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HMST > SEC Filings for HMST > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for HOMESTREET, INC.


8-Aug-2013

Quarterly Report


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

FORWARD-LOOKING STATEMENTS

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

• 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 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, and 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

• competition.

We do not intend to update any of the forward-looking statements after the date of this report, whether to conform these statements to actual results or changes in our expectations or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.

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 Six
                                                           At or for the Quarter Ended                                        Months Ended
(dollars in thousands,            Jun. 30,         Mar. 31,         Dec. 31,         Sept. 30,         Jun. 30,         Jun. 30,         Jun. 30,
except share data)                  2013             2013             2012             2012              2012             2013             2012

Income statement data (for
the period ended):
Net interest income            $     17,415     $     15,235     $     16,591     $      16,520     $     14,799     $     32,650     $     27,631
Provision for loan losses               400            2,000            4,000             5,500            2,000            2,400            2,000
Noninterest income                   57,556           58,943           71,932            69,091           56,850          116,499           96,998
Noninterest expense                  56,712           55,799           55,966            45,934           46,954          112,511           81,691
Net income before taxes              17,859           16,379           28,557            34,177           22,695           34,238           40,938
Income tax expense                    5,791            5,439            7,060            12,186            4,017           11,230            2,301
Net income                     $     12,068     $     10,940     $     21,497     $      21,991     $     18,678     $     23,008     $     38,637
Basic earnings per common
share (1)                      $       0.84     $       0.76     $       1.50     $        1.53     $       1.31     $       1.60     $       3.15
Diluted earnings per common
share (1)                      $       0.82     $       0.74     $       1.46     $        1.50     $       1.26     $       1.56     $       3.03
Common shares outstanding
(1)                              14,406,676       14,400,206       14,382,638        14,354,972       14,325,214       14,406,676       14,325,214
Weighted average common
shares:
Basic                            14,376,580       14,359,691       14,371,120        14,335,950       14,252,120       14,368,135       12,272,342
Diluted                          14,785,481       14,804,129       14,714,166        14,699,032       14,824,064       14,794,805       12,772,198
Shareholders' equity per
share                          $      18.62     $      18.78     $      18.34     $       16.82     $      15.05     $      18.62     $      15.05
Financial position (at
period end):
Cash and cash equivalents      $     21,645     $     18,709     $     25,285     $      22,051     $     75,063     $     21,645     $     75,063
Investment securities
available for sale                  538,164          415,238          416,329           414,050          415,610          538,164          415,610
Loans held for sale                 471,191          430,857          620,799           535,908          415,189          471,191          415,189
Loans held for investment,
net                               1,416,439        1,358,982        1,308,974         1,268,703        1,235,253        1,416,439        1,235,253
Mortgage servicing rights           137,385          111,828           95,493            81,512           78,240          137,385           78,240
Other real estate owned              11,949           21,664           23,941            17,003           40,618           11,949           40,618
Total assets                      2,776,124        2,508,251        2,631,230         2,511,269        2,427,203        2,776,124        2,427,203
Deposits                          1,963,123        1,934,704        1,976,835         1,981,814        1,904,749        1,963,123        1,904,749
FHLB advances                       409,490          183,590          259,090           131,597           65,590          409,490           65,590
Repurchase agreements                     -                -                -                 -          100,000                -          100,000
Shareholders' equity                268,321          270,405          263,762           241,499          215,614          268,321          215,614
Financial position
(averages):
Investment securities
available for sale             $    512,475     $    422,761     $    418,261     $     411,916     $    431,875     $    467,865     $    406,502
Loans held for investment         1,397,219        1,346,100        1,297,615         1,270,652        1,304,740        1,371,801        1,321,646
Total interest-earning
assets                            2,321,195        2,244,563        2,244,727         2,187,059        2,143,380        2,283,090        2,116,785
Total interest-bearing
deposits                          1,527,732        1,543,645        1,609,075         1,625,437        1,640,159        1,535,644        1,672,764
FHLB advances                       307,296          147,097          122,516           112,839           79,490          227,639           68,704
Repurchase agreements                10,913                -              558            18,478           52,369            5,487           26,185
Total interest-bearing
liabilities                       1,917,098        1,752,599        1,794,006         1,818,611        1,833,875        1,835,302        1,829,510
Shareholders' equity                280,783          274,355          262,163           231,361          207,344          277,588          174,070


Summary Financial Data (continued)
                                                                                                   At or for the Six
                                            At or for the Quarter Ended                               Months Ended
(dollars in
thousands, except       Jun. 30,      Mar. 31,        Dec. 31,      Sept. 30,      Jun. 30,     Jun. 30,        Jun. 30,
share data)               2013          2013            2012          2012           2012         2013            2012

Financial
performance:
Return on average
common shareholders'
 equity (2)               17.19 %       15.95 %         32.80 %        38.02 %       36.03 %      16.58 %         44.39 %
Return on average
assets                     1.86 %        1.75 %          3.46 %         3.60 %        3.15 %       1.81 %          3.30 %
Net interest
 margin (3)                3.10 %        2.81 % (4)      3.06 %         3.12 %        2.85 %       2.96 % (4)      2.68 %
Efficiency ratio (5)      75.65 %       75.22 %         63.22 %        53.65 %       65.53 %      75.44 %         65.55 %
Asset quality:
Allowance for credit
losses                 $ 27,858      $ 28,594        $ 27,751      $  27,627      $ 27,125     $ 27,858        $ 27,125
Allowance for loan
losses/total loans         1.92 %        2.05 %          2.06 %         2.12 %        2.13 %       1.92 %          2.13 %
Allowance for loan
losses/nonaccrual
loans                     93.11 %       88.40 %         92.20 %        71.80 %       81.28 %      93.11 %         81.28 %
Total nonaccrual
loans (6)              $ 29,701      $ 32,133        $ 29,892      $  38,247      $ 33,107     $ 29,701        $ 33,107
Nonaccrual
loans/total loans          2.06 %        2.32 %          2.24 %         2.95 %        2.62 %       2.06 %          2.62 %
Other real estate
owned                  $ 11,949      $ 21,664        $ 23,941      $  17,003      $ 40,618     $ 11,949        $ 40,618
Total nonperforming
assets                 $ 41,650      $ 53,797        $ 53,833      $  55,250      $ 73,725     $ 41,650        $ 73,725
Nonperforming
assets/total assets        1.50 %        2.14 %          2.05 %         2.20 %        3.04 %       1.50 %          3.04 %
Net charge-offs        $  1,136      $  1,157        $  3,876      $   4,998      $ 10,277     $  2,293        $ 17,675
Regulatory capital
ratios for the Bank:
Tier 1 leverage
capital (to average
assets)                   11.89 %       11.97 %         11.78 %        10.86 %       10.20 %      11.89 %         10.20 %
Tier 1 risk-based
capital (to
risk-weighted
assets)                   17.89 %       19.21 %         18.05 %        16.76 %       15.83 %      17.89 %         15.83 %
Total risk-based
capital (to
risk-weighted
assets)                   19.15 %       20.47 %         19.31 %        18.01 %       17.09 %      19.15 %         17.09 %
Other data:
Full-time equivalent
employees (ending)        1,309         1,218           1,099            998           913        1,309             913

(1) Share and per share data shown after giving effect to the 2-for-1 forward stock splits effective March 6, 2012 and November 5, 2012.

(2) Net earnings available to common shareholders divided by average common shareholders' equity.

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

(4) 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 and 3.08% for the six months ended June 30, 2013.

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

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


                                                                                                          At or for the Six
                                            At or for the Quarter Ended                                      Months Ended
                     Jun. 30,         Mar. 31,        Dec. 31,        Sept. 30,       Jun. 30,         Jun. 30,        Jun. 30,
(in thousands)         2013             2013            2012            2012            2012             2013            2012

SUPPLEMENTAL
DATA:
Loans serviced
for others
Single family     $ 10,404,613     $  9,701,396     $ 8,870,688     $ 8,109,669     $ 7,468,982     $ 10,404,613     $ 7,468,982
Multifamily            720,368          737,007         727,118         760,820         772,473          720,368         772,473
Other                   51,058           52,825          53,235          53,617          56,840           51,058          56,840
Total loans
serviced for
others            $ 11,176,039     $ 10,491,228     $ 9,651,041     $ 8,924,106     $ 8,298,295     $ 11,176,039     $ 8,298,295

Loan production
volumes:
Single family
mortgage closed
loans (1) (2)     $  1,307,286     $  1,192,156     $ 1,518,971     $ 1,368,238     $ 1,068,656     $  2,499,442     $ 1,780,958
Single family
mortgage interest
rate lock
commitments(2)       1,423,290        1,035,822       1,254,954       1,313,182       1,303,390        2,459,112       2,218,531
Single family
mortgage loans
sold(2)              1,229,686        1,360,344       1,434,947       1,238,879         962,704        2,590,030       1,497,015
Multifamily
mortgage
originations            14,790           49,119          40,244          20,209          35,908           63,909          51,621
Multifamily
mortgage loans
sold                    15,386           50,587          33,689          26,515          27,178           65,973          58,601

(1) Represents single family mortgage closed loan volume designated for sale during each respective period.

(2) Includes loans originated by Windermere Mortgage Series Services LLC ("WMS") and purchased by HomeStreet, Inc.


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 2012 Annual Report on Form 10-K.

Management's Overview of Second Quarter 2013 Financial Performance

We are a 92-year-old diversified financial services company headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. (the "Company") is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides residential 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, loans for residential and commercial real estate construction, 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, 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 known as Windermere Mortgage Services Series LLC ("WMS LLC").

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

At June 30, 2013, we had total assets of $2.78 billion, net loans held for investment of $1.42 billion, deposits of $1.96 billion and shareholders' equity of $268.3 million.

On April 22, 2013, the Company paid a common stock dividend of $0.11 per share payable to shareholders of record as of April 11, 2013. On July 29, 2013, HomeStreet, Inc.'s announced that the Company's board of directors approved a special cash dividend of $0.11 per common share, payable on August 15, 2013 to shareholders of record as of the close of business on August 5, 2013.

On July 9, 2013, the Company announced the execution of a definitive agreement for HomeStreet Bank to purchase two AmericanWest Bank branches in Western Washington. As of June 30, 2013, the deposits were approximately $36.5 million for the two branches combined. Additionally, HomeStreet is acquiring loans with these two branches totaling approximately $2.15 million as of June 30, 2013. This transaction is subject to regulatory approval and is anticipated to close in the fourth quarter of 2013.

On July 26, 2013, the Company announced that it has entered into two separate merger agreements pursuant to which HomeStreet Bank will acquire Seattle-based Fortune Bank for approximately $27.0 million, and Yakima National Bank, based in Yakima, Wash., and parent holding company, YNB Financial Services Corp. ("Yakima National"), for approximately $10.3 million. These acquisitions, both of which are subject to regulatory approval and the approval of their respective shareholders, are anticipated to close in the fourth quarter of 2013.

Results for the second quarter of 2013 as compared to the same quarter in the prior year reflect the growth of our mortgage banking business and investments to expand our commercial and consumer business. Since June 2012, we have increased our lending capacity by adding loan officers and operations personnel in single family lending, commercial real estate lending, and commercial business lending. We opened four mortgage lending offices, a new commercial lending office and three new de novo bank branches. In addition, we expanded our range of services by adding a new private banking department.

As a result of rising interest rates, the mortgage industry has experienced lower industry application volume and a shift in composition to a purchase mortgage-dominated market. During the quarter, the purchase mortgage market has become substantially more competitive as lenders try to secure a reliable flow of purchase mortgage production.

The Company has historically pursued a mortgage loan origination strategy focused on the home purchase market, while retaining its customers through refinancing their mortgages as well as through repeat purchase transactions. Consequently, our

1 DUS® is a registered trademark of Fannie Mae 54


originations have historically had a higher composition of purchase mortgages than many peer institutions. We expect to grow our purchase mortgage and overall market share as total mortgage market originations decline and the mortgage origination market continues to transition away from one dominated by mortgage refinancing, largely due to an increase in interest rates that has made refinancing less attractive in recent months. We continue to focus on the purchase mortgage market by offering incentive pricing, developing additional targeted shared marketing relationships with builders, real estate agents and other real estate professionals and hiring loan officers who have proven track records in generating home purchase mortgage loans.

Financial Performance

                                At or for the Three Months                              At or for the Six Months
                                      Ended June 30,               Percent Change            Ended June 30,            Percent Change
 (in thousands, except
per share data and
ratios)                           2013               2012          2013 vs. 2012          2013             2012        2013 vs. 2012

Selected statement of
operations data
Total net revenue           $      74,971       $      71,649             5  %       $    149,149       $ 124,629            20  %
Total noninterest expense          56,712              46,954            21               112,511          81,691            38
Provision for credit
losses                                400               2,000           (80 )               2,400           2,000            20
Income tax expense                  5,791               4,017            44                11,230           2,301           388
Net income                         12,068              18,678           (35 )              23,008          38,637           (40 )

Financial performance
Diluted earnings per
common share                $        0.82       $        1.26           (35 )%       $       1.56       $    3.03           (49 )%
Return on average common
shareholders' equity                17.19 %             36.03 %          NM                 16.58 %         44.39 %          NM
Return on average assets             1.86 %              3.15 %          NM                  1.81 %          3.30 %          NM
Net interest margin                  3.10 %              2.85 %          NM                  2.96 %          2.68 %          NM

Capital ratios (Bank
only)
Tier 1 leverage capital
(to average assets)                 11.89 %             10.20 %          NM                 11.89 %         10.20 %          NM
Tier 1 risk-based capital
(to risk-weighted assets)           17.89 %             15.83 %          NM                 17.89 %         15.83 %          NM
Total risk-based capital
(to risk-weighted assets)           19.15 %             17.09 %          NM                 19.15 %         17.09 %          NM
NM = Not meaningful

For the second quarter of 2013, net income was $12.1 million, or $0.82 per diluted share, compared with $18.7 million, or $1.26 per diluted share a year ago. Return on equity for the second quarter of 2013 (on an annualized basis) was 17.19%, compared to 36.03% for the same period last year, while return on average assets for the second quarter of 2013 (on an annualized basis) was 1.86%, compared to 3.15% for the same period a year ago.

The decrease in net income as compared to same quarter in the prior year was primarily driven by investments in the expansion of our commercial and consumer business and reductions in servicing income, which was offset by the growth of our mortgage banking business, as described below.

Net revenue increased 4.6% to $75.0 million from the second quarter of 2012, primarily driven by increased net gain on mortgage loan origination and sale activities, which was mainly the result of increased single family loan production volume driven by an increase in the number of mortgage loan . . .

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