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Section 1: 10-Q (FORM 10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________ 
FORM 10-Q
________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2018
Commission file number: 001-35424
________________________________ 
HOMESTREET, INC.
(Exact name of registrant as specified in its charter)
________________________________ 
Washington
 
91-0186600
(State or other jurisdiction of incorporation)
 
(IRS Employer Identification No.)
601 Union Street, Suite 2000
Seattle, Washington 98101
(Address of principal executive offices)
(Zip Code)
(206) 623-3050
(Registrant’s telephone number, including area code) 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large Accelerated Filer
 
o
Accelerated Filer
 
x
 
 
 
 
 
 
Non-accelerated Filer
 
o
Smaller Reporting Company
 
o
 
 
 
 
 
 
Emerging growth Company
 
o
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 12(a) of the Exchange Act.
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No  x
The number of outstanding shares of the registrant's common stock as of October 31, 2018 was 26,991,909.6.
 





PART I – FINANCIAL INFORMATION
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
ITEM 2
 

2




 
 
 
ITEM 3
ITEM 4
 
ITEM 1
ITEM 1A
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6

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


3


PART I
ITEM 1 FINANCIAL STATEMENTS


HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

(in thousands, except share data)
 
September 30,
2018
 
December 31,
2017
 
 
 
 
 
ASSETS
 
 
 
 
Cash and cash equivalents (including interest-earning instruments of $35,763 and $30,268)
 
$
59,006

 
$
72,718

Investment securities (includes $831,102 and $846,268 carried at fair value)
 
903,685

 
904,304

Loans held for sale (includes $350,948 and $577,313 carried at fair value)
 
404,440

 
610,902

Loans held for investment (net of allowance for loan losses of $40,438 and $37,847; includes $4,089 and $5,477 carried at fair value)
 
5,026,301

 
4,506,466

Mortgage servicing rights (includes $263,622 and $258,560 carried at fair value)
 
291,759

 
284,653

Other real estate owned
 
751

 
664

Federal Home Loan Bank stock, at cost
 
40,732

 
46,639

Premises and equipment, net
 
95,737

 
104,654

Goodwill
 
22,564

 
22,564

Other assets
 
184,107

 
188,477

Total assets
 
$
7,029,082

 
$
6,742,041

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Deposits
 
$
5,155,042

 
$
4,760,952

Federal Home Loan Bank advances
 
816,591

 
979,201

Accounts payable and other liabilities
 
162,252

 
172,234

Federal funds purchased and securities sold under agreements to repurchase
 
55,000

 

Long-term debt
 
125,415

 
125,274

Total liabilities
 
6,314,300

 
6,037,661

Commitments and contingencies (Note 7)
 

 

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 shares, issued and outstanding, 26,989,742 shares and 26,888,288 shares
 
511

 
511

Additional paid-in capital
 
341,606

 
339,009

Retained earnings
 
396,782

 
371,982

Accumulated other comprehensive loss
 
(24,117
)
 
(7,122
)
Total shareholders' equity
 
714,782

 
704,380

Total liabilities and shareholders' equity
 
$
7,029,082

 
$
6,742,041


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

4


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except share data)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Interest income:
 
 
 
 
 
 
 
Loans
$
63,905

 
$
56,547

 
$
181,250

 
$
157,251

Investment securities
5,580

 
5,264

 
16,666

 
16,315

Other
188

 
170

 
620

 
431

 
69,673

 
61,981

 
198,536

 
173,997

Interest expense:
 
 
 
 
 
 
 
Deposits
11,286

 
6,020

 
28,636

 
17,510

Federal Home Loan Bank advances
4,720

 
3,405

 
13,138

 
8,174

Federal funds purchased and securities sold under agreements to repurchase
83

 

 
139

 
5

Long-term debt
1,695

 
1,520

 
4,941

 
4,513

Other
245

 
196

 
575

 
436

 
18,029

 
11,141

 
47,429

 
30,638

Net interest income
51,644

 
50,840

 
151,107

 
143,359

Provision for credit losses
750

 
250

 
2,500

 
750

Net interest income after provision for credit losses
50,894

 
50,590

 
148,607

 
142,609

Noninterest income:
 
 
 
 
 
 
 
Net gain on loan origination and sale activities
44,571

 
71,010

 
149,939

 
197,199

Loan servicing income
7,828

 
8,282

 
22,434

 
26,285

Income from WMS Series LLC
4

 
166

 
315

 
757

Depositor and other retail banking fees
2,038

 
1,839

 
5,936

 
5,306

Insurance agency commissions
588

 
535

 
1,658

 
1,432

(Loss) gain on sale of investment securities available for sale, net
(4
)
 
331

 
234

 
888

Other
3,083

 
1,721

 
7,812

 
7,486

 
58,108

 
83,884

 
188,328

 
239,353

Noninterest expense:
 
 
 
 
 
 
 
Salaries and related costs
60,335

 
75,374

 
196,153

 
223,072

General and administrative
14,009

 
16,147

 
43,300

 
49,147

Amortization of core deposit intangibles
406

 
470

 
1,219

 
1,477

Legal
1,111

 
352

 
2,680

 
662

Consulting
539

 
914

 
2,174

 
2,743

Federal Deposit Insurance Corporation assessments
942

 
791

 
2,950

 
2,312

Occupancy
8,442

 
12,391

 
31,575

 
29,480

Information services
8,809

 
8,760

 
25,967

 
24,580

Net cost (benefit) from operation and sale of other real estate owned
2

 
(502
)
 
(89
)
 
(658
)
 
94,595

 
114,697

 
305,929

 
332,815

Income before income taxes
14,407

 
19,777

 
31,006

 
49,147

Income tax expense
2,572

 
5,938

 
6,206

 
15,116

NET INCOME
$
11,835

 
$
13,839

 
$
24,800

 
$
34,031

 
 
 
 
 
 
 
 
Basic income per share
$
0.44

 
$
0.51

 
$
0.92

 
$
1.27

Diluted income per share
$
0.44

 
$
0.51

 
$
0.91

 
$
1.26

Basic weighted average number of shares outstanding
26,985,425

 
26,883,392

 
26,963,260

 
26,857,006

Diluted weighted average number of shares outstanding
27,181,688

 
27,089,040

 
27,165,672

 
27,077,032


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

5


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net income
$
11,835

 
$
13,839

 
$
24,800

 
$
34,031

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during the period, net of tax (benefit) expense of $(1,169) and $665 for the three months ended September 30, 2018 and 2017, and $(4,469), and $3,552 for the nine months ended September 30, 2018 and 2017, respectively
(4,399
)
 
1,236

 
(16,811
)
 
6,597

Reclassification adjustment for net losses (gains) included in net income, net of tax (benefit) expense of zero and $116 for the three months ended September 30, 2018 and 2017, and $49 and $311 for the nine months ended September 30, 2018 and 2017, respectively
4

 
(215
)
 
(184
)
 
(577
)
Other comprehensive (loss) income
(4,395
)
 
1,021

 
(16,995
)
 
6,020

Comprehensive income
$
7,440

 
$
14,860

 
$
7,805

 
$
40,051


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

6


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

 
(in thousands, except share data)
Number
of shares
 
Common
stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
26,800,183

 
$
511

 
$
336,149

 
$
303,036

 
$
(10,412
)
 
$
629,284

Net income

 

 

 
34,031

 

 
34,031

Share-based compensation expense

 

 
1,884

 

 

 
1,884

Common stock issued
84,219

 

 
250

 

 

 
250

Other comprehensive income

 

 

 

 
6,020

 
6,020

Balance, September 30, 2017
26,884,402

 
$
511

 
$
338,283

 
$
337,067

 
$
(4,392
)
 
$
671,469

 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2018
26,888,288

 
$
511

 
$
339,009

 
$
371,982

 
$
(7,122
)
 
$
704,380

Net income

 

 

 
24,800

 

 
24,800

Share-based compensation expense

 

 
2,236

 

 

 
2,236

Common stock issued
101,454

 

 
361

 

 

 
361

Other comprehensive loss

 

 

 

 
(16,995
)
 
(16,995
)
Balance, September 30, 2018
26,989,742

 
$
511

 
$
341,606

 
$
396,782

 
$
(24,117
)
 
$
714,782


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

7


HOMESTREET, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
24,800

 
$
34,031

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion
18,671

 
16,765

Provision for credit losses
2,500

 
750

Net fair value adjustment and gain on sale of loans held for sale
(71,098
)
 
(170,209
)
Fair value adjustment of loans held for investment
35

 
(1,056
)
Origination of mortgage servicing rights
(50,551
)
 
(56,067
)
Change in fair value of mortgage servicing rights
(28,243
)
 
31,916

Net gain on sale of investment securities
(234
)
 
(888
)
Net gain on sale of loans originated as held for investment
(169
)
 
(2,161
)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned
(92
)
 
(504
)
Loss on disposal of fixed assets
303

 
157

Loss on lease abandonment
6,073

 
4,450

Net deferred income tax expense
4,372

 
11,513

Share-based compensation expense
2,528

 
2,129

Origination of loans held for sale
(4,850,098
)
 
(5,789,638
)
Proceeds from sale of loans originated as held for sale
5,175,266

 
5,889,561

Changes in operating assets and liabilities:
 
 
 
Decrease in accounts receivable and other assets
4,986

 
11,660

Decrease in accounts payable and other liabilities
(10,250
)
 
(13,769
)
Net cash provided by (used in) operating activities
228,799

 
(31,360
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of investment securities
(147,134
)
 
(296,843
)
Proceeds from sale of investment securities
38,465

 
342,461

Principal repayments and maturities of investment securities
82,432

 
81,156

Proceeds from sale of other real estate owned
460

 
3,211

Proceeds from sale of loans originated as held for investment
319,004

 
140,642

Proceeds from sale of mortgage servicing rights
65,318

 

Mortgage servicing rights purchased from others

 
(565
)
Capital expenditures related to other real estate owned

 
(57
)
Origination of loans held for investment and principal repayments, net
(887,449
)
 
(695,199
)
Proceeds from sale of property and equipment
467

 

Purchase of property and equipment
(7,056
)
 
(35,771
)
Net cash acquired from acquisitions

 
19,285

Net cash used in investing activities
(535,493
)
 
(441,680
)

8


 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in deposits, net
$
393,916

 
$
219,332

Proceeds from Federal Home Loan Bank advances
9,077,500

 
7,557,200

Repayment of Federal Home Loan Bank advances
(9,240,000
)
 
(7,290,200
)
Proceeds from federal funds purchased and securities sold under agreements to repurchase
1,733,700

 
351,618

Repayment of federal funds purchased and securities sold under agreements to repurchase
(1,678,700
)
 
(351,618
)
Proceeds from line of credit draws
30,000

 

Repayment of line of credit draws
(30,000
)
 
 
Proceeds from Federal Home Loan Bank stock repurchase
151,771

 
131,603

Purchase of Federal Home Loan Bank stock
(145,864
)
 
(143,742
)
Proceeds from stock issuance, net
69

 
11

Payments from equity raise

 
(46
)
Net cash provided by financing activities
292,392

 
474,158

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(14,302
)
 
1,118

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
 
 
 
Cash, cash equivalents and restricted cash, beginning of year
73,909

 
56,378

Cash, cash equivalents and restricted cash, end of period
59,607

 
57,496

Less restricted cash included in other assets
(601
)
 
(2,446
)
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
59,006

 
$
55,050

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
Cash paid during the period for:
 
 
 
Interest paid
$
47,007

 
$
29,347

Federal and state income taxes refunded, net
193

 
23,382

Non-cash activities:
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
455

 
1,125

Loans transferred from held for investment to held for sale
423,504

 
246,664

Loans transferred from held for sale to held for investment
57,061

 
41,686

Ginnie Mae loans recognized with the right to repurchase, net
415

 
493

Receivable from sale of mortgage servicing rights
3,414

 


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

9


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

NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

HomeStreet, Inc. and its wholly owned subsidiaries (the "Company") is a diversified financial services company serving customers primarily on the West Coast of the United States, including Hawaii. The Company is principally engaged in commercial banking, mortgage banking, and consumer/retail banking activities. The Company's consolidated financial statements include the accounts of HomeStreet, Inc. and its wholly owned subsidiaries, HomeStreet Capital Corporation, HomeStreet Statutory Trusts and HomeStreet Bank (the "Bank"), and the Bank’s subsidiaries, HomeStreet/WMS, Inc., HomeStreet Reinsurance, Ltd., Continental Escrow Company, HomeStreet Foundation, HS Properties, Inc., HS Evergreen Corporate Center LLC, Union Street Holdings LLC, HS Cascadia Holdings LLC and YNB Real Estate LLC. HomeStreet Bank was formed in 1986 and is a state-chartered commercial 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, management 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. Some of these estimates require application of management's most difficult, subjective or complex judgments and result in amounts that are inherently uncertain and may change in future periods. Management has made significant estimates in several areas, including the fair value of assets acquired and liabilities assumed in business combinations, allowance for credit losses (Note 3, Loans and Credit Quality), valuation of residential mortgage servicing rights and loans held for sale (Note 6, Mortgage Banking Operations), valuation of certain loans held for investment (Note 3, Loans and Credit Quality), valuation of investment securities (Note 2, Investment Securities), and valuation of derivatives (Note 5, Derivatives and Hedging Activities). We have reclassified certain prior period amounts to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, comprehensive income, cash flows, total assets or total shareholder's equity as previously reported.

These unaudited interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim financial statements do not necessarily indicate the results that may be expected for the full year. The interim financial information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission ("2017 Annual Report on Form 10-K").

Recent Accounting Developments


In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds, eliminates, and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the added disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect to not separate non-lease components from leases when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

10


In February 2018, the FASB issued ASU No.2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU 2018-02. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("Tax Act"). The update does not have any impact on the underlying ASC 740 guidance that requires the effect of a change in tax law be included in income from continuing operations. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, or ASU 2017-12. This standard better aligns an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedge instruments and the hedged item in the financial statements. Adoption for this ASU is required for fiscal years and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently evaluating the provisions of this guidance to determine the potential impact the new standard will have on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and other Costs (Subtopic 320-20): Premium Amortization on Purchased Callable Debt Securities, or ASU 2017-08. This standard shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date to more closely align interest income recorded on bonds held at a premium with the economics of the underlying instrument. Adoption of ASU 2017-08 is required for fiscal years and interim periods within those fiscal years, beginning after December, 15, 2018, early adoption is permitted. The Company has determined the provisions of this guidance will not have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Adoption of ASU 2017-04 is required for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019 with early adoption permitted for annual or interim goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current U.S. GAAP requires an “incurred loss” methodology for recognizing credit losses that delay recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that has the contractual right to receive cash. The amendments in this ASU replace the incurred loss impairment model in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is still evaluating the effects this ASU will have on the Company’s consolidated financial statements. The Company has formed an internal committee to oversee the project. Upon adoption, the Company expects a change in the processes and procedures to calculate the allowance for loan losses, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. The new guidance may result in an increase in the allowance for loan losses; however, management is still assessing the magnitude

11


of the increase and its impact on the Company's consolidated financial statements. In addition, the current accounting policy and procedures for other-than-temporary impairment on investment securities classified as available for sale will be replaced with an allowance approach. The Company has begun developing and implementing processes to address the provisions of this ASU.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As the Company expects to elect the transition option provided in ASU No. 2018-11 (see above), the modified retrospective approach will be applied on January 1, 2019 (as opposed to January 1, 2017). The Company also expects to elect certain relief options offered in ASU 2016-02 including the package of practical expedients, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with original terms of twelve months or less). The Company will likely elect the hindsight practical expedient, which allows entities to reassess their assumptions used when determining lease term and impairment of right-of-use assets. The Company has facility and equipment lease agreements which are currently being accounted for as operating leases and therefore not being recognized on the Company’s consolidated statement of condition. The Company expects the new guidance will require these lease agreements to be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of financial condition, along with the Company’s regulatory capital ratios. However, the Company does not expect the new guidance to have a material impact on the Company’s consolidated statements of income. The Company is nearing completion of its effort to compile a complete inventory of arrangements containing a lease and accumulating the lease data necessary to apply the amended guidance. In addition, the Company is implementing new software to aid in the transition. The current estimated impact of implementing this ASU at January 1, 2019 is an increase in right-of-use assets ranging between $150.0 million to $175.0 million and an associated increase in lease liabilities on our consolidated statement of financial condition. This estimate is subject to revision as we approach the implementation date of January 1, 2019.


12


NOTE 2–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale and held to maturity.
 
 
At September 30, 2018
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
116,523

 
$

 
$
(6,229
)
 
$
110,294

Commercial
35,351

 

 
(1,052
)
 
34,299

Municipal bonds
384,230

 
513

 
(12,161
)
 
372,582

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
167,393

 

 
(8,097
)
 
159,296

Commercial
116,671

 
30

 
(3,316
)
 
113,385

Corporate debt securities
22,308

 
2

 
(1,051
)
 
21,259

U.S. Treasury securities
11,207

 

 
(537
)
 
10,670

Agency debentures
9,872

 

 
(555
)
 
9,317

 
$
863,555

 
$
545

 
$
(32,998
)
 
$
831,102

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
11,337

 
$

 
$
(379
)
 
$
10,958

Commercial
17,387

 

 
(553
)
 
16,834

Collateralized mortgage obligations
16,472

 
6

 
(109
)
 
16,369

Municipal bonds
27,294

 
108

 
(601
)
 
26,801

Corporate debt securities
94

 

 

 
94

 
$
72,584

 
$
114

 
$
(1,642
)
 
$
71,056


13


 
At December 31, 2017
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
133,654

 
$
4

 
$
(3,568
)
 
$
130,090

Commercial
24,024

 
8

 
(338
)
 
23,694

Municipal bonds
389,117

 
2,978

 
(3,643
)
 
388,452

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
164,502

 
3

 
(4,081
)
 
160,424

Commercial
100,001

 
9

 
(1,441
)
 
98,569

Corporate debt securities
25,146

 
67

 
(476
)
 
24,737

U.S. Treasury securities
10,899

 

 
(247
)
 
10,652

Agency debentures
9,861

 

 
(211
)
 
9,650

 
$
857,204

 
$
3,069

 
$
(14,005
)
 
$
846,268

 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
12,062

 
$
35

 
$
(99
)
 
$
11,998

Commercial
21,015

 
75

 
(161
)
 
20,929

Collateralized mortgage obligations
3,439

 

 

 
3,439

Municipal bonds
21,423

 
339

 
(97
)
 
21,665

Corporate debt securities
97

 

 

 
97

 
$
58,036

 
$
449

 
$
(357
)
 
$
58,128


Mortgage-backed securities ("MBS") and collateralized mortgage obligations ("CMO") represent securities issued by government sponsored enterprises ("GSEs"). Each of the MBS and CMO securities in our investment portfolio are guaranteed by Federal National Mortgage Association ("Fannie Mae"), Government National Mortgage Association ("Ginnie Mae") or Federal Home Loan Mortgage Corporation ("Freddie Mac"). Municipal bonds are comprised of general obligation bonds (i.e., backed by the general credit of the issuer) and revenue bonds (i.e., backed by revenues from the specific project being financed) issued by various municipal corporations. As of September 30, 2018 and December 31, 2017, all securities held, including municipal bonds and corporate debt securities, were rated investment grade, based upon external ratings where available and, where not available, based upon internal ratings which correspond to ratings as defined by Standard and Poor’s Rating Services (“S&P”) or Moody’s Investors Services (“Moody’s”). As of September 30, 2018 and December 31, 2017, substantially all securities held had ratings available by external ratings agencies.


14


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

 
At September 30, 2018
 
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
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(151
)
 
$
4,665

 
$
(6,078
)
 
$
105,148

 
$
(6,229
)
 
$
109,813

Commercial
(517
)
 
21,504

 
(535
)
 
12,795

 
(1,052
)
 
34,299

Municipal bonds
(4,309
)
 
175,456

 
(7,852
)
 
162,506

 
(12,161
)
 
337,962

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(1,228
)
 
49,619

 
(6,869
)
 
109,677

 
(8,097
)
 
159,296

Commercial
(1,488
)
 
58,535

 
(1,828
)
 
44,308

 
(3,316
)
 
102,843

Corporate debt securities
(162
)
 
8,637

 
(889
)
 
12,394

 
(1,051
)
 
21,031

U.S. Treasury securities

 

 
(537
)
 
9,374

 
(537
)
 
9,374

Agency debentures

 

 
(555
)
 
9,317

 
(555
)
 
9,317

 
$
(7,855
)
 
$
318,416

 
$
(25,143
)
 
$
465,519

 
$
(32,998
)
 
$
783,935

 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(135
)
 
$
4,591

 
$
(244
)
 
$
4,066

 
$
(379
)
 
$
8,657

Commercial
(168
)
 
7,740

 
(385
)
 
9,095

 
(553
)
 
16,835

Collateralized mortgage obligations
(109
)
 
12,954

 

 

 
(109
)
 
12,954

Municipal bonds
(297
)
 
11,468

 
(304
)
 
9,079

 
(601
)
 
20,547

 
$
(709
)
 
$
36,753

 
$
(933
)
 
$
22,240

 
$
(1,642
)
 
$
58,993



15


 
At December 31, 2017
 
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
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE FOR SALE
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(182
)
 
$
18,020

 
$
(3,386
)
 
$
110,878

 
$
(3,568
)
 
$
128,898

Commercial
(113
)
 
15,265

 
(225
)
 
6,748

 
(338
)
 
22,013

Municipal bonds
(760
)
 
105,415

 
(2,883
)
 
134,103

 
(3,643
)
 
239,518

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(612
)
 
53,721

 
(3,469
)
 
104,555

 
(4,081
)
 
158,276

Commercial
(538
)
 
57,236

 
(903
)
 
35,225

 
(1,441
)
 
92,461

Corporate debt securities
(15
)
 
5,272

 
(461
)
 
13,365

 
(476
)
 
18,637

U.S. Treasury securities
(3
)
 
997

 
(244
)
 
9,655

 
(247
)
 
10,652

Agency debentures
(211
)
 
9,650

 
$

 

 
(211
)
 
9,650

 
$
(2,434
)
 
$
265,576

 
$
(11,571
)
 
$
414,529

 
$
(14,005
)
 
$
680,105

 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(13
)
 
$
2,662

 
$
(86
)
 
$
4,452

 
$
(99
)
 
$
7,114

Commercial
(161
)
 
15,900

 

 

 
(161
)
 
15,900

Collateralized mortgage obligations

 
3,439

 

 

 

 
3,439

Municipal bonds
(3
)
 
2,185

 
(94
)
 
9,465

 
(97
)
 
11,650

 
$
(177
)
 
$
24,186

 
$
(180
)
 
$
13,917

 
$
(357
)
 
$
38,103


The Company has evaluated securities available for sale that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any issuer- or industry-specific credit event. The Company has not identified any expected credit losses on its debt securities as of September 30, 2018 and December 31, 2017. In addition, as of September 30, 2018 and December 31, 2017, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis.


16


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

 
At September 30, 2018
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars 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
$

 
%
 
$

 
%
 
$
7,333

 
1.60
%
 
$
102,961

 
2.05
%
 
$
110,294

 
2.02
%
Commercial

 

 
12,759

 
2.14

 
17,984

 
2.86

 
3,556

 
2.84

 
34,299

 
2.59

Municipal bonds
1,195

 
2.50

 
13,264

 
2.25

 
33,448

 
2.77

 
324,675

 
3.36

 
372,582

 
3.27

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

 
159,296

 
2.30

 
159,296

 
2.30

Commercial

 

 
9,203

 
2.30

 
24,511

 
2.78

 
79,671

 
2.32

 
113,385

 
2.41

Agency debentures

 

 

 

 
9,317

 
2.18

 

 

 
9,317

 
2.18

Corporate debt securities
1,006

 
2.11

 
3,982

 
2.97

 
13,801

 
3.34

 
2,470

 
3.68

 
21,259

 
3.26

U.S. Treasury securities

 

 
1,295

 
2.80

 
9,375

 
1.17

 

 

 
10,670

 
1.84

Total available for sale
$
2,201

 
2.32
%
 
$
40,503

 
2.23
%
 
$
115,769

 
2.64
%
 
$
672,629

 
2.78
%
 
$
831,102

 
2.73
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$

 
%
 
$
10,958

 
2.84
%
 
$
10,958

 
2.84
%
Commercial

 

 
10,177

 
2.43

 
6,657

 
2.58

 

 

 
16,834

 
2.49

Collateralized mortgage obligations

 

 
8,030

 
3.57

 

 

 
8,339

 
2.78

 
16,369

 
3.17

Municipal bonds

 

 
1,785

 
2.83

 
5,572

 
2.24

 
19,444

 
3.20

 
26,801

 
2.97

Corporate debt securities

 

 

 

 

 

 
94

 
6.00

 
94

 
6.00

Total held to maturity
$

 
%
 
$
19,992

 
2.92
%
 
$
12,229

 
2.43
%
 
$
38,835

 
3.02
%
 
$
71,056

 
2.88
%
 


17


 
At December 31, 2017
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(dollars 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
$

 
%
 
$

 
%
 
$
8,914

 
1.63
%
 
$
121,176

 
1.97
%
 
$
130,090

 
1.94
%
Commercial

 

 
15,356

 
2.07

 
4,558

 
2.03

 
3,780

 
2.98

 
23,694

 
2.21

Municipal bonds
641

 
2.64

 
24,456

 
3.10

 
39,883

 
3.25

 
323,472

 
3.81

 
388,452

 
3.71

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential

 

 

 

 

 

 
160,424

 
2.10

 
160,424

 
2.10

Commercial

 

 
12,550

 
2.09

 
21,837

 
2.38

 
64,182

 
2.13

 
98,569

 
2.18

Agency debentures

 

 

 

 
9,650

 
2.26

 

 

 
9,650

 
2.26

Corporate debt securities
1,048

 
2.11

 
6,527

 
2.80

 
11,033

 
3.49

 
6,129

 
3.57

 
24,737

 
3.27

U.S. Treasury securities
997

 
1.22

 

 

 
9,655

 
1.76

 

 

 
10,652

 
1.71

Total available for sale
$
2,686

 
1.90
%
 
$
58,889

 
2.58
%
 
$
105,530

 
2.67
%
 
$
679,163

 
2.90
%
 
$
846,268

 
2.85
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HELD TO MATURITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$

 
%
 
$

 
%
 
$

 
%
 
$
11,998

 
2.93
%
 
$
11,998

 
2.93
%
Commercial

 

 
6,577

 
2.15

 
14,352

 
2.71

 

 

 
20,929

 
2.53

Collateralized mortgage obligations

 

 

 

 

 

 
3,439

 
1.90

 
3,439

 
1.90

Municipal bonds

 

 
1,846

 
3.35

 
4,630

 
2.57

 
15,189

 
3.50

 
21,665

 
3.28

Corporate debt securities

 

 

 

 

 

 
97

 
6.00

 
97

 
6.00

Total held to maturity
$

 
%
 
$
8,423

 
2.41
%
 
$
18,982

 
2.68
%
 
$
30,723