quarter of 2014 compared to a provision of $2.0 million in the first quarter of 2013. The release of $1.5 million of reserves was due to the quarter-over-quarter net decline of $177.2 million in
unimpaired portfolio loan balances, which was the result of the decision to sell $310.5 million of single family mortgage portfolio loans. The Company sold $56.1 million of the $310.5 million in loans in March.
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 March 31, 2014 |
(in thousands) | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| | | | | |
Impaired loans: | | | | | |
Loans with no related allowance recorded | $ | 73,931 |
| | $ | 89,441 |
| | $ | — |
|
Loans with an allowance recorded | 43,905 |
| | 44,654 |
| | 1,910 |
|
Total | $ | 117,836 |
| (1) | $ | 134,095 |
| | $ | 1,910 |
|
|
| At December 31, 2013 |
(in thousands) | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
| | | | | |
Impaired loans: | | | | | |
Loans with no related allowance recorded | $ | 81,301 |
| | $ | 112,795 |
| | $ | — |
|
Loans with an allowance recorded | 38,568 |
| | 38,959 |
| | 2,571 |
|
Total | $ | 119,869 |
| (1) | $ | 151,754 |
| | $ | 2,571 |
|
| |
(1) | Includes $70.6 million and $70.3 million in single family performing TDRs at March 31, 2014 and December 31, 2013, respectively. |
The Company had 215 impaired loans totaling $117.8 million at March 31, 2014 and 216 impaired loans totaling $119.9 million at December 31, 2013. The average recorded investment in these loans for the first quarter of 2014 was $118.9 million compared to $124.9 million for the first quarter of 2013. Impaired loans of $43.9 million and $38.6 million had a valuation allowance of $1.9 million and $2.6 million at March 31, 2014 and December 31, 2013, respectively.
The allowance for credit losses represents management’s estimate of the incurred credit losses inherent within our loan portfolio. For further discussion related to credit policies and estimates see Critical Accounting Policies and Estimates — Allowance for Loan Losses within Part II, Item 7 Management's Discussion and Analysis in our 2013 Annual Report on Form 10-K.
The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.
|
| | | | | | | | | | | | | | | | | | | |
| At March 31, 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 |
| | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Single family | $ | 9,406 |
| | 42.1 | % | | 39.6 | % | | $ | 11,990 |
| | 49.8 | % | | 47.7 | % |
Home equity | 3,882 |
| | 17.4 |
| | 8.0 |
| | 3,987 |
| | 16.6 |
| | 7.1 |
|
| 13,288 |
| | 59.5 |
| | 47.6 |
| | 15,977 |
| | 66.4 |
| | 54.8 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | 4,309 |
| | 19.3 |
| | 28.4 |
| | 4,012 |
| | 16.7 |
| | 25.2 |
|
Multifamily | 965 |
| | 4.3 |
| | 4.2 |
| | 942 |
| | 3.9 |
| | 4.2 |
|
Construction/land development | 2,003 |
| | 9.0 |
| | 9.6 |
| | 1,414 |
| | 5.9 |
| | 6.9 |
|
Commercial business | 1,752 |
| | 7.9 |
| | 10.2 |
| | 1,744 |
| | 7.1 |
| | 8.9 |
|
| 9,029 |
| | 40.5 |
| | 52.4 |
| | 8,112 |
| | 33.6 |
| | 45.2 |
|
Total allowance for credit losses | $ | 22,317 |
| | 100.0 | % | | 100.0 | % | | $ | 24,089 |
| | 100.0 | % | | 100.0 | % |
The following table presents activity in our allowance for credit losses, which includes reserves for unfunded commitments.
|
| | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2014 | | 2013 |
| | | |
Allowance at the beginning of period | $ | 24,089 |
| | $ | 27,751 |
|
Provision for loan losses | (1,500 | ) | | 2,000 |
|
Recoveries: | | | |
Consumer | | | |
Single family | 16 |
| | 75 |
|
Home equity | 90 |
| | 97 |
|
| 106 |
| | 172 |
|
Commercial | | | |
Commercial real estate | 56 |
| | — |
|
Construction/land development | 16 |
| | 70 |
|
Commercial business | 84 |
| | 112 |
|
| 156 |
| | 182 |
|
Total recoveries | 262 |
| | 354 |
|
Charge-offs: | | | |
Consumer | | | |
Single family | (111 | ) | | (721 | ) |
Home equity | (423 | ) | | (839 | ) |
| (534 | ) | | (1,560 | ) |
Commercial | | | |
Commercial real estate | — |
| | 197 |
|
Construction/land development | — |
| | (148 | ) |
| — |
| | 49 |
|
Total charge-offs | (534 | ) | | (1,511 | ) |
(Charge-offs), net of recoveries | (272 | ) | | (1,157 | ) |
Balance at end of period | $ | 22,317 |
| | $ | 28,594 |
|
The following table presents the composition of TDRs by accrual and nonaccrual status.
|
| | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | Accrual | | Nonaccrual | | Total |
| | | | | |
Consumer | | | | | |
Single family (1) | $ | 70,958 |
| | $ | 2,569 |
| | $ | 73,527 |
|
Home equity | 2,538 |
| | — |
| | 2,538 |
|
| 73,496 |
| | 2,569 |
| | 76,065 |
|
Commercial | | | | | |
Commercial real estate | 19,451 |
| | 2,784 |
| | 22,235 |
|
Multifamily | 3,145 |
| | — |
| | 3,145 |
|
Construction/land development | 5,907 |
| | — |
| | 5,907 |
|
Commercial business | 104 |
| | 117 |
| | 221 |
|
| 28,607 |
| | 2,901 |
| | 31,508 |
|
| $ | 102,103 |
| | $ | 5,470 |
| | $ | 107,573 |
|
|
| | | | | | | | | | | |
| At December 31, 2013 |
(in thousands) | Accrual | | Nonaccrual | | Total |
| | | | | |
Consumer | | | | | |
Single family (1) | $ | 70,304 |
| | $ | 4,017 |
| | $ | 74,321 |
|
Home equity | 2,558 |
| | 86 |
| | 2,644 |
|
| 72,862 |
| | 4,103 |
| | 76,965 |
|
Commercial | | | | | |
Commercial real estate | 19,620 |
| | 628 |
| | 20,248 |
|
Multifamily | 3,163 |
| | — |
| | 3,163 |
|
Construction/land development | 6,148 |
| | — |
| | 6,148 |
|
Commercial business | 112 |
| | — |
| | 112 |
|
| 29,043 |
| | 628 |
| | 29,671 |
|
| $ | 101,905 |
| | $ | 4,731 |
| | $ | 106,636 |
|
| |
(1) | Includes loan balances insured by the FHA or guaranteed by the VA of $19.1 million and $17.8 million, at March 31, 2014 and December 31, 2013, respectively. |
The Company had 203 loan relationships classified as troubled debt restructurings (“TDRs”) totaling $107.6 million at March 31, 2014 with related unfunded commitments of $51 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 above.
Delinquent loans and other real estate owned by loan type consisted of the following.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
(in thousands) | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due and Not Accruing | | 90 Days or More Past Due and Still Accruing | | Total Past Due Loans | | Other Real Estate Owned |
| | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Single family | $ | 7,547 |
| | $ | 4,117 |
| | $ | 6,942 |
| | $ | 37,852 |
| (1) | $ | 56,458 |
| | $ | 4,211 |
|
Home equity | 117 |
| | 314 |
| | 1,078 |
| | — |
| | 1,509 |
| | — |
|
| 7,664 |
| | 4,431 |
| | 8,020 |
| | 37,852 |
| | 57,967 |
| | 4,211 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | 208 |
| | — |
| | 12,192 |
| | — |
| | 12,400 |
| | 2,040 |
|
Construction/land development | — |
| | — |
| | — |
| | — |
| | — |
| | 5,838 |
|
Commercial business | — |
| | — |
| | 2,621 |
| | 10 |
| | 2,631 |
| | — |
|
| 208 |
| | — |
| | 14,813 |
| | 10 |
| | 15,031 |
| | 7,878 |
|
Total | $ | 7,872 |
| | $ | 4,431 |
| | $ | 22,833 |
| | $ | 37,862 |
| | $ | 72,998 |
| | $ | 12,089 |
|
| |
(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, 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 |
| | | | | | | | | | | |
Consumer loans | | | | | | | | | | | |
Single family | $ | 6,466 |
| | $ | 4,901 |
| | $ | 8,861 |
| | $ | 46,811 |
| (1) | $ | 67,039 |
| | $ | 5,246 |
|
Home equity | 375 |
| | 75 |
| | 1,846 |
| | — |
| | 2,296 |
| | — |
|
| 6,841 |
| | 4,976 |
| | 10,707 |
| | 46,811 |
| | 69,335 |
| | 5,246 |
|
Commercial loans | | | | | | | | | | | |
Commercial real estate | — |
| | — |
| | 12,257 |
| | — |
| | 12,257 |
| | 1,688 |
|
Construction/land development | — |
| | — |
| | — |
| | — |
| | — |
| | 5,977 |
|
Commercial business | — |
| | — |
| | 2,743 |
| | — |
| | 2,743 |
| | — |
|
| — |
| | — |
| | 15,000 |
| | — |
| | 15,000 |
| | 7,665 |
|
Total | $ | 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 Resources
Liquidity risk management is primarily intended to ensure we are able to maintain cash flows adequate to fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis, in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc., HomeStreet Capital ("HSC") and the Bank
have established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity.
HomeStreet, Inc., HomeStreet Capital and the Bank have different funding needs and sources of liquidity and separate regulatory capital requirements.
HomeStreet, Inc.
The main source of liquidity for HomeStreet, Inc. is proceeds from dividends from the Bank and HomeStreet Capital. In the past, we have raised longer-term funds through the issuance of senior debt and TruPS. Historically, the main cash outflows were distributions to shareholders, interest and principal payments to creditors and operating expenses. HomeStreet, Inc.’s ability to pay dividends to shareholders depends substantially on dividends received from the Bank.
HomeStreet Capital
HomeStreet Capital generates positive cash flow from its servicing fee income on the DUS portfolio, net of its costs to service the portfolio. Offsetting this are HomeStreet Capital's costs to purchase the servicing rights on new production from the Bank. Liquidity management and reporting requirements for DUS lenders such as HomeStreet Capital are set by Fannie Mae. HomeStreet Capital's liquidity management therefore consists of meeting Fannie Mae requirements and its own operational needs.
HomeStreet Bank
The Bank’s primary short-term sources of funds include deposits, advances from the FHLB, repayments and prepayments of loans, proceeds from the sale of loans and investment securities and interest from our loans and investment securities. We have also raised short-term funds through the sale of securities under agreements to repurchase. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit inflows and outflows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The primary liquidity ratio is defined as net cash, short-term investments and other marketable assets as a percent of net deposits and short-term borrowings. At March 31, 2014, our primary liquidity ratio was 36.3% compared to 26.9% at December 31, 2013.
At March 31, 2014 and December 31, 2013, the Bank had available borrowing capacity of $400.9 million and $228.5 million from the FHLB, and $357.9 million and $332.7 million from the Federal Reserve Bank of San Francisco, respectively.
Cash Flows
For the three months ended March 31, 2014, cash and cash equivalents increased $13.8 million, compared to a decrease of $6.6 million for the three months ended March 31, 2013. 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 three months ended March 31, 2014, net cash of $54.0 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 three months ended March 31, 2013, net cash of $167.8 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.
Cash flows from investing activities
The Company's investing activities primarily include available-for-sale securities and loans originated and held for investment. For the three months ended March 31, 2014, net cash of $11.8 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 three months ended March 31, 2013, net cash of $57.2 million was used in investing activities, as we used cash to fund higher balances of loans held for investment.
Cash flows from financing activities
The Company's financing activities are primarily related to customer deposits and net proceeds from the FHLB. For the three months ended March 31, 2014, net cash of $56.0 million was provided by financing activities, primarily driven by a $160.5 million growth in deposits, partially offset by repayments of FHLB advances of $100.0 million. For the three months ended March 31, 2013, net cash of $117.1 million was used in financing activities. During the three months ended March 31, 2013, the decline of customer deposits due to the maturity of certificates of deposit was partially offset by increased transaction and savings deposits. We had net repayments of $75.5 million of FHLB advances resulting from lower average balances of loans held for sale, as we use FHLB advances to fund these loans.
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 March 31, 2014, the Bank's capital ratios continued to meet the regulatory capital category of “well capitalized” as defined by the FDIC’s prompt corrective action rules.
The following tables present the Bank’s capital amounts and ratios.
|
| | | | | | | | | | | | | | | | | | | | |
| At March 31, 2014 |
| Actual | | For Minimum Capital Adequacy Purposes | | To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions |
(in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | |
Tier 1 leverage capital (to average assets) | $ | 296,076 |
| | 9.94 | % | | $ | 119,152 |
| | 4.0 | % | | $ | 148,940 |
| | 5.0 | % |
Tier 1 risk-based capital (to risk-weighted assets) | 296,076 |
| | 13.99 | % | | 84,665 |
| | 4.0 | % | | 126,998 |
| | 6.0 | % |
Total risk-based capital (to risk-weighted assets) | 318,393 |
| | 15.04 | % | | 169,330 |
| | 8.0 | % | | 211,663 |
| | 10.0 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| At December 31, 2013 |
| Actual | | For Minimum Capital Adequacy Purposes | | To Be Categorized As “Well Capitalized” Under Prompt Corrective Action Provisions |
(in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| | | | | | | | | | | |
Tier 1 leverage capital (to average assets) | $ | 291,673 |
| | 9.96 | % | | $ | 117,182 |
| | 4.0 | % | | $ | 146,478 |
| | 5.0 | % |
Tier 1 risk-based capital (to risk-weighted assets) | 291,673 |
| | 14.12 | % | | 81,708 |
| | 4.0 | % | | 122,562 |
| | 6.0 | % |
Total risk-based capital (to risk-weighted assets) | 315,762 |
| | 15.28 | % | | 163,415 |
| | 8.0 | % | | 204,269 |
| | 10.0 | % |
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% and a total risk-based ratio of at least 8.0%. In addition to the preceding requirements, both the Company and the Bank are required to establish a “conservation buffer”, consisting of common equity Tier 1 capital,which is at least 2.5% above each of the preceding common equity Tier 1 capital 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- 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 as of the effective date.
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 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk Management
For a discussion of the quantitative and qualitative disclosures about market risk, see Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk, Market Risk Management in our 2013 Annual Report on Form 10-K.
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ITEM 4 | CONTROLS 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 March 31, 2014.
Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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 loss based on information known at this time.
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 risks faced by us described below and elsewhere in this 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. Recent increases in interest rates has reduced our mortgage revenues in large part by drastically reducing the market for refinancings, which has negatively impacted our noninterest income and, to a lesser extent, our net interest income, as 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.
In 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. Future 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 of new home purchases and refinancing. These factors have and may in the future further negatively affect our mortgage loan origination volume and adversely affect our noninterest income.
Current economic conditions continue to pose significant challenges for us and could adversely affect our financial condition and results of operations.
Despite recent improvements in the economy and increases in interest rates, we are continuing to operate in an uncertain economic environment, including sluggish national and global conditions, accompanied by high unemployment and very low interest rates. Financial institutions continue to be affected by changing conditions in the real estate and financial markets, along with an arduous regulatory climate. Recent improvements in the housing 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 asset values, all of which would adversely affect our financial condition and results of operations.
In particular, we may face risks related to market conditions that may negatively impact our business opportunities and plans, such as:
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• | Market 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; |
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• | Regulatory scrutiny of the industry could increase, leading to harsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the plaintiff’s bar; |
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• | The 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; |
| |
• | Challenges in accurately estimating the ability of our borrowers to repay their loans if our forecasts of economic conditions and other economic predictions are not accurate; |
| |
• | Further erosion in the fiscal condition of the U.S. Treasury that may lead to new taxes limiting the ability of the Company to pursue growth and return profits to shareholders; and |
| |
• | Uncertainty regarding future political developments and fiscal policy. |
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.
The proposed restructuring or replacement of Fannie Mae and Freddie Mac and changes in existing government-sponsored and federal mortgage programs could negatively 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.
One of the leading proposals being debated in Congress would eliminate Fannie Mae and Freddie Mac and replace them with a government-regulated cooperative authorized to issue mortgage-backed securities with a 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 restricts the current loan purchase programs of those entities may 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 $158.7 million at March 31, 2014. Changes in the policies and operations of Fannie Mae and Freddie Mac 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.
In addition, our ability 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 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 cash flows.
We are subject to extensive regulation that has in the past restricted our activities and could further restrict our activities in the future, including capital distributions, and imposes 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. Examination findings by the regulatory agencies may result in adverse consequences to the Company or the Bank. Further, 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 and may have a material negative effect on us.
The Dodd-Frank Act significantly changed the laws as they apply to financial institutions and revised and expanded 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 were effective immediately, though many are being phased in gradually. In addition, the statute in many instances calls for regulatory rulemaking to implement its provisions, not all of which 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 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 Item 1 of our Form 10-K for the year ended December 31, 2013 previously filed with the SEC.
We will be subject to more stringent capital requirements.
In July 2013, 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 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 certain 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 servicing 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 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. 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.
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,
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• | 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. |
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• | 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. |
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• | 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 on decisions handed down by courts in Oregon, we and other servicers of MERS-related loans have elected to foreclose 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/or if the Washington or other state courts where we do significant business issue a similar decision 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 operations. |
These or other judicial decisions or legislative actions, if upheld or implemented, 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, 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 grow 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, 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. While the full impact of CFPB's activities on our business is still unknown, we anticipate that CFPB actions 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 Item 1 of our Form 10-K for the year ended December 31, 2013 previously filed with the SEC.
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.
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.
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. New capital rules will impose more stringent capital requirements to maintain “well capitalized” status which may 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 dividend policy and the board of directors has determined that it is in the best interests of the shareholders not to declare a dividend to be paid in the second quarter of 2014. As such, our dividends are not regular and may be subject to restriction due to cash flow limitations, capital requirements, capital needs of the business or other 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 myriad of issues, including:
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• | 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; |
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• | 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; |
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• | 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; |
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• | Changes in government-sponsored enterprises and their ability to insure or 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; |
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• | 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; |
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• | 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 |
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• | 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, 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 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:
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• | Expenses related to hiring and training a large number of new employees; |
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• | Higher compensation costs relative to production in the initial months of new employment; |
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• | Increased compliance costs; |
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• | Costs associated with opening new offices that may be needed to provide for the new employees; |
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• | New state laws and regulations to which we have not been previously subject; |
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• | Diversion of management’s attention from the daily operations of other aspects of the business; |
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• | The potential of litigation related from prior employers related to the portability of their employees; |
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• | The potential loss of other key employees. |
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.
Federal, state and local consumer lending laws may restrict our ability to originate or increase our risk of liability with respect to certain mortgage loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended 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 insurance to borrowers, repeatedly refinancing loans, 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 create the potential for liability 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 certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
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 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:
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• | 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; |
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• | Declining mortgage servicing fee revenues because we recognize these revenues only upon collection; |
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• | Increasing loan servicing costs; |
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• | Declining fair value on our mortgage servicing rights; and |
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• | 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, 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 related to the acquired branches to our books. Any future acquisitions we may make will have a similar result. Although we review loan quality as part of our due 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.
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.
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 PCs, and other mobile 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 become 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 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. In addition, some of our primary 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 losses, 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 perform critical functions in a timely 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.
The failure to protect our customers’ confidential information and privacy could adversely affect our business.
We are subject to state and federal privacy regulations and confidentiality obligations that, among other things restrict the use and dissemination of, and access to, the information that we produce, store or maintain in the course of our business. We also 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:
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• | training and educating our employees and independent contractors regarding our obligations relating to confidential information; |
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• | monitoring changes in state or federal privacy and compliance requirements; |
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• | drafting and enforcing appropriate contractual provisions into any contract that raises proprietary and confidentiality issues; |
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• | maintaining secure storage facilities and protocols for tangible records; |
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• | physically and technologically securing access to electronic information; and |
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• | 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.
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 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 Internet 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.
In addition, because of the demand for technology-driven products, banks are increasingly contracting with third party vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly transaction, strategic, reputation, cybersecurity and compliance risks. There can be no assurance that we will be able to successfully manage the risks associated with our increased dependency on technology.
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, 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, 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 FHLB may require us to recognize an impairment charge with respect to such holdings. The FHLB is currently subject to a Consent Order issued by its primary regulator, the Federal Housing Finance Agency.
A change in federal monetary policy could adversely impact our mortgage banking revenues.
The 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 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 has 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.
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 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.
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 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 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 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 do so. Currently, we only purchase loans from WMS Series LLC, an affiliated business arrangement with certain Windermere real estate brokerage franchise owners.
New CFPB regulations which took effect in January 2014 may negatively impact our residential mortgage loan business and compliance risk.
In January 2014 new federal regulations promulgated by the Consumer Financial Protection Bureau ("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 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.
Efforts to integrate acquisitions could consume significant resources 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 integration of the acquired assets or entity into HomeStreet or HomeStreet Bank, including risks that arise after the transaction is completed. These risks include:
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• | Difficulties in integrating the operations, technologies, and personnel of the acquired companies; |
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• | Difficulties in implementing internal controls over financial reporting; |
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• | Diversion of management's attention from normal daily operations of the business; |
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• | 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; |
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• | Potential responsibility for the liabilities of acquired businesses; |
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• | Inability to maintain our internal standards, controls, procedures and policies at the acquired companies or businesses; and |
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• | 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. Further, even if we successfully address these factors, we may nonetheless experience customer losses, or we may fail to grow the acquired businesses as we intend.
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:
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• | a classified board of directors so that only approximately one third of our board of directors is elected each year; |
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• | elimination of cumulative voting in the election of directors; |
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• | procedures for advance notification of shareholder nominations and proposals; |
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• | the ability of our board of directors to amend our bylaws without shareholder approval; and |
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• | 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 2 | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
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ITEM 3 | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4 | MINE SAFETY DISCLOSURE |
Not applicable.
Not applicable.
EXHIBIT INDEX
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Exhibit | | |
Number | | Description |
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31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) |
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31.2 | | Certification of Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(1) |
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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) |
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101.INS | | XBRL Instance Document(3)(4) |
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101.SCH | | XBRL Taxonomy Extension Schema Document(3) |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document(3) |
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101.DEF | | XBRL Taxonomy Extension Label Linkbase Document(3) |
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101.LAB | | XBRL Taxonomy Extension Presentation Linkbase Document(3) |
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101.PRE | | XBRL Taxonomy Extension Definitions Linkbase Document(3) |
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(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. |
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(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. |
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(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 March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013, (ii) the Consolidated Statements of Financial Condition as of March 31, 2014, and December 31, 2013, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three months ended March 31, 2014 and 2013, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013, and (v) the Notes to Consolidated Financial Statements. |
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 May 8, 2014.
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| HomeStreet, Inc. |
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| By: | /s/ Mark K. Mason |
| | Mark K. Mason |
| | President and Chief Executive Officer |
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| HomeStreet, Inc. |
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| By: | /s/ Cory D. Stewart |
| | Cory D. Stewart |
| | Executive Vice President and Chief Accounting Officer |
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