Edgar Filing: HomeStreet, Inc.

HMST-2013.6.30-10Q

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: June 30, 2013

Commission file number: 001-35424

________________________________

HOMESTREET, INC.

(Exact name of registrant as specified in its charter)

________________________________



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

601 Union Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

(Zip Code)

(206) 623-3050

(Registrant’s telephone number, including area code)

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

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 ¨

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



Large Accelerated Filer	¨	Accelerated Filer	¨

Non-accelerated Filer	x	Smaller Reporting Company	¨

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

The number of outstanding shares of the registrant's common stock as of July 31, 2013 was 14,419,124.



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at June 30, 2013, and December 31, 2012		4

Interim Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		5

Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012		6

Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012		7

Interim Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012		8

Notes to Interim Consolidated Financial Statements (Unaudited)

Note 1 – Summary of Significant Accounting Policies		10

Note 2 – Significant Risks and Uncertainties		10

Note 3 – Investment Securities Available for Sale		11

Note 4 – Loans and Credit Quality		14

Note 5 – Deposits		27

Note 6 – Derivatives and Hedging Activities		28

Note 7 – Mortgage Banking Operations		31

Note 8 – Commitments, Guarantees, and Contingencies		36

Note 9 – Fair Value Measurement		37

Note 10 – Earnings Per Share		46

Note 11 – Business Segments		46

Note 12 – Subsequent Events		48

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

Forward-Looking Statements		49

Summary Financial Data		51

Management’s Overview of Financial Performance		54

Critical Accounting Policies and Estimates		56

Results of Operations		57

Review of Financial Condition		65

Business Segments		68

Off-Balance Sheet Arrangements		69

Enterprise Risk Management		70

Credit Risk Management		70

Liquidity and Capital Management		74

Accounting Developments		77




ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	78

ITEM 4	CONTROLS AND PROCEDURES	78

PART II – OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	79

ITEM 1A	RISK FACTORS	79

ITEM 6	EXHIBITS	92

SIGNATURES		93

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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



(in thousands, except share data)	June 30, 2013			December 31, 2012

ASSETS
Cash and cash equivalents (includes interest-bearing instruments of $7,568 and $12,414)	$	21,645		$	25,285
Investment securities available for sale	538,164			416,329
Loans held for sale (includes $459,981 and $607,578 carried at fair value)	471,191			620,799
Loans held for investment (net of allowance for loan losses of $27,655 and $27,561)	1,416,439			1,308,974
Mortgage servicing rights (includes $128,146 and $87,396 carried at fair value)	137,385			95,493
Other real estate owned	11,949			23,941
Federal Home Loan Bank stock, at cost	35,708			36,367
Premises and equipment, net	18,362			15,232
Accounts receivable and other assets	125,281			88,810
Total assets	$	2,776,124		$	2,631,230
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	1,963,123		$	1,976,835
Federal Home Loan Bank advances	409,490			259,090
Accounts payable and other liabilities	73,333			69,686
Long-term debt	61,857			61,857
Total liabilities	2,507,803			2,367,468
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, 14,406,676 shares and 14,382,638 shares	511			511
Additional paid-in capital	91,054			90,189
Retained earnings	185,300			163,872
Accumulated other comprehensive income (loss)	(8,544		)	9,190
Total shareholders' equity	268,321			263,762
Total liabilities and shareholders' equity	$	2,776,124		$	2,631,230

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except share data)	2013			2012			2013		2012

Interest income:
Loans	$	17,446		$	17,351		$	35,495	$	33,832
Investment securities available for sale	2,998			2,449			5,657		4,688
Other	24			56			54		192
	20,468			19,856			41,206		38,712
Interest expense:
Deposits	2,367			4,198			5,856		9,077
Federal Home Loan Bank advances	387			535			680		1,209
Securities sold under agreements to repurchase	11			50			11		50
Long-term debt	283			271			1,999		736
Other	5			3			10		9
	3,053			5,057			8,556		11,081
Net interest income	17,415			14,799			32,650		27,631
Provision for credit losses	400			2,000			2,400		2,000
Net interest income after provision for credit losses	17,015			12,799			30,250		25,631
Noninterest income:
Net gain on mortgage loan origination and sale activities	52,424			46,799			106,379		76,347
Mortgage servicing income	2,183			7,091			5,255		14,964
Income from Windermere Mortgage Services Series LLC	993			1,394			1,613		2,560
Loss on debt extinguishment	—			(939		)	—		(939		)
Depositor and other retail banking fees	761			771			1,482		1,506
Insurance commissions	190			177			370		359
Gain on sale of investment securities available for sale (includes unrealized gains reclassified from accumulated other comprehensive income of $238 and $911 for the three months ended June 30, 2013 and 2012, and $190 and $952 for the six months ended June 30, 2013 and 2012, respectively)	238			911			190		952
Other	767			646			1,210		1,249
	57,556			56,850			116,499		96,998
Noninterest expense:
Salaries and related costs	38,579			28,224			73,641		49,575
General and administrative	10,270			6,832			21,200		12,156
Legal	599			724			1,210		1,159
Consulting	763			322			1,459		677
Federal Deposit Insurance Corporation assessments	143			717			710		1,957
Occupancy	3,381			2,092			6,183		3,881
Information services	3,574			1,994			6,570		3,717
Other real estate owned expense and other adjustments	(597		)	6,049			1,538		8,569
	56,712			46,954			112,511		81,691
Income before income taxes	17,859			22,695			34,238		40,938
Income tax expense (includes reclassification adjustments of $83 and $333 for the three months ended June 30, 2013 and 2012, and $66 and $333 for the six months ended June 30, 2013 and 2012, respectively)	5,791			4,017			11,230		2,301
NET INCOME	$	12,068		$	18,678		$	23,008	$	38,637
Basic income per share	$	0.84		$	1.31		$	1.60	$	3.15
Diluted income per share	$	0.82		$	1.26		$	1.56	$	3.03
Basic weighted average number of shares outstanding	14,376,580			14,252,120			14,368,135		12,272,342
Diluted weighted average number of shares outstanding	14,785,481			14,824,064			14,794,805		12,772,198

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Net income	$	12,068		$	18,678		$	23,008		$	38,637
Other comprehensive income (loss), net of tax:
Unrealized (loss) gain on securities:
Unrealized holding (loss) gain arising during the period (net of tax (benefit) expense of $(7,737) and $1,571 for the three months ended June 30, 2013 and 2012 and $(9,483) and $1,237 for the six months ended June 30, 2013 and 2012, respectively)	(14,367		)	3,492			(17,610		)	2,582
Reclassification adjustment included in net income (net of tax expense of $83 and $333 for the three months ended June 30, 2013 and 2012, and $66 and $333 for the six months ended June 30, 2013 and 2012, respectively)	(155		)	(578		)	(124		)	(619		)
Other comprehensive income (loss)	(14,522		)	2,914			(17,734		)	1,963
Comprehensive income (loss)	$	(2,454	)	$	21,592		$	5,274		$	40,600

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



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

Balance, January 1, 2012	5,403,498	$	511	$	31	$	81,746		$	4,119		$	86,407
Net income	—	—		—		38,637			—			38,637
Share-based compensation	—	—		2,216		—			—			2,216
Common stock issued	8,921,716	—		86,390		—			—			86,390
Other comprehensive income	—	—		—		—			1,963			1,963
Balance, June 30, 2012	14,325,214	$	511	$	88,637	$	120,383		$	6,082		$	215,613

Balance, January 1, 2013	14,382,638	$	511	$	90,189	$	163,872		$	9,190		$	263,762
Net income	—	—		—		23,008			—			23,008
Dividends declared	—	—		—		(1,580		)	—			(1,580		)
Share-based compensation	—	—		783		—			—			783
Common stock issued	24,038	—		82		—			—			82
Other comprehensive loss	—	—		—		—			(17,734		)	(17,734		)
Balance, June 30, 2013	14,406,676	$	511	$	91,054	$	185,300		$	(8,544	)	$	268,321

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

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(in thousands)	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	23,008		$	38,637
Adjustments to reconcile net income to net cash used in operating activities:
Amortization/accretion of discount/premium on loans held for investment, net of additions	190			(554		)
Amortization/accretion of discount/premium on investment securities	3,505			2,576
Amortization of intangibles	16			52
Amortization of mortgage servicing rights	913			953
Provision for credit losses	2,400			2,000
Provision for losses on other real estate owned	339			8,332
Depreciation on premises and equipment	2,021			1,121
Fair value adjustment of loans held for sale	32,661			(14,129		)
Fair value adjustment of foreclosed loans transferred to other real estate owned	(218		)	(490		)
Origination of mortgage servicing rights	(36,168		)	(18,817		)
Change in fair value of mortgage servicing rights	(6,628		)	16,964
Net gain on sale of investment securities	(190		)	(952		)
Net gain on sale of other real estate owned	(400		)	(237		)
Net deferred income tax expense (benefit)	10,883			(13,222		)
Share-based compensation expense	624			2,216
Origination of loans held for sale	(2,899,308		)	(1,835,017		)
Proceeds from sale of loans held for sale	3,016,255			1,584,367
Cash used by changes in operating assets and liabilities:
Increase in accounts receivable and other assets	(33,328		)	(49,644		)
(Decrease) increase in accounts payable and other liabilities	(1,457		)	28,948
Net cash provided by (used in) operating activities	115,118			(246,896		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(221,106		)	(223,483		)
Proceeds from sale of investment securities	50,594			119,539
Principal repayments and maturities of investment securities	18,079			19,290
Proceeds from sale of other real estate owned	14,697			18,919
Mortgage servicing rights purchased from others	(10		)	(59		)
Capital expenditures related to other real estate owned	(22		)	(63		)
Origination of loans held for investment and principal repayments, net	(113,428		)	38,883
Property and equipment purchased	(5,151		)	(4,778		)
Net cash used in investing activities	(256,347		)	(31,752		)



	Six Months Ended June 30,
(in thousands)	2013			2012

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits, net	$	(13,711	)	$	(105,006	)
Proceeds from Federal Home Loan Bank advances	3,264,946			525,521
Repayment of Federal Home Loan Bank advances	(3,114,546		)	(517,850		)
Proceeds from securities sold under agreements to repurchase	159,790			293,500
Repayment of securities sold under agreements to repurchase	(159,790		)	(193,500		)
Proceeds from Federal Home Loan Bank stock repurchase	659			—
Proceeds from stock issuance, net	82			87,744
Excess tax benefits related to the exercise of stock options	159			—
Net cash provided by financing activities	137,589			90,409
NET DECREASE IN CASH AND CASH EQUIVALENTS	(3,640		)	(188,239		)
CASH AND CASH EQUIVALENTS:
Beginning of year	25,285			263,302
End of period	$	21,645		$	75,063
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	21,524		$	11,081
Federal and state income taxes	6,714			3,450
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	6,225			27,807
Ginnie Mae loans recorded with the right to repurchase, net	$	2,127		$	2,516

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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“2012 Annual Report on Form 10-K”).

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

NOTE 2–SIGNIFICANT RISKS AND UNCERTAINTIES:

Regulatory Agreements

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

On December 27, 2012, the Bank had been notified by the Federal Deposit Insurance Corporation (“FDIC”) and the Washington State Department of Financial Institutions (“WDFI”) that the Bank had taken appropriate corrective actions to address the memorandum of understanding ("MOU") in place since March 26, 2012, and consequently the Bank's MOU was terminated effective December 27, 2012. The Bank is no longer considered a “troubled institution” and is considered “well-capitalized” within the meaning of the FDIC's prompt corrective action rules.

NOTE 3–INVESTMENT SECURITIES AVAILABLE FOR SALE:

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



	At June 30, 2013
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	124,240	$	4	$	(3,305	)	$	120,939
Commercial	13,564		328		—			13,892
Municipal bonds	152,151		1,061		(5,537		)	147,675
Collateralized mortgage obligations:
Residential	138,957		1,144		(2,558		)	137,543
Commercial	18,014		13		(494		)	17,533
Corporate debt securities	76,488		—		(5,515		)	70,973
U.S. Treasury securities	29,600		10		(1		)	29,609
	$	553,014	$	2,560	$	(17,410	)	$	538,164



	At December 31, 2012
(in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value

Mortgage-backed securities:
Residential	$	62,847	$	223	$	(217	)	$	62,853
Commercial	13,720		660		—			14,380
Municipal bonds	123,695		5,574		(94		)	129,175
Collateralized mortgage obligations:
Residential	163,981		6,333		(115		)	170,199
Commercial	8,983		60		—			9,043
U.S. Treasury securities	30,670		11		(2		)	30,679
	$	403,896	$	12,861	$	(428	)	$	416,329

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 June 30, 2013 and December 31, 2012, substantially all securities held, including municipal bonds and corporate debt securities, were rated and considered investment grade according to their credit rating by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”).

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



	At June 30, 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	$	(3,305	)	$	115,937	$	—	$	—	$	(3,305	)	$	115,937
Commercial	—			—		—		—		—			—
Municipal bonds	(5,537		)	96,061		—		—		(5,537		)	96,061
Collateralized mortgage obligations:
Residential	(2,558		)	72,904		—		—		(2,558		)	72,904
Commercial	(494		)	11,698		—		—		(494		)	11,698
Corporate debt securities	(5,515		)	70,973		—		—		(5,515		)	70,973
U.S. Treasury securities	(1		)	1,000		—		—		(1		)	1,000
	$	(17,410	)	$	368,573	$	—	$	—	$	(17,410	)	$	368,573



	At December 31, 2012
	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	$	(217	)	$	18,121	$	—		$	—	$	(217	)	$	18,121
Municipal bonds	(94		)	4,212		—			—		(94		)	4,212
Collateralized mortgage obligations:
Residential	(115		)	13,883		—			—		(115		)	13,883
U.S. Treasury securities	—			—		(2		)	10,238		(2		)	10,238
	$	(426	)	$	36,216	$	(2	)	$	10,238	$	(428	)	$	46,454

The Company has evaluated securities that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company- or industry-specific credit event. The Company anticipates full recovery of the amortized cost of these securities at maturity or sooner in the event of a more favorable market interest rate environment and does not intend to sell nor expect that it will be required to sell such securities before recovery of their amortized cost basis.

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



	At June 30, 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

Available for sale:
Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	—	—	%	$	120,939	2.10	%	$	120,939	2.10	%
Commercial	—		—		—		—		—		—		13,892		4.44		13,892		4.44
Municipal bonds	—		—		—		—		18,864		3.45		128,811		4.44		147,675		4.31
Collateralized mortgage obligations:
Residential	—		—		—		—		8,646		2.07		128,897		2.43		137,543		2.41
Commercial	—		—		—		—		5,338		1.89		12,195		1.40		17,533		1.55
Corporate debt securities	—		—		—		—		33,791		3.31		37,182		3.75		70,973		3.54
U.S. Treasury securities	28,609		0.23		1,000		0.18		—		—		—		—		29,609		0.23
Total available for sale	$	28,609	0.23	%	$	1,000	0.18	%	$	66,639	3.08	%	$	441,916	3.07	%	$	538,164	2.92	%



	At December 31, 2012
	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

Available for sale:
Mortgage-backed securities:
Residential	$	—	—	%	$	—	—	%	$	—	—	%	$	62,853	2.81	%	$	62,853	2.81	%
Commercial	—		—		—		—		—		—		14,380		4.03		14,380		4.03
Municipal bonds	—		—		—		—		15,673		3.64		113,502		4.66		129,175		4.53
Collateralized mortgage obligations:
Residential	—		—		—		—		—		—		170,199		2.64		170,199		2.64
Commercial	—		—		—		—		—		—		9,043		2.06		9,043		2.06
U.S. Treasury securities	30,679		0.23		—		—		—		—		—		—		30,679		0.23
Total available for sale	$	30,679	0.23	%	$	—	—	%	$	15,673	3.64	%	$	369,977	3.33	%	$	416,329	3.11	%

Sales of investment securities available for sale were as follows.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Proceeds	$	34,840		$	85,492		$	50,594		$	119,539
Gross gains	318			1,233			322			1,346
Gross losses	(80		)	(322		)	(132		)	(394		)

There were $104.8 million in investment securities pledged to secure advances from the Federal Home Loan Bank of Seattle ("FHLB") at June 30, 2013 and $51.9 million in investment securities pledged to secure advances from the FHLB at December 31, 2012. At June 30, 2013 and December 31, 2012 there were $7.7 million and $18.6 million, respectively, of securities pledged to secure derivatives in a liability position.

Tax-exempt interest income on securities available for sale of $1.4 million and $1.0 million for the three months ended June 30, 2013 and 2012, respectively, and $2.7 million and $1.7 million for the six months ended June 30, 2013 and 2012, respectively, was recorded in the Company's consolidated statements of operations.

NOTE 4–LOANS AND CREDIT QUALITY:

For a detailed discussion of loans and credit quality, including accounting policies and the methodology used to estimate the allowance for credit losses, see Note 1, Summary of Significant Accounting Policies and Note 5, Loans and Credit Quality to the Company's 2012 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 June 30, 2013			At December 31, 2012

Consumer loans
Single family	$	772,450		$	673,865
Home equity	132,218			136,746
	904,668			810,611
Commercial loans
Commercial real estate	382,345			361,879
Multifamily	26,120			17,012
Construction/land development	61,125			71,033
Commercial business	73,202			79,576
	542,792			529,500
	1,447,460			1,340,111
Net deferred loan fees and discounts	(3,366		)	(3,576		)
	1,444,094			1,336,535
Allowance for loan losses	(27,655		)	(27,561		)
	$	1,416,439		$	1,308,974

Loans in the amount of $473.0 million and $469.8 million at June 30, 2013 and December 31, 2012, 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 repledge these loans.

Loans held for investment are primarily secured by real estate located in the states of Washington, Oregon, Idaho and Hawaii. Loan concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or similar types of loans extended to a diverse group of borrowers that would cause them to be similarly impacted by economic or other conditions. At June 30, 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 43.5% and 21.9% respectively. At December 31, 2012 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 40.4% and 22.5% of the total portfolio, respectively. These loans were mostly located within the Puget Sound area, particularly within King County.

Credit Quality

Management considers the level of allowance for loan losses to be appropriate to cover credit losses inherent within the loans held for investment portfolio as of June 30, 2013. 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 the 2012 Annual Report on Form 10-K.

Activity in the allowance for credit losses was as follows.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Allowance for credit losses (roll-forward):
Beginning balance	$	28,594		$	35,402		$	27,751		$	42,800
Provision for credit losses	400			2,000			2,400			2,000
(Charge-offs), net of recoveries	(1,136		)	(10,277		)	(2,293		)	(17,675		)
Ending balance	$	27,858		$	27,125		$	27,858		$	27,125
Components:
Allowance for loan losses	$	27,655		$	26,910		$	27,655		$	26,910
Allowance for unfunded commitments	203			215			203			215
Allowance for credit losses	$	27,858		$	27,125		$	27,858		$	27,125

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



	Three Months Ended June 30, 2013
(in thousands)	Beginning balance		Charge-offs			Recoveries		Provision			Ending balance

Consumer loans
Single family	$	14,478	$	(1,141	)	$	171	$	302		$	13,810
Home equity	4,708		(299		)	156		314			4,879
	19,186		(1,440		)	327		616			18,689
Commercial loans
Commercial real estate	5,958		(340		)	—		105			5,723
Multifamily	635		—			—		55			690
Construction/land development	894		—			281		10			1,185
Commercial business	1,921		—			36		(386		)	1,571
	9,408		(340		)	317		(216		)	9,169
Total allowance for credit losses	$	28,594	$	(1,780	)	$	644	$	400		$	27,858



	Three Months Ended June 30, 2012
(in thousands)	Beginning balance		Charge-offs			Recoveries		Provision			Ending balance

Consumer loans
Single family	$	11,667	$	(1,251	)	$	433	$	2,016		$	12,865
Home equity	4,531		(1,150		)	212		1,258			4,851
	16,198		(2,401		)	645		3,274			17,716
Commercial loans
Commercial real estate	4,898		(1,691		)	128		1,008			4,343
Multifamily	346		—			—		577			923
Construction/land development	12,716		(7,223		)	514		(2,985		)	3,022
Commercial business	1,244		(323		)	74		126			1,121
	19,204		(9,237		)	716		(1,274		)	9,409
Total allowance for credit losses	$	35,402	$	(11,638	)	$	1,361	$	2,000		$	27,125



	Six Months Ended June 30, 2013
(in thousands)	Beginning balance		Charge-offs			Recoveries		Provision			Ending balance

Consumer loans
Single family	$	13,388	(1,862		)	$	246	$	2,038		$	13,810
Home equity	4,648		(1,138		)	253		1,116			4,879
	18,036		(3,000		)	499		3,154			18,689
Commercial loans
Commercial real estate	5,312		(143		)	—		554			5,723
Multifamily	622		—			—		68			690
Construction/land development	1,580		(148		)	351		(598		)	1,185
Commercial business	2,201		—			148		(778		)	1,571
	9,715		(291		)	499		(754		)	9,169
Total allowance for credit losses	$	27,751	$	(3,291	)	$	998	$	2,400		$	27,858



	Six Months Ended June 30, 2012
(in thousands)	Beginning balance		Charge-offs			Recoveries		Provision			Ending balance

Consumer loans
Single family	$	10,671	$	(2,526	)	$	433	$	4,287		$	12,865
Home equity	4,623		(2,499		)	277		2,450			4,851
	15,294		(5,025		)	710		6,737			17,716
Commercial loans
Commercial real estate	4,321		(1,717		)	128		1,611			4,343
Multifamily	335		—			—		588			923
Construction/land development	21,237		(12,035		)	642		(6,822		)	3,022
Commercial business	1,613		(464		)	86		(114		)	1,121
	27,506		(14,216		)	856		(4,737		)	9,409
Total allowance for credit losses	$	42,800	$	(19,241	)	$	1,566	$	2,000		$	27,125

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



	At June 30, 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	$	12,060	$	1,750	$	13,810	$	687,178	$	85,272	$	772,450
Home equity	4,727		152		4,879		128,587		3,631		132,218
	16,787		1,902		18,689		815,765		88,903		904,668
Commercial loans
Commercial real estate	4,769		954		5,723		354,677		27,668		382,345
Multifamily	222		468		690		22,922		3,198		26,120
Construction/land development	954		231		1,185		53,356		7,769		61,125
Commercial business	847		724		1,571		71,335		1,867		73,202
	6,792		2,377		9,169		502,290		40,502		542,792
Total	$	23,579	$	4,279	$	27,858	$	1,318,055	$	129,405	$	1,447,460



	At December 31, 2012
(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	$	11,212	$	2,176	$	13,388	$	599,538	$	74,327	$	673,865
Home equity	4,611		37		4,648		133,026		3,720		136,746
	15,823		2,213		18,036		732,564		78,047		810,611
Commercial loans
Commercial real estate	3,682		1,630		5,312		334,406		27,473		361,879
Multifamily	106		516		622		13,791		3,221		17,012
Construction/land development	1,092		488		1,580		58,129		12,904		71,033
Commercial business	680		1,521		2,201		77,256		2,320		79,576
	5,560		4,155		9,715		483,582		45,918		529,500
Total	$	21,383	$	6,368	$	27,751	$	1,216,146	$	123,965	$	1,340,111

Interest payments on impaired loans, applied against loan principal or recognized as interest income, of $1.2 million and $1.6 million were recorded for cash payments received during the three months ended June 30, 2013 and 2012, respectively, and $2.3 million and $3.0 million was recorded for cash payments received during the six months ended June 30, 2013 and 2012, respectively.

Impaired Loans

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



	At June 30, 2013
(in thousands)	Recorded investment⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	44,769	$	48,162	$	—
Home equity	2,721		3,227		—
	47,490		51,389		—
Commercial loans
Commercial real estate	10,733		11,997		—
Multifamily	508		508		—
Construction/land development	7,458		17,431		—
Commercial business	129		144		—
	18,828		30,080		—
	$	66,318	$	81,469	$	—
With an allowance recorded:
Consumer loans
Single family	$	40,503	$	40,800	$	1,750
Home equity	910		938		152
	41,413		41,738		1,902
Commercial loans
Commercial real estate	16,935		17,230		954
Multifamily	2,690		3,867		468
Construction/land development	311		311		231
Commercial business	1,738		1,838		724
	21,674		23,246		2,377
	$	63,087	$	64,984	$	4,279
Total:
Consumer loans
Single family	$	85,272	$	88,962	$	1,750
Home equity	3,631		4,165		152
	88,903		93,127		1,902
Commercial loans
Commercial real estate	27,668		29,227		954
Multifamily	3,198		4,375		468
Construction/land development	7,769		17,742		231
Commercial business	1,867		1,982		724
	40,502		53,326		2,377
Total impaired loans	$	129,405	$	146,453	$	4,279



	At December 31, 2012
(in thousands)	Recorded investment ⁽¹⁾		Unpaid principal balance ⁽²⁾		Related allowance

With no related allowance recorded:
Consumer loans
Single family	$	28,202	$	29,946	$	—
Home equity	2,728		3,211		—
	30,930		33,157		—
Commercial loans
Commercial real estate	10,933		12,445		—
Multifamily	508		508		—
Construction/land development	11,097		20,990		—
Commercial business	147		162		—
	22,685		34,105		—
	$	53,615	$	67,262	$	—
With an allowance recorded:
Consumer loans
Single family	$	46,125	$	47,553	$	2,176
Home equity	992		1,142		37
	47,117		48,695		2,213
Commercial loans
Commercial real estate	16,540		16,540		1,630
Multifamily	2,713		2,891		516
Construction/land development	1,807		1,807		488
Commercial business	2,173		2,287		1,521
	23,233		23,525		4,155
	$	70,350	$	72,220	$	6,368
Total:
Consumer loans
Single family	$	74,327	$	77,499	$	2,176
Home equity	3,720		4,353		37
	78,047		81,852		2,213
Commercial loans
Commercial real estate	27,473		28,985		1,630
Multifamily	3,221		3,399		516
Construction/land development	12,904		22,797		488
Commercial business	2,320		2,449		1,521
	45,918		57,630		4,155
Total impaired loans	$	123,965	$	139,482	$	6,368


(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.

The following table provides the average recorded investment in impaired loans by portfolio segment and class. Information related to interest income recognized on average impaired loan balances is not included as it is not operationally practicable to derive this.



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012

Consumer loans
Single family	$	81,628	$	69,967	$	79,194	$	66,535
Home equity	3,550		2,721		3,607		2,794
	85,178		72,688		82,801		69,329
Commercial loans
Commercial real estate	28,191		32,902		27,952		33,677
Multifamily	3,204		5,787		3,210		6,673
Construction/land development	9,115		41,768		10,378		51,159
Commercial business	1,921		965		2,054		1,024
	42,431		81,422		43,594		92,533
	$	127,609	$	154,110	$	126,395	$	161,862

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 June 30, 2013
(in thousands)	Pass		Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	677,673	$	49,910	$	18,229	$	26,638	$	772,450
Home equity	128,336		115		325		3,442		132,218
	806,009		50,025		18,554		30,080		904,668
Commercial loans
Commercial real estate	249,795		91,469		14,613		26,468		382,345
Multifamily	21,365		—		4,755		—		26,120
Construction/land development	46,056		5,075		5,637		4,357		61,125
Commercial business	63,031		8,035		269		1,867		73,202
	380,247		104,579		25,274		32,692		542,792
	$	1,186,256	$	154,604	$	43,828	$	62,772	$	1,447,460


	At December 31, 2012
(in thousands)	Pass		Watch		Special mention		Substandard		Total

Consumer loans
Single family	$	565,312	$	55,768	$	27,599	$	25,186	$	673,865
Home equity	131,246		1,337		1,193		2,970		136,746
	696,558		57,105		28,792		28,156		810,611
Commercial loans
Commercial real estate	217,370		102,353		17,931		24,225		361,879
Multifamily	12,222		1,569		3,221		—		17,012
Construction/land development	21,540		7,243		35,368		6,882		71,033
Commercial business	68,134		7,914		462		3,066		79,576
	319,266		119,079		56,982		34,173		529,500
	$	1,015,824	$	176,184	$	85,774	$	62,329	$	1,340,111

The Company considers ‘adversely classified assets’ to include loans graded as Substandard, Doubtful, and Loss as well as other real estate owned. As of June 30, 2013 and December 31, 2012, none of the Company's loans were rated Doubtful or Loss. For a detailed discussion on credit quality indicators used by management, see Note 5, Loans and Credit Quality within the 2012 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 FHA or guaranteed by the VA are generally maintained on accrual status even if 90 days or more past due.

The following tables present aging analyses of past due loans by loan portfolio segment and loan class.



	At June 30, 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 still accruing⁽¹⁾

Consumer loans
Single family	$	7,943	$	4,790	$	59,326	$	72,059	$	700,391	$	772,450	$	44,832
Home equity	261		165		3,367		3,793		128,425		$	132,218	—
	8,204		4,955		62,693		75,852		828,816		904,668		44,832
Commercial loans
Commercial real estate	—		—		6,051		6,051		376,294		382,345		—
Multifamily	—		—		—		—		26,120		26,120		—
Construction/land development	—		—		4,051		4,051		57,074		61,125		—
Commercial business	—		—		1,738		1,738		71,464		73,202		—
	—		—		11,840		11,840		530,952		542,792		—
	$	8,204	$	4,955	$	74,533	$	87,692	$	1,359,768	$	1,447,460	$	44,832


	At December 31, 2012
(in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans		90 days or more past due and still accruing⁽¹⁾

Consumer loans
Single family	$	11,916	$	4,732	$	53,962	$	70,610	$	603,255	$	673,865	$	40,658
Home equity	787		242		2,970		3,999		132,747		136,746		—
	12,703		4,974		56,932		74,609		736,002		810,611		40,658
Commercial loans
Commercial real estate	—		—		6,403		6,403		355,476		361,879		—
Multifamily	—		—		—		—		17,012		17,012		—
Construction/land development	—		—		5,042		5,042		65,991		71,033		—
Commercial business	—		—		2,173		2,173		77,403		79,576		—
	—		—		13,618		13,618		515,882		529,500		—
	$	12,703	$	4,974	$	70,550	$	88,227	$	1,251,884	$	1,340,111	$	40,658


(1)	Federal Housing Administration ("FHA")-insured and Department of Veterans' Affairs ("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 accrual and nonaccrual loan balances by loan portfolio segment and loan class.



	At June 30, 2013
(in thousands)	Accrual		Nonaccrual		Total

Consumer loans
Single family	$	757,956	$	14,494	$	772,450
Home equity	128,851		3,367		132,218
	886,807		17,861		904,668
Commercial loans
Commercial real estate	376,294		6,051		382,345
Multifamily	26,120		—		26,120
Construction/land development	57,074		4,051		61,125
Commercial business	71,464		1,738		73,202
	530,952		11,840		542,792
	$	1,417,759	$	29,701	$	1,447,460



	At December 31, 2012
(in thousands)	Accrual		Nonaccrual		Total

Consumer loans
Single family	$	660,561	$	13,304	$	673,865
Home equity	133,776		2,970		136,746
	794,337		16,274		810,611
Commercial loans
Commercial real estate	355,476		6,403		361,879
Multifamily	17,012		—		17,012
Construction/land development	65,991		5,042		71,033
Commercial business	77,403		2,173		79,576
	515,882		13,618		529,500
	$	1,310,219	$	29,892	$	1,340,111

The Company had 182 loan relationship classified as troubled debt restructurings (“TDRs”) totaling $111.1 million at June 30, 2013 with related unfunded commitments of $36 thousand. The Company had 162 loan relationships classified as TDRs totaling $110.8 million at December 31, 2012 with related unfunded commitments of $25 thousand. The increase in the number of TDR loan relationships at June 30, 2013 from December 31, 2012 is primarily due to an increase in the number of single family loan TDRs, partially offset by a decline in the number of commercial construction/land development loan TDRs. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above.

Troubled Debt Restructurings

The following tables present information about TDRs by loan portfolio segment and loan class.



	At June 30, 2013
(dollars in thousands)	Concession type	Number of loan relationships	Recorded investment		Related charge- offs

Consumer loans
Single family
	Interest rate reduction	138	$	74,461	$	3,498
	Payment restructure	9	1,513		—
		147	$	75,974	$	3,498
Home equity
	Interest rate reduction	19	$	2,272	$	38
	Payment restructure	5	175		—
		24	$	2,447	$	38
Total consumer
	Interest rate reduction	157	$	76,733	$	3,536
	Payment restructure	14	1,688		—
		171	$	78,421	$	3,536
Commercial loans
Commercial real estate
	Interest rate reduction	2	$	5,932	$	1,884
	Payment restructure	1	15,685		—
		3	$	21,617	$	1,884
Multifamily
	Interest rate reduction	2	$	3,198	$	—
		2	$	3,198	$	—
Construction/land development
	Interest rate reduction	3	$	7,152	$	7,063
	Forgiveness of principal	2	617		43
		5	$	7,769	$	7,106
Commercial business
	Payment restructure	1	129		68
		1	$	129	$	68
Total commercial
	Interest rate reduction	7	$	16,282	$	8,947
	Payment restructure	2	15,814		68
	Forgiveness of principal	2	617		43
		11	$	32,713	$	9,058
Total loans
	Interest rate reduction	164	$	93,015	$	12,483
	Payment restructure	16	17,502		68
	Forgiveness of principal	2	617		43
		182	$	111,134	$	12,594



	At December 31, 2012
(dollars in thousands)	Concession type	Number of loan relationships	Recorded investment		Related charge- offs

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

The following table presents TDR balances that have re-defaulted during the three and six months ended June 30, 2013 and 2012, 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 June 30,
	2013			2012
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	1	$	133	12	$	2,641
Home equity	—	—		1	34
	1	133		13	2,675
Commercial loans
Commercial real estate	—	—		—	—
Construction/land development	—	—		—	—
Commercial business	—	—		1	29
	—	—		1	29
	1	$	133	14	$	2,704



	Six Months Ended June 30,
	2013			2012
(dollars in thousands)	Number of loan relationships that re-defaulted	Recorded investment		Number of loan relationships that re-defaulted	Recorded investment

Consumer loans
Single family	7	$	1,556	23	$	5,261
Home equity	1	22		1	34
	8	1,578		24	5,295
Commercial loans
Commercial real estate	1	770		—	—
Construction/land development	—	—		—	—
Commercial business	—	—		2	389
	1	770		2	389
	9	$	2,348	26	$	5,684

NOTE 5–DEPOSITS:

Deposit balances, including stated rates, were as follows.



(in thousands)	At June 30, 2013		At December 31, 2012

Noninterest-bearing accounts	$	350,392	$	358,831
NOW accounts 0.00% to 0.75% at June 30, 2013 and December 31, 2012	279,670		174,699
Statement savings accounts, due on demand 0.20% to 1.00% at June 30, 2013 and 0.20% to 0.85% at December 31, 2012	115,817		103,932
Money market accounts, due on demand 0.00% to 1.50% at June 30, 2013 and December 31, 2012	813,608		683,906
Certificates of deposit 0.10% to 3.92% at June 30, 2013 and 0.10% to 4.70% at December 31, 2012	403,636		655,467
	$	1,963,123	$	1,976,835

There were no public funds included in deposits as of June 30, 2013 and December 31, 2012.

Interest expense on deposits was as follows.



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012

NOW accounts	$	233	$	124	$	391	$	239
Statement savings accounts	114		93		218		176
Money market accounts	973		816		1,830		1,536
Certificates of deposit	1,047		3,165		3,417		7,126
	$	2,367	$	4,198	$	5,856	$	9,077

The weighted-average interest rates on certificates of deposit at June 30, 2013 and December 31, 2012 were 0.79% and 1.59%, respectively.

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



(in thousands)	At June 30, 2013

Within one year	$	283,443
One to two years	62,964
Two to three years	37,462
Three to four years	13,261
Four to five years	6,506
	$	403,636

The aggregate amount of time deposits in denominations of $100 thousand or more at June 30, 2013 and December 31, 2012 was $203.0 million and $300.4 million, respectively. The aggregate amount of time deposits in denominations of more than $250 thousand at June 30, 2013 and December 31, 2012 was $84.4 million and $45.3 million, respectively. There were $67.0 million in brokered deposits as of June 30, 2013 and none at December 31, 2012.

NOTE 6–DERIVATIVES AND HEDGING ACTIVITIES:

In order 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, the Company utilizes derivatives, such as forward sale commitments, futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy. Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments. We held no derivatives designated as a cash flow or foreign currency hedge instruments at June 30, 2013 or December 31, 2012. Derivatives are reported at their respective fair values in the accounts receivable and other assets or accounts payable and other liabilities line items on the consolidated statements of financial condition, with changes in fair value reflected in current period earnings.

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

The collateral used under the Company's master netting agreements is typically cash, but securities may be used under agreements with certain counterparties. Receivables related to cash collateral that has been paid to counterparties is included in accounts receivable and other assets on the Company's consolidated statements of financial condition. Any securities pledged to counterparties as collateral remain on the consolidated statement of financial condition. Refer to Note 3, Investment Securities Available for Sale of this Form 10-Q for further information on securities collateral pledged. As of June 30, 2013 and December 31, 2012, the Company did not hold any collateral received from counterparties under derivative transactions.

For further information on the policies that govern derivative and hedging activities, see Note 1, Summary of Significant Accounting Policies and Note 11, Derivatives and Hedging Activities within the 2012 Annual Report on Form 10-K.

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



	At June 30, 2013
	Notional Amount		Fair Value Derivatives
(in thousands)			Asset			Liability

Forward sale commitments	$	1,362,188	$	42,984		$	(4,032	)
Interest rate swaptions	25,000		37			—
Interest rate lock commitments	812,540		6,765			(6,359		)
Interest rate swaps	394,440		931			(17,774		)
Total derivatives before netting	$	2,594,168	50,717			(28,165		)
Netting adjustments			(4,300		)	4,300
Carrying value on consolidated statements of financial condition			$	46,417		$	(23,865	)



	At December 31, 2012
	Notional Amount		Fair Value Derivatives
(in thousands)			Asset			Liability

Forward sale commitments	$	1,258,152	$	621		$	(2,743	)
Interest rate lock commitments	734,762		22,548			(20		)
Interest rate swaps	361,892		538			(9,358		)
Total derivatives before netting	$	2,354,806	23,707			(12,121		)
Netting adjustments			(1,052		)	1,052
Carrying value on consolidated statements of financial condition			$	22,655		$	(11,069	)

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



	At June 30, 2013
(in thousands)	Gross fair value			Netting adjustments			Carrying value			Cash collateral paid ⁽¹⁾		Securities pledged		Net amount

Derivative assets:
Forward sale commitments	$	42,984		$	(3,332	)	$	39,652		$	—	$	—	$	39,652
Interest rate swaps / swaptions	968			(968		)	—			—		—		—
Total derivatives subject to legally enforceable master netting agreements	43,952			(4,300		)	39,652			—		—		39,652
Interest rate lock commitments	6,765			—			6,765			—		—		6,765
Total derivative assets	$	50,717		$	(4,300	)	$	46,417		$	—	$	—	$	46,417

Derivative liabilities:
Forward sale commitments	$	(4,032	)	$	3,332		$	(700	)	$	655	$	45	$	—
Interest rate swaps	(17,774		)	968			(16,806		)	15,554		711		(541		)
Total derivatives subject to legally enforceable master netting agreements	(21,806		)	4,300			(17,506		)	16,209		756		(541		)
Interest rate lock commitments	(6,359		)	—			(6,359		)	—		—		(6,359		)
Total derivative liabilities	$	(28,165	)	$	4,300		$	(23,865	)	$	16,209	$	756	$	(6,900	)



	At December 31, 2012
(in thousands)	Gross fair value			Netting adjustments			Carrying value			Cash collateral paid ⁽¹⁾		Net amount

Derivative assets:
Forward sale commitments	$	621		$	(621	)	$	—		$	—	$	—
Interest rate swaps	538			(431		)	107			—		107
Total derivatives subject to legally enforceable master netting agreements	1,159			(1,052		)	107			—		107
Interest rate lock commitments	22,548			—			22,548			—		22,548
Total derivative assets	$	23,707		$	(1,052	)	$	22,655		$	—	$	22,655

Derivative liabilities:
Forward sale commitments	$	(2,743	)	$	621		$	(2,122	)	$	1,953	$	(169	)
Interest rate swaps	(9,358		)	431			(8,927		)	8,927		—
Total derivatives subject to legally enforceable master netting agreements	(12,101		)	1,052			(11,049		)	10,880		(169		)
Interest rate lock commitments	(20		)	—			(20		)	—		(20		)
Total derivative liabilities	$	(12,121	)	$	1,052		$	(11,069	)	$	10,880	$	(189	)

(1)

Excludes cash collateral of $11.6 million and $18.0 million at June 30, 2013 and December 31, 2012, 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 payables, because, at an individual counterparty level, the collateral exceeded the fair value exposure at June 30, 2013 and December 31, 2012.

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 $75 thousand and $(2) thousand for the three months ended June 30, 2013 and 2012, respectively and $106 thousand and $48 thousand for the six months ended June 30, 2013 and 2012, respectively.

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



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2013			2012		2013			2012

Recognized in noninterest income:
Net gain on mortgage loan origination and sale activities ⁽¹⁾	$	21,014		$	3,865	$	19,649		$	10,565
Mortgage servicing income ⁽²⁾	(13,505		)	20,254		(16,023		)	19,739
	$	7,509		$	24,119	$	3,626		$	30,304


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


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

NOTE 7–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.



(in thousands)	At June 30, 2013		At December 31, 2012

Single family	$	459,981	$	607,578
Multifamily	11,210		13,221
	$	471,191	$	620,799

Loans sold consisted of the following.



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012

Single family	$	1,229,686	$	962,704	$	2,590,030	$	1,497,015
Multifamily	15,386		27,178		65,973		58,601
	$	1,245,072	$	989,882	$	2,656,003	$	1,555,616

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



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2013		2012			2013		2012

Single family:
Servicing value and secondary marketing gains⁽¹⁾	$	43,448	$	40,548		$	87,683	$	64,328
Provision for repurchase losses⁽²⁾	—		(1,930		)	—		(2,320		)
Net gain from secondary marketing activities	43,448		38,618			87,683		62,008
Loan origination and funding fees	8,267		7,142			16,062		12,138
Total single family	51,715		45,760			$	103,745	$	74,146
Multifamily	709		1,039			2,634		$	2,201
Total net gain on mortgage loan origination and sale activities	$	52,424	$	46,799		$	106,379	$	76,347


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


(2)	Represents changes in estimated probable future repurchase losses on previously sold loans.

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 June 30, 2013		At December 31, 2012

Single family
U.S. government and agency MBS	$	10,063,558	$	8,508,458
Other	341,055		362,230
	10,404,613		8,870,688
Commercial
Multifamily	720,368		727,118
Other	51,058		53,235
	771,426		780,353
Total loans serviced for others	$	11,176,039	$	9,651,041

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



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Beginning balance	$	1,975		$	861		$	1,955		$	471
Additions ⁽¹⁾	472			2,215			1,008			2,605
Realized losses ⁽²⁾	(637		)	(957		)	(1,153		)	(957		)
Balance, end of period	$	1,810		$	2,119		$	1,810		$	2,119


(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 and foreclosure costs and for funding of loans repurchased from Ginnie Mae mortgage pools prior to recovery of guaranteed amounts. Ginnie Mae advances of $6.6 million and $5.9 million were recorded in accounts receivable and other assets as of June 30, 2013 and December 31, 2012, 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 June 30, 2013 and December 31, 2012, delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statements of financial condition totaled $10.1 million and $8.0 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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Servicing income, net:
Servicing fees and other	$	7,955		$	6,705		$	15,562		$	13,142
Changes in fair value of single family MSRs due to modeled amortization ⁽¹⁾	(6,569		)	(4,052		)	(11,675		)	(9,022		)
Amortization of multifamily MSRs	(423		)	(462		)	(913		)	(953		)
	963			2,191			2,974			3,167
Risk management, single family MSRs:
Changes in fair value due to changes in model inputs and/or assumptions ⁽²⁾	14,725			(15,354		)	18,304			(7,942		)
Net gain (loss) from derivatives economically hedging MSR	(13,505		)	20,254			(16,023		)	19,739
	1,220			4,900			2,281			11,797
Mortgage servicing income	$	2,183		$	7,091		$	5,255		$	14,964


(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 June 30,				Six Months Ended June 30,
(rates per annum)⁽¹⁾	2013		2012		2013		2012

Constant prepayment rate ("CPR")⁽²⁾	8.77	%	11.36	%	9.12	%	10.68	%
Discount rate	10.28	%	10.28	%	10.27	%	10.33	%


(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 June 30, 2013

Fair value of single family MSR	$	128,146
Expected weighted-average life (in years)	6.58
Constant prepayment rate ⁽¹⁾	12.48		%
Impact on 10% adverse change	$	(5,361	)
Impact on 25% adverse change	$	(11,042	)
Discount rate	10.50		%
Impact on fair value of 100 basis points increase	$	(4,665	)
Impact on fair value of 200 basis points increase	$	(9,011	)


(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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Beginning balance	$	102,678		$	79,381		$	87,396		$	70,169
Additions and amortization:
Originations	17,306			10,598			34,112			17,321
Purchases	6			12			9			59
Changes due to modeled amortization⁽¹⁾	(6,569		)	(4,052		)	(11,675		)	(9,022		)
Net additions and amortization	10,743			6,558			22,446			8,358
Changes in fair value due to changes in model inputs and/or assumptions ⁽²⁾	14,725			(15,354		)	18,304			(7,942		)
Ending balance	$	128,146		$	70,585		$	128,146		$	70,585


(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 June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Beginning balance	$	9,150		$	7,420		$	8,097		$	7,112
Origination	512			697			2,055			1,496
Amortization	(423		)	(462		)	(913		)	(953		)
Ending balance	$	9,239		$	7,655		$	9,239		$	7,655

At June 30, 2013, the expected weighted-average life of the Company’s multifamily MSRs was 9.06 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.



(in thousands)	At June 30, 2013

Remainder of 2013	$	823
2014	1,509
2015	1,340
2016	1,226
2017	1,101
2018 and thereafter	3,240
Carrying value of multifamily MSR	$	9,239

NOTE 8–COMMITMENTS, GUARANTEES AND CONTINGENCIES:

Commitments

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

In the ordinary course of business, the Company makes unfunded loan commitments as part of its residential mortgage lending activities generally in the form of a written confirmation from the Company to the seller of a property that we will advance the specified funds enabling the buyer to complete the purchase of the property. Unfunded loan commitments totaled $855.0 million ($800.8 million fixed-rate and $54.2 million adjustable-rate commitments) at June 30, 2013 and $768.9 million ($746.8 million fixed-rate and $22.1 million adjustable-rate commitments) at December 31, 2012.

In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. Commitments related to unused home equity and commercial real estate lines of credit and business banking funding lines totaled $97.3 million and $91.1 million at June 30, 2013 and December 31, 2012, respectively. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $83.0 million and $34.5 million at June 30, 2013 and December 31, 2012, 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 $203 thousand and $190 thousand at June 30, 2013 and December 31, 2012, 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 and are no longer on the Company's consolidated statements of financial condition, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of June 30, 2013 and December 31, 2012, the total unpaid principal balance of loans sold under this program was $720.4 million and $727.1 million, respectively. The Company’s reserve liability related to this arrangement totaled $3.3 million at both June 30, 2013 and December 31, 2012. There were no actual losses incurred under this arrangement during the three and six months ended June 30, 2013 and 2012.

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 pools FHA-insured and VA-guaranteed mortgage loans that 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 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	36

The total unpaid principal balance of loans sold that were subject to the terms and conditions of these representations and warranties totaled $10.46 billion and $8.92 billion as of June 30, 2013 and December 31, 2012, respectively. At June 30, 2013 and December 31, 2012, the Company had recorded a mortgage repurchase liability, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $1.8 million and $2.0 million, respectively.

Contingencies

In the normal course of business, the Company may have various legal claims and other similar contingent matters outstanding for which a loss may be realized. For these claims, the Company establishes a liability for contingent losses when it is probable that a loss has been incurred and the amount of loss can be reasonably estimated. For claims determined to be reasonably possible but not probable of resulting in a loss, there may be a range of possible losses in excess of the established liability. At June 30, 2013, 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 June 30, 2013.

NOTE 9–FAIR VALUE MEASUREMENT:

For a further discussion of fair value measurements, including information regarding the Company’s valuation methodologies and the fair value hierarchy, see Note 17, Fair Value Measurement within the 2012 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 results and the reasonableness of the assumptions used in measuring fair value.

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

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

Estimation of Fair Value

Fair value is based on quoted market prices, when available. In certain cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing spreads utilizing market-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	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 within the 2012 Annual Report on Form 10-K. 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 7, Mortgage Banking Operations.	Level 3 recurring fair value measurement
Multifamily MSRs	Fair value is based on discounted estimated future servicing fees and other revenue, less estimated costs to service the loans.	Carried at lower of amortized cost or fair value Estimated fair value classified as Level 3.
Derivatives
Interest rate swaps Interest rate swaptions Forward sale commitments	Fair value is based on quoted prices for identical or similar instruments, when available. When quoted prices are not available, fair value is based on internally developed modeling techniques, which require the use of multiple observable market inputs including: • Forward interest rates • Interest rate volatilities	Level 2 recurring fair value measurement
Interest rate lock commitments	The fair value considers several factors including: • Fair value of the underlying loan based on quoted prices in the secondary market, when available. • Value of servicing • Fall-out factor	Level 3 recurring fair value measurement effective December 31, 2012.
Other real estate owned (“OREO”)	Fair value is based on appraised value of collateral. 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 June 30, 2013		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	120,939	$	—	$	120,939	$	—
Commercial	13,892		—		13,892		—
Municipal bonds	147,675		—		147,675		—
Collateralized mortgage obligations:
Residential	137,543		—		137,543		—
Commercial	17,533		—		17,533		—
Corporate debt securities	70,973		—		70,973		—
U.S. Treasury securities	29,609		—		29,609		—
Single family mortgage servicing rights	128,146		—		—		128,146
Single family loans held for sale	459,981		—		459,981		—
Derivatives
Forward sale commitments	42,984		—		42,984		—
Interest rate lock commitments	6,765		—		—		6,765
Interest rate swaps	931		—		931		—
Total assets	$	1,177,008	$	—	$	1,042,097	$	134,911
Liabilities:
Derivatives
Forward sale commitments	$	4,032	$	—	$	4,032	$	—
Interest rate lock commitments	6,359		—		—		6,359
Interest rate swaps	17,774		—		17,774		—
Total liabilities	$	28,165	$	—	$	21,806	$	6,359



(in thousands)	Fair Value at December 31, 2012		Level 1		Level 2		Level 3

Assets:
Investment securities available for sale
Mortgage backed securities:
Residential	$	62,853	$	—	$	62,853	$	—
Commercial	14,380		—		14,380		—
Municipal bonds	129,175		—		129,175		—
Collateralized mortgage obligations:
Residential	170,199		—		170,199		—
Commercial	9,043		—		9,043		—
U.S. Treasury securities	30,679		—		30,679		—
Single family mortgage servicing rights	87,396		—		—		87,396
Single family loans held for sale	607,578		—		607,578		—
Derivatives
Forward sale commitments	621		—		621		—
Interest rate lock commitments	22,548		—		—		22,548
Interest rate swaps	538		—		538		—
Total assets	$	1,135,010	$	—	$	1,025,066	$	109,944
Liabilities:
Derivatives
Forward sale commitments	$	2,743	$	—	$	2,743	$	—
Interest rate lock commitments	20		—		—		20
Interest rate swaps	9,358		—		9,358		—
Total liabilities	$	12,121	$	—	$	12,101	$	20

There were no transfers between levels of the fair value hierarchy during the three and six months ended June 30, 2013 and 2012.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights and, as of December 31, 2012, interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the three and six months ended June 30, 2013 and 2012, see Note 7, Mortgage Banking Operations.

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



(in thousands)	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013

Beginning balance, net	$	20,842		$	22,528
Total realized/unrealized gains⁽¹⁾	28,151			73,693
Settlements	(48,587		)	(95,815		)
Ending balance, net	$	406		$	406

(1)

All realized and unrealized gains and losses are recognized in earnings as net gain from mortgage loan origination and sale activities on the consolidated statement of operations. For the three and six months ended June 30, 2013 there were net unrealized (losses) gains of $(550) thousand and $325 thousand , respectively, recognized on interest rate lock commitments still outstanding at June 30, 2013.

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 June 30, 2013

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock commitments, net

406

Income approach

Fall out factor

0.4%

54.8%

11.9%

Value of servicing

0.46%

2.05%

1.06%

(dollars in thousands)

At December 31, 2012

Fair Value

Valuation

Technique

Significant Unobservable

Input

Low

High

Weighted Average

Interest rate lock commitments, net

22,528

Income Approach

Fall out factor

0.4%

59.3%

16.8%

Value of servicing

0.50%

2.18%

1.04%

The fair value of interest rate lock commitments decreases in value upon an increase in the fall-out factor and increases in value upon an increase in the value of servicing. Changes in the fall-out factor and value of servicing do not increase or decrease based on movements in the other significant unobservable input.

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, less the estimated cost to sell. The following tables present assets that were recorded at fair value during the three and six months ended June 30, 2013 and 2012 and still held at the end of the respective reporting period.



	Three Months Ended June 30, 2013
(in thousands)	Fair Value of Assets Held at June 30, 2013		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	50,362	—		—		$	50,362	$	422
Other real estate owned⁽²⁾	7,600		—		—		7,600		(339		)
Total	$	57,962	$	—	$	—	$	57,962	$	83



	Three Months Ended June 30, 2012
(in thousands)	Fair Value of Assets Held at June 30, 2012		Level 1		Level 2		Level 3		Total Losses

Loans held for investment⁽¹⁾	$	36,505	—		—		$	36,505	$	(2,526	)
Other real estate owned⁽²⁾	12,412		—		—		12,412		(2,907		)
Total	$	48,917	$	—	$	—	$	48,917	$	(5,433	)



	Six Months Ended June 30, 2013
(in thousands)	Fair Value of Assets Held at June 30, 2013		Level 1		Level 2		Level 3		Total Gains (Losses)

Loans held for investment⁽¹⁾	$	50,362	—		—		$	50,362	$	592
Other real estate owned⁽²⁾	7,600		—		—		7,600		(739		)
Total	$	57,962	$	—	$	—	$	57,962	$	(147	)



	Six Months Ended June 30, 2012
(in thousands)	Fair Value of Assets Held at June 30, 2012		Level 1		Level 2		Level 3		Total Losses

Loans held for investment⁽¹⁾	$	37,752	—		—		$	37,752	$	(2,702	)
Other real estate owned⁽²⁾	21,885		—		—		21,885		(4,111		)
Total	$	59,637	$	—	$	—	$	59,637	$	(6,813	)


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


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

The following table presents significant Level 3 unobservable inputs used to measure fair value on a nonrecurring basis during the three and six months ended June 30, 2013 and 2012 for assets still held at the end of the period.

(dollars in thousands)

Fair Value of Assets Held at June 30, 2013 ⁽¹⁾

Valuation

Technique

Significant Unobservable

Input

Three Months Ended June 30,

2013

Low

High

Weighted Average

Other real estate owned

5,814

Market approach

Comparable sale adjustments⁽²⁾



(dollars in thousands)	Fair Value of Assets Held at June 30, 2012 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Three Months Ended June 30, 2012
(dollars in thousands)	Fair Value of Assets Held at June 30, 2012 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average

Loans held for investment	$	36,505	Market approach	Comparable sale adjustments⁽²⁾	6	%	57	%	32	%
	540		Income approach	Capitalization rate	6.0	%	11.0	%	8.5	%
Other real estate owned	$	12,412	Market approach	Comparable sale adjustments⁽²⁾	0	%	57	%	29	%
				Other discounts⁽³⁾	4	%	52	%	28	%



(dollars in thousands)	Fair Value of Assets Held at June 30, 2013 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Six Months Ended June 30, 2013
(dollars in thousands)	Fair Value of Assets Held at June 30, 2013 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average

Loans held for investment	$	16,935	Market approach	Comparable sale adjustments⁽²⁾	0	%	95	%	22	%
	16,935		Income approach	Capitalization rate	6.4	%	10.8	%	8.2	%
				Discount rate	8.2	%	9.5	%	8.9	%
Other real estate owned	$	5,814	Market approach	Comparable sale adjustments⁽²⁾	0	%	50	%	25	%



(dollars in thousands)	Fair Value of Assets Held at June 30, 2012 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Six Months Ended June 30, 2012
(dollars in thousands)	Fair Value of Assets Held at June 30, 2012 ⁽¹⁾		Valuation Technique	Significant Unobservable Input	Low		High		Weighted Average

Loans held for investment	$	37,752	Market approach	Comparable sale adjustments⁽²⁾	0	%	65	%	33	%
				Other discounts⁽³⁾	28	%	74	%	51	%
	10,035		Income approach	Capitalization rate	6.0	%	11.0	%	8.5	%
Other real estate owned	$	21,885	Market approach	Comparable sale adjustments⁽²⁾	0	%	70	%	35	%
				Other discounts⁽³⁾	4	%	64	%	34	%


(1)	Assets that are valued using more than one valuation technique are presented within multiple categories for each valuation technique used. Excludes unobservable inputs that we consider, both individually and in the aggregate, to have been insignificant relative to our overall nonrecurring Level 3 measurements recorded during the period.


(2)	Represents the range of net adjustments reflecting differences between a comparable sale and the property being appraised, expressed as an absolute value.

(3)

Includes bulk sale discounts applied to the aggregate retail value of tract development properties, accelerated marketing period discounts and time-hold or other discounts applied to derive the “as is” market value of certain properties requiring a holding period before reaching a state of feasibility or completion (e.g., “upon completion” or "upon stabilization" value) and management discounts based on the Company's experience with actual liquidation values.

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

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 June 30, 2013
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	21,645	$	21,645	$	21,645	$	—	$	—
Loans held for investment	1,416,439		1,425,110		—		—		1,425,110
Loans held for sale – multifamily	11,210		11,243		—		11,243		—
Mortgage servicing rights – multifamily	9,239		10,713		—		—		10,713
Federal Home Loan Bank stock	35,708		35,708		—		35,708		—
Liabilities:
Deposits	$	1,963,123	$	1,920,343	$	—	$	1,920,343	$	—
Federal Home Loan Bank advances	409,490		412,399		—		412,399		—
Long-term debt	61,857		60,240		—		60,240		—



	At December 31, 2012
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3

Assets:
Cash and cash equivalents	$	25,285	$	25,285	$	25,285	$	—	$	—
Loans held for investment	1,308,974		1,340,882		—		—		1,340,882
Loans held for sale – multifamily	13,221		14,810		—		14,810		—
Mortgage servicing rights – multifamily	8,097		9,497		—		—		9,497
Federal Home Loan Bank stock	36,367		36,367		—		36,367		—
Liabilities:
Deposits	$	1,976,835	$	1,979,925	$	—	$	1,979,925	$	—
Federal Home Loan Bank advances	259,090		263,209		—		263,209		—
Long-term debt	61,857		60,241		—		60,241		—

Excluded from the fair value tables above are certain off-balance sheet loan commitments such as unused home equity lines of credit, business banking line funds and undisbursed construction funds. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related allowance for credit losses, which amounted to $440 thousand and $216 thousand at June 30, 2013 and December 31, 2012, respectively.

NOTE 10–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share for the three and six months ended June 30, 2013 and 2012.



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands, except share and per share data)	2013		2012		2013		2012

Net income	$	12,068	$	18,678	$	23,008	$	38,637
Weighted average shares:
Basic weighted-average number of common shares outstanding	14,376,580		14,252,120		14,368,135		12,272,342
Dilutive effect of outstanding common stock equivalents ⁽¹⁾	408,901		427,764		426,670		499,856
Diluted weighted-average number of common stock outstanding	14,785,481		14,824,064		14,794,805		12,772,198
Earnings per share:
Basic earnings per share	$	0.84	$	1.31	$	1.60	$	3.15
Diluted earnings per share	$	0.82	$	1.26	$	1.56	$	3.03

(1)

Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the three and six months ended June 30, 2013 and 2012 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 109,336 and 713,938 at June 30, 2013 and 2012, respectively.

NOTE 11–BUSINESS SEGMENTS:

The Company's business segments are determined based on the products and services provided, as well as the nature of the related business activities, and they reflect the manner in which financial information is currently evaluated by management.

As a result of a change in the manner in which the chief operating decision maker evaluates strategic decisions, commencing with the second quarter of 2013, the Company realigned its business segments and organized them into two lines of business: Mortgage Banking and Commercial and Consumer Banking. 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.

Mortgage Banking originates and purchases of single family residential mortgage loans for sale in the secondary markets. We purchase loans from Windermere Mortgage Services 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.

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through personal service at bank branches 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 with a focus on 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.

Financial highlights by operating segment were as follows.



	Three Months Ended June 30, 2013
(in thousands)	Mortgage Banking		Commercial and Consumer Banking		Total

Condensed income statement:
Net interest income ⁽¹⁾	$	3,728	$	13,687	$	17,415
Provision for loan losses	—		400		400
Noninterest income	56,019		1,537		57,556
Noninterest expense	43,240		13,472		56,712
Income before income taxes	16,507		1,352		17,859
Income tax expense	5,760		31		5,791
Net income	$	10,747	$	1,321	$	12,068
Average assets	$	634,262	$	1,965,672	$	2,599,934



	Three Months Ended June 30, 2012
(in thousands)	Mortgage Banking		Commercial and Consumer Banking			Total

Condensed income statement:
Net interest income ⁽¹⁾	$	3,287	$	11,512		$	14,799
Provision for loan losses	—		2,000			2,000
Noninterest income	54,597		2,253			56,850
Noninterest expense	27,935		19,019			46,954
Income (loss) before income taxes	29,949		(7,254		)	22,695
Income tax expense	3,757		260			4,017
Net income (loss)	$	26,192	$	(7,514	)	$	18,678
Average assets	$	518,661	$	1,853,889		$	2,372,550



	Six Months Ended June 30, 2013
(in thousands)	Mortgage Banking		Commercial and Consumer Banking			Total

Condensed income statement:
Net interest income ⁽¹⁾	$	7,882	$	24,768		$	32,650
Provision for loan losses	—		2,400			2,400
Noninterest income	112,572		3,927			116,499
Noninterest expense	83,340		29,171			112,511
Income (loss) before income taxes	37,114		(2,876		)	34,238
Income tax expense (benefit)	12,574		(1,344		)	11,230
Net income (loss)	$	24,540	$	(1,532	)	$	23,008
Average assets	$	629,675	$	1,918,210		$	2,547,885



	Six Months Ended June 30, 2012
(in thousands)	Mortgage Banking		Commercial and Consumer Banking			Total

Condensed income statement:
Net interest income ⁽¹⁾	$	5,273	$	22,358		$	27,631
Provision for loan losses	—		2,000			2,000
Noninterest income	92,215		4,783			96,998
Noninterest expense	48,145		33,546			81,691
Income (loss) before income taxes	49,343		(8,405		)	40,938
Income tax expense (benefit)	2,845		(544		)	2,301
Net income (loss)	$	46,498	$	(7,861	)	$	38,637
Average assets	$	421,981	$	1,920,061		$	2,342,042

(1)

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

NOTE 12–SUBSEQUENT EVENTS:

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.

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.

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

Financial performance:
Return on average commonshareholders’ 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 Quarter Ended										At or for the Six Months Ended
(in thousands)	Jun. 30, 2013		Mar. 31, 2013		Dec. 31, 2012		Sept. 30, 2012		Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 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.

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

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 producers. Partially offsetting this increase to noninterest income was a decrease in mortgage servicing income, primarily resulting from a reduction in income recognized from MSR risk management activities.

Noninterest expense increased 20.8% to $56.7 million in the second quarter of 2013 from the second quarter of 2012. The $9.8 million increase in noninterest expense primarily related to increased salaries and related costs, reflecting the growth of our commercial real estate, commercial business and single family mortgage lending units, the addition of private banking services

and the expansion of our branch banking network. Higher commissions and incentives were paid in connection with strong growth in closed mortgage loan volume.

The provision for credit losses was $400 thousand in the second quarter of 2013, compared to $2.0 million recorded in the second quarter of 2012. Net charge-offs were $1.1 million in the second quarter of 2013 compared to $10.3 million in the second quarter of 2012. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 1.92% of loans held for investment at June 30, 2013 compared to 2.13% at June 30, 2012, reflecting the improved credit quality of the Company's loan portfolio. Nonperforming assets of $41.7 million, or 1.50% of total assets at June 30, 2013 were down significantly from June 30, 2012 when nonperforming assets were $73.7 million, or 3.04% of total assets.

Income tax expense was $5.8 million in the second quarter of 2013 compared to $4.0 million in the second quarter of 2012. Our estimated annual effective income tax rate was 32.4% as compared to an annual effective tax rate of 20.8% for 2012. The lower effective income tax rate in 2012 compared to 2013 primarily reflected the benefit of a full reversal of deferred tax asset valuation allowances during 2012.

Regulatory Matters

We improved our Bank regulatory capital ratios during 2013, increasing our Tier 1 leverage and total risk-based capital ratios to 11.89% and 19.15%, respectively, compared to 10.20% and 17.09%, respectively, at June 30, 2012.

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 MSRs and OREO


•	Income Taxes

These policies and estimates are described in further detail in Part II, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies within the 2012 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 June 30,
	2013						2012
(in thousands)	Average Balance		Interest		Average Yield/Cost		Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash & cash equivalents	$	21,929	$	13	0.24	%	$	95,599	$	52	0.22	%
Investment securities	512,475		3,561		2.78	%	431,875		2,856		2.65	%
Loans held for sale	389,572		3,469		3.56	%	311,166		2,919		3.76	%
Loans held for investment	1,397,219		14,005		4.01	%	1,304,740		14,466		4.44	%
Total interest-earning assets	2,321,195		21,048		3.63	%	2,143,380		20,293		3.79	%
Noninterest-earning assets ⁽²⁾	278,739						229,170
Total assets	$	2,599,934					$	2,372,550
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	238,328	233		0.39	%	$	150,709	124		0.33	%
Savings accounts	112,937		114		0.40	%	83,547		92		0.44	%
Money market accounts	783,135		973		0.50	%	595,579		814		0.55	%
Certificate accounts	393,332		1,047		1.07	%	810,324		3,168		1.57	%
Total interest-bearing deposits	1,527,732		2,367		0.62	%	1,640,159		4,198		1.03	%
FHLB advances	307,296		387		0.50	%	79,490		535		2.94	%
Securities sold under agreements to repurchase	10,913		11		0.40	%	52,369		50		0.35	%
Long-term debt	61,857		283		1.81	%	61,857		271		1.75	%
Other borrowings	9,300		5		0.22	%	—		3		—
Total interest-bearing liabilities	1,917,098		3,053		0.64	%	1,833,875		5,057		1.11	%
Noninterest-bearing liabilities	402,053						331,331
Total liabilities	2,319,151						2,165,206
Shareholders’ equity	280,783						207,344
Total liabilities and shareholders’ equity	$	2,599,934					$	2,372,550
Net interest income⁽³⁾			$	17,995					$	15,236
Net interest spread					2.99	%					2.68	%
Impact of noninterest-bearing sources					0.11	%					0.17	%
Net interest margin					3.10	%					2.85	%


(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 other real estate owned.


(3)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $580 thousand and $437 thousand for the quarters ended June 30, 2013 and June 30, 2012, respectively. The estimated federal statutory tax rate was 35% for the periods presented.



	Six Months Ended June 30,
	2013								2012
(in thousands)	Average Balance		Interest			Average Yield/Cost			Average Balance		Interest		Average Yield/Cost

Assets:
Interest-earning assets: ⁽¹⁾
Cash & cash equivalents	$	22,312	$	30		0.26	%		$	150,522	$	186	0.25	%
Investment securities	467,865		6,723			2.87	%		406,502		5,345		2.63	%
Loans held for sale	421,112		7,214			3.43	%		238,115		4,461		3.75	%
Loans held for investment	1,371,801		28,341			4.14	%		1,321,646		29,443		4.46	%
Total interest-earning assets	2,283,090		42,308			3.71	%		2,116,785		39,435		3.73	%
Noninterest-earning assets ⁽²⁾	264,795								225,257
Total assets	$	2,547,885							$	2,342,042
Liabilities and shareholders’ equity:
Deposits:
Interest-bearing demand accounts	$	210,032	391			0.38	%		$	144,416	239		0.33	%
Savings accounts	109,234		218			0.40	%		78,635		176		0.45	%
Money market accounts	739,652		1,830			0.50	%		560,385		1,534		0.55	%
Certificate accounts	476,726		3,417			1.45	%		889,328		7,128		1.61	%
Total interest-bearing deposits	1,535,644		5,856			0.77	%		1,672,764		9,077		1.09	%
FHLB advances	227,639		680			0.60	%		68,704		1,209		3.52	%
Securities sold under agreements to repurchase	5,487		11			0.40	%		26,185		50		0.38	%
Long-term debt	61,857		1,999		⁽³⁾	6.43	%	⁽³⁾	61,857		736		2.38	%
Other borrowings	4,675		10			0.42	%		—		9		—
Total interest-bearing liabilities	1,835,302		8,556			0.94	%		1,829,510		11,081		1.22	%
Noninterest-bearing liabilities	434,995								338,462
Total liabilities	2,270,297								2,167,972
Shareholders’ equity	277,588								174,070
Total liabilities and shareholders’ equity	$	2,547,885							$	2,342,042
Net interest income⁽⁴⁾			$	33,752							$	28,354
Net interest spread						2.77	%						2.51	%
Impact of noninterest-bearing sources						0.19	%						0.17	%
Net interest margin						2.96	%	⁽³⁾					2.68	%


(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 other real estate owned.

(3)

Interest expense for the six months ended June 30, 2013 included $1.4 million recorded in the first quarter of 2013 related to the correction of the cumulative effect of an error in prior years, resulting from the under accrual of interest due on our Trust Preferred Securities for which the Company had deferred payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.08%.


(4)	Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $1.1 million and $723 thousand for the six months ended June 30, 2013 and June 30, 2012, respectively. The estimated federal statutory tax rate was 35% for the periods presented.

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 a nonaccrual loan is placed back on accrual status or paid off, the accumulated interest collected on the loan is recognized at the time the loan is removed from nonaccrual status. 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 $174 thousand and $319 thousand for the three months ended June 30, 2013 and 2012, respectively, and $325 thousand and $1.1 million for the six months ended June 30, 2013 and 2012, respectively.

Net Interest Income

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

Net interest income on a tax equivalent basis was $18.0 million for the second quarter of 2013, an increase of $2.8 million, or 18.1%, from $15.2 million for the second quarter of 2012. For the first six months of 2013, net interest income was $33.8 million, an increase of $5.4 million, or 19%, from $28.4 million in the same period last year. During the second quarter of 2013, total interest income increased $755 thousand from the second quarter of 2012, while total interest expense declined $2.0 million from the second quarter of 2012. The net interest margin for the second quarter of 2013 improved to 3.10% from 2.85% in the second quarter of 2012, and improved to 2.96% for the six months ended June 30, 2013 from 2.68% for the same period last year. Improvement in the margin from the second quarter of 2012 resulted from a 47 basis point decline in the cost of funds primarily due to the managed reduction of higher-cost certificates of deposit. This improvement was partially offset by a 16 basis point decline in the yield on interest-earning assets, mostly due to lower yields on our portfolio loans.

Total average interest-earning assets increased from the comparative periods in 2012 primarily as a result of higher average balances of portfolio loans, loans held for sale and investment securities, partially offset by a decrease in cash and cash equivalents. The increase in average balances of portfolio loans and loans held for sale reflects our continued growth in loan production volume across all of our business lines. The higher average balance of our investment securities portfolio reflects management's decision during the quarter to increase this component of the overall asset mix. Total average interest-bearing deposit balances declined from the prior periods mostly as a result of a decline in higher-cost certificates of deposit, partially offset by an increase in transaction and savings deposits.

Total interest income on a tax equivalent basis of $21.0 million in the second quarter of 2013 increased $755 thousand, or 3.7%, from $20.3 million in the second quarter of 2012, primarily driven by increased average interest-earning assets. Our average balance of loans held for sale increased by $78.4 million, or 25.2%, due primarily to higher closed loan volume in the second quarter of 2013 as we continued to grow our mortgage origination and production capacity. The increase in interest income was also the result of a higher average balance of investment securities, which increased $80.6 million, or 18.7%, in the second quarter of 2013 from the second quarter of 2012. These increases were partially offset by a decrease in the yield on average loans held for investment, which decreased 43 basis points compared to the second quarter of 2012. For the first six months of 2013, interest income was $42.3 million, an increase of $2.9 million, or 7.3%, from $39.4 million in the same period last year resulting from a higher average balance of loans held for sale and a higher average balance and yield on investment securities.

Total interest expense of $3.1 million in the second quarter of 2013 decreased $2.0 million, or 39.6%, from $5.1 million in the second quarter of 2012. This decrease was primarily due to a $417.0 million, or 51.5%, decline in the average balance of higher-yielding certificates of deposit, partially offset by an increase in the average balance of lower-cost transaction and savings deposits resulting from the expansion of our deposit and lending branch network. Also contributing to the decrease in interest expense was the restructuring of FHLB advances, prepaying certain long-term advances and using short-term FHLB advances to meet short-term mortgage origination and sales funding needs, which contributed to a 244 basis point decline in interest cost on FHLB advances. For the first six months of 2013, interest expense was $8.6 million, a decrease of $2.5 million, or 22.8%, from $11.1 million in the same period last year, primarily driven by a decline in the average balance of higher-cost certificates of deposit, partially offset by an increase in the average balance of transaction and savings deposits. Interest expense in the first quarter of 2013 included $1.4 million related to the correction of the cumulative effect of an error in prior years that resulted from the under accrual of interest due on our outstanding TruPS for which the Company had deferred the payment of interest.

Provision for Loan Losses

Our loan loss provision for the second quarter of 2013 was $400 thousand compared to $2.0 million for the second quarter of 2012. For the first six months of 2013, loan loss provision was $2.4 million compared to $2.0 million in the same period last year. Nonperforming assets ("NPAs") were $41.7 million at June 30, 2013 compared to $53.8 million at December 31, 2012. Nonaccrual loans of $29.7 million at June 30, 2013 decreased $191 thousand, or 0.6%, from $29.9 million at December 31, 2012.

Net charge-offs of $1.1 million in the second quarter of 2013 were down $9.1 million from net charge-offs of $10.3 million in the second quarter of 2012. For the first six months of 2013, net charge-offs were $2.3 million compared to $17.7 million in the same period last year. The decrease in net charge-offs in 2013 as compared to the same periods of 2012 was primarily due to lower charge-offs on commercial construction loans during 2013. 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 $57.6 million in the second quarter of 2013, an increase of $706 thousand, or 1.2%, from $56.9 million in the second quarter of 2012. For the first six months of 2013, noninterest income was $116.5 million, an increase of $19.5 million, or 20.1%, from $97.0 million in the same period last year. Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale activities and 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. Noninterest income in the second quarter of 2013 as compared to the second quarter of 2012 benefited from increased single family loan production. Our single family mortgage closed loan production increased to $1.31 billion in the second quarter of 2013 from $1.07 billion in the second quarter of 2012 as we continued to grow our mortgage origination and production capacity. The increase in noninterest income, predominantly due to higher net gain on mortgage loan origination and sale activities, is detailed in the tables below.

Noninterest income consisted of the following.



	Three Months Ended June 30,					Dollar Change			Percent Change		Six Months Ended June 30,					Dollar Change			Percent Change
(in thousands)	2013		2012			Dollar Change			Percent Change		2013		2012			Dollar Change			Percent Change

Noninterest income
Net gain on mortgage loan origination and sale activities ⁽¹⁾	$	52,424	$	46,799		$	5,625		12	%	$	106,379	$	76,347		$	30,032		39	%
Mortgage servicing income	2,183		7,091			(4,908		)	(69	)	5,255		14,964			(9,709		)	(65	)
Income from Windermere Mortgage Services Series LLC	993		1,394			(401		)	(29	)	1,613		2,560			(947		)	(37	)
Loss on debt extinguishment	—		(939		)	939			NM		—		(939		)	939			NM
Depositor and other retail banking fees	761		771			(10		)	(1	)	1,482		1,506			(24		)	(2	)
Insurance commissions	190		177			13			7		370		359			11			3
Gain (loss) on securities available for sale	238		911			(673		)	(74	)	190		952			(762		)	(80	)
Other	767		646			121			19		1,210		1,249			(39		)	(3	)
Total noninterest income	$	57,556	$	56,850		$	706		1		$	116,499	$	96,998		$	19,501		20
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 June 30,					Dollar Change			Percent Change		Six Months Ended June 30,					Dollar Change		Percent Change
(in thousands)	2013		2012			Dollar Change			Percent Change		2013		2012			Dollar Change		Percent Change

Single family:
Servicing value and secondary marketing gains⁽¹⁾	$	43,448	$	40,548		$	2,900		7	%	$	87,683	$	64,328		$	23,355	36	%
Provision for repurchase losses⁽²⁾	—		(1,930		)	1,930			NM		—		(2,320		)	2,320		NM
Net gain from secondary marketing activities	43,448		38,618			4,830			13		87,683		62,008			25,675		41
Loan origination and funding fees	8,267		7,142			1,125			16		16,062		12,138			3,924		32
Total single family	51,715		45,760			5,955			13		103,745		74,146			29,599		40
Multifamily	709		1,039			(330		)	(32	)	2,634		2,201			433		20
Net gain on mortgage loan origination and sale activities	$	52,424	$	46,799		$	5,625		12	%	$	103,745	$	74,146		$	29,599	40	%
NM = not meaningful


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


(2)	Represents changes in estimated probable future repurchase losses on previously sold loans.

Net gain on mortgage loan origination and sale activities was $52.4 million for the second quarter of 2013, an increase of $5.6 million, or 12.0%, from $46.8 million for the second quarter of 2012. For the first six months of 2013, net gain on mortgage loan origination and sale activities was $103.7 million, an increase of $29.6 million, or 39.9%, from $74.1 million in the same period last year. This increase predominantly reflects increased single family loan production, primarily due to the expansion of our mortgage lending operations as we added approximately 45 mortgage production personnel during the first half of 2013.

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



	Three Months Ended June 30,				Dollar Change		Percent Change		Six Months Ended June 30,				Dollar Change		Percent Change
(in thousands)	2013		2012		Dollar Change		Percent Change		2013		2012		Dollar Change		Percent Change

Production volumes:
Single family mortgage closed loan volume ^{(1) (2)}	$	1,307,286	$	1,068,656	$	238,630	22	%	$	2,499,442	$	1,780,958	$	718,484	40	%
Single family mortgage interest rate lock commitments ⁽²⁾	1,423,290		1,303,390		119,900		9		2,459,112		2,218,531		240,581		11


(1)	Represents single family mortgage originations designated for sale during each respective period.


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

During the second quarter of 2013, single family closed loan production increased 22.3% and single family interest rate lock commitments increased 9.2% as compared to the second quarter of 2012. For the first six months of 2013, single family closed loan production increased 40.3% and single family interest rate lock commitments increased 10.8% as compared to the same period last year. Our mortgage loan origination and sale revenue growth reflected our expansion of mortgage loan origination capacity. Our production mix continued to shift to the purchase mortgage market during the second quarter of 2013, primarily as a result of an increase in purchase volume combined with a significant decline in refinancing volume caused mainly by a sharp increase in mortgage interest rates experienced late in the quarter.

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.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Effect of changes to the mortgage repurchase liability:
Servicing value and secondary marketing gains⁽¹⁾	$	(472	)	$	(285	)	$	(1,008	)	$	(675	)
Provision for repurchase losses⁽²⁾	—			(1,930		)	—			(1,930		)
	$	(472	)	$	(2,215	)	$	(1,008	)	$	(2,605	)


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


(2)	Represents changes in estimated probable future repurchase losses on previously sold loans.

For further information on the Company's mortgage repurchase liability, see Note 8, Commitments, Guarantees and Contingencies in this Form 10-Q.

Mortgage servicing income consisted of the following.



	Three Months Ended June 30,																		Total Dollar Change			Total Percent Change
	2013									2012
(in thousands)	Single Family			Multifamily			Total			Single Family			Multifamily			Total

Servicing income, net:
Servicing fees and other	$	7,216		$	739		$	7,955		$	5,934		$	771		$	6,705		$	1,250		19	%
Changes in fair value of MSRs due to modeled amortization ⁽¹⁾	(6,569		)	n/a			(6,569		)	(4,052		)	n/a			(4,052		)	(2,517		)	62
Amortization	n/a			(423		)	(423		)	n/a			(462		)	(462		)	39			(8	)
	647			316			963			1,882			309			2,191			(1,228		)	(56	)
Risk management:
Changes in fair value of MSRs due to changes in model inputs and/or assumptions ⁽²⁾	14,725			n/a			14,725			(15,354		)	n/a			(15,354		)	30,079			(196	)
Net gain from derivatives economically hedging MSRs	(13,505		)	n/a			(13,505		)	20,254			n/a			20,254			(33,759		)	(167	)
	1,220			—			1,220			4,900			n/a			4,900			(3,680		)	(75	)
Mortgage servicing income	$	1,867		$	316		$	2,183		$	6,782		$	309		$	7,091		$	(4,908	)	(69	)%


(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.



	Six Months Ended June 30,																		Total Dollar Change			Total Percent Change
	2013									2012
(in thousands)	Single Family			Multifamily			Total			Single Family			Multifamily			Total

Servicing income, net:
Servicing fees and other	$	14,011		$	1,551		$	15,562		$	11,590		$	1,552		$	13,142		$	2,420		18	%
Changes in fair value of MSRs due to modeled amortization ⁽¹⁾	(11,675		)	n/a			(11,675		)	(9,022		)	n/a			(9,022		)	(2,653		)	29
Amortization	n/a			(913		)	(913		)	n/a			(953		)	(953		)	40			(4	)
	2,336			638			2,974			2,568			599			3,167			(193		)	(6	)
Risk management:
Changes in fair value of MSRs due to changes in model inputs and/or assumptions ⁽²⁾	18,304			n/a			18,304			(7,942		)	n/a			(7,942		)	26,246			(330	)
Net gain from derivatives economically hedging MSRs	(16,023		)	n/a			(16,023		)	19,739			n/a			19,739			(35,762		)	(181	)
	2,281			n/a			2,281			11,797			n/a			11,797			(9,516		)	(81	)
Mortgage servicing income	$	4,617		$	638		$	5,255		$	14,365		$	599		$	14,964		$	(9,709	)	(65	)%


(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 second quarter of 2013, mortgage servicing income was $2.2 million, a decrease of $4.9 million from $7.1 million in the second quarter of 2012. For the first six months of 2013, mortgage servicing income was $5.3 million, a decrease of $9.7 million from $15.0 million in the first six months of 2012. This decrease was primarily due to mortgage servicing rights ("MSR") risk management results, which represents 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 the MSR risk management activities for the second quarter of 2013 was a gain of $1.2 million compared to a gain of $4.9 million in the second quarter of 2012. For the first six months of 2013, the net performance of the MSR risk management activities was $2.3 million compared to a gain of $11.8 million for the same period last year. The lower gain in 2013 largely reflects a reduction in sensitivity to interest rates for the Company's MSRs, which has enabled the Company to reduce the notional amount of derivative instruments used to economically hedge MSRs. The lower notional amount of derivative instruments, along with a flatter yield curve, resulted in lower net gains from MSR risk management, which negatively impacted mortgage servicing income. In addition, MSR risk management results for 2013 reflect the impact on the fair value of MSRs due to changes in model inputs and assumptions related to factors other than interest rate changes. Such factors included changes to the FHA streamlined refinance program and higher expected home values, both of which generally lead to higher projected prepayment speeds, and resulted in a decline in income from MSR risk management activities in 2013.

Mortgage servicing fees collected in the second quarter of 2013 were $8.0 million, an increase of $1.3 million, or 18.6%, from $6.7 million in the second quarter of 2012. Our loans serviced for others portfolio increased to $11.18 billion at June 30, 2013 from $9.65 billion at December 31, 2012 and $8.30 billion at June 30, 2012.

Income from Windermere Mortgage Services Series LLC decreased in the second quarter of 2013 to $993 thousand from $1.4 million in the second quarter of 2012. The decrease in 2013 was primarily due to decreased closed loan volume and interest rate lock commitments, which were $218.2 million and $207.4 million, respectively, for the three months ended June 30, 2013 compared to $242.1 million and $233.1 million, respectively, for the same period in 2012.

Depositor and other retail banking fees for the three and six months ended June 30, 2013 were relatively consistent with 2012 results. The following table presents the composition of depositor and other retail banking fees for the periods indicated.



	Three Months Ended June 30,				Dollar Change			Percent Change		Six Months Ended June 30,				Dollar Change			Percent Change
(in thousands)	2013		2012		Dollar Change			Percent Change		2013		2012		Dollar Change			Percent Change

Fees:
Monthly maintenance and deposit-related fees	$	366	$	393	$	(27	)	(7	)%	$	719	$	770	$	(51	)	(7	)%
Debit Card/ATM fees	373		351		22			6		723		690		33			5
Other fees	22		27		(5		)	(19	)	40		46		(6		)	(13	)
Total depositor and other retail banking fees	$	761	$	771	$	(10	)	(1	)%	$	1,482	$	1,506	$	(24	)	(2	)%

Noninterest Expense

Noninterest expense was $56.7 million in the second quarter of 2013, an increase of $9.8 million, or 20.8%, from $47.0 million in the second quarter of 2012. For the first six months of 2013, noninterest expense was $112.5 million, an increase of $30.8 million, or 37.7%, from $81.7 million for the same period last year. The increase in noninterest expense was primarily the result of increased salaries and related costs related to increased closed loan production in 2013 as compared to the same periods of 2012. Additionally, higher marketing and other general and administrative expenses, resulting from the Company's growth in retail deposit branches and increased mortgage and commercial loan production personnel, were partially offset by a decrease in other real estate owned ("OREO") expenses. During the second quarter of 2013, the Company recorded a $1.2 million increase to the net realizable value of a commercial real estate OREO property.

Noninterest expense consisted of the following.



	Three Months Ended June 30,					Dollar Change			Percent Change		Six Months Ended June 30,				Dollar Change			Percent Change
(in thousands)	2013			2012		Dollar Change			Percent Change		2013		2012		Dollar Change			Percent Change

Noninterest expense
Salaries and related costs	$	38,579		$	28,224	$	10,355		37	%	$	73,641	$	49,575	$	24,066		49	%
General and administrative	10,270			6,832		3,438			50		21,200		12,156		9,044			74
Legal	599			724		(125		)	(17	)	1,210		1,159		51			4
Consulting	763			322		441			137		1,459		677		782			116
Federal Deposit Insurance Corporation assessments	143			717		(574		)	(80	)	710		1,957		(1,247		)	(64	)
Occupancy	3,381			2,092		1,289			62		6,183		3,881		2,302			59
Information services	3,574			1,994		1,580			79		6,570		3,717		2,853			77
Other real estate owned expense and other adjustments	(597		)	6,049		(6,646		)	(110	)	1,538		8,569		(7,031		)	(82	)
Total noninterest expense	$	56,712		$	46,954	$	9,758		21	%	$	112,511	$	81,691	$	30,820		38	%

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

Salaries and related costs were $38.6 million in the second quarter of 2013, an increase of $10.4 million, or 36.7%, from $28.2 million in the second quarter of 2012. For the first six months of 2013, salaries and related costs were $73.6 million, an increase of $24.1 million, or 48.5%, from $49.6 million for the same period last year. The increase primarily resulted from a $6.1 million and $12.5 million increase in base salaries and related costs for the second quarter and first six months of 2013, respectively, due to Company growth and a $4.8 million and $11.3 million increase in commissions and incentives paid for the

second quarter and first six months of 2013, respectively, in connection with strong growth in closed mortgage loan volume. At June 30, 2013, we had increased our full-time equivalent employees by 43.4% from June 30, 2012.

General and administrative expense was $10.3 million in the second quarter of 2013, an increase of $3.4 million, or 50.3%, from $6.8 million in the second quarter of 2012. For the first six months of 2013, general and administrative expenses were $21.2 million, an increase of $9.0 million, or 74.4%, from $12.2 million for the same period last year. These expenses include general office and equipment expense, marketing, taxes and insurance. The increase in general and administrative expense was primarily due to the overall growth in our mortgage lending and commercial and consumer business lines and increased marketing expenses.

Income Tax Expense

Review of Financial Condition – Comparison of June 30, 2013 to December 31, 2012

Total assets were $2.78 billion at June 30, 2013 and $2.63 billion at December 31, 2012. The increase in total assets was primarily due to a $121.8 million increase in investment securities and a $107.5 million increase in loans held for investment, partially offset by a $149.6 million decrease in loans held for sale.

Cash and cash equivalents was $21.6 million at June 30, 2013 compared to $25.3 million at December 31, 2012, a decrease of $3.6 million, or 14.4%.

Investment securities available for sale were $538.2 million at June 30, 2013 compared to $416.3 million at December 31, 2012, an increase of $121.8 million, or 29.3%. The higher balance of our investment securities portfolio reflects management's decision during the quarter to increase this component of the overall asset mix and to add corporate debt securities to the Company's portfolio. With the Company's improved credit position and excess capital, the investment in corporate debt securities provides diversification in the portfolio with minimal additional credit risk.

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



	At June 30, 2013				At December 31, 2012
(in thousands)	Fair Value		Percent		Fair Value		Percent

Investment securities available for sale:
Mortgage-backed securities:
Residential	$	120,939	22.5	%	$	62,853	15.1	%
Commercial	13,892		2.6		14,380		3.5
Municipal bonds	147,675		27.4		129,175		31.0
Collateralized mortgage obligations:
Residential	137,543		25.6		170,199		40.9
Commercial	17,533		3.3		9,043		2.2
Corporate debt securities	70,973		13.2		—		—
U.S. Treasury securities	29,609		5.5		30,679		7.4
Total investment securities available for sale	$	538,164	100.0	%	$	416,329	100.0	%

Loans held for sale were $471.2 million at June 30, 2013 as compared to $620.8 million at December 31, 2012, a decrease of $149.6 million, or 24.1%. Loans held for sale include single family and multifamily residential loans, typically sold within 30 days of closing the loan. The decrease in loans held for sale was primarily the result of rising mortgage interest rates and declining refinancing loan volume, coupled with the expected seasonal weakness in the mortgage market and low housing inventories that have constrained the purchase mortgage market.

Loans held for investment, net were $1.42 billion at June 30, 2013 compared to $1.31 billion at December 31, 2012, an increase of $107.5 million, or 8.2%. Our single family loan portfolio increased by $98.6 million from December 31, 2012, primarily as a result of increased originations of mortgages that exceed conventional conforming loan limits. This increase was partially offset by a $16.3 million decrease in commercial business and construction loans, as unscheduled payoffs were greater than loan originations during the first six months of 2013.

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 June 30, 2013					At December 31, 2012
(in thousands)	Amount			Percent		Amount			Percent

Consumer loans
Single family	$	772,450		53.4	%	$	673,865		50.3	%
Home equity	132,218			9.1		136,746			10.2
	904,668			62.5		810,611			60.5
Commercial loans
Commercial real estate ⁽¹⁾	382,345			26.4		361,879			27.0
Multifamily	26,120			1.8		17,012			1.3
Construction/land development	61,125			4.2		71,033			5.3
Commercial business	73,202			5.1		79,576			5.9
	542,792			37.5		529,500			39.5
	1,447,460			100.0	%	1,340,111			100.0	%
Net deferred loan fees and costs	(3,366		)			(3,576		)
	1,444,094					1,336,535
Allowance for loan losses	(27,655		)			(27,561		)
	$	1,416,439				$	1,308,974


(1)	June 30, 2013 and December 31, 2012 balances comprised of $94.1 million and $94.9 million of owner occupied loans, respectively, and $288.2 million and $267.0 million of non-owner occupied loans, respectively.

Accounts receivable and other assets was $125.3 million at June 30, 2013 compared to $88.8 million at December 31, 2012, an increase of $36.5 million, or 41.1%. This increase was primarily due to a $5.0 million investment in an affordable housing project and an increase in the fair value of derivative assets, primarily forward sale commitments used to economically hedge secondary marketing activities, reflecting rising mortgage interest rates experienced in the latter part of the second quarter of 2013.

Deposits were $1.96 billion at June 30, 2013 compared to $1.98 billion at December 31, 2012, a decrease of $13.7 million or 0.7%. This decrease was due to the managed reduction of certificates of deposit balances, which were $403.6 million at June 30, 2013, a decrease of $251.8 million, or 38%, from $655.5 million at December 31, 2012. Largely offsetting this decrease were increases in transaction and savings deposits, which were $1.33 billion at June 30, 2013, an increase of $284.3 million, or 27.2%, from $1.05 billion at December 31, 2012. This improvement in the composition of deposits reflects our successful efforts to attract transaction and savings deposit balances through our branch network and convert customers with maturing certificates of deposit to transaction and savings deposits.

The following table details the composition of our deposits by dollar amount and as a percentage of our total deposits.



(in thousands)	At June 30, 2013				At December 31, 2012
	Amount		Percent		Amount		Percent

Deposits by Product:
Noninterest-bearing accounts - checking and savings	$	121,281	6	%	$	83,563	4	%
Interest-bearing transaction and savings deposits:
NOW accounts	279,670		14		174,699		9
Statement savings accounts due on demand	115,817		6		103,932		5
Money market accounts due on demand	813,608		41		683,906		35
Total interest-bearing transaction and savings deposits	1,209,095		61		962,537		49
Total transaction and savings deposits	1,330,376		67		1,046,100		53
Certificates of deposit	403,636		21		655,467		33
Noninterest-bearing accounts - other	229,111		12		275,268		14
Total deposits	$	1,963,123	100	%	$	1,976,835	100	%

Federal Home Loan Bank advances were $409.5 million at June 30, 2013 compared to $259.1 million at December 31, 2012, an increase of $150.4 million, or 58.0%. The increase was the result of higher overall asset balances, as the Company uses these borrowings to fund our mortgage banking and securities investment activities.

Accounts payable and other liabilities were $73.3 million at June 30, 2013 compared to $69.7 million at December 31, 2012, an increase of $3.6 million, or 5.2%. This increase was primarily due to the change in the fair value of derivatives used for MSR risk management, partially offset by the first quarter 2013 payment of $13.5 million in net deferred interest payable due on its outstanding TruPS.

Shareholders’ Equity

Shareholders' equity was $268.3 million at June 30, 2013 compared with $263.8 million at December 31, 2012. This increase included net income of $23.0 million, partially offset by comprehensive loss of $17.7 million recognized during the six months ended June 30, 2013. The comprehensive loss represents unrealized losses in the valuation of our investment securities portfolio at June 30, 2013 as a result of the increase in interest rates experienced in the latter part of the second quarter of 2013.

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.

As a result of the above, shareholders’ equity, on a per share basis, increased to $18.62 per share at June 30, 2013, up from $18.34 per share at December 31, 2012.

Return on Equity and Assets

The following table presents certain information regarding our returns on average equity and average total assets. Return on equity ratios for the periods shown may not be comparable due to the impact and timing of the Company's initial public offering of common stock completed in February 2012 and changes in the annual effective income tax rate between periods. During 2012, the Company benefited from the full reversal of its deferred tax asset valuation allowances.



	At or for the Three Months Ended June 30,				At or for the Six Months Ended June 30,
	2013		2012		2013		2012

Return on assets ⁽¹⁾	1.86	%	3.15	%	1.81	%	3.30	%
Return on equity ⁽²⁾	17.19	%	36.03	%	16.58	%	44.39	%
Equity to assets ratio ⁽³⁾	10.80	%	8.74	%	10.89	%	7.43	%


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


(2)	Net income divided by average equity (annualized).


(3)	Average equity divided by average total assets.

Business Segments

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



	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2013		2012		2013		2012

Net interest income	$	3,728	$	3,287	$	7,882	$	5,273
Noninterest income	56,019		54,597		112,572		92,215
Noninterest expense	43,240		27,935		83,340		48,145
Income before income taxes	16,507		29,949		37,114		49,343
Income tax expense	5,760		3,757		12,574		2,845
Net income	$	10,747	$	26,192	$	24,540	$	46,498
Average assets	$	634,262	$	518,661	$	629,675	$	421,981

Mortgage banking net income was $10.7 million for the second quarter of 2013, a decrease of $15.4 million, or 59.0%, from net income of $26.2 million for the second quarter of 2012. For the first six months of 2013, mortgage banking net income was $24.5 million, a decrease of $22.0 million, or 47.2%, from net income of $46.5 million for the first six months of 2012. The decrease in mortgage banking net income during these periods as compared to the prior year was primarily due to an increase in noninterest expense, being partially offset by an increase in noninterest income. The increase in noninterest income and

noninterest expense reflected elevated mortgage loan origination and sale activities as well as increased salaries and related costs in connection with the expansion of single family lending operations. See — "Results of Operations, Noninterest Income—Net gain on mortgage loan origination and sale activities.”

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through personal service at bank branches 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. As of June 30, 2013, our bank branch network consists of 23 branches, primarily in the Pacific Northwest and Hawaii. At June 30, 2013 and December 31, 2012, our transaction and savings deposits totaled $1.33 billion and $1.05 billion and our loan portfolio totaled $1.42 billion and $1.31 billion, respectively.

We originate commercial real estate loans with a focus on 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. At June 30, 2013, and December 31, 2012, our loans servicing portfolio included $720.4 million and $727.1 million, respectively, of loans we had originated and sold under the DUS program.



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands)	2013		2012			2013			2012

Net interest income	$	13,687	$	11,512		$	24,768		$	22,358
Provision for loan losses	400		2,000			2,400			2,000
Noninterest income	1,537		2,253			3,927			4,783
Noninterest expense	13,472		19,019			29,171			33,546
Income (loss) before income taxes	1,352		(7,254		)	(2,876		)	(8,405		)
Income tax expense (benefit)	31		260			(1,344		)	(544		)
Net income (loss)	$	1,321	$	(7,514	)	$	(1,532	)	$	(7,861	)
Average assets	$	1,965,672	$	1,853,889		$	1,918,210		$	1,920,061

Commercial and consumer banking net income was $1.3 million for the second quarter of 2013, improving results by $8.8 million from a net loss of $7.5 million for the second quarter of 2012. For the first six months of 2013, commercial and consumer banking had a net loss of $1.5 million, improving results by $6.3 million from a net loss of $7.9 million for the first six months of 2012. The improvement in 2013 primarily resulted from an increase in net interest income, which reflects improvements in our deposit product and pricing strategy. That strategy resulted in our reducing higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits. In addition, contributing to the improvement in the second quarter of 2013 was a lower provision for loan losses, which reflects improving credit trends.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments (which include but are not limited to commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.

For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the Off-Balance Sheet Arrangements and Commitments, Guarantees and Contingencies discussions within Part II, Item 7 Management's Discussion and Analysis in our 2012 Annual Report on Form 10-K, as well as Note 13, Commitments, Guarantees and Contingencies within the 2012 Annual Report on Form 10-K and Note 8, Commitments, Guarantees and Contingencies in this Form 10-Q.

Enterprise Risk Management

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

For more information on how we manage these business, financial and other risks, see the Enterprise Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 2012 Annual Report on Form 10-K.

Credit Risk Management

The following discussion highlights developments since December 31, 2012 and should be read in conjunction with the Credit Risk Management discussion within Part II, Item 7 Management's Discussion and Analysis in our 2012 Annual Report on Form 10-K.

Asset Quality and Nonperforming Assets

Nonperforming assets ("NPAs") were $41.7 million and $53.8 million at June 30, 2013 and December 31, 2012, respectively. NPAs at June 30, 2013 represented 1.50% of total assets compared to 2.05% of total assets at December 31, 2012. Nonaccrual loans of $29.7 million, or 2.06% of total loans at June 30, 2013, decreased $191 thousand, or 0.6% from $29.9 million, or 2.24% of total loans at December 31, 2012. OREO balances of $11.9 million at June 30, 2013 declined $12.0 million, or 50.1%, from $23.9 million at December 31, 2012. Net charge-offs during the three and six months ended June 30, 2013 were $1.1 million and $2.3 million, compared with $10.3 million and $17.7 million during the three and six months ended June 30, 2012.

At June 30, 2013, our loans held for investment portfolio, excluding the allowance for loan losses, was $1.44 billion, an increase of $107.6 million from December 31, 2012, while the allowance for loan losses increased to $27.7 million, or 1.92% of loans held for investment, compared to $27.6 million, or 2.06% of loans held for investment at December 31, 2012, reflecting the improved credit quality of the Company's loan portfolio.

Our provision for loan losses for the three and six months ended June 30, 2013 was $400 thousand and $2.4 million compared to $2.0 million for both the three and six months ended June 30, 2012. Management considers the current level of the allowance for loan losses to be appropriate to cover estimated incurred losses inherent within our loans held for investment portfolio.

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



	At June 30, 2013
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	66,318	$	81,469	$	—
Loans with an allowance recorded	63,087		64,984		4,279
Total	$	129,405	$	146,453	$	4,279

	At December 31, 2012
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance

Impaired loans:
Loans with no related allowance recorded	$	53,615	$	67,262	$	—
Loans with an allowance recorded	70,350		72,220		6,368
Total	$	123,965	$	139,482	$	6,368

The Company had 218 impaired loans totaling $129.4 million at June 30, 2013 and 167 impaired loans totaling $124.0 million at December 31, 2012. The average recorded investment in these loans for the three and six months ended June 30, 2013 was $127.6 million and $126.4 million compared with $154.1 million and $161.9 million for the three and six months ended June 30, 2012. Impaired loans of $63.1 million at June 30, 2013 had a valuation allowance of $4.3 million. At December 31, 2012, impaired loans of $70.4 million had a valuation allowance of $6.4 million.

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 2012 Annual Report on Form 10-K.

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



	At June 30, 2013						At December 31, 2012
(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	$	13,810	49.6	%	53.4	%	$	13,388	48.2	%	50.3	%
Home equity	4,879		17.5	%	9.1	%	4,648		16.7	%	10.2	%
	18,689		67.1	%	62.5	%	18,036		64.9	%	60.5	%
Commercial loans
Commercial real estate	5,723		20.5	%	26.4	%	5,312		19.1	%	27.0	%
Multifamily	690		2.5	%	1.8	%	622		2.2	%	1.3	%
Construction/land development	1,185		4.3	%	4.2	%	1,580		5.7	%	5.3	%
Commercial business	1,571		5.6	%	5.1	%	2,201		8.1	%	5.9	%
	9,169		32.9	%	37.5	%	9,715		35.1	%	39.5	%
Total allowance for credit losses	$	27,858	100.0	%	100.0	%	$	27,751	100.0	%	100.0	%

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



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2013			2012			2013			2012

Allowance at the beginning of period	$	28,594		$	35,402		$	27,751		$	42,800
Provision for loan losses	400			2,000			2,400			2,000
Recoveries:
Consumer
Single family	171			433			246			433
Home equity	156			212			253			277
	327			645			499			710
Commercial
Commercial real estate	—			128			—			128
Construction/land development	281			514			351			642
Commercial business	36			74			148			86
	317			716			499			856
Total recoveries	644			1,361			998			1,566
Charge-offs:
Consumer
Single family	(1,141		)	(1,251		)	(1,862		)	(2,526		)
Home equity	(299		)	(1,150		)	(1,138		)	(2,499		)
	(1,440		)	(2,401		)	(3,000		)	(5,025		)
Commercial
Commercial real estate	(340		)	(1,691		)	(143		)	(1,717		)
Construction/land development	—			(7,223		)	(148		)	(12,035		)
Commercial business	—			(323		)	—			(464		)
	(340		)	(9,237		)	(291		)	(14,216		)
Total charge-offs	(1,780		)	(11,638		)	(3,291		)	(19,241		)
(Charge-offs), net of recoveries	(1,136		)	(10,277		)	(2,293		)	(17,675		)
Balance at end of period	$	27,858		$	27,125		$	27,858		$	27,125

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



	At June 30, 2013
(in thousands)	Accrual		Nonaccrual		Total

Consumer
Single family	$	71,438	$	4,536	$	75,974
Home equity	2,326		121		2,447
	73,764		4,657		78,421
Commercial
Commercial real estate	21,617		—		21,617
Multifamily	3,198		—		3,198
Construction/land development	3,718		4,051		7,769
Commercial business	129		—		129
	28,662		4,051		32,713
	$	102,426	$	8,708	$	111,134



	At December 31, 2012
(in thousands)	Accrual		Nonaccrual		Total

Consumer
Single family	$	67,483	$	3,931	$	71,414
Home equity	2,288		465		2,753
	69,771		4,396		74,167
Commercial
Commercial real estate	21,071		770		21,841
Multifamily	3,221		—		3,221
Construction/land development	6,365		5,042		11,407
Commercial business	147		—		147
	30,804		5,812		36,616
	$	100,575	$	10,208	$	110,783

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



	At June 30, 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	$	7,943	$	4,790	$	14,494	$	44,832	$	72,059	$	4,468
Home equity	261		165		3,367		—		3,793		—
	8,204		4,955		17,861		44,832		75,852		4,468
Commercial loans
Commercial real estate	—		—		6,051		—		6,051		1,184
Construction/land development	—		—		4,051		—		4,051		6,297
Commercial business	—		—		1,738		—		1,738		—
	—		—		11,840		—		11,840		7,481
Total	$	8,204	$	4,955	$	29,701	$	44,832	$	87,692	$	11,949



	At December 31, 2012
(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	$	11,916	$	4,732	$	13,304	$	40,658	$	70,610	$	4,071
Home equity	787		242		2,970		—		3,999		—
	12,703		4,974		16,274		40,658		74,609		4,071
Commercial loans
Commercial real estate	—		—		6,403		—		6,403		10,283
Construction/land development	—		—		5,042		—		5,042		9,587
Commercial business	—		—		2,173		—		2,173		—
	—		—		13,618		—		13,618		19,870
Total	$	12,703	$	4,974	$	29,892	$	40,658	$	88,227	$	23,941


(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 Management

Liquidity management is primarily intended to ensure we are able to maintain cash flows adequate to fund operations and meet our obligations, including demands of depositors, funding loan commitments, draws on lines of credit and paying any creditors, on a timely and cost-effective basis in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc. and HomeStreet Bank have established liquidity guidelines and operating practices that involve the assessment of the sources and uses of cash as well as collateral maintained at the Federal Reserve Bank and FHLB. The overall liquidity position is projected on a short-term and long-term basis to manage liquidity risk. Furthermore, the projected liquidity position is analyzed and reviewed using stress scenarios on a semi-annual basis to identify potential adverse impacts to off-balance sheet capacity and to ensure operational preparedness.

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

HomeStreet, Inc.

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

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 June 30, 2013, our primary liquidity ratio was 39.7% compared to 43.9% at December 31, 2012.

At June 30, 2013 and December 31, 2012, the Bank had available borrowing capacity of $36.2 million and $55.7 million from the FHLB, and $268.3 million and $124.3 million from the Federal Reserve Bank of San Francisco, respectively.

Our lending agreement with the FHLB permits it to refuse to make advances during periods in which an “event of default” (as defined in that agreement) exists. An event of default occurs when the FHLB gives notice to the Bank of an intention to take any of a list of permissible actions following the occurrence of specified events or conditions affecting the Bank. The Bank is not aware of any potential event of default at the present time. The FHLB has required the Bank to deliver physical possession of certain negotiable instruments and related documentation as collateral for borrowings under that agreement.

Cash Management

For the six months ended June 30, 2013 and 2012, cash and cash equivalents decreased $3.6 million and $188.2 million, respectively. 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 six months ended June 30, 2013, net cash of $115.1 million was provided by operating activities, as proceeds from the sale of loans held for sale were largely offset by cash used to fund the production of loans held for sale. We believe that cash flows from operations, available cash balances and our ability to generate cash through short-term debt are sufficient to fund our operating liquidity needs. For the six months ended June 30, 2012, net cash of $246.9 million was used in operating activities, primarily to fund the production of loans held for sale.

Cash flows from investing activities

The Company's investing activities primarily include available-for-sale securities and loans originated and held for investment. For the six months ended June 30, 2013, net cash of $256.3 million was used in investing activities, as the Company increased the balances of its investment securities portfolio and its loans held for investment portfolio. For the six months ended June 30, 2012, net cash of $31.8 million was used in investing activities, as we used the proceeds from our stock issuance to purchase available-for-sale securities. Net purchases in our investment securities portfolio were $223.5 million during that period, reflecting management's decision during the quarter to increase this component of the overall asset mix.

Cash flows from financing activities

The Company's financing activities are primarily related to customer deposits and net proceeds from the FHLB. For the six months ended June 30, 2013, net cash of $137.6 million was provided by financing activities. We had net proceeds of $150.4 million of FHLB advances as the Company grew its investment securities portfolio by $121.8 million and its loans held for investment portfolio by $107.5 million, both of which require additional wholesale funding. The decline of customer deposits due to the maturity of certificates of deposit was partially offset by increased transaction and savings deposits. For the six months ended June 30, 2012, net cash of $90.4 million was provided by financing activities as the Company had net proceeds

of $87.7 million from the issuance of common stock through our initial public offering, which we used to purchase available-for-sale investment securities.

Capital Management

Federally insured depository institutions, such as the Bank, are required to maintain a minimum level of regulatory capital. The FDIC regulations recognize two types, or tiers, of capital: “core capital,” or Tier 1 capital, and “supplementary capital,” or Tier 2 capital. The FDIC currently measures a bank’s capital using (1) Tier 1 leverage ratio, (2) Tier 1 risk-based capital ratio and (3) Total risk-based capital ratio. In order to qualify as “well capitalized,” a bank must have a Tier 1 leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a Total risk-based capital ratio of at least 10.0%. In order to be deemed “adequately capitalized,” a bank generally must have a Tier 1 leverage ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a Total risk-based capital ratio of at least 8.0%. The FDIC retains the right to require a depository institution to maintain a higher capital level based on its particular risk profile.

At June 30, 2013 the Bank was “well capitalized” under the FDIC regulatory requirements.

The following tables present the Bank’s capital amounts and ratios.



	At June 30, 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)	$	306,272	11.89	%	$	103,075	4.0	%	$	128,844	5.0	%
Tier 1 risk-based capital (to risk-weighted assets)	306,272		17.89	%	68,471		4.0	%	102,707		6.0	%
Total risk-based capital (to risk-weighted assets)	327,733		19.15	%	136,943		8.0	%	171,178		10.0	%



	At December 31, 2012
	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)	$	286,963	11.78	%	$	97,466	4.0	%	$	121,833	5.0	%
Tier 1 risk-based capital (to risk-weighted assets)	286,963		18.05	%	63,596		4.0	%	95,394		6.0	%
Total risk-based capital (to risk-weighted assets)	306,934		19.31	%	127,192		8.0	%	158,991		10.0	%

Basel III

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 would 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 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 6.0%

and a total risk-based ratio of 8.0%. Both the Company and the Bank are required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%. 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.

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.

Accounting Developments

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



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 2012 Annual Report on Form 10-K.



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 June 30, 2013.

Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION



ITEM 1	LEGAL PROCEEDINGS

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



ITEM 1A	RISK FACTORS

An investment in the Company is speculative and involves a high degree of risk. The risks described below represent some of the material risks you should carefully consider before making an investment decision. If any of these risks occur, our business, capital, liquidity, financial condition and results of operations could be materially and adversely affected, in which case the price of our common stock could decline significantly and you could lose all or a part of your investment. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also become important factors that materially adversely affect our business, capital, liquidity, financial condition and results of operations. You should carefully consider the following risk factors, together with the other information contained in this Report and other documents we file with the SEC, before making an investment decision about the Company.

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. Changes in interest rates may reduce our mortgage revenues, which would negatively impact our noninterest income and to a lesser extent our net interest income, and may impact 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.

Our securities portfolio includes securities that are insured or guaranteed by U.S. government agencies or government-sponsored enterprises and other securities that are sensitive to interest rate fluctuations. The unrealized gains or losses in our available-for-sale portfolio are reported as a separate component of shareholders' equity until realized upon sale. As a result, future interest rate fluctuations may impact 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 rise, particularly if they rise substantially or quickly, we may experience a reduction in mortgage refinancing and financing of new home purchases. These factors may negatively affect our mortgage loan origination volume and adversely affect our noninterest income.

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

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

The Federal Reserve Bank 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 Bank's interest rate policies can also materially affect the value of financial instruments we hold, including debt securities and mortgage servicing rights, or MSRs. These monetary policies can also negatively impact our borrowers, which in turn may increase the risk that they will be unable to pay their loans according to the terms or at all. We have no control over the monetary policies of the Federal Reserve Board and cannot predict when changes are expected or what the magnitude of such changes may be.

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

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

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

A substantial portion of our revenue is derived from residential mortgage lending which is a market sector that has experienced 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 years. Moreover, a significant increase in interest rates, which we experienced in the second quarter of 2013, may materially and adversely affect our future loan origination volume, margins, and the value of the collateral securing our outstanding loans, may increase rates of borrower default, and may otherwise adversely affect our business.

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

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

In particular, we may face risks related to market conditions that may negatively impact our business opportunities and plans, such as:


•	uncertainty related to increased regulation and aggressive governmental enforcement in the financial sector generally and the mortgage banking business specifically, including increased costs of compliance;


•	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;


•	increases in FDIC insurance premiums due to depletion of that agency's insurance funds;


•	restrictions in our ability to engage in routine funding transactions due to the commercial soundness of other financial institutions and government sponsored entities ("GSEs"); 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.

We have been rapidly increasing the growth of our mortgage business through hiring of additional loan officers, and the costs associated with that growth may not keep pace with the anticipated increase in our revenues.

Beginning in February of 2012, we have hired a substantial number of mortgage loan personnel, including large groups of employees previously affiliated with MetLife Home Loans. In addition to increasing our exposure to a more volatile segment of our business, the rapid expansion of our single family mortgage loan operations through hiring a large number of additional employees involves significant expense and exposes us to potential additional risks, including:


•	Expenses related to hiring and training a large number of new employees;


•	Higher compensation costs relative to production in the initial months of new employment;


•	Increased compliance costs;


•	Costs associated with opening new offices that may be needed to provide for the new employees;


•	Diversion of management's attention from the daily operations of the business;


•	The potential of litigation related from prior employers related to the portability of their employees;


•	The potential loss of other key employees.

We cannot guarantee that these costs will be fully offset by increased revenue generated by the expansion in this business line in the near future, or at all.

Our anticipated growth through acquisition is subject to regulatory review and approval.

We recently announced that we have agreed to acquire Fortune Bank, Yakima National Bank and two retail branches of AmericanWest Bank. Each of these acquisitions is subject to regulatory review and approval. If our regulators require us to substantially change the terms of the acquisition or decline to approve the transactions, we may not be able to recognize the growth that management anticipates from those transactions and we may not be able to recover the costs associated with pursuing those acquisitions.

Efforts to integrate future acquisitions could consume significant resources.

In addition to our recently announced agreements to acquire Fortune Bank, Yakima National Bank and two retail branches of AmericanWest Bank, which are expected to close in the fourth quarter of 2013, pending satisfaction of certain closing conditions and regulatory and respective shareholders' approvals, we may seek out other acquisitions in the near future as we look for ways to continue to grow our business and our market share. These pending acquisitions and any other future acquisition we may undertake involve numerous risks related to the integration of the acquired assets or entity into HomeStreet or HomeStreet Bank, including risks that arise after the transaction is completed. These risks include:


•	difficulties in integrating the operations, technologies, and personnel of the acquired companies;


•	difficulties in implementing internal controls over financial reporting;


•	diversion of management's attention from normal daily operations of the business;


•	inability to maintain the key business relationships and the reputations of acquired businesses;


•	entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;


•	responsibility for the liabilities of acquired businesses;


•	inability to maintain our internal standards, controls, procedures and policies at the acquired companies or businesses; and


•	potential loss of key employees of the acquired companies.

Difficulties in integrating any or all of these acquisitions may increase our costs and adversely impact our financial condition and results of operations.

We cannot assure you that we will remain profitable.

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


•	Increased costs from growth through acquisition of new loan officers, originators and servicing personnel as well as the acquisition of other entities such as Fortune and Yakima National Bank could exceed the income growth anticipated from these opportunities, especially in the short term as these new hires and new acquisitions are integrated into our business;


•	Changes in the interest rate environment may limit our ability to make loans, decrease our net interest income and noninterest income, reduce demand for loans, increase the cost of deposits and otherwise negatively impact our financial situation;


•	Volatility in mortgage markets, which is driven by factors outside of our control such as interest rate changes, housing inventory and general economic conditions, may negatively impact our ability to originate loans and change the fair value of our existing loans;


•	Changes in governmental sponsored entities and their ability to buy our loans in the secondary market may have significant changes in our ability to recognize income on sale of our loans to third parties;


•	Competition in the mortgage market industry may drive down the interest rates we are able to offer while at the same time changes in the cost structures and fees of governmental sponsored entities to whom we sell many of these loans may compress our margins and reduce our net income and profitability; and


•	Our hedging strategies to offset risks related to interest rate changes may not prove to be successful and may result in unanticipated losses for the Company.

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

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

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

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

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

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


•	the reduction of cash flows and capital resources, as we are required to make cash advances to meet contractual obligations to investors, process foreclosures, and maintain, repair and market foreclosed properties;


•	declining mortgage servicing fee revenues because we recognize these revenues only upon collection;


•	increasing loan servicing costs;


•	declining fair value on our mortgage servicing rights; and


•	declining fair values and liquidity of securities held in our investment portfolio that are collateralized by mortgage obligations.

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

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

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

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

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

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

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

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

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

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

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

The proposed restructuring or elimination of Fannie Mae and Freddie Mac 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.

In August 2012, the Treasury Department entered into amendments to its senior preferred stock purchase agreements with each of Fannie Mae and Freddie Mac that require those agencies to reduce the amount of mortgage assets they hold, setting a cap of $650 billion for December 31, 2012 and requiring a decrease of at least 15% per year for each year thereafter, to a minimum of $250 billion, as a step toward winding down those agencies. Most recently, the House Financial Services Committee recommended legislation that would wind down Fannie Mae and Freddie Mac with the expectation that a private market would emerge to purchase, bundle and resell conforming loans into the secondary market in their stead, subject to oversight and regulation from the federal government.

Whether or not such a private market would emerge is unknown. We cannot predict whether or not this or any other proposed legislation will pass, when or if a dismantling of Fannie Mae and Freddie Mac may occur, what the future of the mortgage

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

While there is no clarity on what will ultimately happen to Fannie Mae and Freddie Mac, any dismantling of those entities, or any other legislation that calls for the restructuring of Fannie those entities in such a way that restricts their loan purchase programs, may have a material adverse effect on our ability to originate loans and sell those loans to third party purchasers, which in turn would have a material adverse effect on our business and results of operations. Moreover, we have recorded on our balance sheet an intangible asset (mortgage servicing rights, or MSRs) relating to our right to service single and multifamily loans sold to Fannie Mae and Freddie Mac. That MSR asset was valued at $137.4 million at June 30, 2013 and $95.5 million at December 31, 2012. Changes in Fannie Mae's and Freddie Mac's policies and operations 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.

Through our wholly owned subsidiary HomeStreet Capital Corporation, we participate as a lender in the DUS program. Fannie Mae delegates responsibility for originating, underwriting and servicing mortgages, and we assume a limited portion of the risk of loss during the remaining term on each commercial mortgage loan that we sell to Fannie Mae.

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

Our operations are subject to extensive regulation by federal, state and local governmental authorities, including the FDIC, the Washington Department of Financial Institutions and the Federal Reserve, and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations to which we are subject are evolving and change frequently. Changes to those laws, rules and regulations are also sometimes retroactively applied. Furthermore, the on-site examination cycle for an institution in our circumstances is frequent and extensive. Examination findings by the regulatory agencies may result in adverse consequences to the Company or the Bank. 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 changes the laws as they apply to financial institutions and revises and expands 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 are 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, 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. See “Regulation and Supervision” in Part I - Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2012.

We will be subject to more stringent capital requirements.

On July 2, 2013, 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 Book will be required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%, which in effect brings the common equity Tier 1 capital ratio requirement to 7% to preclude regulatory restrictions on

specified operations. In this regard, any institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. Additional prompt corrective action rules will apply to the Bank, including higher ratio requirements for the Bank to be considered well-capitalized. The new rules also modify the manner for determining when certain capital elements are included in the ration calculations. Maintaining higher capital levels may result in lower profits for the Company as we will not be able to grow our lending as quickly as we might otherwise be able to do if we were to maintain lower capital levels.

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

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

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

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

•

Recent legislation and court decisions with precedential value could allow judges to modify the terms of residential mortgages in bankruptcy proceedings and could hinder our ability to foreclose promptly on defaulted mortgage loans or expand assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in our being held responsible for violations in the mortgage loan origination process.


•	Congress and various regulatory authorities have proposed programs that would require a reduction in principal balances of “underwater” residential mortgages, which if implemented would tend to reduce loan servicing income and which might adversely affect the carrying values of portfolio loans.

•

Recent court cases in Oregon and Washington have challenged whether Mortgage Electronic Registration Systems, Inc. (“MERS”) meets the statutory definition of deed of trust beneficiary under applicable state laws. Based 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 courts 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 and adversely affect our cost of doing business and results of operations

We cannot offer assurances as to which, if any, of these initiatives may be adopted or, if adopted, to what extent they would affect our business. Any such initiatives 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 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 growth 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 by the Consumer Financial Protection Bureau (CFPB) which has broad rulemaking authority over consumer financial products and services. The full impact of CFPB's

activities on our business is still unknown, however, 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 Part I- Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2012.

An important information technology systems provider was previously identified as having internal control deficiencies, and the persistence or recurrence of such issues could give rise to significant risks to the Bank and the Company.

In the first quarter of 2012 and again in the second quarter of 2013, we were notified that the provider of one of the Bank's critical information technology and transaction processing systems was identified as posing a significant risk to banking operations for that vendor's clients. That vendor has been criticized for, among other things, an unsatisfactory risk management system, the lack of a compliance culture and a lack of internal controls. That vendor has encountered a significant cyberattack and related computer fraud, and there have been indications that in the absence of a prompt remediation of known and unknown deficiencies, that vendor's systems may create enhanced risk for users.

The Bank does not use this system that was the subject of the cyberattack; however, the Bank uses this vendor for a wide variety of important functions, and given their progress in remediating these issues, and subject to the vendor's continued progress, we have plans to increase our reliance on this vendor and its products and services. Our Board of Directors, as well as the Bank's Board of Directors, were briefed on this development and are provided quarterly updates on the vendor's remediation efforts. Although the vendor believed all of the outstanding actions had been completed by March 31, 2013, a subsequent assessment found those remediation activities had not been wholly effective. If these concerns are not addressed effectively, the Bank could experience a number of potentially materially adverse consequences, including:


•	greater than normal exposure to compliance problems, which could lead to adverse regulatory actions, including potential enforcement actions;


•	the need to replace one or more of our information systems providers, which could lead to increased costs, disruptions in our relationships with one or more customers, management distractions, and other difficulties;


•	potential claims by customers, including class action claims, resulting from actual or alleged compromises of consumer or business financial information;


•	difficulties in maintaining an adequate system of internal controls and procedures and internal control over financial reporting;


•	the loss of confidence of one or more of our customers, or reputational harm associated with the use of these systems, particularly if our customers experience actual difficulties, losses or attacks; and


•	a dispute with this vendor over the adequacy of the products and services for which we contracted, potentially including increases in legal fees and other litigation costs.

The Bank is expanding its use of certain of this vendor's systems, and so may face an increased risk of exposure to the compliance failures of this vendor in the future.

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

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

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

To date we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks and losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, our plans to continue to implement our Internet banking and mobile banking channel, our expanding operations and the outsourcing 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.

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, reputational damage, 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 could have a material adverse effect on our business, financial condition and results of operations.

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

Our real estate lending also exposes us to environmental liabilities.

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

We may be required to recognize impairment with respect to investment securities, 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.

The strength and stability of other financial institutions may adversely affect our business.

Our counterparty risk exposure is affected by the actions and creditworthiness of other financial institutions with which we do business. Negative impacts to our counterparty financial institutions could affect our ability to engage in routine funding transactions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Many of these types of transactions can expose us to credit risk in the event of default by a direct or indirect counterparty or client.

If other financial institutions in our markets dispose of real estate collateral at below-market or distressed prices, such actions may increase our losses and have a material adverse effect our financial condition and results of operations.

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.

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 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.

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.

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

Some provisions of our articles of incorporation and bylaws may have the effect of deterring or delaying attempts by our shareholders to remove or replace management, to commence proxy contests, or to effect changes in control. These provisions include:


•	a classified board of directors so that only approximately one third of our board of directors is elected each year;


•	elimination of cumulative voting in the election of directors;


•	procedures for advance notification of shareholder nominations and proposals;


•	the ability of our board of directors to amend our bylaws without shareholder approval; and


•	the ability of our board of directors to issue shares of preferred stock without shareholder approval upon the terms and conditions and with the rights, privileges and preferences as the board of directors may determine.

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



ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.



ITEM 3	DEFAULTS UPON SENIOR SECURITIES

Not applicable.



ITEM 4	MINE SAFETY DISCLOSURE

Not applicable.



ITEM 5	OTHER INFORMATION

Not applicable.



ITEM 6	EXHIBITS

EXHIBIT INDEX



Exhibit
Number		Description

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.⁽¹⁾

31.2		Certification of Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.⁽¹⁾

32		Certification of Periodic Financial Report by Principal Executive Officer and Principal Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. § 1350.⁽²⁾

101.INS		XBRL Instance Document⁽³⁾⁽⁴⁾

101.SCH		XBRL Taxonomy Extension Schema Document⁽³⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽³⁾

101.DEF		XBRL Taxonomy Extension Label Linkbase Document⁽³⁾

101.LAB		XBRL Taxonomy Extension Presentation Linkbase Document⁽³⁾

101.PRE		XBRL Taxonomy Extension Definitions Linkbase Document⁽³⁾


(1)	Filed herewith.


(2)	This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.


(3)	As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

(4)

Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Firm’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012, (ii) the Consolidated Statements of Financial Condition as of June 30, 2013, and December 31, 2012, (iii) the Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the three and six months ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, 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 August 8, 2013.



	HomeStreet, Inc.

	By:	/s/ Mark K. Mason
		Mark K. Mason
		President and Chief Executive Officer



	HomeStreet, Inc.

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