UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________ 
FORM 10-K
____________________________
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
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 or organization)
 
(I.R.S. Employer
Identification Number)
601 Union Street, Ste. 2000
Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (206) 623-3050
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
  
Name of each exchange on which registered
Common Stock, no par value
  
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None.
____________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   ¨     No   x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   ¨     No   x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 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, or 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. (Check one):
Large accelerated filer
 
¨
Accelerated filer
 
x
 
 
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes   ¨     No   x

As of June 28, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates was approximately $248.0 million , based on a closing price of $21.45 per share of common stock on the NASDAQ Global Select Market on such date. Shares of common stock held by each executive officer and director and by each person known to the Company who beneficially owns more than 5% of the outstanding common stock have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock as of February 28, 2014 was 14,841,290 .

DOCUMENTS INCORPORATED BY REFERENCE
Certain information that will be contained in the definitive proxy statement for the registrant's annual meeting to be held in 2014 is incorporated by reference into Part III of this Form 10-K.
 

Table of Contents

ITEM 1
ITEM 1A
ITEM 1B
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6
ITEM 7
ITEM 7A
ITEM 8
ITEM 9
ITEM 9A
ITEM 9B
ITEM 10
ITEM 11
ITEM 12
ITEM 13
ITEM 14
ITEM 15
CERTIFICATIONS
 
EXHIBIT 21
 
EXHIBIT 31.1
 
EXHIBIT 31.2
 
EXHIBIT 32
 
Unless we state otherwise or the content otherwise requires, references in this Form 10-K 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.

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PART 1

FORWARD-LOOKING STATEMENTS

This Form 10-K and the documents incorporated by reference contain, in addition to historical information, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our future plans, objectives, expectations, intentions and financial performance, and assumptions that underlie these statements. All statements other than statements of historical fact are “forward-looking statements” for the purposes of these provisions. When used in this Form 10-K, terms such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of those terms or other comparable terms are intended to identify such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Our actual results may differ significantly from the results discussed in such forward-looking statements, and we may take actions that differ from our current plans and expectations. The known risks that could cause our results to differ, or may cause us to take actions that are not currently planned or expected, are described in Item 1A , Risk Factors.

Unless required by law, we do not intend to update any of the forward-looking statements after the date of this Form 10-K to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K.

Except as otherwise noted, references to “we,” “our,” “us” or “the Company” refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes.

ITEM 1
BUSINESS

General

We are a diversified financial services company founded in 1921 and headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. (the "Company") is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides 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" ® ) (DUS ® is a registered trademark of Fannie Mae.) 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 WMS Series LLC (“WMS LLC”). At December 31, 2013 , we had total assets of $3.07 billion .

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 December 31, 2013 , we had a network of 30 bank branches in the Puget Sound, Eastern and Southwest regions of Washington state, Portland, Oregon and Hawaii, as well as 44 stand-alone lending centers located in these same areas and additionally in California; the Eugene and Salem regions of Oregon; and in the Boise and northern regions of Idaho. WMS LLC provides point-of-sale loan origination services at 41 Windermere Real Estate offices in Washington and Oregon.

We operate two business segments: Commercial and Consumer Banking and Mortgage Banking. For a discussion of operating results of these lines of business, see "Business Segments" within Management's Discussion and Analysis of this Form 10-K.

Commercial and Consumer Banking . We provide 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

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permanent loans for our portfolio primarily on single family residences, and on office, retail, industrial and multifamily property types.

Mortgage Banking. We originate and purchase single family mortgage loans for sale in the secondary markets. Most of our single family mortgage loans are originated on a retail basis by HomeStreet loan officers. We also purchase mortgage
loans from WMS 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 to loan wholesalers 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.

Shares of our common stock are traded on the NASDAQ Global Select Market under the symbol “HMST.”

Acquisitions

On November 1, 2013, the Company completed its acquisitions of Fortune Bank (“Fortune”) and YNB Financial Services Corp. (“YNB”), the parent company of Yakima National Bank.

On December 6, 2013, the Company acquired two retail deposit branches and certain related assets from AmericanWest Bank, a Washington state-chartered bank. The branches are located on Bainbridge Island and in West Seattle.

Recent Developments

HomeStreet Bank was recently evaluated, assessed and assigned its respective mortgage origination and servicer (collectively “servicer”) ratings by both Moody's Investors Service (“Moody’s) and Fitch Ratings Inc. (“Fitch”). Moody's has assigned a servicer quality assessment of SQ4+ as a primary servicer of prime residential mortgage loans. Fitch has assigned a residential mortgage servicer rating for prime product of RPS3-; outlook stable. The Bank initiated this process as part of its mortgage banking strategy to potentially expand its loan investor markets and provide greater liquidity. We expect to continue to undergo these review processes in the future. For additional information please visit www.moodys.com and www.fitchratings.com. Information from these sites is not a part of this report and is not incorporated herein.

On March 5, 2014, the Company announced its intent to sell two pools of residential loans, while retaining the right to service such loans. The first pool is comprised of fixed-rate residential mortgage loans with outstanding principal balances of approximately $105 million. The second pool is comprised of adjustable rate residential mortgage loans with outstanding principal balances of approximately $222 million. The mortgage loans subject to these sales are located in Washington, Oregon, Idaho and Hawaii. The $105 million pool sale is expected to close in March 2014 and the $222 million pool sale is expected to close in April 2014. These sales are subject to numerous contingencies, including the successful negotiation and execution of final agreements between the parties.

Business Strategy

During 2013, significant progress was made in building a strong foundation for achieving growth and diversification. We grew our Commercial and Consumer Banking segment by expanding our business development capacity and geographic footprint through hiring additional loan officers, opening two de novo bank branches, purchasing two bank branches and acquiring two community banks. In our Mortgage Banking segment, we continued to build on our heritage as a single family mortgage lender by increasing the number of mortgage lending offices within our current footprint as well as expanding into California and by targeted hiring throughout our network of mortgage lending offices. We have hired additional purchase-oriented lending officers in order to help mitigate the impact of the transition to a purchase mortgage market and reduced refinancing activity.

We are pursuing the following strategies in our business segments:

Commercial and Consumer Banking. Our Commercial and Consumer Banking strategy involves growth through expansion while improving operations and productivity to drive cost efficiencies. Through our recent acquisitions of Fortune and YNB, we increased our portfolio of commercial business loans and added experienced commercial lending officers and managers. We increased our presence in the Puget Sound area through the Fortune acquisition and expanded into central and eastern Washington through our acquisition of YNB. We plan to expand our commercial real estate business, with a focus on our multifamily mortgage origination business, particularly through our Fannie Mae DUS origination and servicing relationships. We plan to expand beyond our current markets by forming strategic alliances with multifamily property service providers inside and outside our existing lending areas. We expect to continue to benefit from being one of only 25 companies nationally

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that is an approved Fannie Mae DUS seller and servicer. In addition, we have historically supported our DUS program by providing new construction and short-term bridge loans to experienced borrowers who intend to build or purchase apartment buildings for renovation, which we then seek to replace with permanent financing upon completion of the projects.

We also originate commercial construction real estate loans, bridge loans and permanent loans for our portfolio, primarily on office, retail, industrial and multifamily property types located within the Company's geographic footprint. We also may place loans with capital market sources, such as life insurance companies.

Our Commercial and Consumer Banking strategy also involves the expansion of our retail deposit branch network, primarily focusing on high-growth areas of Puget Sound, in order to build convenience and market share. In connection with this strategy, we opened two de novo branches during 2013 and acquired two retail deposit branches from AmericanWest Bank in the fourth quarter of 2013. We are also in the process of growing our consumer banking business in central and eastern Washington through our recent acquisition of YNB, which allowed us to add four retail deposit branches in those regions. We intend to continue to add de novo retail deposit branches in new and existing markets. We seek to meet the financial needs of our consumer and business customers by providing targeted banking products and services, investment services and products, and insurance products through our bank branches and through dedicated investment advisors, insurance agents and business banking officers. We intend to grow our network of retail deposit branches and in turn grow our core deposits and increase business deposits from new cash management and business lending customers.

Mortgage Banking. We have leveraged our reputation for high quality service and reliable loan closing to increase our single family mortgage market share significantly over the last four years. We plan to continue to grow our business through targeted hiring of loan originators with successful track records and an emphasis on purchase mortgage transactions. We intend to continue to focus on conventional conforming and government insured or guaranteed single family mortgage origination. We also expect to use portfolio lending to complement secondary market lending, particularly for well-qualified borrowers with loan sizes greater than the conventional conforming limits.

Market and Competition

The financial services industry is highly competitive. We compete with banks, savings and loan associations, credit unions, mortgage banking companies, insurance companies, finance companies, and investment and mutual fund companies. In particular, we compete with several financial institutions with greater resources, including the capacity to make larger loans, fund extensive advertising and offer a broader array of products and services. The number of competitors for middle-market business customers has, however, decreased in recent years due to bank failures and consolidations. At the same time, national banks have been focused on larger customers to achieve economies of scale in lending and depository relationships and have also consolidated business banking operations and support and reduced service levels in the Pacific Northwest. We have taken advantage of the failures and takeovers of certain of our competitors by recruiting well-qualified employees and attracting new customers who seek long-term stability, local decision-making, quality services, products and expertise. We believe there is a significant opportunity for a well-capitalized, community-focused bank that emphasizes responsive and personalized service to provide a full range of financial services to small- and middle-market commercial and consumer customers in those markets where we do business.

In addition, we believe we are well positioned to take advantage of changes in the single family mortgage origination and servicing industry that have helped to reduce the number of competitors. The mortgage industry is compliance-intensive and requires significant expertise and internal control systems to ensure mortgage loan origination and servicing providers meet all origination, processing, underwriting, servicing and disclosure requirements. These requirements are causing some competitors to exit the industry. New entrants must make significant investments in experienced personnel and specialized systems to manage the compliance process. These investments represent a significant barrier to entry. In addition, lending in conventional and government guaranteed or insured mortgage products, including FHA and VA loans, requires significantly higher capitalization than had previously been required for mortgage brokers and non-bank mortgage companies.

Our single family mortgage origination and servicing business is highly dependent upon compliance with underwriting and servicing guidelines of Fannie Mae, Freddie Mac, FHA, VA and Ginnie Mae as well as a myriad of federal and state consumer compliance regulations. Our demonstrated expertise in these activities, together with our significant volume of lending in low- and moderate-income areas and direct community investment, contribute to our uninterrupted record of “Outstanding” Community Reinvestment Act (“CRA”) ratings since 1986. We believe our ability to maintain our historically strong compliance culture represents a significant competitive advantage.




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Employees

As of December 31, 2013 the Company employed 1,502 full-time equivalent employees compared to 1,099 full-time equivalents at December 31, 2012 .

Where You Can Obtain Additional Information

We file annual, quarterly, current and other reports with the Securities and Exchange Commission (the "SEC"). We make available free of charge on or through our website http://www.homestreet.com all of these reports (and all amendments thereto), as soon as reasonably practicable after we file these materials with the SEC. Please note that the contents of our website do not constitute a part of our reports, and those contents are not incorporated by reference into this report or any of our other securities filings. You may review a copy of our reports, including exhibits and schedules filed therewith, and obtain copies of such materials at the SEC'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 SEC at 1-800-SEC-0330. The SEC 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 SEC.

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REGULATION AND SUPERVISION

The following is a brief description of certain laws and regulations that are applicable to us. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere in this annual report on Form 10-K, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The bank regulatory framework to which we are subject is intended primarily for the protection of bank depositors and the Deposit Insurance Fund and not for the protection of shareholders or other security holders.
General

The Company is a savings and loan holding company and is regulated by the Board of Governors at the Federal Reserve System (the "Federal Reserve"), and the Washington State Department of Financial Institutions, Division of Banks (the "WDFI"). The Company is required to register and file reports with, and otherwise comply with, the rules and regulations of the Federal Reserve and the WDFI.
The Office of Thrift Supervision, or the OTS, previously was the Company's primary federal regulator. Under the Dodd-Frank Act, the OTS was dissolved on July 21, 2011 and its authority to supervise and regulate the Company and its non-bank subsidiaries was transferred to the Federal Reserve. References to the Federal Reserve in this document should be read to include the OTS prior to the date of the transfer with respect to those functions transferred to the Federal Reserve.
The Bank is a Washington state-chartered savings bank. The Bank is subject to regulation, examination and supervision by the WDFI and the Federal Deposit Insurance Corporation (the "FDIC").
As a result of the recent financial crisis, regulation of the financial services industry has been undergoing major changes. Among these is the Dodd-Frank Act, which makes significant modifications to and expansions of the rulemaking, supervisory and enforcement authority of the federal banking regulators. Some of the changes were effective immediately, but others are being phased in over time. The Dodd-Frank Act requires various regulators, including the banking regulators, to adopt numerous regulations, not all of which have been finalized. Accordingly, in many instances, the precise requirements of the Dodd-Frank Act are not yet known.
Further, new statutes, regulations and guidance are considered regularly that could contain wide-ranging potential changes to the competitive landscape for financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed statute, regulation or other guidance will be adopted or promulgated, or the extent to which our business may be affected. Any change in policies, whether by the Federal Reserve, the WDFI, the FDIC, the Washington legislature or the United States Congress, could have a material adverse impact on us and our operations and shareholders. In addition, the Federal Reserve, the WDFI and the FDIC have significant discretion in connection with their supervisory and enforcement activities and examination policies, including, among other things, policies with respect to the Bank's capital levels, the classification of assets and establishment of adequate loan loss reserves for regulatory purposes.
Our operations and earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. In addition to its role as the regulator of savings and loan holding companies, the Federal Reserve has, and is likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary and fiscal policy including, among other things, actions taken in order to curb inflation or combat a recession. The Federal Reserve affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which banks are subject. In recent years, in response to the financial crisis, the Federal Reserve has created several innovative programs to stabilize certain financial institutions, to help ensure the availability of credit and to purchase financial assets through programs such as quantitative easing. Quantitative easing has had a significant impact on the market for mortgage-backed securities ("MBS") and by some accounts has stimulated the national economy. We believe these policies have had a beneficial effect on the Company and the mortgage banking industry as a whole. In late 2013, the Federal Reserve announced it would begin to scale back its purchases of financial assets. We cannot predict the effects of this tapering. In addition, we cannot predict the nature or impact of future changes in monetary and fiscal policies of the Federal Reserve.
Company Order
The Company previously was subject to an Order to Cease and Desist issued by the OTS on May 18, 2009 and subsequently administered by the Federal Reserve. This order was terminated by the Federal Reserve effective March 26, 2013.

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Consent Agreement/Memorandum of Understanding
The Bank had previously consented to the issuance by the FDIC and the WDFI of an Order to Cease and Desist dated May 8, 2009. The Bank Order was terminated on March 26, 2012. Also on March 26, 2012, the Bank entered into a MOU with the FDIC and the WDFI. The MOU was terminated on December 27, 2012.
Regulation of the Company
General
Because we have made an election under Section 10(1) of the Home Owners' Loan Act (“HOLA”) for the Bank to be treated as a “savings association” for purposes of Section 10 of HOLA, the Company is registered as a savings and loan holding company with the Federal Reserve and is subject to Federal Reserve regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. Among other things, the Federal Reserve is authorized to restrict or prohibit activities that are determined to be a serious risk to the financial safety, soundness or stability of a subsidiary savings bank. Unlike bank holding companies, savings and loan holding companies have not been subject to any specific regulatory capital ratios, although they have been subject to review by the Federal Reserve and approval of capital levels as part of its examination process. However, under the Dodd-Frank Act, the Company will become subject to capital requirements. Our continued ability to use the provisions of Section 10(1) of HOLA - which allow the Company to be registered as a savings and loan holding company rather than as a bank holding company - is conditioned upon the Bank's continued qualification as a lender under the Qualified Thrift Lender test set forth in HOLA. See “- Regulation and Supervision of HomeStreet Bank - Qualified Thrift Lender Test .” Since the Bank is chartered under Washington law, the WDFI has authority to regulate the Company generally relating to its conduct affecting the Bank. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Company and affiliates thereof.
Numerous provisions of the Dodd-Frank Act affect the Company and its business and operations. Some of the provisions are:
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New capital requirements for savings and loan holding companies.
•
All holding companies of depository institutions are required to serve as a source of strength for their depository subsidiaries.
•
The Federal Reserve is given heightened authority to examine, regulate and take action with respect to all of a holding company's subsidiaries.
The Company is a unitary savings and loan holding company within the meaning of federal law. Generally, companies that become savings and loan holding companies following the May 4, 1999 grandfather date in the Gramm-Leach-Bliley Act of 1999 may engage only in the activities permitted for financial institution holding companies as well as activities that are permitted for multiple savings and loan holding companies. Because the Company became a savings and loan holding company prior to that grandfather date, the activities in which the Company and its subsidiaries (other than the Bank and its subsidiaries) may engage generally are not restricted by HOLA. If, however, we are acquired by a non-financial company, or if we acquire another savings association subsidiary (and become a multiple savings and loan holding company), we will terminate our “grandfathered” unitary savings and loan holding company status and become subject to certain limitations on the types of business activities in which we could engage. The Company may not engage in any activity or render any service for or on behalf of the Bank for the purpose of or with the effect of evading any law or regulation applicable to the Bank.
Because the Bank is treated as a savings association subsidiary of a savings and loan holding company, we must give the Federal Reserve at least 30 days' advance notice of the proposed declaration of a dividend by the Bank. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the Federal Reserve, and the Federal Reserve has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the Bank.
Capital / Source of Strength
Under the Dodd-Frank Act, capital requirements will be imposed on savings and loan holding companies such as the Company. See “Regulation and Supervision of HomeStreet Bank - Capital and Prompt Corrective Action Requirements - Proposed Capital Regulations .”
Regulations and historical practice of the Federal Reserve have required bank holding companies to serve as a “source of strength” for their subsidiary banks. The Dodd-Frank Act codifies this requirement and extends it to all companies that control an insured depository institution. Accordingly, the Company is now required to act as a source of strength for the Bank.

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Restrictions Applicable to Savings and Loan Holding Companies
Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly (or through one or more subsidiaries), from acquiring:
•
control (as defined under HOLA) of another savings institution (or a holding company parent) without prior written approval of the Federal Reserve;
•
through merger, consolidation or purchase of assets, another savings institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company) without prior Federal Reserve or FDIC approval;
•
with certain exceptions, more than 5.0% of the voting shares of a non-subsidiary savings association or a non-subsidiary holding company; or
•
control of any depository institution not insured by the FDIC (except through a merger with and into the holding company's savings institution subsidiary that is approved by the FDIC).
In evaluating applications by holding companies to acquire savings associations, the Federal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.
A savings and loan holding company generally may not acquire as a separate subsidiary a savings association in a different state from where its current savings association is located, except:
•
in the case of certain emergency acquisitions approved by the FDIC;
•
if such holding company controls a savings association that operated a home or branch office in such additional state as of March 5, 1987; or
•
if the laws of the state in which the savings association to be acquired is located specifically authorize a savings association chartered by that state to be acquired by a savings institution chartered by the state where the acquiring savings association or savings and loan holding company is located, or by a holding company that controls such a state-chartered association.
Acquisition of Control
Under the federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company. An acquisition of control can occur upon the acquisition of 10.0% or more of the voting stock of a savings and loan holding company or as otherwise defined by the Federal Reserve. Under the Change in Bank Control Act, the Federal Reserve has 60 days from the filing of a complete notice to act (the 60-day period may be extended), taking into consideration certain factors, including the financial and managerial resources of the acquirer and the antitrust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company. Control can also exist if an individual or company has, or exercises, directly or indirectly or by acting in concert with others, a controlling influence over the Bank. Washington law also imposes certain limitations on the ability of persons and entities to acquire control of banking institutions and their parent companies.
Dividend Policy
Under Washington law, the Company is generally permitted to make a distribution, including payments of dividends, only if, after giving effect to the distribution, in the judgment of the board of directors, (1) the Company would be able to pay its debts as they become due in the ordinary course of business and (2) the Company's total assets would at least equal the sum of its total liabilities plus the amount that would be needed if the Company were to be dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.
The Company had previously elected to defer the payment of interest on its outstanding Trust Preferred Securities ("TruPS"), and therefore had been prohibited from declaring or paying dividends or distributions on, and from making liquidation payments with respect to, its common stock until it is current on all interest payments due. On March 12, 2013, the Federal Reserve approved the Company's request to make its interest payments current on its outstanding TruPS and the Company subsequently paid all deferred and current interest owed on its outstanding TruPS on March 15, 2013.

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The Company's ability to pay dividends to shareholders is significantly dependent on the Bank's ability to pay dividends to the Company. New capital rules will impose additional requirements on the ability of the Company and the Bank to pay dividends. See “Regulation of Home Street Bank - Capital and Prompt Corrective Action Requirements - New Capital Rules .”
Compensation Policies
Compensation policies and practices at HomeStreet, Inc. and HomeStreet Bank are subject to regulation by their respective banking regulators and the SEC.
Guidance on Sound Incentive Compensation Policies . Effective on June 25, 2010, the Office of the Comptroller of the Currency, the Federal Reserve, the FDIC and the OTS adopted Sound Incentive Compensation Policies Final Guidance (the “Final Guidance”) designed to help ensure that incentive compensation policies at banking organizations do not encourage imprudent risk-taking and are consistent with the safety and soundness of the organization.
The Final Guidance applies to senior executives and others who are responsible for oversight of HomeStreet's company-wide activities and material business lines, as well as other employees who, either individually or as a part of a group, have the ability to expose the Bank to material amounts of risk.
Dodd-Frank Act . In addition to the Final Guidance, the Dodd-Frank Act contains a number of provisions relating to compensation applying to public companies such as the Company. The Dodd-Frank Act added a new Section 14A(a) to the Exchange Act that requires companies to include a separate non-binding resolution subject to shareholder vote in their proxy materials approving the executive compensation disclosed in the materials. In addition, a new Section 14A(b) to the Exchange Act requires any proxy or consent solicitation materials for a meeting seeking shareholder approval of an acquisition, merger, consolidation or disposition of all or substantially all of the company's assets to include a separate non-binding shareholder resolution approving certain “golden parachute” payments made in connection with the transaction. A new Section 10D to the Exchange Act requires the SEC to direct the national securities exchanges to require companies to implement a policy to “claw back” certain executive payments that were made based on improper financial statements.
In addition, Section 956 of the Dodd-Frank Act requires certain regulators (including the FDIC, SEC and Federal Reserve) to adopt requirements or guidelines prohibiting excessive compensation or compensation that could lead to material loss as well as rules relating to disclosure of compensation. On April 14, 2011, these regulators published a joint proposed rulemaking to implement Section 956 of Dodd-Frank for depository institutions, their holding companies and various other financial institutions with $1 billion or more in assets. Section 956 prohibits incentive-based compensation arrangements which encourage inappropriate risk taking by covered financial institutions and are deemed to be excessive, or that may lead to material losses. The proposed rule would (1) prohibit incentive-based compensation arrangements for covered persons that would encourage inappropriate risks by providing excess compensation, (2) prohibit incentive-based compensation arrangements for covered persons that would expose the institution to inappropriate risks by providing compensation that could lead to a material financial loss, (3) require policies and procedures for incentive-based compensation arrangements that are commensurate with the size and complexity of the institutions and (4) require annual reports on incentive compensation structures to the institution's appropriate federal regulator.
FDIC Regulations . We are further restricted in our ability to make certain “golden parachute” and “indemnification” payments under Part 359 of the FDIC regulations, and the FDIC also regulates payments to executives under Part 364 of its regulations relating to excessive executive compensation.
Emerging Growth Company
We are an “Emerging Growth Company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not Emerging Growth Companies. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from certain requirements under the Dodd-Frank Act, including the requirement to hold a non-binding advisory vote on executive compensation and the requirement to obtain stockholder approval of any golden parachute payments not previously approved. We currently intend to take advantage of some or all of these reporting exemptions until we are no longer qualify as an Emerging Growth Company.

We will remain an Emerging Growth Company for up to five years from the end of the year of our initial public offering, or until (1) we have total annual gross revenues of at least $1 billion, (2) we qualify as a large accelerated filer, or (3) we issue more than $1 billion in nonconvertible debt in a three-year period.


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Regulation and Supervision of HomeStreet Bank
General
As a savings bank chartered under the laws of the State of Washington, HomeStreet Bank is subject to applicable provisions of Washington law and regulations of the WDFI. As a state-chartered savings bank that is not a member of the Federal Reserve System, the Bank's primary federal regulator is the FDIC. It is subject to regulation and examination by the WDFI and the FDIC, as well as enforcement actions initiated by the WDFI and the FDIC, and its deposits are insured by the FDIC.
Washington Banking Regulation
As a Washington savings bank, the Bank's operations and activities are substantially regulated by Washington law and regulations, which govern, among other things, the Bank's ability to take deposits and pay interest, to make loans on or invest in residential and other real estate, to make consumer and commercial loans, to invest in securities, to offer various banking services to its customers and to establish branch offices. Under state law, savings banks in Washington also generally have, subject to certain limitations or approvals, all of the powers that Washington chartered commercial banks have under Washington law and that federal savings banks and national banks have under federal laws and regulations.
Washington law also governs numerous corporate activities relating to the Bank, including the Bank's ability to pay dividends, to engage in merger activities and to amend its articles of incorporation, as well as limitations on change of control of the Bank. Under Washington law, the board of directors of the Bank generally may not declare a cash dividend on its capital stock if payment of such dividend would cause its net worth to be reduced below the net worth requirements, if any, imposed by the WDFI and dividends may not be paid in an amount greater than its retained earnings without the approval of the WDFI. These restrictions are in addition to restrictions imposed by federal law. Mergers involving the Bank and sales or acquisitions of its branches are generally subject to the approval of the WDFI. No person or entity may acquire control of the Bank until 30 days after filing an application with the WDFI, who has the authority to disapprove the application. Washington law defines “control” of an entity to mean directly or indirectly, alone or in concert with others, to own, control or hold the power to vote 25.0% or more of the outstanding stock or voting power of the entity. Any amendment to the Bank's articles of incorporation requires the approval of the WDFI.
The Bank is subject to periodic examination by and reporting requirements of the WDFI, as well as enforcement actions initiated by the WDFI. The WDFI's enforcement powers include the issuance of orders compelling or restricting conduct by the Bank and the authority to bring actions to remove the Bank's directors, officers and employees. The WDFI has authority to place the Bank under supervisory direction or to take possession of the Bank and to appoint the FDIC as receiver.
Dodd-Frank Act
Numerous provisions of the Dodd-Frank Act affect the Bank and its business and operations. For example, the Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor.
In addition, under the Dodd-Frank Act:
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The requirements relating to the Bank's capital have been modified.
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In order to prevent abusive residential lending practices, new responsibilities are imposed on parties engaged in residential mortgage origination, brokerage and lending, and securitizers of mortgages and other asset-backed securities ("ABS") are required, subject to certain exemptions, to retain not less than five percent of the credit risk of the mortgages or other assets backing the securities.
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Restrictions on affiliate and insider transactions are expanded.
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Restrictions on management compensation and related governance have been enhanced.
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A federal Consumer Financial Protection Bureau ("CFPB") is created with a broad authority to regulate consumer financial products and services.
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Restrictions are imposed on the amount of interchange fees that certain debit card issuers may charge.
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Restrictions on banking entities from engaging in proprietary trading or owning interests in or sponsoring hedge funds or private equity funds (the Volcker Rule), and requiring sponsors of ABS to retain an ownership stake in the ABS.

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In part because not all of the regulations implementing the Dodd-Frank Act have yet been finalized or become effective, it is difficult to predict at this time what specific impact the Dodd-Frank Act and the final rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense. Any additional changes in our regulation and oversight, whether in the form of new laws, rules and regulations, could make compliance more difficult or expensive or otherwise materially adversely affect our business, financial condition or prospects. 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.
Insurance of Deposit Accounts and Regulation by the FDIC
The FDIC is the Bank's principal federal bank regulator. As such, the FDIC is authorized to conduct examinations of and to require reporting by the Bank. The FDIC may prohibit the Bank from engaging in any activity determined by law, regulation or order to pose a serious risk to the institution, and may take a variety of enforcement actions in the event the Bank violates a law, regulation or order, engages in an unsafe or unsound practice or under certain other circumstances. The FDIC also has the authority to appoint itself as receiver of the Bank or to terminate the Bank's deposit insurance if it were to determine that the Bank has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The Bank is a member of the Deposit Insurance Fund (“DIF”) administered by the FDIC, which insures customer deposit accounts. Under the Dodd-Frank Act, the amount of federal deposit insurance coverage was permanently increased from $100,000 to $250,000, per depositor, for each account ownership category at each depository institution. This change made permanent the coverage increases that had been in effect since October 2008. The unlimited FDIC insurance for non-interest bearing transaction accounts that had been available since 2008 was discontinued as of December 31, 2012.
In order to maintain the DIF, member institutions, such as the Bank, are assessed insurance premiums. In light of the stresses that have occurred on the DIF in recent years and increases in insurance coverage, assessments have risen sharply.
The Dodd-Frank Act requires the FDIC to make numerous changes to the DIF and the manner in which assessments are calculated. The minimum ratio of assets in the DIF to the total of estimated insured deposits was increased from 1.15% to 1.35%, and the FDIC is given until September 30, 2020 to meet the reserve ratio. In December 2010, the FDIC adopted a final rule setting the reserve ratio of the DIF at 2.0%. As required by the Dodd-Frank Act, assessments are now based on an insured institution's average consolidated assets less tangible equity capital.
For the purpose of determining an institution's assessment rate, each institution is provided an assessment risk assignment, which is generally based on the risk that the institution presents to the DIF. Insured institutions with assets of less than $10 billion are placed in one of four risk categories. These risk categories are generally determined based on an institution's capital levels and its supervisory evaluation. These institutions generally have an assessment rate that can range from 2.5 to 45 basis points. However, the FDIC does have flexibility to adopt assessment rates without additional rule-making provided that the total base assessment rate increase or decrease does not exceed 2 basis points. In the future, if the reserve ratio reaches certain levels, these assessment rates will generally be lowered. As of December 31, 2013, the Bank's assessment rate was 6 basis points on average assets less average tangible equity capital.
In addition, all FDIC-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation. The Financing Corporation rate is adjusted quarterly to reflect changes in assessment bases of the DIF. These assessments will continue until the Financing Corporation bonds mature in 2019. The annual rate for the first quarter of 2014 is 0.62 basis points.
Qualified Thrift Lender Test
A savings association can comply with the Qualified Thrift Lender test either by meeting the Qualified Thrift Lender test set forth in the HOLA and its implementing regulations or by qualifying as a domestic building and loan association as defined in Section 7701(a)(19) of the Internal Revenue Code of 1986 and implementing regulations.
To qualify under the HOLA test, the Bank is required to maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” are total assets less (1) specified liquid assets up to 20% of total assets, (2) intangibles, including goodwill, and (3) the value of the property used to conduct business. “Qualified thrift investments” primarily consists of residential mortgages and related investments, including certain MBS, home equity loans, credit card loans, student loans and small business loans.

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To qualify under the Internal Revenue Code test, a savings association must meet both a “business operations” test and a “60% of assets” test. The business operations test requires the business of a savings association to consist primarily of acquiring the savings of the public and investing in loans. The 60% of assets test requires that at least 60% of a savings association's assets must consist of residential real property loans and certain other traditional thrift assets. While the Bank is eligible to qualify as a qualified thrift lender under the HOLA test, it is not clear due to statutory ambiguities that the Bank is eligible to qualify under the Internal Revenue Code test. As noted above, it is necessary for the Bank to qualify as a qualified thrift lender only under one of these two tests.
As of December 31, 2013 , the Bank held approximately 91% of its portfolio assets in qualified thrift investments and had more than $2.16 billion of its portfolio assets in qualified thrift investments for each of the 12 months ending December 31, 2013 . Therefore, the Bank qualified under the HOLA test. A savings association subsidiary of a savings and loan holding company that does not meet the Qualified Thrift Lender test must comply with the following restrictions on its operations:
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the association may not engage in any new activity or make any new investment, directly or indirectly, unless the activity or investment is also permissible for a national bank;
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the branching powers of the association are restricted to those of a national bank located in the association's home state; and
•
payment of dividends by the association is subject to the rules regarding payment of dividends by a national bank and must be necessary for its parent company to meet its obligations and must receive regulatory approval.
Further, an institution which fails to comply with the qualified thrift lender test is also subject to possible agency enforcement action as a violation of law under the HOLA. In addition, if the institution does not requalify under HOLA test within three years after failing the test, the institution would be prohibited from engaging in any activity not permissible for a national bank and would have to repay any outstanding advances from the FHLB as promptly as possible. Within one year of the date that a savings association ceases to meet the Qualified Thrift Lender test, any company that controls the association must register as and be deemed to be a bank holding company subject to all of the provisions of the Bank Holding Company Act of 1956 and other statutes applicable to bank holding companies. There are certain limited exceptions to these requirements.
Capital and Prompt Corrective Action Requirements
Capital Requirements
Federally insured depository institutions, such as the Bank, are required to maintain a minimum level of regulatory capital. “Total capital” generally means the sum of Tier 1 capital and Tier 2 capital. The FDIC regulations recognize two types, or tiers, of capital: “core capital,” or Tier 1 capital, and “supplementary capital,” or Tier 2 capital. Tier 1 capital generally includes common shareholders' equity and noncumulative perpetual preferred stock, less most intangible assets. Tier 2 capital, which is recognized up to 100% of Tier 1 capital for risk-based capital purposes (after any deductions for disallowed intangibles and disallowed deferred tax assets), includes such items as qualifying general loan loss reserves (up to 1.25% of risk-weighted assets), cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years), certain perpetual preferred stock, hybrid capital instruments including mandatory convertible debt, term subordinated debt, intermediate-term preferred stock (original average maturity of at least five years) and net unrealized holding gains on equity securities (subject to certain limitations); provided, however, the amount of term subordinated debt and intermediate term preferred stock that may be included in Tier 2 capital for risk-based capital purposes is limited to 50.0% of Tier 1 capital.
The FDIC currently measures a bank's capital using the (1) total risk-based capital ratio, (2) Tier 1 risk-based capital ratio and (3) Tier 1 capital leverage ratio. The risk-based measures are based on ratios of qualifying capital to risk-weighted assets. To determine risk-weighted assets, assets are placed in one of five categories and given a percentage weight based on the relative risk of that category. In addition, certain off-balance-sheet items are converted to balance-sheet credit equivalent amounts, and each amount is then assigned to one of the five categories. In evaluating the adequacy of a bank's capital, the FDIC may also consider other factors that may affect the bank's financial condition, such as interest rate risk exposure, liquidity, funding and market risks, the quality and level of earnings, concentration of credit risk, risks arising from nontraditional activities, loan and investment quality, the effectiveness of loan and investment policies, and management's ability to monitor and control financial operating risks. Under the current capital rules, banks are required to have a total risk-based capital ratio of at least 8.00%, a Tier 1 risk-based capital ratio of at least 4.00% and Tier 1 capital leverage ratio generally of at least 4.00%

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Prompt Corrective Action Regulations
Section 38 of the Federal Deposit Insurance Act establishes a framework of supervisory actions for insured depository institutions that are not adequately capitalized, also known as “prompt corrective action” regulations. All of the federal banking agencies have promulgated substantially similar regulations to implement a system of prompt corrective action. The framework for the type of supervisory action is based on a determination of a bank's capital category as follows:
•
in order to be considered “well capitalized,” a bank must have a total risk-based capital ratio of 10.0% or more, a Tier 1 risk-based capital ratio of 6.0% or more, a leverage capital ratio of 5.0% or more, and must not be subject to any written agreement, order or capital directive to meet and maintain a specific capital level for any capital measure;
•
in order to be considered “adequately capitalized,” a bank must have a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more, and a leverage capital ratio of 4.0% or more (or, a leverage ratio of at least 3.0% if the institution has a composite CAMELS (Capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk) rating of 1 and is not experiencing or anticipating any significant growth);
•
a bank is “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage capital ratio that is less than 4.0% (or a leverage ratio of at least 3.0% under certain circumstances);
•
a bank is “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a leverage capital ratio that is less than 3.0%; and
•
a bank is “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%.
Additionally, a bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
At each successive lower capital category, an insured bank is subject to increasingly severe supervisory actions. These actions include, but are not limited to, restrictions on asset growth, interest rates paid on deposits, branching, allowable transactions with affiliates, ability to pay bonuses and raises to senior executives and pursuing new lines of business. Additionally, all “undercapitalized” banks are required to implement capital restoration plans to restore capital to at least the “adequately capitalized” level, and the FDIC is generally required to close “critically undercapitalized” banks within a 90-day period.
New Capital Regulations
In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.
Under the Rules, both the Company and the Bank will be required to meet certain minimum capital requirements. The Rules implement a new capital ratio of common equity Tier 1 capital to risk-based assets. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”) except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Both the Company and the Bank expect to elect this one-time option to exclude certain components of AOCI. Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 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%. In addition to the preceding requirements, both the Company and the Bank are required to establish a “conservation buffer,” consisting of common equity Tier 1 capital, which is at least 2.5% above each of the preceding common equity Tier 1 capital ratio, the Tier 1 risk-based ratio and the total risk-based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The prompt corrective action rules, which apply to the Bank but not the Company, are modified to include a common equity Tier 1 risk-based ratio and to increase certain other capital requirements for the various thresholds. For example, the requirements for the Bank to be considered well-capitalized under the Rules are a 5.0% Tier 1 leverage ratio, a 6.5% common equity Tier 1 risk-based ratio, an 8.0% Tier 1 risk-based capital ratio and a 10.0% total risk-based capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively.
The Rules modify the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed

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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 $815 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 credits 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.
Limitations on Transactions with Affiliates
Transactions between the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of the Bank is any company or entity which controls, is controlled by or is under common control with the Bank but which is not a subsidiary of the Bank. The Company and its non-bank subsidiaries are affiliates of the Bank. Generally, Section 23A limits the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of the Bank's capital stock and surplus, and imposes an aggregate limit on all such transactions with all affiliates in an amount equal to 20.0% of such capital stock and surplus. Section 23B applies to “covered transactions” as well as certain other transactions and requires that all transactions be on terms substantially the same, or at least as favorable to the Bank, as those provided to a non-affiliate. The term “covered transaction” includes the making of loans to an affiliate, the purchase of or investment in the securities issued by an affiliate, the purchase of assets from an affiliate, the acceptance of securities issued by an affiliate as collateral security for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, or certain transactions with an affiliate that involves the borrowing or lending of securities and certain derivative transactions with an affiliate.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place restrictions on loans, derivatives, repurchase agreements and securities lending to executive officers, directors and principal shareholders of the Bank and its affiliates.
Standards for Safety and Soundness
The federal banking regulatory agencies have prescribed, by regulation, a set of guidelines for all insured depository institutions prescribing safety and soundness standards. These guidelines establish general standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings standards, compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines before capital becomes impaired. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal shareholder.
Each insured depository institution must implement a comprehensive written information security program that includes administrative, technical and physical safeguards appropriate to the institution's size and complexity and the nature and scope of its activities. The information security program also must be designed to ensure the security and confidentiality of customer information, protect against any unanticipated threats or hazards to the security or integrity of such information, protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer and ensure the proper disposal of customer and consumer information. Each insured depository institution must also develop and implement a risk-based response program to address incidents of unauthorized access to customer information in customer information systems. If the FDIC determines that the Bank fails to meet any standard prescribed by the guidelines, it may require the Bank to submit an acceptable plan to achieve compliance with the standard. The Bank maintains a program to meet the information security requirements and believes it is currently in compliance with this regulation.
Real Estate Lending Standards
FDIC regulations require the Bank to adopt and maintain written policies that establish appropriate limits and standards for real estate loans. These standards, which must be consistent with safe and sound banking practices, must establish loan portfolio

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diversification standards, prudent underwriting standards (including loan-to-value ratio limits) that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. The Bank is obligated to monitor conditions in its real estate markets to ensure that its standards continue to be appropriate for current market conditions. The Bank's board of directors is required to review and approve the Bank's standards at least annually.
The FDIC has published guidelines for compliance with these regulations, including supervisory limitations on loan-to-value ratios for different categories of real estate loans. Under the guidelines, the aggregate amount of all loans in excess of the supervisory loan-to-value ratios should not exceed 100.0% of total capital, and the total of all loans for commercial, agricultural, multifamily or other non-one-to-four family residential properties in excess of such ratios should not exceed 30.0% of total capital. Loans in excess of the supervisory loan-to-value ratio limitations must be identified in the Bank's records and reported at least quarterly to the Bank's board of directors.
The FDIC and the federal banking agencies have also issued guidance on sound risk management practices for concentrations in commercial real estate lending. The particular focus is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be sensitive to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is not to limit a bank's commercial real estate lending but to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations.
Risk Retention
The Dodd-Frank Act requires that, subject to certain exemptions, securitizers of mortgage and other asset-backed securities retain not less than five percent of the credit risk of the mortgages or other assets. In April 2011, the federal banking regulators, together with the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban Development, published proposed regulations implementing this requirement. Generally, the proposed regulations provide various ways in which the retention of risk requirement can be satisfied and also describe exemptions from the retention requirements for various types of assets, including mortgages. Final regulations have not been adopted.
Volcker Rule

In December 2013, the FDIC, the FRB and various other federal agencies issued final rules to implement certain provisions of the Dodd-Frank Act commonly known as the “Volcker Rule.” Subject to certain exceptions, the final rules generally prohibit banks and affiliated companies from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on those instruments, for their own account. The final rules also impose restrictions on banks and their affiliates from acquiring or retaining an ownership interest in, sponsoring or having certain other relationships with hedge funds or private equity funds. Compliance with the rule will be required by July 21, 2015.
Activities and Investments of Insured State-Chartered Financial Institutions
Federal law generally prohibits FDIC-insured state banks from engaging as a principal in activities, and from making equity investments, other than those that are permissible for national banks. An insured state bank is not prohibited from, among other things, (1) acquiring or retaining a majority interest in certain subsidiaries, (2) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2.0% of the bank's total assets, (3) acquiring up to 10.0% of the voting stock of a company that solely provides or reinsures directors', trustees' and officers' liability insurance coverage or bankers' blanket bond group insurance coverage for insured depository institutions and (4) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Washington State has enacted a law regarding financial institution parity. The law generally provides that Washington-chartered savings banks may exercise any of the powers of Washington-chartered commercial banks, national banks or federally-chartered savings banks, subject to the approval of the Director of the WDFI in certain situations.
Environmental Issues Associated With Real Estate Lending
The Comprehensive Environmental Response, Compensation and Liability Act, or the CERCLA, is a federal statute that generally imposes strict liability on all prior and present “owners and operators” of sites containing hazardous waste. However, Congress has acted to protect secured creditors by providing that the term “owner and operator” excludes a person whose ownership is limited to protecting its security interest in the site. Since the enactment of the CERCLA, this “secured creditor” exemption has been the subject of judicial interpretations which have left open the possibility that lenders could be liable for cleanup costs on contaminated property that they hold as collateral for a loan. To the extent that legal uncertainty exists in this

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area, all creditors, including the Bank, that have made loans secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.
Reserve Requirements
The Bank is subject to Federal Reserve regulations pursuant to which depositary institutions may be required to maintain non-interest-earning reserves against their deposit accounts and certain other liabilities. Currently, reserves must be maintained against transaction accounts (primarily negotiable order of withdrawal and regular checking accounts). The regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $12.4 million up to $79.5 million in 2013 and 10% of the accounts over $79.5 million. Net transaction accounts up to $12.4 million are exempt from reserve requirements. The regulations generally require that reserves be maintained in the amount of 3.0% of the aggregate of transaction accounts over $13.3 million up to $89.0 million in 2014 and 10% of the accounts over $89.0 million. Net transaction accounts up to $12.4 million are exempt from reserve requirements.
Federal Home Loan Bank System
The Federal Home Loan Bank system consists of twelve regional Federal Home Loan Banks. Among other benefits, each of these serves as a reserve or central bank for its members within its assigned region. Each of the Federal Home Loan Banks makes available loans or advances to its members in compliance with the policies and procedures established by its board of directors. The Bank is a member of the Federal Home Loan Bank of Seattle ("FHLB"). As a member, the Bank is required to own stock in the FHLB and currently owns $35.3 million of stock in the FHLB. The Federal Housing Finance Agency (the “Finance Agency”) is the primary regulator of the FHLB, and the Finance Agency classified the FHLB as undercapitalized in August 2009. In October 2010, the FHLB entered into a Stipulation and Consent to The Issuance of a Consent Order with the Finance Agency, which sets forth requirements for capital management, asset composition and other operating and risk management improvements. In September 2012, the Finance Agency reclassified the FHLB as adequately capitalized but the FHLB remained subject to the Consent Order. On November 22, 2013, the Finance Agency issued an amended Consent Order, which modifies and supersedes the October 2010 Consent Order. The amended Consent Order acknowledges the FHLB’s fulfillment of many of the requirements set forth in the 2010 Consent Order and improvements in the FHLB’s financial performance, while continuing to impose certain restrictions on its ability to repurchase, redeem, and pay dividends on its capital stock. As such, Finance Agency approval or non-objection will continue to be required for all repurchases, redemptions, and dividend payments on capital stock.
Community Reinvestment Act of 1977
Banks are subject to the provisions of the CRA of 1977, which requires the appropriate federal bank regulatory agency to assess a bank's record in meeting the credit needs of the assessment areas serviced by the bank, including low and moderate income neighborhoods. The regulatory agency's assessment of the bank's record is made available to the public. Further, these assessments are considered by regulators when evaluating mergers, acquisitions and applications to open or relocate a branch or facility. The Bank currently has a rating of “Outstanding” under the CRA.
Dividends
Dividends from the Bank constitute an important source of funds for dividends that may be paid by the Company to shareholders. The amount of dividends payable by the Bank to the Company depends upon the Bank's earnings and capital position and is limited by federal and state laws. Under Washington law, the Bank may not declare or pay a cash dividend on its capital stock if this would cause its net worth to be reduced below the net worth requirements, if any, imposed by the WDFI. In addition, dividends on the Bank's capital stock may not be paid in an amount greater than its retained earnings without the approval of the WDFI.
The amount of dividends actually paid during any one period will be strongly affected by the Bank's policy of maintaining a strong capital position. Because the Bank is treated as a savings association subsidiary of a savings and loan holding company, it must give the Federal Reserve at least 30 days' advance notice of the proposed declaration of a dividend on its guaranty, permanent or other non-withdrawable stock. Federal law prohibits an insured depository institution from paying a cash dividend if this would cause the institution to be “undercapitalized,” as defined in the prompt corrective action regulations. Moreover, the federal bank regulatory agencies have the general authority to limit the dividends paid by insured banks if such payments are deemed to constitute an unsafe and unsound practice. New capital rules adopted by the FDIC will impose additional requirements on the Bank’s ability to pay dividends. See “- Capital and Prompt Corrective Action Requirements - New Capital Rules .”

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Liquidity
The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. See “Management's Discussion and Analysis - Liquidity Risk and Capital Resources.”
Compensation
The Bank is subject to regulation of its compensation practices. See “Regulation and Supervision - Regulation of the Company - Compensation Policies .”
Bank Secrecy Act and USA Patriot Act
The Company and the Bank are subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers and mandatory transaction reporting obligations. By way of example, the Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious.
Like all United States companies and individuals, the Company and the Bank are prohibited from transacting business with certain individuals and entities named on the Office of Foreign Asset Control's list of Specially Designated Nationals and Blocked Persons. Failure to comply may result in fines and other penalties. The Office of Foreign Asset Control (“OFAC”) has issued guidance directed at financial institutions in which it asserted that it may, in its discretion, examine institutions determined to be high-risk or to be lacking in their efforts to comply with these prohibitions.
The Bank maintains a program to meet the requirements of the Bank Secrecy Act, USA PATRIOT Act and OFAC and believes it is currently in compliance with these requirements.
Identity Theft
Section 315 of the Fair and Accurate Credit Transactions Act ("FACT Act") requires each financial institution or creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent and mitigate identity theft “red flags” in connection with the opening of certain accounts or certain existing accounts.
The Bank maintains a program to meet the requirements of Section 315 of the FACT Act and believes it is currently in compliance with these requirements.
Consumer Protection Laws and Regulations
The Bank and its affiliates are subject to a broad array of federal and state consumer protection laws and regulations that govern almost every aspect of its business relationships with consumers. While this list is not exhaustive, these include the Truth-in-Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Secure and Fair Enforcement in Mortgage Licensing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Service Members' Civil Relief Act, the Right to Financial Privacy Act, the Home Ownership and Equity Protection Act, the Consumer Leasing Act, the Fair Credit Billing Act, the Homeowners Protection Act, the Check Clearing for the 21st Century Act, laws governing flood insurance, laws governing consumer protections in connection with the sale of insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement some or all of the foregoing. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans and providing other services. Failure to comply with these laws and regulations can subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil liability, criminal penalties, punitive damages and the loss of certain contractual rights. The Bank has a compliance governance structure in place to help ensure its compliance with these requirements.
The Dodd-Frank Act established the CFPB as a new independent bureau that is responsible for regulating consumer financial products and services under federal consumer financial laws. The CFPB has broad rulemaking authority with respect to these laws and exclusive examination and primary enforcement authority with respect to banks with assets of $10 billion or more.
The Dodd-Frank Act also contains a variety of provisions intended to reform consumer mortgage practices. The provisions include (1) a requirement that lenders make a determination that at the time a residential mortgage loan is consummated the consumer has a reasonable ability to repay the loan and related costs, (2) a ban on loan originator compensation based on the

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interest rate or other terms of the loan (other than the amount of the principal), (3) a ban on prepayment penalties for certain types of loans, (4) bans on arbitration provisions in mortgage loans and (5) requirements for enhanced disclosures in connection with the making of a loan. The Dodd-Frank Act also imposes a variety of requirements on entities that service mortgage loans.
The Dodd-Frank Act contains provisions further regulating payment card transactions. The Dodd-Frank Act required the Federal Reserve to adopt regulations limiting any interchange fee for a debit transaction to an amount which is “reasonable and proportional” to the costs incurred by the issuer. The Federal Reserve has adopted final regulations limiting the amount of debit interchange fees that large bank issuers may charge or receive on their debit card transactions. There is an exemption from the rules for issuers with assets of less than $10 billion and the Federal Reserve has stated that it will monitor and report to Congress on the effectiveness of the exemption. Nevertheless, it is unclear whether such smaller issuers (which include the Bank) will, as a practical matter, be able to avoid the impact of the regulations.
Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") implemented a broad range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley because we are required to file periodic reports with the SEC under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley and/or its implementing regulations establishes membership requirements and additional responsibilities for our audit committee, imposes restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposes additional responsibilities for our external financial statements on our chief executive officer and chief accounting officer, expands the disclosure requirements for our corporate insiders, requires our management to evaluate our disclosure controls and procedures and our internal control over financial reporting, and requires our independent registered public accounting firm to issue a report on our internal control over financial reporting.

Future Legislation or Regulation

In light of recent conditions in the United States economy and the financial services industry, the Obama administration, Congress, the regulators and various states continue to focus attention on the financial services industry. Additional proposals that affect the industry have been and will likely continue to be introduced. We cannot predict whether any of these proposals will be enacted or adopted or, if they are, the effect they would have on our business, our operations or our financial condition.

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ITEM 1A
RISK FACTORS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this report.

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

Interest rates may be affected by many factors beyond our control, including general and economic conditions and the monetary and fiscal policies of various governmental and regulatory authorities. 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.

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

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

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

We are operating in an uncertain economic environment, including sluggish national and global conditions, accompanied by high unemployment and very low interest rates. Financial institutions continue to be affected by changing conditions in the real estate and financial markets, along with an arduous regulatory climate. Dramatic declines in the housing market in recent years, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions. While conditions have improved, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations.

In particular, we may face risks related to market conditions that may negatively impact our business opportunities and plans, such as:
•
Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities;
•
Regulatory scrutiny of the industry could increase, leading to harsh regulation of our industry that could lead to a higher cost of compliance, limit our ability to pursue business opportunities and increase our exposure to the judicial system and the plaintiff’s bar;
•
The models we use to assess the creditworthiness of our customers may prove less reliable than we had anticipated in predicting future behaviors which may impair our ability to make good underwriting decisions;
•
Challenges in accurately estimating the ability of our borrowers to repay their loans if our forecasts of economic conditions and other economic predictions are not accurate;
•
Further erosion in the fiscal condition of the U.S. Treasury that may lead to new taxes limiting the ability of the Company to pursue growth and return profits to shareholders; and
•
Uncertainty regarding future political developments and fiscal policy.

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If recovery from the economic recession slows or if we experience another recessionary dip, our ability to access capital and our business, financial condition and results of operations may be adversely impacted.

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

We originate and purchase, sell and thereafter service single family and multifamily mortgages under the Fannie Mae, and to a lesser extent the Freddie Mac, single family purchase programs and the Fannie Mae multifamily DUS program. Since the nationwide downturn in residential mortgage lending that began in 2007 and the placement of Fannie Mae and Freddie Mac into conservatorship, Congress and various executive branch agencies have offered a wide range of proposals aimed at restructuring these agencies. None of these proposals have yet been defined with any specificity, and so we cannot predict how any such initiative would impact our business. However, any restructuring of Fannie Mae and Freddie Mac that restricts their loan purchase programs may have a material adverse effect on our business and results of operations. Moreover, we have recorded on our balance sheet an intangible asset (mortgage servicing rights, or MSRs) relating to our right to service single and multifamily loans sold to Fannie Mae and Freddie Mac. That MSR asset was valued at $162.5 million at December 31, 2013. 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.

Fannie Mae and Freddie Mac are under conservatorship with the Federal Housing Finance Agency. On February 11, 2011, the Obama administration presented Congress with a report titled “ Reforming America's Housing Finance Market, A Report to Congress ,” outlining its proposals for reforming America's housing finance market with the goal of scaling back the role of the U.S. government in, and promoting the return of private capital to, the mortgage markets and ultimately winding down Fannie Mae and Freddie Mac. Without mentioning a specific time frame, the report calls for the reduction of the role of Fannie Mae and Freddie Mac in the mortgage markets by, among other things, reducing conforming loan limits, increasing guarantee fees and requiring larger down payments by borrowers. We cannot be certain if or when Fannie Mae and Freddie Mac ultimately will be wound down, if or when additional reform of the housing finance market will be implemented or what the future role of the U.S. government will be in the mortgage market, and, accordingly, we will not be able to determine the impact that any such reform may have on us until a definitive reform plan is adopted.

In addition, our ability to generate income through mortgage sales to institutional investors depends in part on programs sponsored by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of mortgage-backed securities in the secondary market. Any discontinuation of, or significant reduction in, the operation of those programs could have a material adverse effect on our loan origination and mortgage sales as well as our results of operations. Also, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these entities could negatively impact our results of business, operations and cash flows. Further, the Dodd-Frank Act imposes a requirement that private securitizers of mortgage and other asset backed securities retain, subject to certain exemptions, not less than five percent of the credit risk of the mortgages or other assets backing the securities.

We are subject to extensive regulation that has in the past restricted and could further restrict our activities in the future, 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. Examination findings by the regulatory agencies may result in adverse consequences to the Company or the Bank. Further, we have, in the past, been subject to specific regulatory orders that constrained our business and required us to take measures that investors may have deemed undesirable, and we may again in the future be subject to such orders if banking regulators were to determine that our operations require such restrictions. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the authority to restrict our operations, adversely reclassify our assets, determine the level of deposit premiums assessed and require us to increase our allowance for loan losses.


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

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

Some of these changes were effective immediately, though many are being phased in gradually. In addition, the statute in many instances calls for regulatory rulemaking to implement its provisions, not all of which have been completed or are in effect, so the precise contours of the law and its effects on us cannot yet be fully understood. The provisions of the Dodd-Frank Act and the subsequent exercise by regulators of their revised and expanded powers thereunder could materially and negatively impact the profitability of our business, the value of assets we hold or the collateral available for our loans, require changes to business practices or force us to discontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk. See “ Regulation and Supervision ” in Item 1 of this Form 10-K.

We will be subject to more stringent capital requirements.

In July 2013, the U.S. federal banking regulators (including the Federal Reserve and FDIC) jointly announced the adoption of new rules relating to capital standards requirements, including requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision, which standards are commonly referred to as Basel III. A substantial portion of these rules will apply to both the Company and the Bank beginning in January 2015. As part of these new rules, both the Company and the Bank will be required to have a common equity Tier 1 capital ratio of 4.5%, have a Tier 1 leverage ratio of 4.0%, a Tier 1 risk-based ratio of 6.0% and a total risk-based ratio of 8.0%. In addition, both the Company and the Bank will be required to establish a “conservation buffer”, consisting of common equity Tier 1 capital, equal to 2.5%, which means in effect that in order to prevent certain regulatory restrictions, the common equity Tier 1 capital ratio requirement will be 7.0%, the Tier 1 risk-based ratio requirement will be 8.5% and the total risk-based ratio requirement will be 10.5%. In this regard, any institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The requirement for a conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019. Additional prompt corrective action rules will apply to the Bank, including higher ratio requirements for the Bank to be considered well-capitalized. The new rules also modify the manner for determining when certain capital elements are included in the ratio calculations. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from the new common equity Tier 1 capital to the extent that any one such category exceeds 10% of new common equity Tier 1 capital, or all such categories in the aggregate exceed 15% of  new common equity Tier 1 capital. Maintaining higher capital levels may result in lower profits for the Company as we will not be able to grow our lending as quickly as we might otherwise be able to do if we were to maintain lower capital levels. See “Regulation of Home Street Bank - Capital and Prompt Corrective Action Requirements - New Capital Rules .”

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

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

•
Recent legislation and court decisions with precedential value could allow judges to modify the terms of residential mortgages in bankruptcy proceedings and could hinder our ability to foreclose promptly on defaulted mortgage loans or expand assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in our being held responsible for violations in the mortgage loan origination process.
•
Congress and various regulatory authorities have proposed programs that would require a reduction in principal balances of “underwater” residential mortgages, which if implemented would tend to reduce loan servicing income and which might adversely affect the carrying values of portfolio loans.

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•
Recent court cases in Oregon and Washington have challenged whether Mortgage Electronic Registration Systems, Inc. (“MERS”) meets the statutory definition of deed of trust beneficiary under applicable state laws. Based on decisions handed down by courts in Oregon, we and other servicers of MERS-related loans have elected to foreclose through judicial procedures in Oregon, resulting in increased foreclosure costs, longer foreclosure timelines and additional delays. If the Oregon case law is upheld on appeal, and/or if the Washington or other state courts where we do significant business issue a similar decision in the cases pending before them, our foreclosure costs and foreclosure timelines may continue to increase, which in turn, could increase our single family loan delinquencies, servicing costs, and adversely affect our cost of doing business and results of operations.

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

In addition, while these legislative and regulatory proposals and courts decisions generally have focused primarily, if not exclusively, on residential mortgage origination, other laws and regulations may be enacted that affect the manner in which we do business and the products and services that we provide, restrict our ability to grow through acquisition, restrict our ability to compete in our current business or expand into any new business, and impose additional fees, assessments or taxes on us or increase our regulatory oversight. For example, our consumer business, including our mortgage, credit card, and other consumer lending and non-lending businesses, may be adversely affected by the policies enacted or regulations adopted by the Consumer Financial Protection Bureau (CFPB) which has broad rulemaking authority over consumer financial products and services. While the full impact of CFPB's activities on our business is still unknown, we anticipate that CFPB actions may increase our compliance costs and require changes in our business practices as a result of new regulations and requirements and could limit the products and services we are able to provide to customers. We are unable to predict whether U.S. federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could adversely affect our cost of doing business and profitability. See “Regulation and Supervision - Regulation and Supervision ” in Item 1 of this Form 10-K.

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

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

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

HomeStreet, Inc. is a separate legal entity from the Bank, and although we do receive some dividends from HomeStreet Capital Corporation, the primary source of our funds from which we service our debt, pay dividends to our shareholders and otherwise satisfy our obligations is dividends from the Bank. The availability of dividends from the Bank is limited by various statutes and regulations, as well as by our policy of retaining a significant portion of our earnings to support the Bank's operations. New capital rules will impose more stringent capital requirements to maintain “well capitalized” status which may impact the Bank’s ability to pay dividends to the Company. See “Regulation of Home Street Bank - Capital and Prompt Corrective Action

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Requirements - New Capital Rules .” If the Bank cannot pay dividends to us, we may be limited in our ability to service our debts, fund the Company's operations and pay dividends to the Company's shareholders. While the Company has made dividend distributions to its public shareholders in recent quarters, the Company has not adopted a dividend policy and the Company may not be able to continue paying dividends and may suspend the payment of dividends from time to time.

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, and our ability to remain profitable is threatened by a myriad of issues, including:

•
Increased costs from growth through acquisition as well as the acquisition of other entities could exceed the income growth anticipated from these opportunities, especially in the short term as these 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 and servicing rights;
•
Changes in government-sponsored enterprises and their ability to insure or to buy our loans in the secondary market may have significant changes in our ability to recognize income on sale of our loans to third parties;
•
Competition in the mortgage market industry may drive down the interest rates we are able to offer on our mortgages;
•
Changes in the cost structures and fees of government-sponsored enterprises to whom we sell many of these loans may compress our margins and reduce our net income and profitability; and
•
Our hedging strategies to offset risks related to interest rate changes may not prove to be successful and may result in unanticipated losses for the Company.

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

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

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

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

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


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Efforts to integrate acquisitions could consume significant resources and may not be successful.

In the fourth quarter of 2013 we completed our acquisitions of Fortune Bank, Yakima National Bank and the two retail branches of AmericanWest Bank. We may seek out other acquisitions in the near future as we look for ways to continue to grow our business and our market share. These acquisitions and 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;
•
Potential responsibility for the liabilities of acquired businesses;
•
Inability to maintain our internal standards, controls, procedures and policies at the acquired companies or businesses; and
•
Potential loss of key employees of the acquired companies.

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

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

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

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.


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

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

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

•
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, as a result of our recent acquisitions of Fortune Bank, Yakima National Bank and two branches of AmericanWest Bank, we have added the loans previously held by the acquired companies or related to the acquired branches to our books. Although we review loan quality as part of our due diligence in considering any acquisition, the addition of such loans may increase our credit risk exposure, requiring an increase in our allowance for loan losses or we may experience adverse effects to our financial condition, results of operations and cash flows stemming from losses on those additional loans.

Our real estate lending also exposes us to environmental liabilities.

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

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environmental remediation. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

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

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

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

To date we 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

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

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

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

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

In addition, because of the demand for technology-driven products, banks are increasingly contracting with third party vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly transaction, strategic, reputation, cybersecurity and compliance risks. There can be no assurance that we will be able to successfully manage the risks associated with our increased dependency on technology.

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

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

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

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

As a result of the Federal Reserve Board's concerns regarding continued slow economic growth, the Federal Reserve Board, in 2008 implemented its standing monetary policy known as “quantitative easing,” a program involving the purchase of mortgage backed securities and United States Treasury securities, the volume of which has been aligned with specific economic targets or measures intended to bolster the U.S. economy. As the Federal Reserve Board, through the Federal Open Market Committee (the “Committee”), monitors economic performance, the volume of the quantitative easing program has been incrementally

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reduced. The Committee has stated that if incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

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

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

A substantial portion of our consolidated net revenues (net interest income plus noninterest income) are derived from originating and selling residential mortgages. Residential mortgage lending in general has experienced substantial volatility in recent periods. Moreover, a significant increase in interest rates, such as 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.

We may incur losses due to changes in prepayment rates.

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

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

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

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

Certain third party loan purchasers revised their fee structures in the third quarter of 2013 and increased the costs of doing business with them. For example, certain purchasers of conforming loans, including Fannie Mae and Freddie Mac, raised costs of guarantee fees and other required fees and payments. These changes increased the cost of mortgages to consumers and the

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cost of selling conforming loans to third party loan purchasers which in turn decreased our margin and negatively impacted our profitability. Additionally, the FHA raised costs for premiums and extended the period for which private mortgage insurance is required on a loan purchased by them. Additional changes in the future from third party loan purchasers may have a negative impact on our ability to originate loans to be sold because of the increased costs of such loans and may decrease our profitability with respect to loans held for sale. In addition, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these third party loan purchasers could negatively impact our results of business, operations and cash flows.

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

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

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

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

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

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

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

In January 2014 new federal regulations promulgated by the Consumer Financial Protection Bureau ("CFPB") took effect which impact how we originate and service residential mortgage loans.  The new regulations, among other things, require mortgage lenders to assess and document a borrower’s ability to repay their mortgage loan.  The regulations provide borrowers the ability to challenge foreclosures and sue for damages based on allegations that the lender failed to meet the standard for determining the borrower’s ability to repay their loan.  While the regulations include presumptions in favor of the lender based on certain loan underwriting criteria, it is uncertain how these presumptions will be construed and applied by courts in the event

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of litigation.  The ultimate impact of these new regulations on the lender’s enforcement of its loan documents in the event of a loan default, and the cost and expense of doing so, is uncertain, but may be significant.  In addition, the secondary market demand for loans that do not fall within the presumptively safest category of a “qualified mortgage” as  defined by the CFPB is uncertain.  

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


ITEM 1B
UNRESOLVED STAFF COMMENTS

None.

ITEM 2
PROPERTIES

We lease principal offices, which are located in office space in downtown Seattle at 601 Union Street, Suite 2000, Seattle, WA 98101. This office lease provides sufficient space to conduct the management of our business. In addition, we currently lease space for all 81 of our office locations. Our branches include separate lending and retail banking facilities, as well as combined facilities, primarily located in Washington, Oregon, Idaho, California and Hawaii.

ITEM 3
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 loss based on information known at this time.

ITEM 4
MINE SAFETY DISCLOSURES

Not applicable.

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PART II
 
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock began trading on the NASDAQ stock market on February 10, 2012 under the symbol “HMST.” Prior to that date, our common stock was not publicly traded. The following table sets forth, for the periods indicated, the high and low (other than our initial public offering price of $11.00 per share) reported sales prices per share of the common stock as reported on the NASDAQ Global Select Market, our principal trading market (as adjusted to reflect the 2-for-1 forward stock split effective March 6, 2012 and the 2-for-1 forward stock split effective November 5, 2012).
 
 
High
 
Low
 
Special Cash Dividends Declared
For the year ended December 31, 2013
 
 
 
 
 
First quarter ended March 31
$
28.73

 
$
21.80

 
$
—

Second quarter ended June 30
24.69

 
19.66

 
0.11

Third quarter ended September 30
23.17

 
18.97

 
0.11

Fourth quarter ended December 31
21.25

 
18.48

 
0.11

 
 
 
 
 
 
For the year ended December 31, 2012
 
 
 
 
 
First quarter ended March 31
$
14.99

 
$
11.33

 
$
—

Second quarter ended June 30
17.77

 
13.30

 
—

Third quarter ended September 30
19.75

 
15.39

 
—

Fourth quarter ended December 31
26.97

 
18.55

 
—


As of March 10, 2014, there were 138 shareholders of record of our common stock.

Dividend Policy

The Company declared a special cash dividend of $0.11 per share in each of the quarters ended June 30, 2013, September 30, 2013 and December 31, 2013. Subsequently, on January 23, 2014 the Company declared a special cash dividend of $0.11 per share payable on February 24, 2014 to shareholders of record at the close of business on February 3, 2014.

The amount and timing of future dividends have not been determined. The payment of dividends will depend upon a number of factors, including regulatory capital requirements, the Company’s and the Bank’s liquidity, financial condition and results of operations, strategic growth plans, tax considerations, statutory and regulatory limitations and general economic conditions. The Company's ability to pay dividends to shareholders is significantly dependent on the Bank's ability to pay dividends to the Company, which is limited to the extent necessary for the Bank to meet the regulatory requirements of a “well-capitalized” bank or other formal or informal guidance communicated by our principal regulators. New capital rules to be implemented on January 1, 2015 will impose more stringent requirements on the ability of the Bank to maintain “well-capitalized” status and to pay dividends to the Company. See “Regulation of Home Street Bank - Capital and Prompt Corrective Action Requirements - New Capital Rules .”

For the foregoing reasons, there can be no assurance that we will pay any further special dividends in any future period.

Sales of Unregistered Securities

Not applicable.

Stock Repurchases in the Fourth Quarter

Not applicable.


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Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2013, including the HomeStreet, Inc. 2010 Equity Incentive Plan (the “2010 Plan”), the HomeStreet, Inc. 2011 Director Equity Compensation Plan (the "2011 Plan"), and the retention grants made in 2010 outside of the 2010 Plan but subject to the terms and conditions of that plan.
 
Plan Category
(a) Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
 
(b) Weighted
Average Exercise
Price of
Outstanding
Options,
Warrants, and
Rights
 
(c) Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities Reflected
in Column (a))
 
 
 
 
 
 
 
 
Plans approved by shareholders
604,616

(1
)
$
12.42

 
249,396

(2)(3)(4)
Plans not approved by shareholders (5)
49,600

 
$
0.81

 
N/A

 
Total
654,216

 
$
12.10

 
249,396

 
 
(1)
Consists of option grants awarded pursuant to the 2010 Plan.
(2)
Consists of 94,294 shares remaining under the 2010 Plan and 155,102 shares remaining under the 2011 Plan.
(3)
The 2010 Plan was passed by shareholders in January 2010 but did not become effective until the completion of our initial public offering in February 2012. Following our initial public offering, the number of shares available for issuance under the 2010 Plan, giving effect to our 2-for-1 forward stock splits in March 2012 and November 2012, was 965,854 . This amount was established by our Board of Directors, which determined that it will not issue equity grants under the 2010 Plan in an amount that would cause the combined amount of awards granted pursuant to the 2010 Plan and the 2010 retention equity awards to exceed 1,412,712 shares of common stock or 10% of the number of shares outstanding immediately following the closing of our initial public offering.
(4)
During 2013, under the 2010 Plan, the Company awarded 31,654 restricted stock awards, of which none have vested, and 1,489 performance stock awards, all of which have vested. The Company also issued an aggregate of 8,366 shares of unrestricted common stock to the Company’s non-employee directors pursuant to the terms of the 2011 Plan. There are no outstanding options, warrants or rights under the 2011 Plan.
(5)
Consists of retention equity awards granted in 2010 outside of the 2010 Plan but subject to its terms and conditions.


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Stock Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of HomeStreet, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison from February 10, 2012 (the date our common stock commenced trading on the NASDAQ Stock Market) through December 31, 2013 of the cumulative total return for our common stock, the KBW Bank Index (BKX) and the Russell 2000 (RUT) Index. The graph assumes that $100 was invested at the market close on February 10, 2012 in the common stock of HomeStreet, Inc., the KBW Bank Index and the Russell 2000 Index and data for the KBW Bank Index and the Russell 2000 Index assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.

    

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ITEM 6
SELECTED FINANCIAL DATA

The data set forth below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations,” and the Consolidated Financial Statements and Notes thereto appearing at Item 8 of this report.

The following table sets forth selected historical consolidated financial and other data for us at and for each of the periods ended as described below. The selected historical consolidated financial data as of December 31, 2013 and 2012 and for each of the years ended December 31, 2013, 2012 and 2011 have been derived from, and should be read together with, our audited consolidated financial statements and related notes included elsewhere in this Form 10-K. The selected historical consolidated financial data as of December 31, 2011, 2010 and 2009 and for each of the years ended December 31, 2010 and 2009 have been derived from our audited consolidated financial statements for those years, which are not included in this Form 10-K. You should read the summary selected historical consolidated financial and other data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto, which are included elsewhere in this Form 10-K. We have prepared our unaudited information on the same basis as our audited consolidated financial statements and have included, in our opinion, all adjustments that we consider necessary for a fair presentation of the financial information set forth in that information.
 
 
At or for the Year Ended December 31,
(dollars in thousands, except share data)
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
Income statement data (for the period ended):
 
 
 
 
 
 
 
 
 
Net interest income
$
74,444

 
$
60,743

 
$
48,494

 
$
39,276

 
$
31,502

Provision for credit losses
900

 
11,500

 
3,300

 
37,300

 
153,515

Noninterest income
190,745

 
238,020

 
97,205

 
90,474

 
59,230

Noninterest expense
229,495

 
183,591

 
126,494

 
126,000

 
94,448

Net income (loss) before taxes
34,794

 
103,672

 
15,905

 
(33,550
)
 
(157,231
)
Income tax expense (benefit)
10,985

 
21,546

 
(214
)
 
697

 
(46,955
)
Net income (loss)
$
23,809

 
$
82,126

 
$
16,119

 
$
(34,247
)
 
$
(110,276
)
Basic income (loss) per share (1)
$
1.65

 
$
6.17

 
$
2.98

 
$
(6.34
)
 
$
(20.41
)
Diluted income (loss) per share (1)
$
1.61

 
$
5.98

 
$
2.80

 
$
(6.34
)
 
$
(20.41
)
Common shares outstanding (1)
14,799,991

 
14,382,638

 
5,403,498

 
5,403,498

 
5,403,498

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
Basic
14,412,059

 
13,312,939

 
5,403,498

 
5,403,498

 
5,403,498

Diluted
14,798,168

 
13,739,398

 
5,748,342

 
5,403,498

 
5,403,498

Book value per share
$
17.97

 
$
18.34

 
$
15.99

 
$
10.88

 
$
17.01

Dividends per share
$
0.33

 
$
—

 
$
—

 
$
—

 
$
—

Financial position (at year end):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
33,908

 
$
25,285

 
$
263,302

 
$
72,639

 
$
217,103

Investment securities
498,816

 
416,517

 
329,242

 
313,715

 
658,058

Loans held for sale  (2)
279,941

 
620,799

 
150,409

 
212,602

 
57,046

Loans held for investment, net
1,871,813

 
1,308,974

 
1,300,873

 
1,538,521

 
1,964,994

Mortgage servicing rights (2)
162,463

 
95,493

 
77,281

 
87,232

 
78,372

Other real estate owned
12,911

 
23,941

 
38,572

 
170,455

 
107,782

Total assets
3,066,054

 
2,631,230

 
2,264,957

 
2,485,697

 
3,209,536

Deposits
2,210,821

 
1,976,835

 
2,009,755

 
2,129,742

 
2,332,333

Federal Home Loan Bank advances
446,590

 
259,090

 
57,919

 
165,869

 
677,840

Total shareholders' equity
$
265,926

 
$
263,762

 
$
86,407

 
$
58,789

 
$
91,896



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At or for the Year Ended December 31,
(dollars in thousands, except share data)
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
Financial position (averages):
 
 
 
 
 
 
 
 
 
Investment securities
$
515,000

 
$
410,819

 
$
306,813

 
$
457,930

 
$
372,320

Loans held for investment
1,496,146

 
1,303,010

 
1,477,976

 
1,868,035

 
2,307,215

Total interest earning assets
2,422,136

 
2,167,363

 
2,069,858

 
2,642,693

 
3,056,755

Total interest-bearing deposits
1,590,492

 
1,644,859

 
1,814,464

 
2,071,237

 
2,012,971

Federal Home Loan Bank advances
293,871

 
93,325

 
93,755

 
382,083

 
685,715

Total interest-bearing liabilities
2,023,409

 
1,817,847

 
1,970,725

 
2,522,767

 
2,776,163

Shareholders’ equity
$
249,081

 
$
211,329

 
$
68,537

 
$
89,267

 
$
160,145

Financial performance:
 
 
 
 
 
 
 
 
 
Return on average shareholders' equity  (3)
9.56
%
 
38.86
%
 
23.52
%
 
(38.00
)%
 
(68.86
)%
Return on average total assets
0.88
%
 
3.42
%
 
0.70
%
 
(1.19
)%
 
(3.47
)%
Net interest margin (4)
3.17
%
(5)  
2.89
%
 
2.36
%
 
1.50
 %
 
1.04
 %
Efficiency ratio (6)
86.54
%
 
61.45
%
 
86.82
%
 
97.24
 %
 
104.10
 %
Credit quality:
 
 
 
 
 
 
 
 
 
Allowance for credit losses
$
24,089

 
$
27,751

 
$
42,800

 
$
64,566

 
$
110,422

Allowance for loan losses/total loans
1.26
%
 
2.06
%
 
3.18
%
 
4.00
 %
 
5.28
 %
Allowance for loan losses/nonaccrual loans
93.00
%
 
92.20
%
 
55.81
%
 
56.69
 %
 
29.25
 %
Total nonaccrual loans  (7)
$
25,707

 
$
29,892

 
$
76,484

 
$
113,210

 
$
374,218

Nonaccrual loans/total loans
1.36
%
 
2.24
%
 
5.69
%
 
7.06
 %
 
18.04
 %
Other real estate owned
$
12,911

 
$
23,941

 
$
38,572

 
$
170,455

 
$
107,782

Total nonperforming assets
$
38,618

 
$
53,833

 
$
115,056

 
$
283,665

 
$
482,000

Nonperforming assets/total assets
1.26
%
 
2.05
%
 
5.08
%
 
11.41
 %
 
15.02
 %
Net charge-offs
$
4,562

 
$
26,549

 
$
25,066

 
$
83,156

 
$
101,680

Regulatory capital ratios for the bank:
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital (to average assets)
9.96
%
 
11.78
%
 
6.04
%
 
4.52
 %
 
4.53
 %
Tier 1 risk-based capital (to risk-weighted assets)
14.28
%
 
18.05
%
 
9.88
%
 
6.88
 %
 
7.19
 %
Total risk-based capital (to risk-weighted assets)
15.46
%
 
19.31
%
 
11.15
%
 
8.16
 %
 
8.50
 %
SUPPLEMENTAL DATA:
 
 
 
 
 
 
 
 
 
Loans serviced for others:
 
 
 
 
 
 
 
 
 
Single family
$
11,795,621

 
$
8,870,688

 
$
6,885,285

 
$
6,343,158

 
$
5,820,946

Multifamily
720,429

 
727,118

 
758,535

 
776,671

 
810,910

Other
95,673

 
53,235

 
56,785

 
58,765

 
69,839

Total loans serviced for others
$
12,611,723

 
$
9,651,041

 
$
7,700,605

 
$
7,178,594

 
$
6,701,695

Loan origination activity:
 
 
 
 
 
 
 
 
 
Single family
$
4,870,603

 
$
4,901,459

 
$
1,721,264

 
$
2,069,144

 
$
2,727,457

Other
585,547

 
255,049

 
150,401

 
120,058

 
124,433

Total loan origination activity
$
5,456,150

 
$
5,156,508

 
$
1,871,665

 
$
2,189,202

 
$
2,851,890

 

36
Table of Contents


(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 , as well as the 1-for-2.5 reverse stock split effective July 19, 2011.
(2)
On January 1, 2010 we elected to carry mortgage servicing rights related to single family loans at fair value, and elected to carry single family mortgage loans held for sale using the fair value option.
(3)
Net earnings (loss) available to common shareholders divided by average common shareholders’ equity.
(4)
Net interest income divided by total average earning assets on a tax equivalent basis.
(5)
Net interest margin for the year ended December 31, 2013 included $1.4 million in interest expense related to the correction of the cumulative effect of an error in prior years, resulting from the under accrual of interest due on the TruPS for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.23% for the year ended December 31, 2013 .
(6)
The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).
(7)
Generally, loans are placed on nonaccrual status when they are 90 or more days past due.





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Table of Contents

ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and the Consolidated Financial Statements and the related Notes included in Items 6 and 8 of this Form 10-K. The following discussion contains statements using the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” and similar expressions (or the negative of these terms) generally identify forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company and are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-K, particularly in Item 1A “Risk Factors” that could cause actual results to differ significantly from those projected. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to update any of the forward-looking statements after the date of this Form 10-K to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-K.

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 annual report on Form 10-K.


Management’s Overview of 2013 Financial Performance

We are a diversified financial services company founded in 1921 and headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides mortgage and commercial loans, deposit products and services, non-deposit investment products, private banking and cash management services. Our primary loan products include single family residential mortgages, loans secured by commercial real estate, construction loans for residential and commercial real estate projects, and commercial business loans. HomeStreet Capital Corporation, a Washington corporation, originates, sells and services multifamily mortgage loans under the Fannie Mae Delegated Underwriting and Servicing Program (“DUS" ® ) in conjunction with HomeStreet Bank. Doing business as HomeStreet Insurance Agency, we provide insurance products and services for consumers and businesses. We also offer single family home loans through our partial ownership in an affiliated business arrangement known as WMS Series LLC (“WMS LLC”).

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

At December 31, 2013 , we had total assets of $3.07 billion , net loans held for investment of $1.87 billion , deposits of $2.21 billion and shareholders’ equity of  $265.9 million . At December 31, 2012 , we had total assets of $2.63 billion , net loans held for investment of $1.31 billion , deposits of $1.98 billion and shareholders' equity of $263.8 million .

On November 1, 2013, the Company successfully completed the acquisitions of Fortune Bank and YNB Financial Services Corp., the parent of Yakima National Bank. Immediately following completion of the acquisitions, YNB was merged into HomeStreet, Inc. Additionally, Fortune Bank and Yakima National Bank were merged into HomeStreet Bank. On December 6, 2013, the Company completed the acquisition of two retail deposit branches from AmericanWest Bank. Through these fourth quarter acquisitions, the Company acquired $206.7 million of portfolio loans and $261.1 million of deposits. The Company recorded $4.5 million of acquisition-related expenses during the year ended December 31, 2013 .

Results for 2013 reflect the growth of our mortgage banking business and investments to expand our commercial and consumer business. During 2013 , we increased our lending capacity by adding loan origination and operations personnel in single family lending, commercial real estate lending, and commercial business lending. We opened 19 mortgage loan origination offices, two commercial lending offices and two de novo retail deposit branches. In addition, we expanded our bank branch network by adding six retail deposit branches: four through the acquisition of YNB and two through the acquisition of retail branches from AmericanWest Bank.


(1) DUS® is a registered trademark of Fannie Mae.
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Table of Contents

As discussed below, during 2013 we continued to execute our strategy of diversifying earnings by expanding the commercial and consumer banking business; growing our mortgage banking market share in new markets; improving the quality of our deposits; bolstering our processing, compliance and risk management capabilities; and working to successfully integrate the businesses acquired during the year.

Consolidated Financial Performance

 
Year Ended December 31,
 (in thousands, except per share data and ratios)
2013
 
2012
 
2011
 
 
 
 
 
 
Selected statement of operations data
 
 
 
 
 
Total net revenue (1)
$
265,189

 
$
298,763

 
$
145,699

Total noninterest expense
229,495

 
183,591

 
126,494

Provision for credit losses
900

 
11,500

 
3,300

Income tax expense (benefit)
10,985

 
21,546

 
(214
)
Net income
23,809

 
82,126

 
16,119

 
 
 
 
 
 
Financial performance
 
 
 
 
 
Diluted income per share
$
1.61

 
$
5.98

 
$
2.80

Return on average shareholders’ equity
9.56
%
 
38.86
%
 
23.52
%
Return on average total assets
0.88
%
 
3.42
%
 
0.70
%
Net interest margin
3.17
%
(2)  
2.89
%
 
2.36
%
 
 
 
 
 
 
Capital ratios (Bank only)
 
 
 
 
 
Tier 1 leverage capital (to average assets)
9.96
%
 
11.78
%
 
6.04
%
Tier 1 risk-based capital (to risk-weighted assets)
14.28
%
 
18.05
%
 
9.88
%
Total risk-based capital (to risk-weighted assets)
15.46
%
 
19.31
%
 
11.15
%
(1)
Total net revenue is net interest income and noninterest income.
(2)
Net interest margin for the year ended December 31, 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 3.23% for the year ended December 31, 2013 .

For 2013 , we reported net income of $23.8 million , or $1.61 per diluted share, compared to $82.1 million , or $5.98 per share, for 2012 . Return on average equity was 9.56% for 2013 , compared to 38.86% for 2012 , while the return on average assets was 0.88% for 2013 , compared to 3.42% for 2012 .

Commercial and Consumer Banking Segment Results

Commercial and Consumer Banking segment net income increased to $2.6 million for the year ended December 31, 2013 from a net loss of $14.5 million for the year ended December 31, 2012 , primarily due to lower provision for credit losses and an increase in net interest income, which reflected an improvement in our loan credit quality and higher average balances of portfolio loans and investment securities.

Commercial and Consumer Banking segment net interest income was $59.2 million for the year ended December 31, 2013 , an increase of $12.5 million , or 26.9% , from $46.6 million for the year ended December 31, 2012 , primarily due to higher average balances of portfolio loans and investment securities, as well as improved composition of deposit balances. The continued improvement in the composition of deposits was primarily the result of our successful efforts to attract transaction and savings deposit balances through effective brand marketing.

Improved credit quality of the Company's loan portfolio resulted in a $900 thousand provision for credit losses for the year ended December 31, 2013 , compared to a credit loss provision of $11.5 million for the year ended December 31, 2012 . Net charge-offs were $4.6 million in 2013 compared to $26.5 million in 2012 . Overall, the allowance for loan losses (which

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Table of Contents

excludes the allowance for unfunded commitments) was 1.26% of loans held for investment at December 31, 2013 compared to 2.06% at December 31, 2012 , which primarily reflected the improved credit quality of the Company's loan portfolio. Excluding acquired loans, the allowance for loan losses as a percentage of total loans was 1.40% of total loans at December 31, 2013 . Nonperforming assets of $38.6 million , or 1.26% of total assets at December 31, 2013 , were down significantly from December 31, 2012 when nonperforming assets were $53.8 million , or 2.05% of total assets.

Mortgage Banking Segment Results

Mortgage Banking segment net income was $21.2 million for the year ended December 31, 2013 compared to net income of $96.6 million for the year ended December 31, 2012 . The decrease in net income was primarily the result of substantially lower mortgage interest rate lock commitment volumes and lower gain on sale margins.

Mortgage Banking noninterest income of $182.7 million decreased $45.5 million , or 19.9% , from $228.2 million for the year ended December 31, 2012 , primarily due to decreased mortgage interest rate lock commitments volumes and gain on sale margins. Commitment volumes declined mainly due to the rise in mortgage interest rates beginning in the second quarter of 2013, causing a significant decrease in refinancing activity that was only partially offset by a slightly stronger purchase mortgage market. At the same time, the mortgage market became substantially more competitive as lenders tried to secure a reliable flow of production through competitive pricing.

Mortgage Banking noninterest expense of $165.7 million increased $45.4 million , or 37.7% , from $120.4 million for the year ended December 31, 2012 , primarily due to the addition of approximately 120 mortgage originators and mortgage fulfillment personnel as we grew our single family mortgage lending network.

Regulatory Matters

The Bank remains well-capitalized, with Tier 1 leverage and total risk-based capital ratios at December 31, 2013 of 9.96% and 15.46% , respectively, compared with 11.78% and 19.31% at December 31, 2012 . The decline in the Bank's capital ratios from December 31, 2012 was primarily attributable to the fourth quarter acquisitions of Fortune Bank, Yakima National Bank and two branches from AmericanWest Bank, which created $13.6 million of intangible assets which are not included as capital for regulatory purposes and which resulted in an increase in average and risk-weighted assets, as well as the equity impact of lower net income in 2013 .

Recent Developments

On March 5, 2014, the Company announced its intent to sell two pools of residential loans, while retaining the right to service such loans. The first pool is comprised of fixed-rate residential mortgage loans with outstanding principal balances of approximately $105 million. The second pool is comprised of adjustable rate residential mortgage loans with outstanding principal balances of approximately $222 million. The mortgage loans subject to these sales are located in Washington, Oregon, Idaho and Hawaii. The $105 million pool sale is expected to close in March 2014 and the $222 million pool sale is expected to close in April 2014. These sales are subject to numerous contingencies, including the successful negotiation and execution of final agreements between the parties.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with the accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expense in the financial statements. Various elements of our accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those we applied, which might have produced different results that could have had a material effect on the financial statements.

We have identified the following accounting policies and estimates that, due to the inherent judgments and assumptions and the potential sensitivity of the financial statements to those judgments and assumptions, are critical to an understanding of our financial statements. We believe that the judgments, estimates and assumptions used in the preparation of the Company's financial statements are appropriate. For a further description of our accounting policies, see Note 1– Summary of Significant Accounting Policies in the financial statements included in this Form 10-K.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of incurred credit losses inherent within our loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in those future periods.


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Table of Contents

We employ a disciplined process and methodology to establish our allowance for loan losses that has two basic components: first, an asset-specific component involving the identification of impaired loans and the measurement of impairment for each individual loan identified; and second, a formula-based component for estimating probable principal losses for all other loans.

An asset-specific allowance for impaired loans is established based on the amount of impairment calculated on those loans and charging off amounts determined to be uncollectible. A loan is considered impaired when it is probable that all contractual principal and interest payments due will not be collected substantially in accordance with the terms of the loan agreement. Factors we consider in determining whether a loan is impaired include payment status, collateral value, borrower financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

When a loan is identified as impaired, impairment is measured as the difference between the recorded investment in the loan and the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the loan’s observable market price. For impaired collateral-dependent loans, impairment is measured as the difference between the recorded investment in the loan and the fair value of the underlying collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral. In accordance with our appraisal policy, the fair value of impaired collateral-dependent loans is based upon independent third-party appraisals or on collateral valuations prepared by in-house appraisers, which generally are updated every twelve months. We require an independent third-party appraisal at least annually for substandard loans and other real estate owned ("OREO"). Once a third-party appraisal is six months old, or if our chief appraiser determines that market conditions, changes to the property, changes in intended use of the property or other factors indicate that an appraisal is no longer reliable, we perform an internal collateral valuation to assess whether a change in collateral value requires an additional adjustment to carrying value. A collateral valuation is a restricted-use report prepared by our internal appraisal staff in accordance with our appraisal policy. Upon the receipt of an updated appraisal or collateral valuation, loan impairments are remeasured and recorded. If the calculated impairment is determined to be permanent, fixed or nonrecoverable, the impairment will be charged off. Loans designated as impaired are generally placed on nonaccrual and remain in that status until all principal and interest payments are current and the prospects for future payments in accordance with the loan agreement are reasonably assured, at which point the loan is returned to accrual status. See " Credit Risk Management – Asset Quality and Nonperforming Assets ” discussions within Management's Discussion and Analysis of this Form 10-K.

In estimating the formula-based component of the allowance for loan losses, loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. Credit loss assumptions are estimated using a model that categorizes loan pools based on loan type and asset quality rating ("AQR") or delinquency bucket. This model calculates an expected loss percentage for each loan category by considering the probability of default, based on the migration of loans from performing to loss by AQR or delinquency buckets using one-year analysis periods, and the potential severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The formula-based component of the allowance for loan losses also considers qualitative factors for each loan class, including the following changes in:
•
lending policies and procedures;
•
international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets;
•
the nature of the loan portfolio, including the terms of the loans;
•
the experience, ability and depth of the lending management and other relevant staff;
•
the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans;
•
the quality of our loan review and process;
•
the value of underlying collateral for collateral-dependent loans;
•
the existence and effect of any concentrations of credit and changes in the level of such concentrations; and
•
the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

Qualitative factors are expressed in basis points and are adjusted downward or upward based on management’s judgment as to the potential loss impact of each qualitative factor to a particular loan pool at the date of the analysis.


41
Table of Contents

Additionally, our credit administration department continually monitors conditions that affect the carrying values of our collateral, including local and regional economic factors as well as asset-specific factors such as tax values, comparable sales and other factors that affect or suggest changes in the actual collateral values. They also monitor and adjust for changes in comparable sales or competing projects, changes in zoning or entitlement status, changes in occupancy rates for income properties and similar factors.

The provision for loan losses recorded through earnings is based on management’s assessment of the amount necessary to maintain the allowance for loan losses at a level appropriate to cover probable incurred losses inherent within the loans held for investment portfolio. The amount of provision and the corresponding level of allowance for loan losses are based on our evaluation of the collectability of the loan portfolio based on historical loss experience and other significant qualitative factors.

The allowance for loan losses, as reported in our consolidated statements of financial condition, is adjusted by a provision for loan losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries. For further information on the allowance for loan losses, see Note 6– Loans and Credit Quality in the notes to the financial statements of this Form 10-K.

Fair Value of Financial Instruments, Single Family MSRs and OREO

A portion of our assets are carried at fair value, including single family mortgage servicing rights, single family loans held for sale, interest rate lock commitments, investment securities available for sale and derivatives used in our hedging programs. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Fair value is based on quoted market prices, when available. If a quoted price for an asset or liability is not available, the Company uses valuation models to estimate its 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. We believe our 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.

A three-level valuation hierarchy has been established under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:
•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
•
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
•
Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions of what market participants would use in pricing the asset or liability.

Significant judgment is required to determine whether certain assets and liabilities measured at fair value are included in Level 2 or Level 3. When making this judgment, we consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs used. The classification of Level 2 or Level 3 is based upon the specific facts and circumstances of each instrument or instrument category and judgments are made regarding the significance of the Level 3 inputs to an instrument's fair value measurement in its entirety. If Level 3 inputs are considered significant, the instrument is classified as Level 3.

The following is a summary of the assets and liabilities recorded at fair value on a recurring basis and where the amounts are measured using significant Level 3 inputs. The fair value of the remaining assets and liabilities were measured using valuation methodologies involving market-based or market-derived information, collectively Level 1 and 2 measurements.


42
Table of Contents

 
 
At December 31,
 
 
2013
 
2012
 
(in millions)
Total Balance
 
Level 3
 
Total Balance
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
Assets carried at fair value
$
925.8

 
$
159.1

 
$
1,135.0

 
$
109.9

 
As a percentage of total assets
30
%
 
5
%
 
43
%
 
4
%
 
Liabilities carried at fair value
$
10.4

 
$
—

 
$
12.1

 
$
—

 
As a percentage of total liabilities
NM

 
NM

 
1
%
 
NM

 
NM = not meaningful
 
 
 
 
 
 
 

As of December 31, 2013 , our Level 3 recurring fair value measurements consisted of single family MSRs and interest rate lock commitments.
 
On a quarterly basis, our Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Bank's Board of Directors review the significant inputs used in Level 3 measurements. 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 Finance Committee of the Board provides oversight and approves the Company’s Asset/Liability Management Policy. We obtain an MSR valuation from an independent valuation firm at least quarterly to assist with the validation of our fair value estimates and the reasonableness of the assumptions used in measuring fair value.

In addition to the recurring fair value measurements shown above, from time to time the Company may have certain nonrecurring fair value measurements. These fair value measurements usually result from the application of lower of cost or fair value accounting or impairment of individual assets. As of December 31, 2013 and 2012 , the Company's Level 3 nonrecurring fair value measurements, totaling $57.4 million and $50.8 million , respectively, were based on the appraised value of collateral used as the basis for the valuation of collateral dependent loans held for investment and OREO.
  
Real estate valuations are overseen by our appraisal department, which is independent of our lending and credit administration functions. The appraisal department maintains the appraisal policy and recommends changes to the policy subject to approval by the Credit Committee of the Company's Board of Directors and Company's Loan Committee (the "Loan Committee"), established by the Credit Committee of the Company's Board of Directors and comprised of certain of the Company's management. Appraisals are prepared by independent third-party appraisers and our internal appraisers. Single family appraisals are generally reviewed by our single family loan underwriters. Single family appraisals with unusual, higher risk or complex characteristics, as well as commercial real estate appraisals, are reviewed by our appraisal department.

For further information on the fair value of financial instruments, single family MSRs and OREO, see Note 1– Summary of Significant Accounting Policies, Note 13– Mortgage Banking Operations and Note 18– Fair Value Measurements in the notes to the financial statements of this Form 10-K.

Income Taxes

In establishing an income tax provision, we must make judgments and interpretations about the application of inherently complex tax laws. We must also make estimates about when in the future certain items will affect taxable income. Our interpretations may be subject to review during examination by taxing authorities and disputes may arise over the respective tax positions. We monitor tax authorities and revise our estimates of accrued income taxes due to changes in income tax laws and their interpretation by the courts and regulatory authorities on a quarterly basis. Revisions of our estimate of accrued income taxes also may result from our own income tax planning and strategies and from the resolution of income tax controversies. Such revisions in our estimates may be material to our operating results for any given reporting period.

Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, a deferred tax asset or liability is determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company records net deferred tax assets to the extent it is believed that these assets will more likely than not be realized. In making such determination, management considers all available positive and negative evidence, including future reversals of

43
Table of Contents

existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. After reviewing and weighing all of the positive and negative evidence, if the positive evidence outweighs the negative evidence, then the Company does not record a valuation allowance for deferred tax assets. If the negative evidence outweighs the positive evidence, then a valuation allowance for all or a portion of the deferred tax assets is recorded.

The Company recognizes interest and penalties related to unrecognized tax benefits as income tax expense in the consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated statements of financial condition. For further information regarding income taxes, see Note 15– Income Taxes to the financial statements of this Form 10-K.


44
Table of Contents

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:
 
Year Ended December 31,
 
2013
 
2012
(in thousands)
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets: (1)
 
 
 
 
 
 
 
 
 
 
 
Cash & cash equivalents
$
29,861

 
$
73

 
0.24
%
 
$
94,478

 
$
231

 
0.24
%
Investment securities
515,000

 
14,608

 
2.84

 
410,819

 
11,040

 
2.69

Loans held for sale
381,129

 
14,180

 
3.72

 
359,056

 
12,719

 
3.56

Loans held for investment
1,496,146

 
62,384

 
4.17

 
1,303,010

 
58,490

 
4.49

Total interest-earning assets
2,422,136

 
91,245

 
3.77

 
2,167,363

 
82,480

 
3.81

Noninterest-earning assets (2)
296,078

 
 
 
 
 
236,497

 
 
 
 
Total assets
$
2,718,214

 
 
 
 
 
$
2,403,860

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand accounts
$
242,530

 
$
925

 
0.38
%
 
$
151,029

 
$
498

 
0.33
%
Savings accounts
122,602

 
545

 
0.44

 
90,246

 
395

 
0.44

Money market accounts
810,666

 
3,899

 
0.48

 
613,546

 
3,243

 
0.53

Certificate accounts
415,876

 
4,816

 
1.16

 
790,038

 
12,605

 
1.60

Total interest-bearing deposits
1,591,674

 
10,185

 
0.64

 
1,644,859

 
16,741

 
1.02

Federal Home Loan Bank advances
293,871

 
1,532

 
0.52

 
93,325

 
1,788

 
1.91

Securities sold under agreements to repurchase
2,721

 
11

 
0.40

 
17,806

 
70

 
0.39

Long-term debt
62,349

 
2,546

(3)  
4.03

 
61,857

 
1,333

 
2.16

Other borrowings
73,976

 
257

 
—

 
—

 
16

 
—

Total interest-bearing liabilities
2,024,591

 
14,531

 
0.72

 
1,817,847

 
19,948

 
1.10

Noninterest-bearing liabilities
444,542

 
 
 
 
 
374,684

 
 
 
 
Total liabilities
2,469,133

 
 
 
 
 
2,192,531

 
 
 
 
Shareholders' equity
249,081

 
 
 
 
 
211,329

 
 
 
 
Total liabilities and shareholders’ equity
$
2,718,214

 
 
 
 
 
$
2,403,860

 
 
 
 
Net interest income (4)
 
 
$
76,714

 
 
 
 
 
$
62,532

 
 
Net interest spread
 
 
 
 
3.05
%
 
 
 
 
 
2.71
%
Impact of noninterest-bearing sources
 
 
 
 
0.12
%
 
 
 
 
 
0.18
%
Net interest margin
 
 
 
 
3.17
%
 
 
 
 
 
2.89
%
 
(1)
The average balances of nonaccrual assets and related income, if any, are included in their respective categories.
(2)
Includes loan balances that have been foreclosed and are now reclassified to OREO.
(3)
Interest expense for the year ended December 31, 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 3.23% .
(4)
Includes taxable-equivalent adjustments primarily related to tax-exempt income on certain loans and securities of $2.3 million and $1.8 million for the years ended 2013 and 2012 , respectively. The estimated federal statutory tax rate was 35% for the periods presented.

45


Interest on Nonaccrual Loans

We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual status, we reverse the accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Additionally, if a nonaccrual loan is placed back on accrual status or paid off, the accumulated interest collected on the loan is recognized as an adjustment to the cost basis of the loan 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 $686 thousand and $1.1 million for the years ended December 31, 2013 and 2012 , respectively.

Rate and Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense, excluding interest income from nonaccrual loans. Information is provided in each category with respect to: (1) changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by prior volume), (3) changes attributable to changes in rate and volume (change in rate multiplied by change in volume), which were allocated in proportion to the percentage change in average volume and average rate and included in the relevant column and (4) the net change.
 
 
Year Ended December 31,
 
2013 vs. 2012
 
Increase (Decrease)
Due to
 
Total Change
(in thousands)
Rate
 
Volume
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
(158
)
 
$
(158
)
Investment securities
762

 
2,806

 
3,568

Loans held for sale
675

 
786

 
1,461

Loans held for investment
(4,775
)
 
8,669

 
3,894

Total interest-earning assets
(3,338
)
 
12,103

 
8,765

Liabilities:
 
 
 
 
 
Deposits:
 
 
 
 
 
Interest-bearing demand accounts
129

 
298

 
427

Savings accounts
8

 
142

 
150

Money market accounts
(386
)
 
1,042

 
656

Certificate accounts
(1,819
)
 
(5,970
)
 
(7,789
)
Total interest-bearing deposits
(2,068
)
 
(4,488
)
 
(6,556
)
Federal Home Loan Bank advances
(4,079
)
 
3,823

 
(256
)
Securities sold under agreements to repurchase
(1
)
 
(58
)
 
(59
)
Long-term debt
1,203

 
10

 
1,213

Other borrowings
—

 
241

 
241

Total interest-bearing liabilities
(4,945
)
 
(472
)
 
(5,417
)
Total changes in net interest income
$
1,607

 
$
12,575

 
$
14,182



46

Net Income

For the year ended 2013 , we reported net income of $23.8 million , a decrease of $58.3 million , or 71.0% , compared to net income of $82.1 million in 2012 . The decline in net income in 2013 mainly resulted from a $47.3 million , or 19.9% , decrease in noninterest income compared to 2012 , primarily due to a significantly lower gain on mortgage loan origination and sale activities resulting from a decline in single family mortgage loan production compared to the record production that the Company experienced in 2012. This decrease was partially offset by a $13.7 million increase in net interest income in 2013 mainly due to improved deposit product and pricing strategies that included reducing our higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits. Additionally, we experienced a $45.9 million , or 25.0% , increase in noninterest expense as we continued to grow our business and market share in 2013 both organically and through acquisitions.

Net Interest Income

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

Net interest income on a tax equivalent basis was $76.7 million for the year ended December 31, 2013 , an increase of $ 14.2 million , or 23% , from $62.5 million for the year ended December 31, 2012 . During 2013 , total interest income increased $8.8 million from 2012 , while total interest expense decreased $5.4 million from 2012 . The net interest margin for the year ended December 31, 2013 improved to 3.17% from 2.89% in 2012 . Total average interest-earning assets increased in 2013 primarily as a result of growth in the investment securities portfolio and new portfolio loan originations, partially offset by a decrease in cash and cash equivalents mainly used to fund these investments. Total average interest-bearing deposit balances decreased from 2012 mostly as a result of a reduction in higher-cost retail certificates of deposits, partially offset by an increase in transaction and savings deposits. The improvement in our net interest income and net interest margin in large part reflected the execution of our deposit product and pricing strategies, as growth in transaction and savings account balances partially offset maturities of higher yielding certificates of deposit. Additionally, we increased our net interest income through increased commercial portfolio lending as we continued to grow our Commercial and Consumer Banking segment.

Total interest income on a tax equivalent basis of $91.2 million in 2013 increased $8.8 million , or 10.6% , from $82.5 million in 2012 , primarily driven by higher average balances of portfolio loans and investment securities. Average balance of loans held for investment increased by $193.1 million , or 14.8% , and the average balance of investment securities increased $104.2 million , or 25.4% , from 2012 . We re-balanced our investment securities with a shift toward higher-yielding municipal securities, which resulted in an increase in yield on investment securities of 15 basis points. These increases were partially offset by a decrease in the average balance of cash and cash equivalents, which decreased $64.6 million , or 68.4% , compared to 2012 and a lower yield on average loans held for investment, which decreased 32 basis points during 2013 .

Total interest expense of $14.5 million in 2013 decreased $5.4 million , or 27% , from $19.9 million in 2012 . This decrease was primarily due to a $374.2 million , or 47.4% , reduction in the average balance of higher-yielding certificates of deposit, partially offset by an increase in lower cost transaction and savings deposits as we expand our deposit branch network. Also contributing to the decrease in interest expense was the restructuring of FHLB advances. We prepaid certain long-term FHLB advances and used short-term FHLB advances to meet short-term mortgage origination and sales funding needs, which contributed to a 139 basis point decline in interest cost on FHLB advances.

Provision for Loan Losses

Management believes that the Company’s allowance for loan losses is at a level appropriate to cover estimated incurred losses inherent within the loans held for investment portfolio. Our credit risk profile has improved since December 31, 2012 as illustrated by the credit trends below.

Provision for credit losses was $900 thousand in 2013 , compared to $11.5 million in 2012 , reflecting the improved credit quality of the Company's loan portfolio. Nonaccrual loans declined to $25.7 million at December 31, 2013 , a decrease of $4.2 million , or 14.0% , from $29.9 million at December 31, 2012 . Nonaccrual loans as a percentage of total loans was 1.36% at December 31, 2013 compared to 2.24% at December 31, 2012 . Criticized/classified loans declined to 5.01% of total loans from 11.08% of total loans a year ago. Loan delinquencies also decreased, with total loans past due decreasing to 4.44% of loans held for investment at December 31, 2013 , compared to 6.58% at December 31, 2012 . Overall, the allowance for credit

47

losses decreased to $24.1 million , or 1.27% of loans held for investment at December 31, 2013 , down from $27.8 million , or 2.07% of total loans held for investment at December 31, 2012 .

Net charge-offs of $4.6 million for 2013 were down $22.0 million , or 82.8% , from net charge-offs of $26.5 million for 2012 . Net charge-offs during 2012 included an $11.8 million charge-off related to the settlement of collection litigation and resolution of certain related nonperforming construction/land development loans with aggregate carrying values of $26.6 million. For a more detailed discussion on our allowance for loan losses and related provision for loan losses, see "- Credit Risk Management" in this Form 10-K.

Noninterest Income

Noninterest income was $190.7 million for the year ended December 31, 2013 , a decrease of $47.3 million , or 19.9% , from noninterest income of $238.0 million for 2012 . Our noninterest income is heavily dependent upon our single family mortgage banking activities, which are comprised of mortgage origination and sale 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. The decrease in noninterest income in 2013 compared to 2012 was primarily the result of lower net gain on mortgage loan origination and sale activities, mostly related to substantially lower refinancing activities that resulted mainly from increased mortgage interest rates, partially offset by growth in our purchase mortgage transactions and the expansion of our mortgage lending operations.

Noninterest income consisted of the following:
 
 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities (1)
$
164,712

 
$
210,564

 
$
(45,852
)
 
(22
)%
Mortgage servicing income
17,073

 
16,121

 
952

 
6

Income from WMS Series LLC
704

 
4,264

 
(3,560
)
 
(83
)
Loss on debt extinguishment
—

 
(939
)
 
939

 
(100
)
Depositor and other retail banking fees
3,172

 
3,062

 
110

 
4

Insurance agency commissions
864

 
743

 
121

 
16

Gain on sale of investment securities available for sale
1,772

 
1,490

 
282

 
19

Other
2,448

 
2,715

 
(267
)
 
(10
)
Total noninterest income
$
190,745

 
$
238,020

 
$
(47,275
)
 
(20
)%
 (1) Single family and multifamily mortgage banking activities.


48

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:

 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Single family:
 
 
 
 
 
 
 
Servicing value and secondary market gains (1)
$
128,391

 
$
175,655

 
$
(47,264
)
 
(27
)%
Loan origination and funding fees
30,051

 
30,037

 
14

 
—
 %
Total single family
158,442

 
205,692

 
(47,250
)
 
(23
)
Multifamily
5,306

 
4,872

 
434

 
9

Other
964

 
—

 
964

 
NM

Net gain on mortgage loan origination and sale activities
$
164,712

 
$
210,564

 
$
(45,852
)
 
(22
)%
NM=Not meaningful
 
 
 
 
 
 
 

(1)
Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.

Net gain on mortgage loan origination and sale activities was $164.7 million in 2013 , a decrease of $45.9 million , or 21.8% , from $210.6 million in 2012 . This decrease predominantly reflected substantially lower mortgage interest rate lock commitment volumes and lower secondary marketing gains. Commitment volumes declined mainly due to the rise in mortgage interest rates beginning in the second quarter of 2013, causing a significant decrease in refinancing activity that was only partially offset by a slightly stronger purchase mortgage market. This impact was partially mitigated by the expansion of our mortgage lending operations as we added approximately 120 mortgage origination and support personnel during 2013 .

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

 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Single family mortgage closed loan volume (1)
$
4,459,649

 
$
4,668,167

 
$
(208,518
)
 
(4
)%
Single family mortgage interest rate lock commitments  (2)
$
3,907,274

 
$
4,786,667

 
$
(879,393
)
 
(18
)%
(1)
Represents single family mortgage originations designated for sale during each respective period.
(2)
Includes loans originated by WMS Services LLC ("WMS") and purchased by HomeStreet Bank.

During 2013 , single family closed loan production decreased 4.5% and single family interest rate lock commitments decreased 18.4% from 2012 mainly as a result of higher mortgage interest rates during 2013 . Our production mix continued to shift from the refinance mortgage market to the purchase mortgage market during 2013 .


49

The Company records a liability for estimated mortgage repurchase losses, which has the effect of reducing net gain on mortgage loan origination and sale activities. The following table presents the effect of changes in the Company's mortgage repurchase liability within the respective line items of net gain on mortgage loan origination and sale activities. For further information on the Company's mortgage repurchase liability, see Note 14, Commitments, Guarantees and Contingencies to the financial statements of this Form 10-K.
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Effect of changes to the mortgage repurchase liability recorded in net gain on mortgage loan origination and sale activities:
 
 
 
New loan sales (1)
$
(1,828
)
 
$
(1,348
)
Other changes in estimated repurchase losses (2)
—

 
(2,969
)
 
$
(1,828
)
 
$
(4,317
)
 
(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.

Mortgage servicing income consisted of the following:

 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
(in thousands)
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
 
 
Servicing fees and other
$
34,173

 
$
27,833

 
$
6,340

 
23
 %
Changes in fair value of MSRs due to modeled amortization (1)
(20,533
)
 
(20,662
)
 
129

 
(1
)
Amortization
(1,803
)
 
(2,014
)
 
211

 
(10
)
 
11,837

 
5,157

 
6,680

 
130
 %
Risk management:
 
 
 
 
 
 
 
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2)
25,668

 
(11,018
)
 
36,686

 
(333
)%
Net (loss) gain from derivatives economically hedging MSRs
(20,432
)
 
21,982

 
(42,414
)
 
(193
)
 
5,236

 
10,964

 
(5,728
)
 
(52
)
Mortgage servicing income
$
17,073

 
$
16,121

 
$
952

 
6
 %

(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 year ended December 31, 2013 , mortgage servicing income of $17.1 million increased $1.0 million from $16.1 million in 2012 , primarily due to increased servicing fees collected during 2013 on the Company's single family mortgage servicing. This increase was partially offset by lower 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 our MSR risk management activities for 2013 was a gain of $5.2 million compared to a gain of $11.0 million in 2012 . The lower gain in 2013 largely reflected lower sensitivity to interest rates for the Company's MSRs, which led 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,

50

which negatively impacted mortgage servicing income. In addition, MSR risk management results for 2013 reflected the impact on the fair value of MSRs of changes in model inputs and assumptions related to factors other than interest rate changes, such as higher expected home values which generally lead to higher projected prepayment speeds, and a decline in income from MSR risk management activities in 2013 .

Mortgage servicing fees collected in 2013 were $34.2 million , an increase of $6.3 million , or 22.8% , from $27.8 million in 2012 primarily as a result of the increase in the loans serviced for others portfolio. Our loans serviced for others portfolio increased to $12.61 billion at December 31, 2013 from $9.65 billion at December 31, 2012 .

Income from WMS Series LLC in 2013 was $704 thousand compared to $4.3 million in 2012 . The decrease in 2013 was primarily due to a 33.6% decrease in interest rate lock commitments and a 25.5% decrease in closed loan volume, which were $548.7 million and $694.4 million in 2013 , respectively, compared to $825.8 million and $932.4 million in 2012 .

Loss on debt extinguishment. We recorded no loss on debt extinguishment in 2013 compared to a loss of $939 thousand in 2012 , primarily as a result of a prepayment fee for the early retirement of $25.5 million of long-term FHLB advances. This prepayment resulted in reduced interest expense in 2013 as we replaced high-cost, long-term FHLB advances with other lower-cost, short-term borrowings.

Depositor and other retail banking fees for 2013 were relatively consistent with 2012 results. The following table presents the composition of depositor and other retail banking fees for the periods indicated.
 
 
Year Ended December 31,
 
Dollar 
Change
 
Percent
Change
(in thousands)
2013
 
2012
 
 
 
 
 
 
 
 
 
 
Monthly maintenance and deposit-related fees
$
1,568

 
$
1,569

 
$
(1
)
 
—
 %
Debit Card/ATM fees
1,523

 
1,396

 
127

 
9

Other fees
81

 
97

 
(16
)
 
(16
)
Total depositor and other retail banking fees
$
3,172

 
$
3,062

 
$
110

 
4
 %

Insurance agency commissions increased to $864 thousand from $743 thousand in 2012 . This increase in commissions primarily resulted from increased personal and casualty insurance line sales.

Gain on investment securities available for sale was $1.8 million in 2013 compared to $1.5 million in 2012 , as the Company re-balanced its portfolio and provided liquidity for the growth in lending volumes.

Other income was $2.4 million in 2013 , relatively consistent with $2.7 million in 2012 .


51

Noninterest Expense

Noninterest expense was $229.5 million in 2013 , an increase of $45.9 million , or 25.0% , from $183.6 million in 2012 . Included in noninterest expense in 2013 were acquisition-related expenses of $4.5 million . The increase in noninterest expense was primarily the result of a $29.6 million increase in salaries and related costs and a $12.5 million increase in general and administrative expenses resulting from a 37% growth in personnel in connection with our continued expansion of our mortgage banking and commercial and consumer businesses. These additions to personnel were partially offset by attrition and position eliminations in mortgage production, mortgage operations, and in commercial lending and administration. Position eliminations in 2013 were in response to a slowdown in mortgage activity and the integration of our acquisitions and were intended to improve efficiency and performance. These increases in noninterest expense were partially offset by significantly lower other real estate owned ("OREO") expenses, which were $1.8 million in 2013 , a decrease of $8.3 million from OREO expense of $10.1 million in 2012 .

Noninterest expense consisted of the following:
 
 
Year Ended December 31,
 
Dollar  Change
 
Percentage Change
(in thousands)
2013
 
2012
 
 
Noninterest expense
 
 
 
 
 
 
 
Salaries and related costs
$
149,440

 
$
119,829

 
$
29,611

 
25
 %
General and administrative
40,366

 
27,838

 
12,528

 
45

Legal
2,552

 
1,796

 
756

 
42

Consulting
5,637

 
3,037

 
2,600

 
86

Federal Deposit Insurance Corporation assessments
1,433

 
3,554

 
(2,121
)
 
(60
)
Occupancy
13,765

 
8,585

 
5,180

 
60

Information services
14,491

 
8,867

 
5,624

 
63

Net cost of operation and sale of other real estate owned
1,811

 
10,085

 
(8,274
)
 
(82
)
Total noninterest expense
$
229,495

 
$
183,591

 
$
45,904

 
25
 %

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

Salaries and related costs were $149.4 million in 2013 , an increase of $29.6 million , or 24.7% , from $119.8 million in 2012 . The increase primarily resulted from a 36.7% increase in full-time equivalent employees at December 31, 2013 compared to December 31, 2012 , as well as commissions and incentives paid to employees for 2013 due to the overall growth in our mortgage lending and commercial and consumer business lines.

General and administrative expense was $40.4 million in 2013 , an increase of $12.5 million , or 45.0% , from $27.8 million in 2012 . These expenses include general office and equipment expense, marketing, taxes and insurance. The increase in general and administrative expense in 2013 was primarily due to Company growth and increased marketing expenses.

Consulting expense was $5.6 million in 2013 , an increase of $2.6 million , or 85.6% , from $3.0 million in 2012 , primarily due to acquisition-related activities.

FDIC assessments were $1.4 million in 2013 , a decrease of $2.1 million , or 59.7% , from $3.6 million in 2012 , primarily due to an improvement in the Company's risk category.

Occupancy expense was $13.8 million in 2013 , an increase of $5.2 million , or 60.3% , from $8.6 million in 2012 as we grew our mortgage banking business and consumer and commercial customer base with the opening of 19 new mortgage loan origination offices, two commercial lending offices and two de novo retail deposit branches in 2013 . Additionally, we added six retail deposit branches through acquisitions during the fourth quarter of 2013.

Information services expense was $14.5 million in 2013 , an increase of $5.6 million , or 63.4% , from $8.9 million in 2012 . This increase was primarily due to company-wide systems and tools upgrades and a 36.7% increase in headcount.

Net cost of operation and sale of other real estate owned was $1.8 million in 2013 , a decrease of $8.3 million from $10.1 million in 2012 . OREO valuation adjustments were $603 thousand for 2013 compared to valuation adjustments of $12.2

52

million in 2012 . Valuation adjustments to OREO balances declined with the reduction in the net balance of OREO properties in 2013 . Lower balances of OREO properties also resulted in decreased maintenance expenses.

Income Tax Expense

The Company's income tax expense was $11.0 million for the year ended December 31, 2013 compared to $21.5 million for the year ended December 31, 2012 . The Company's 2013 tax expense is based on the annual effective income tax rate plus discrete benefits recognized during the year. The Company's annual effective income tax rate for the year was 31.6% compared to an annual effective income tax rate of 20.8% for 2012 . The lower effective income tax rate in 2012 primarily reflected the benefit of a full reversal of deferred tax asset valuation allowances during 2012 .

Capital Expenditures

During 2013 , our net expenditures for property and equipment were $22.8 million compared to net expenditures of $11.4 million during 2012 , as we continued to implement our strategic initiatives regarding the expansion of our mortgage banking and commercial and consumer businesses.


53

Comparison of the year ended 2012 to the year ended 2011

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, for years ended December 31, 2012 and 2011 were as follows:
 
Year Ended December 31,
 
2012
 
2011
(in thousands)
Average
Balance
 
Interest
 
Average
Yield/Cost
 
Average
Balance
 
Interest
 
Average
Yield/Cost
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets (1) :
 
 
 
 
 
 
 
 
 
 
 
Cash & cash equivalents
$
94,478

 
$
231

 
0.24
%
 
$
159,031

 
$
465

 
0.29
%
Investment securities
410,819

 
11,040

 
2.69

 
306,813

 
7,083

 
2.31

Loans held for sale
359,056

 
12,719

 
3.56

 
126,038

 
5,602

 
4.44

Loans held for investment
1,303,010

 
58,490

 
4.49

 
1,477,976

 
66,342

 
4.49

Total interest-earning assets
2,167,363

 
82,480

 
3.81

 
2,069,858

 
79,492

 
3.84

Noninterest-earning assets (2)
236,497

 
 
 
 
 
229,943

 
 
 
 
Total assets
$
2,403,860

 
 
 
 
 
$
2,299,801

 
 
 
 
Liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand accounts
$
151,029

 
$
498

 
0.33
%
 
$
129,254

 
$
575

 
0.44
%
Savings accounts
90,246

 
395

 
0.44

 
57,513

 
335

 
0.58

Money market accounts
613,546

 
3,243

 
0.53

 
450,362

 
3,018

 
0.67

Certificate accounts
790,038

 
12,605

 
1.60

 
1,177,335

 
20,887

 
1.77

Deposits
1,644,859

 
16,741

 
1.02

 
1,814,464

 
24,815

 
1.37

Federal Home Loan Bank advances
93,325

 
1,788

 
1.91

 
93,755

 
3,821

 
4.08

Securities sold under agreements to repurchase
17,806

 
70

 
0.39

 
—

 
—

 
—

Long-term debt
61,857

 
1,333

 
2.16

 
62,506

 
2,046

 
3.27

Other borrowings
—

 
16

 
—

 
—

 
16

 
—

Total interest-bearing
liabilities
1,817,847

 
19,948

 
1.10

 
1,970,725

 
30,698

 
1.56

Other noninterest-bearing liabilities
374,684

 
 
 
 
 
260,539

 
 
 
 
Total liabilities
2,192,531

 
 
 
 
 
2,231,264

 
 
 
 
Shareholders' equity
211,329

 
 
 
 
 
68,537

 
 
 
 
Total liabilities and shareholders’ equity
$
2,403,860

 
 
 
 
 
$
2,299,801

 
 
 
 
Net interest income (3)
 
 
$
62,532

 
 
 
 
 
$
48,794

 
 
Net interest spread
 
 
 
 
2.71
%
 
 
 
 
 
2.28
%
Impact of noninterest-bearing sources
 
 
 
 
0.18
%
 
 
 
 
 
0.08
%
Net interest margin
 
 
 
 
2.89
%
 
 
 
 
 
2.36
%
 
(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 $1.8 million and $300 thousand for the years ended 2012 and 2011, respectively. The estimated federal statutory tax rate was 35% for the periods presented.

54

Interest on Nonaccrual Loans

We do not include interest collected on nonaccrual loans in interest income. When we place a loan on nonaccrual status, we reverse the accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Additionally, if a nonaccrual loan is placed back on accrual status or paid off, the accumulated interest collected on the loan is recognized as an adjustment to the cost basis of the loan 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 $1.1 million and $4.9 million for the years ended December 31, 2012 and 2011, respectively.

Rate and Volume Analysis

The following table presents the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities affected our interest income and interest expense, excluding interest income from nonaccrual loans. Information is provided in each category with respect to: (1) changes attributable to changes in volume (changes in volume multiplied by prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by prior volume), (3) changes attributable to changes in rate and volume (change in rate multiplied by change in volume), which were allocated in proportion to the percentage change in average volume and average rate and included in the relevant column and (4) the net change.
 
 
Year Ended December 31,
 
2012 vs. 2011
 
Increase (Decrease) Due to
 
Total Change
(in thousands)
Rate
 
Volume
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
Cash & cash equivalents
$
(67
)
 
$
(167
)
 
$
(234
)
Investment securities
1,288

 
2,669

 
3,957

Loans held for sale
(1,333
)
 
8,450

 
7,117

Loans held for investment
2

 
(7,854
)
 
(7,852
)
Total interest-earning assets
(110
)
 
3,098

 
2,988

Liabilities:
 
 
 
 
 
Deposits:
 
 
 
 
 
Interest-bearing demand accounts
(164
)
 
87

 
(77
)
Savings accounts
(98
)
 
158

 
60

Money market accounts
(723
)
 
948

 
225

Certificate accounts
(1,941
)
 
(6,341
)
 
(8,282
)
Total interest-bearing deposits
(2,926
)
 
(5,148
)
 
(8,074
)
FHLB advances
(2,015
)
 
(18
)
 
(2,033
)
Securities sold under agreements to repurchase
—

 
70

 
70

Long-term debt
(692
)
 
(21
)
 
(713
)
Total interest-bearing liabilities
(5,633
)
 
(5,117
)
 
(10,750
)
Total changes in net interest income
$
5,523

 
$
8,215

 
$
13,738


For the year ended 2012 , we reported net income of $82.1 million compared to net income of $16.1 million for 2011.

Net Interest Income

Net interest income on a tax equivalent basis increased $13.7 million , or 28.2% , from 2011 to $62.5 million for the year ended December 31, 2012. During 2012, total interest income increased $3.0 million from 2011, while total interest expense declined $10.8 million from 2011. The net interest margin for the year ended December 31, 2012 improved to 2.89% from 2.36% in 2011. Total average interest-earning assets increased in 2012 as higher mortgage production volumes resulted in a

55

higher average balance of loans held for sale, partially offset by a decrease in cash and cash equivalents which was used to fund loans held for sale production. Average balances of investment securities increased primarily as a result of the investment of proceeds from our initial public offering. Total average interest-bearing deposit balances declined from 2011, mostly reflecting our deposit product and pricing strategies, resulting in a managed reduction of higher-cost certificates of deposit and replacement with transaction and savings deposits.

Total interest income on a tax equivalent basis of $82.5 million in 2012 increased $3.0 million , or 3.8% , from $79.5 million in 2011, primarily driven by increased average interest-earning assets. Our average balance of loans held for sale increased by $233.0 million , or 185% , due primarily to our increased closed loan volume during 2012. The increase in interest income also reflected a higher average balance of investment securities, which increased $104.0 million , or 33.9% , in 2012 from 2011. We invested proceeds from the sale of loans and our initial public offering in investment securities with a shift towards higher-yielding municipal securities, resulting in an increase in yield on investment securities of 38 basis points. These increases were partially offset by a decrease in the average balance of loans held for investment, which decreased $175.0 million, or 11.8%, compared to 2011 and a lower yield on average loans held for sale, which decreased 90 basis points as mortgage interest rates declined during 2012.

Total interest expense of $19.9 million in 2012 decreased $10.8 million, or 35.0%, from $30.7 million in 2011. This decrease was primarily due to a $387.3 million, or 32.9%, decline in the average balance of higher-yielding certificates of deposit, partially offset by an increase in lower cost transaction and savings deposits as we expand our deposit and lending branch network. Also contributing to the decrease in interest expense was the restructuring of FHLB advances. We prepaid certain long-term advances and used short-term FHLB advances to meet short-term mortgage origination and sales funding needs, which contributed to a 217 basis point decline in interest cost on FHLB advances.

Provision for Loan Losses

Our loan loss provision expense for 2012 was $11.5 million compared to $3.3 million for 2011. Asset quality trends continued to improve as our nonperforming assets ("NPAs") of $53.8 million at December 31, 2012 declined from $115.1 million at December 31, 2011. Nonaccrual loans of $29.9 million at December 31, 2012 declined $46.6 million, or 60.9%, from $76.5 million at December 31, 2011.

Net charge-offs of $26.5 million for 2012 were up $1.5 million from net charge-offs of $25.1 million for 2011. Net charge-offs during 2012 included an $11.8 million charge-off related to the settlement of collection litigation and resolution of certain related nonperforming construction/land development loans with aggregate carrying values of $26.6 million.

Noninterest Income

Noninterest income was $238.0 million for the year ended December 31, 2012, an increase of $140.8 million, or 145%, from 2011. 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 affordability, among other factors. Noninterest income in 2012 benefited from increased single family loan production, as borrowers continued to take advantage of historically low mortgage interest rates, and the expansion of our mortgage lending operations. Our single family mortgage banking closed loan originations designated for sale increased to $4.67 billion in 2012 from $1.70 billion in 2011 as we continue to grow our mortgage origination and production capacity and increased our mortgage lending and support personnel by 146% during 2012. The increase in noninterest income, predominantly due to higher net gain on mortgage loan origination and sale activities, is detailed in the tables below.


56

Noninterest income consisted of the following:
 
 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities  (1)
$
210,564

 
$
48,467

 
$
162,097

 
334
 %
Mortgage servicing income
16,121

 
38,056

 
(21,935
)
 
(58
)
Income from WMS Series LLC
4,264

 
2,119

 
2,145

 
101

Gain (loss) on debt extinguishment
(939
)
 
2,000

 
(2,939
)
 
(147
)
Depositor and other retail banking fees
3,062

 
3,061

 
1

 
—

Insurance agency commissions
743

 
910

 
(167
)
 
(18
)
Gain on investment securities available for sale
1,490

 
1,102

 
388

 
35

Other
2,715

 
1,490

 
1,225

 
82

Total noninterest income
$
238,020

 
$
97,205

 
$
140,815

 
145
 %
(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:

 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Single family:
 
 
 
 
 
 
 
Servicing value and secondary market gains (1)
$
178,624

 
34,287

 
$
144,337

 
421
%
Provision for repurchase losses (2)
(2,969
)
 
(764
)
 
(2,205
)
 
289

Net gain from secondary market activities
175,655

 
33,523

 
142,132

 
424

Loan origination and funding fees
30,037

 
11,946

 
18,091

 
151

Total single family
205,692

 
45,469

 
160,223

 
352

Multifamily
4,872

 
2,998

 
1,874

 
63

Net gain on mortgage loan origination and sale activities
$
210,564

 
$
48,467

 
$
162,097

 
334
%
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 $210.6 million in 2012 , an increase of $162.1 million , or 334% , from $48.5 million in 2011. This increase predominantly reflects increased single family loan production, as borrowers continued to take advantage of historically low mortgage interest rates, and the expansion of our mortgage lending operations as we added approximately 389 mortgage origination and support personnel during 2012 .


57

Single family production volumes of loans designated for sale consisted of the following:

 
Year Ended December 31,
 
Dollar
 Change
 
Percentage Change
(in thousands)
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Production volumes:
 
 
 
 
 
 
 
Single family mortgage closed loan volume (1)
$
4,668,167

 
$
1,701,608

 
$
2,966,559

 
174
%
Single family mortgage interest rate lock commitments  (2)
$
4,786,667

 
$
1,772,617

 
$
3,014,050

 
170
%

(1)
Represents single family mortgage originations designated for sale during each respective period.
(2)
Includes loans originated by WMS and purchased by HomeStreet Bank.

During 2012, single family closed loan production increased 174% and single family interest rate lock commitments increased 170% from 2011. Our mortgage loan origination and sale revenue growth reflected our expansion of mortgage loan origination capacity and strong demand for both purchase and refinance mortgage loans in our markets, including refinances through the federal government's expanded Home Affordable Refinance Program, primarily driven by record low mortgage interest rates. Also contributing to the improvement in net gain on mortgage loan origination and sale activities was an increase in gross revenue per loan that persisted throughout 2012. We experienced historically high margins as a result of a combination of historically low mortgage interest rates, which increased demand for mortgage loan products, coupled with capacity constraints of mortgage loan providers to process the elevated demand, resulting from industry consolidation and other factors.

The Company records a provision for repurchase losses as a reduction to net gain on mortgage loan origination and sale activities, which was $3.0 million for 2012, compared to $764 thousand in 2011.

Mortgage servicing income consisted of the following.

 
Year Ended December 31,
 
Dollar
Change
 
Percent
Change
(in thousands)
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
 
 
Servicing fees and other
$
27,833

 
$
26,125

 
$
1,708

 
7
 %
Changes in fair value of MSRs due to modeled amortization (1)
(20,662
)
 
(14,435
)
 
(6,227
)
 
43

Amortization
(2,014
)
 
(1,487
)
 
(527
)
 
35

 
5,157

 
10,203

 
(5,046
)
 
(49
)
Risk management:
 
 
 
 
 
 
 
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2)
(11,018
)
 
(25,565
)
 
14,547

 
(57
)
Net gain from derivatives economically hedging MSRs
21,982

 
53,418

 
(31,436
)
 
(59
)
 
10,964

 
27,853

 
(16,889
)
 
(61
)
Mortgage servicing income
$
16,121

 
$
38,056

 
$
(21,935
)
 
(58
)%
NM = not meaningful
 
 
 
 
 
 
 

(1)
Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.

 
For the year ended December 31, 2012 , mortgage servicing income of $16.1 million decreased $21.9 million from $38.1 million in 2011 . This decrease was primarily due to 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

58

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 in 2012 was a gain of $11.0 million compared to a gain of $27.9 million in 2011. The lower gain in 2012 largely reflected a reduction in sensitivity to interest rates for the Company's MSRs, which 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 derivatives economically hedging MSRs, which negatively impacted mortgage servicing income. In addition, MSR risk management results for 2012 reflected the impact in the fair value of MSRs due to changes in model inputs and assumptions related to factors other than interest rate changes, which were not within the scope of the Company's MSR hedging strategy. 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 2012. The significant net gain from MSR risk management activities in 2011 resulted from a substantial widening of mortgage interest rates versus swap interest rates and lower realized prepayments.

Mortgage servicing fees collected in 2012 were $27.8 million , an increase of $1.7 million , or 6.5% , from $26.1 million in 2011 . Our loans serviced for others portfolio increased to $9.65 billion at December 31, 2012 from $7.70 billion at December 31, 2011.

Income from WMS Series LLC increased in 2012 to $4.3 million from $2.1 million in 2011 . The increase was primarily due to an increase in closed loan volume and interest rate lock commitments, which were $932.4 million and $825.8 million , respectively, compared to $541.4 million and $521.8 million in 2011 .

Gain (loss) on debt extinguishment recorded in 2012 was a loss of $939 thousand , which represented a prepayment fee for the early retirement of $25.5 million of long-term FHLB advances. This prepayment resulted in reduced interest expense in future periods as we replaced high-cost, long-term FHLB advances with other lower-cost, short-term borrowings. During 2011, we recorded a gain on debt extinguishment of $2.0 million upon the early retirement of senior debt, which totaled $5.0 million and was settled for $3.0 million.

Insurance agency commissions decreased to $743 thousand from $910 thousand in 2011 . This decrease in commissions resulted from decreased annuity sales.

Gain on investment securities available for sale was $1.5 million in 2012 compared to $1.1 million in 2011 . The gain in 2012 was the result of rebalancing and ongoing maintenance of the portfolio.

Other income was $2.7 million in 2012 , up from $1.5 million in 2011 primarily due to an increase in investment services activities.

Noninterest Expense

Noninterest expense was $183.6 million in 2012 , an increase of $57.1 million , or 45% , from $126.5 million in 2011 . Noninterest expense increased primarily due to a $66.3 million increase in salaries and related costs, reflecting higher commissions and incentives paid as loan production increased in 2012, and an increase in the number of employees as we expanded our mortgage production and support personnel and community banking business. Lower OREO expenses partially offset these increases in noninterest expense as valuation losses related to OREO decreased in 2012.


59

Noninterest expense consisted of the following:
 
 
Year Ended December 31,
 
Dollar  Change
 
Percentage Change
(in thousands)
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Noninterest expense
 
 
 
 
 
 
 
Salaries and related costs
$
119,829

 
$
53,519

 
$
66,310

 
124
 %
General and administrative
27,838

 
18,490

 
9,348

 
51

Legal
1,796

 
3,360

 
(1,564
)
 
(47
)
Consulting
3,037

 
2,644

 
393

 
15

Federal Deposit Insurance Corporation assessments
3,554

 
5,534

 
(1,980
)
 
(36
)
Occupancy
8,585

 
6,764

 
1,821

 
27

Information services
8,867

 
5,902

 
2,965

 
50

Net cost of operation and sale of other real estate owned
10,085

 
30,281

 
(20,196
)
 
(67
)
Total noninterest expense
$
183,591

 
$
126,494

 
$
57,097

 
45
 %

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

Salaries and related costs were $119.8 million in 2012 , an increase of $66.3 million , or 124% , from $53.5 million in 2011. The increase primarily resulted from a $42.0 million increase in commissions and incentives paid reflecting strong growth in closed mortgage loan volume, and a $20.6 million increase in base salaries and other payroll related costs as we increased our personnel to support our growing mortgage lending business as well as our commercial and consumer businesses. As of December 31, 2012, we increased full-time equivalent employees by 79% from December 31, 2011.

General and administrative expense was $27.8 million in 2012 , an increase of $9.3 million , or 50.6% , from $18.5 million in 2011. Included in this line item are general office and equipment expense, marketing, taxes and insurance. The increase in general and administrative expense in 2012 was primarily due to the overall growth in loan production volume and support personnel during 2012.

Legal expense was $1.8 million in 2012 , a decrease of $1.6 million , or 46.5% , from $3.4 million in 2011, as legal expense associated with our efforts to resolve problem loans and OREO declined. During 2011, we recognized $600 thousand of legal expense associated with our capital raising efforts which were suspended during 2011.

FDIC assessments were $3.6 million in 2012 , a decrease of $2.0 million , or 35.8% , from $5.5 million in 2011, primarily due to an improvement in the Company's risk category, which reduced our fees to 14 basis points on average assets less average tangible equity capital beginning in the second quarter of 2012 from 23 basis points in 2011.

Occupancy expense was $8.6 million in 2012 , an increase of $1.8 million , or 26.9% , from $6.8 million in 2011 as we grew our mortgage banking business and consumer and commercial customer base with the opening of 15 new mortgage loan origination offices and two new retail deposit branches in 2012.

Information services expense was $8.9 million in 2012 , an increase of $3.0 million , or 50.2% , from $5.9 million in 2011. This increase was primarily due to company-wide systems and tools upgrades and a 79% increase in headcount.

Net cost of operation and sale of other real estate owned was $10.1 million in 2012 , a decrease of $20.2 million from $30.3 million in 2011. OREO valuation adjustments were $12.2 million for 2012 compared to valuation adjustments of $27.1 million in 2011. Valuation adjustments to OREO balances declined with the reduction in the net balance of OREO properties in 2012. Declines in property values continued to slow, mitigating the severity of losses realized. Lower balances of OREO properties also resulted in decreased maintenance expenses.

Income Tax Expense (Benefit)

The Company's income tax expense was $21.5 million for the year ended December 31, 2012 compared to an income tax benefit of $214 thousand for the year ended December 31, 2011. The Company's annual effective income tax rate for the year of 20.8% differed from the Federal statutory tax rate of 35% primarily due to a $14.4 million tax benefit related to the reversal of the Company's beginning of year valuation allowance against deferred tax assets in the second quarter of 2012 and

60

recurring items, such as tax exempt income, mortgage reinsurance income and state income taxes in Oregon, Hawaii and Idaho.  Our effective tax rate in 2011 differed from the Federal statutory tax rate due to a valuation allowance on deferred tax assets because of uncertainty in our ability to realize these assets in the future.     

Capital Expenditures

During 2012, our net expenditures for property and equipment were $11.4 million as we implemented our strategic initiatives such as branch expansions and the expansion of our single family mortgage lending capacity, as well as computer hardware upgrades and expansion of our corporate offices. We had no material capital expenditures in 2011.

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

Total assets were $3.07 billion at December 31, 2013 and $2.63 billion at December 31, 2012 . The increase in total assets was primarily due to an $82.3 million increase in investment securities and a $562.8 million increase in portfolio loans, partially offset by a $340.9 million decrease in loans held for sale.

Cash and cash equivalents was $33.9 million at December 31, 2013 , compared to $25.3 million at December 31, 2012 , an increase of $8.6 million , or 34.1% .

Investment securities was $498.8 million at December 31, 2013 , compared to $416.5 million at December 31, 2012 , an increase of $82.3 million , or 19.8% . The higher balance of our investment securities portfolio reflected management's decision in the second quarter of 2013 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 provided diversification in the Company's investment securities portfolio with minimal additional credit risk.

We primarily hold investment securities for liquidity purposes, while also creating a relatively stable source of interest income. We designated substantially all securities as available for sale. We held securities having a carrying value of $17.1 million , which were designated as held to maturity.

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
 
At December 31,
 
 
2013
 
2012
 
(in thousands)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
Residential
$
137,602

 
$
133,910

 
$
62,847

 
$
62,853

 
Commercial
13,391

 
13,433

 
13,720

 
14,380

 
Municipal bonds
136,937

 
130,850

 
123,695

 
129,175

 
Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
Residential
93,112

 
90,327

 
163,981

 
170,199

 
Commercial
17,333

 
16,845

 
8,983

 
9,043

 
Corporate debt securities
75,542

 
68,866

 
—

 
—

 
U.S. Treasury securities
27,478

 
27,452

 
30,670

 
30,679

 
Total available for sale
$
501,395

 
$
481,683

 
$
403,896

 
$
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 December 31, 2013 and 2012 , all securities held, including municipal bonds and corporate debt securities, were rated investment grade based upon external ratings where available and, where not available,

61

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 December 31, 2013 and 2012 , substantially all securities held by the Company had ratings available by external ratings agencies.

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 December 31, 2013
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After
ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
10,581

 
1.63
%
 
$
123,329

 
1.82
%
 
$
133,910

 
1.81
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,433

 
4.51

 
13,433

 
4.51

Municipal bonds
—

 
—

 
—

 
—

 
19,598

 
3.51

 
111,252

 
4.29

 
130,850

 
4.17

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
19,987

 
2.31

 
70,340

 
2.17

 
90,327

 
2.20

Commercial
—

 
—

 
—

 
—

 
5,270

 
1.90

 
11,575

 
1.42

 
16,845

 
1.57

Corporate debt securities
—

 
—

 
—

 
—

 
32,848

 
3.31

 
36,018

 
3.75

 
68,866

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
26,451

 
0.30

 
—

 
—

 
—

 
—

 
27,452

 
0.29

Total available for sale
$
1,001

 
0.18
%
 
$
26,451

 
0.30
%
 
$
88,284

 
2.84
%
 
$
365,947

 
2.92
%
 
$
481,683

 
2.75
%

 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
%



62

Each of the MBS and CMO securities in our investment portfolio are guaranteed by Fannie Mae, Ginnie Mae or Freddie Mac. Investments in these instruments involve a risk that actual prepayments will vary from the estimated prepayments over the life of the security. This may require adjustments to the amortization of premium or accretion of discount relating to such instruments, thereby changing the net yield on such securities. At December 31, 2013 , the aggregate net premium associated with our MBS portfolio was $10.5 million , or 8.7% , of the aggregate unpaid principal balance, compared with $6.8 million or 9.8% at December 31, 2012 . The aggregate net premium associated with our CMO portfolio as of December 31, 2013 was $6.4 million , or 6.1% , of the aggregate unpaid principal balance, compared with $7.6 million or 4.6% at December 31, 2012 . There is also reinvestment risk associated with the cash flows from such securities and the market value of such securities may be adversely affected by changes in interest rates.

Management monitors the portfolio of securities classified as available for sale for impairment, which may result from credit deterioration of the issuer, changes in market interest rates relative to the rate of the instrument or changes in prepayment speeds. We evaluate each investment security on a quarterly basis to assess if impairment is considered other than temporary. In conducting this evaluation, management considers many factors, including but not limited to whether we expect to recover the entire amortized cost basis of the security in light of adverse changes in expected future cash flows, the length of time the security has been impaired and the severity of the unrealized loss. We also consider whether we intend to sell the security (or whether we will be required to sell the security) prior to recovery of its amortized cost basis, which may be at maturity.

Based on this evaluation, management concluded that unrealized losses as of December 31, 2013 were the result of changes in interest rates. Management does not intend to sell such securities nor is it likely it will be required to sell such securities prior to recovery of the securities’ amortized cost basis. Accordingly, none of the unrealized losses as of December 31, 2013 were considered other than temporary.

Loans held for sale were $279.9 million at December 31, 2013 , compared to $620.8 million as of December 31, 2012 , a decrease of $340.9 million , or 54.9% . 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 low housing inventories that have constrained the purchase mortgage market.

Loans held for investment, net were $1.87 billion at December 31, 2013 , compared to $1.31 billion as of December 31, 2012 , an increase of $562.8 million , or 43.0% . Our single family loan portfolio increased by $231.0 million from December 31, 2012 , primarily as a result of increased originations of mortgages that exceed conventional conforming loan limits. Our commercial real estate and multifamily loan balances increased a combined $178.0 million and our commercial business loans increased $91.5 million from December 31, 2012 primarily as a result of the growth of our commercial real estate lending business, both organically and through acquisition.


63

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 December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
(in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
904,913

 
47.7
%
 
$
673,865

 
50.3
%
 
$
496,934

 
36.9
%
 
$
526,462

 
32.7
%
 
$
590,695

 
28.4
%
Home equity
135,650

 
7.1

 
136,746

 
10.2

 
158,936

 
11.8

 
181,537

 
11.3

 
209,944

 
10.2

 
1,040,563

 
54.8

 
810,611

 
60.5

 
655,870

 
48.7

 
707,999

 
44.0

 
800,639

 
38.6

Commercial loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate (1)
477,642

 
25.1

 
361,879

 
27.0

 
402,139

 
29.8

 
426,879

 
26.6

 
449,373

 
21.6

Multifamily
79,216

 
4.2

 
17,012

 
1.3

 
56,379

 
4.2

 
104,497

 
6.5

 
85,522

 
4.1

Construction/ land development
130,465

 
6.9

 
71,033

 
5.3

 
173,405

 
12.9

 
285,131

 
17.7

 
631,525

 
30.4

Commercial business
171,054

 
9.0

 
79,576

 
5.9

 
59,831

 
4.4

 
82,959

 
5.2

 
109,322

 
5.3

 
858,377

 
45.2

 
529,500

 
39.5

 
691,754

 
51.3

 
899,466

 
56.0

 
1,275,742

 
61.4

 
1,898,940

 
100.0
%
 
1,340,111

 
100.0
%
 
1,347,624

 
100.0
%
 
1,607,465

 
100.0
%
 
2,076,381

 
100.0
%
Net deferred loan fees and discounts
(3,219
)
 
 
 
(3,576
)
 
 
 
(4,062
)
 
 
 
(4,767
)
 
 
 
(1,915
)
 
 
 
1,895,721

 
 
 
1,336,535

 
 
 
1,343,562

 
 
 
1,602,698

 
 
 
2,074,466

 
 
Allowance for loan losses
(23,908
)
 
 
 
(27,561
)
 
 
 
(42,689
)
 
 
 
(64,177
)
 
 
 
(109,472
)
 
 
 
$
1,871,813

 
 
 
$
1,308,974

 
 
 
$
1,300,873

 
 
 
$
1,538,521

 
 
 
$
1,964,994

 
 
 
(1)
December 31, 2013 and 2012 balances comprised of $156.7 million and $94.9 million of owner-occupied loans, respectively, and $320.9 million and $267.0 million of non-owner-occupied loans, respectively.


64

The following table shows the composition of the loan portfolio by fixed-rate and adjustable-rate loans and the re-pricing characteristics.
 
 
At December 31,
 
2013
 
2012
(in thousands)
Amount
 
Percent
 
Amount
 
Percent
 
 
 
 
 
 
 
 
Adjustable-rate loans:
 
 
 
 
 
 
 
Single family
$
508,232

 
26.8
%
 
$
294,427

 
22.0
%
Commercial
293,548

 
15.5

 
218,181

 
16.3

Multifamily
69,439

 
3.7

 
8,386

 
0.6

Construction/land development, net (1)
70,028

 
3.7

 
40,268

 
3.0

Commercial business
117,718

 
6.2

 
45,384

 
3.4

Home equity
79,447

 
4.2

 
89,615

 
6.7

Total adjustable-rate loans
1,138,412

 
59.9

 
696,261

 
52.0

Fixed-rate loans:
 
 
 
 
 
 
 
Single family
396,681

 
20.9

 
379,438

 
28.3

Commercial
184,094

 
9.7

 
143,698

 
10.7

Multifamily
9,777

 
0.5

 
8,626

 
0.6

Construction/land development, net (1)
60,437

 
3.2

 
30,765

 
2.3

Commercial business
53,336

 
2.8

 
34,192

 
2.6

Home equity
56,203

 
3.0

 
47,131

 
3.5

Total fixed-rate loans
760,528

 
40.1

 
643,850

 
48.0

Total loans held for investment
1,898,940

 
100.0
%
 
1,340,111

 
100.0
%
Less:
 
 
 
 
 
 
 
Deferred loan fees
(3,219
)
 
 
 
(3,576
)
 
 
Allowance for loan losses
(23,908
)
 
 
 
(27,561
)
 
 
Loans held for investment, net
$
1,871,813

 
 
 
$
1,308,974

 
 
 
(1)
Construction/land development is presented net of the undisbursed portion of the loan commitment.



65

The following tables show the contractual maturity of our loan portfolio by loan type.

 
At December 31, 2013
 
Loans due after one year
by rate characteristic
(in thousands)
Within one year
 
After
one year through
five years
 
After
five
years
 
Total
 
Fixed-
rate
 
Adjustable-
rate
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Single family
$
2,117

 
$
11,889

 
$
890,907

 
$
904,913

 
$
396,580

 
$
506,215

Home equity
1,001

 
3,231

 
131,418

 
135,650

 
56,107

 
78,542

Total consumer
3,118

 
15,120

 
1,022,325

 
1,040,563

 
452,687

 
584,757

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
21,265

 
107,259

 
349,118

 
477,642

 
177,567

 
278,810

Multifamily
—

 
4,255

 
74,961

 
79,216

 
9,777

 
69,439

Construction/land development
75,019

 
45,404

 
10,042

 
130,465

 
24,259

 
31,187

Commercial business
99,374

 
46,030

 
25,650

 
171,054

 
43,016

 
28,661

Total commercial
195,658

 
202,948

 
459,771

 
858,377

 
254,619

 
408,097

Total loans held for investment
$
198,776

 
$
218,068

 
$
1,482,096

 
$
1,898,940

 
$
707,306

 
$
992,854



 
At December 31, 2012
 
Loans due after one year
by rate characteristic
(in thousands)
Within one year
 
After
one year through
five years
 
After
five
years
 
Total
 
Fixed-
rate
 
Adjustable-
rate
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Single family
$
669

 
$
10,721

 
$
662,475

 
$
673,865

 
$
378,770

 
$
294,426

Home equity
2

 
1,924

 
134,820

 
136,746

 
47,130

 
89,614

Total consumer
671

 
12,645

 
797,295

 
810,611

 
425,900

 
384,040

Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
37,412

 
180,613

 
143,854

 
361,879

 
134,870

 
189,597

Multifamily
—

 
5,161

 
11,851

 
17,012

 
8,181

 
8,831

Construction/land development
46,920

 
18,136

 
5,977

 
71,033

 
5,636

 
18,477

Commercial business
44,053

 
23,690

 
11,833

 
79,576

 
29,760

 
5,763

Total commercial
128,385

 
227,600

 
173,515

 
529,500

 
178,447

 
222,668

Total loans held for investment
$
129,056

 
$
240,245

 
$
970,810

 
$
1,340,111

 
$
604,347

 
$
606,708


 


66

The following table presents the loan portfolio by loan type and region as of December 31, 2013 .
 
 
Washington
 
Puget Sound
 
Vancouver & Other  (2)(3)
 
 
 
Kitsap/Jefferson/Clallam (1)
(in thousands)
King (1)
 
Snohomish (3)
 
Pierce (1)
 
Thurston (3)
 
 
Spokane  (2)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
464,120

 
$
89,921

 
$
51,267

 
$
17,703

 
$
41,348

 
$
30,883

 
$
14,192

Home equity
56,491

 
15,722

 
10,406

 
4,557

 
8,706

 
3,957

 
5,211

 
520,611

 
105,643

 
61,673

 
22,260

 
50,054

 
34,840

 
19,403

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
238,663

 
54,068

 
22,007

 
23,987

 
624

 
56,673

 
6,942

Multifamily
25,342

 
3,183

 
16,729

 
515

 
—

 
12,497

 
—

Construction/land development
60,547

 
11,825

 
11,532

 
5,449

 
13,185

 
16,729

 
269

Commercial business
122,396

 
1,248

 
7,702

 
—

 
149

 
31,973

 
1,293

 
446,948

 
70,324

 
57,970

 
29,951

 
13,958

 
117,872

 
8,504

Total loans
$
967,559

 
$
175,967

 
$
119,643

 
$
52,211

 
$
64,012

 
$
152,712

 
$
27,907


 
Idaho
 
Oregon
 
 
 
 
 
 
(in thousands)
Boise  (2)
 
Portland (2)(3)
 
Bend  (2)(3)
 
Salem (2)
 
Hawaii
 
Other (4)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
12,001

 
$
67,387

 
$
19,246

 
$
12,656

 
$
38,832

 
$
45,357

 
$
904,913

Home equity
91

 
13,348

 
3,257

 
4,218

 
8,678

 
1,008

 
135,650

 
12,092

 
80,735

 
22,503

 
16,874

 
47,510

 
46,365

 
1,040,563

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
589

 
50,261

 
8,009

 
6,725

 
—

 
9,094

 
477,642

Multifamily
—

 
13,282

 
7,668

 
—

 
—

 
—

 
79,216

Construction/land development
2,331

 
3,813

 
3,272

 
—

 
1,513

 
—

 
130,465

Commercial business
—

 
2,318

 
47

 
—

 
3

 
3,925

 
171,054

 
2,920

 
69,674

 
18,996

 
6,725

 
1,516

 
13,019

 
858,377

Total loans
$
15,012

 
$
150,409

 
$
41,499

 
$
23,599

 
$
49,026

 
$
59,384

 
$
1,898,940

 
(1)
Refers to a specific county.
(2)
Refers to a specific city.
(3)
Also includes surrounding counties.
(4)
Includes California, Alaska and Florida.


67

The following table presents the loan portfolio by loan type and region as of December 31, 2012 .  

 
Washington
 
Puget Sound
 
Vancouver & Other  (2)(3)
 
 
 
Kitsap/Jefferson/Clallam (1)
(in thousands)
King (1)
 
Snohomish (3)
 
Pierce (1)
 
Thurston (3)
 
 
Spokane  (2)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
321,285

 
$
81,544

 
$
53,788

 
$
17,702

 
$
32,282

 
$
24,443

 
$
9,961

Home equity
55,829

 
17,436

 
11,739

 
5,037

 
8,209

 
2,783

 
3,899

 
377,114

 
98,980

 
65,527

 
22,739

 
40,491

 
27,226

 
13,860

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
163,949

 
83,028

 
15,391

 
20,388

 
645

 
4,632

 
13,261

Multifamily
8,274

 
3,406

 
—

 
542

 
—

 
—

 
—

Construction/land development
12,777

 
1,527

 
32,762

 
6,923

 
1,773

 
5,771

 
—

Commercial business
64,998

 
4,667

 
3,642

 
15

 
457

 
—

 
1,253

 
249,998

 
92,628

 
51,795

 
27,868

 
2,875

 
10,403

 
14,514

Total loans
$
627,112

 
$
191,608

 
$
117,322

 
$
50,607

 
$
43,366

 
$
37,629

 
$
28,374


 
Idaho
 
Oregon
 
 
 
 
 
 
(in thousands)
Boise  (2)
 
Portland (2)(3)
 
Bend  (2)(3)
 
Salem (2)
 
Hawaii
 
Other (4)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
7,873

 
$
58,945

 
$
17,543

 
$
12,968

 
$
35,531

 
$
—

 
$
673,865

Home equity
43

 
14,100

 
3,165

 
4,836

 
9,595

 
75

 
136,746

 
7,916

 
73,045

 
20,708

 
17,804

 
45,126

 
75

 
810,611

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
35,652

 
11,530

 
6,925

 
48

 
6,430

 
361,879

Multifamily
—

 
1,898

 
2,892

 
—

 
—

 
—

 
17,012

Construction/land development
—

 
1,179

 
4,588

 
3,006

 
727

 
—

 
71,033

Commercial business
—

 
4,191

 
—

 
—

 
21

 
332

 
79,576

 
—

 
42,920

 
19,010

 
9,931

 
796

 
6,762

 
529,500

Total loans
$
7,916

 
$
115,965

 
$
39,718

 
$
27,735

 
$
45,922

 
$
6,837

 
$
1,340,111


(1)
Refers to a specific county.
(2)
Refers to a specific city.
(3)
Also includes surrounding counties.
(4)
Includes Alaska and Florida.


68

The following table presents the loan portfolio by loan type and year of origination.
 
December 31, 2013
 
Prior to
2000
 
2000-
2004
 
2005-
2008
 
2009-
2010
 
2011-
2012
 
2013
 
Total
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
7,236

 
$
25,471

 
$
195,559

 
$
136,240

 
$
168,885

 
$
371,522

 
$
904,913

Home equity
3

 
17,919

 
93,304

 
4,819

 
2,704

 
16,901

 
135,650

 
7,239

 
43,390

 
288,863

 
141,059

 
171,589

 
388,423

 
1,040,563

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
361

 
10,041

 
205,754

 
20,263

 
109,308

 
131,915

 
477,642

Multifamily
—

 
63

 
12,199

 
1,115

 
5,416

 
60,423

 
79,216

Construction/land development
—

 
—

 
14,155

 
411

 
19,789

 
96,110

 
130,465

Commercial business
52

 
892

 
29,980

 
14,493

 
43,110

 
82,527

 
171,054

 
413

 
10,996

 
262,088

 
36,282

 
177,623

 
370,975

 
858,377

Total loans
$
7,652

 
$
54,386

 
$
550,951

 
$
177,341

 
$
349,212

 
$
759,398

 
$
1,898,940



The following table presents the loan portfolio by loan type and year of origination.
 
December 31, 2012
 
Prior to
2000
 
2000-
2004
 
2005-
2008
 
2009-
2010
 
2011
 
2012
 
Total
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
8,255

 
$
35,722

 
$
243,341

 
$
148,622

 
$
19,726

 
$
218,199

 
$
673,865

Home equity
6

 
21,554

 
108,970

 
4,807

 
1,029

 
380

 
136,746

 
8,261

 
57,276

 
352,311

 
153,429

 
20,755

 
218,579

 
810,611

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
234

 
18,679

 
258,995

 
5,388

 
18,822

 
59,761

 
361,879

Multifamily
—

 
—

 
13,606

 
—

 
—

 
3,406

 
17,012

Construction/land development
—

 
—

 
49,909

 
648

 
1,351

 
19,125

 
71,033

Commercial business
—

 
1,825

 
37,485

 
12,143

 
3,037

 
25,086

 
79,576

 
234

 
20,504

 
359,995

 
18,179

 
23,210

 
107,378

 
529,500

Total loans
$
8,495

 
$
77,780

 
$
712,306

 
$
171,608

 
$
43,965

 
$
325,957

 
$
1,340,111







69

The following table presents loan origination and loan sale volumes.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Loans originated:
 
 
 
 
 
Real estate:
 
 
 
 
 
Single family:
 
 
 
 
 
Originated by HomeStreet
$
4,176,187

 
$
3,969,082

 
$
1,179,863

Originated by WMS Series LLC
694,416

 
932,377

 
541,401

Single family
4,870,603

 
4,901,459

 
1,721,264

Multifamily
90,967

 
115,274

 
129,558

Commercial real estate
129,531

 
49,982

 
3,000

Construction/land development
255,314

 
54,187

 
12,448

Total real estate
5,346,415

 
5,120,902

 
1,866,270

Commercial business
109,735

 
35,606

 
5,395

Home equity
—

 
—

 
—

Total loans originated
$
5,456,150

 
$
5,156,508

 
$
1,871,665

Loans sold:
 
 
 
 
 
Single family
$
4,733,473

 
$
4,170,840

 
$
1,739,220

Multifamily
104,016

 
118,805

 
119,478

Total loans sold
$
4,837,489

 
$
4,289,645

 
$
1,858,698


Other real estate owned was $12.9 million at December 31, 2013 , compared to $23.9 million at December 31, 2012 , a decrease of $11.0 million , or 46.1% . This decrease was predominantly due to sales of OREO properties, which totaled $18.6 million and loss provision of $603 thousand for 2013, partially offset by additions to the OREO assets of $8.2 million .

FHLB Stock was $35.3 million at December 31, 2013 , compared to $36.4 million at December 31, 2012 . FHLB stock is carried at par value and can only be purchased or redeemed at par value in transactions between the FHLB and its member institutions. Both cash and stock dividends received on FHLB stock are reported in earnings.

On November 6, 2009, the FHLB’s regulator defined its capital classification as undercapitalized. Under the Federal Housing Finance Agency (the "Finance Agency") regulations, a FHLB that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock. In September 2012, the Finance Agency reclassified the FHLB as adequately capitalized but the FHLB remained subject to a consent order. On November 22, 2013, the Finance Agency issued an amended consent order, which modified and superseded the October 2010 consent order. The amended consent order acknowledges the FHLB’s fulfillment of many of the requirements set forth in the 2010 consent order and improvements in the FHLB’s financial performance, while continuing to impose certain restrictions on its ability to repurchase, redeem, and pay dividends on its capital stock. As such, Finance Agency approval or non-objection will continue to be required for all repurchases, redemptions, and dividend payments on capital stock.

Management periodically evaluates FHLB stock for other-than-temporary impairment based on its assessment of ultimate recoverability of par value, rather than recognizing temporary declines in value. The determination of whether the decline affects the ultimate recoverability is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB and (4) the liquidity position of the FHLB. The FHLB continues to benefit from a superior credit rating from Standard & Poor’s, which allows the FHLB to secure funding for its activities at attractive rates and terms, further supporting continued access to liquidity. Based on its evaluation, management determined there is no other-than-temporary impairment on the FHLB stock investment as of December 31, 2013 or December 31, 2012 .


70

Accounts receivable and other assets was $122.9 million at December 31, 2013 , compared to $88.2 million at December 31, 2012 , an increase of $34.7 million , or 39.3% . This increase was primarily due to a $28.0 million increase in federal income tax receivable at December 31, 2013 . The income tax receivable balance was $1.6 million at December 31, 2012 .

Deposits

Deposits were $2.21 billion at December 31, 2013 , compared to $1.98 billion at December 31, 2012 , an increase of $234.0 million , or 11.8% . This increase was primarily attributable to the addition of deposits from the acquisitions of YNB, Fortune Bank and two AmericanWest branches during the fourth quarter of 2013. During 2013, the Company increased the balances of transaction and savings deposits by $491.8 million , or 47.0% , to $1.54 billion at December 31, 2013 from $1.05 billion at December 31, 2012 . Partially offsetting the increased transaction and savings deposits was the managed reduction of certificates of deposit balances, which decreased $141.1 million , or 21.5% , to $514.4 million at December 31, 2013 from $655.5 million at December 31, 2012 . This improvement in the composition of deposits was partially the result of our successful efforts to attract transaction and savings deposit balances through effective brand marketing.

Deposit balances were as follows for the periods indicated:
 
 
At December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Noninterest-bearing accounts - checking and savings
$
164,437

 
$
83,563

 
$
69,276

Interest-bearing transaction and savings deposits:
 
 
 
 
 
NOW accounts
297,965

 
174,699

 
138,936

Statement savings accounts due on demand
156,181

 
103,932

 
66,898

Money market accounts due on demand
919,322

 
683,906

 
499,457

Total interest-bearing transaction and savings deposits
1,373,468

 
962,537

 
705,291

Total transaction and savings deposits
1,537,905

 
1,046,100

 
774,567

Certificates of deposit
514,400

 
655,467

 
1,033,798

Noninterest-bearing accounts - other
158,516

 
275,268

 
201,390

Total deposits
$
2,210,821

 
$
1,976,835

 
$
2,009,755


Borrowings

FHLB advances were $446.6 million at December 31, 2013 , compared with $259.1 million as of December 31, 2012 . FHLB advances may be collateralized by stock in the FHLB, cash, pledged mortgage-backed securities, real estate-secured commercial loans and unencumbered qualifying mortgage loans. As of December 31, 2013 , 2012 and 2011, FHLB borrowings had weighted average interest rates of 0.43% , 0.60% and 4.67% , respectively. Of the total FHLB borrowings outstanding as of December 31, 2013 , $431.0 million mature prior to December 31, 2014. We had $228.5 million and $55.7 million of additional borrowing capacity with the FHLB as of December 31, 2013 and December 31, 2012 , respectively. Our lending agreement permits the FHLB to refuse to make advances under that agreement 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. Among those events is the issuance or entry of “any supervisory or consent order pertaining to” the Bank. No such condition existed at December 31, 2013 .

We may also borrow, on a collateralized basis, from the Federal Reserve Bank of San Francisco ("FRBSF" or "Federal Reserve Bank"). At December 31, 2013 and December 31, 2012 , we did not have any outstanding borrowings from the FRBSF. Based on the amount of qualifying collateral available, borrowing capacity from the FRBSF was $332.7 million and $124.3 million at December 31, 2013 and December 31, 2012 , respectively. The FRBSF is also not contractually bound to offer credit to us, and our access to this source for future borrowings may be discontinued at any time.

Long-term debt was $64.8 million at December 31, 2013 and $61.9 million at December 31, 2012 . Most of this balance represents junior subordinated debentures issued in connection with the sale of TruPS by HomeStreet Statutory Trusts, subsidiaries of HomeStreet, Inc. During 2013, as a result of the acquisition of YNB, the Company acquired $3.1 million of additional TruPS. TruPS allow investors to buy subordinated debt through a variable interest entity trust that issues preferred securities to third-party investors and uses the cash received to purchase subordinated debt from the issuer. That debt is the sole

71

asset of the trust and the coupon rate on the debt mirrors the dividend rate on the preferred securities. These securities are nonvoting and are not convertible into capital stock, and the variable interest entity trust is not consolidated in our financial statements.


Shareholders' Equity

Shareholders’ equity was $265.9 million at December 31, 2013 compared to $263.8 million at December 31, 2012 . This increase included net income of $23.8 million , partially offset by other comprehensive loss of $21.2 million recognized during 2013 and $4.7 million of dividends paid during 2013 compared to total comprehensive income of $87.2 million recognized during 2012 . The comprehensive loss in 2013 represented unrealized losses in the valuation of our investment securities available for sale portfolio at December 31, 2013 as a result of the increase in interest rates experienced beginning in the latter part of the second quarter of 2013 .

The Company paid cash dividends to shareholders of $0.11 per share on each of April 22, 2013, August 29, 2013 and November 25, 2013.

Shareholders' equity, on a per share basis, was $17.97 per share at December 31, 2013 , compared to $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.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Return on assets (1)
0.88
%
 
3.42
%
 
0.70
%
Return on equity (2)
9.56
%
 
38.86
%
 
23.52
%
Equity to assets ratio (3)
9.16
%
 
8.79
%
 
2.98
%
 
(1)
Net income divided by average total assets.
(2)
Net earnings (loss) available to common shareholders divided by average common shareholders’ equity.
(3)
Average equity divided by average total assets.

Business Segments

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

This process is dynamic and is based on management's current view of the Company's operations and is not necessarily comparable with similar information for other financial institutions. We define our business segments by product type and customer segment. If the management structure or the allocation process changes, allocations, transfers and assignments may change.

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

We use various management accounting methodologies to assign certain balance sheet and income statement items to the responsible business segments, including:

72

•
A funds transfer pricing (“FTP”) method, which allocates interest income credits and funding charges between the segments and our treasury division, which then assigns to each such business segment a funding credit for its liabilities, such as deposits, and a charge to fund its assets.
•
An allocation of charges for services rendered to the business segments by centralized functions, such as corporate overhead, which are generally based on each segment’s consumption patterns.
•
An allocation of the Company's consolidated income taxes on the basis of the effective tax rate applied to the segment’s pretax income or loss.

Effective January 1, 2012 management updated the FTP methodology it uses for reviewing segment results and managing the Company’s business segments. Under the previous FTP methodology, we computed the cost of funds from our current period’s financial results and then allocated a portion of that cost of funds to each respective business segment. This approach was based on internal financial results and updated for current period information, thereby providing an updated funding cost applied to certain assets or liabilities originated in prior periods.

The updated methodology is based on external market factors and more closely aligns the expected weighted-average life of the financial asset or liability to external economic data, such as the U.S. Dollar LIBOR/Swap curve, and provides a more consistent basis for determining our cost of funds to be allocated to each business segment. The updated approach is also more consistent with FTP measurement techniques employed by other financial institutions. We have reclassified all prior period amounts to conform to the current methodology and presentation.

In general, the impact of the FTP change resulted in a lower cost of funds as compared with the previous method, as the Company’s funding costs have generally been higher than market rates due to the historical structure of the deposit portfolio and wholesale borrowings.

Commercial and Consumer Banking Segment

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through bank branches and commercial lending centers, and through ATMs, online, mobile and telephone banking. These products and services include deposit products; residential, consumer and business portfolio loans; investment products; insurance products and cash management services. We originate residential and commercial construction loans, bridge loans and permanent loans for our portfolio primarily on single family residences, and on office, retail, industrial and multifamily property types. We originate commercial real estate loans including multifamily lending through our Fannie Mae DUS business, whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. As of December 31, 2013 , our bank branch network consisted of 30 branches in the Pacific Northwest and Hawaii. At December 31, 2013 and 2012 , our transaction and savings deposits totaled $1.53 billion and $1.05 billion , respectively, and our loan portfolio totaled $1.87 billion and $1.31 billion , respectively. This segment is also responsible for the management of the Company's portfolio of investment securities.


73

Commercial and Consumer Banking segment results are detailed below.

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net interest income
$
59,172

 
$
46,626

 
$
44,576

Provision for loan losses
900

 
11,500

 
3,300

Noninterest income
8,041

 
9,786

 
13,199

Noninterest expense
63,767

 
63,227

 
79,893

Income (loss) before income taxes
2,546

 
(18,315
)
 
(25,418
)
Income tax (benefit) expense
(91
)
 
(3,821
)
 
(111
)
Net income (loss)
$
2,637

 
$
(14,494
)
 
$
(25,307
)
 
 
 
 
 
 
Average assets
$
2,122,846

 
$
1,849,036

 
$
2,068,951

Pre-tax pre-provision profit (loss) (1)
3,446

 
(6,815
)
 
(22,118
)
Efficiency ratio (2)
94.87
%
 
112.08
%
 
138.28
%
Full-time equivalent employees (ending)
577

 
413

 
313

Net gain on mortgage loan origination and sale activity:
 
 
 
 
 
Multifamily
$
5,306

 
$
4,872

 
$
2,998

Other
964

 
—

 
—

 
$
6,270

 
$
4,872

 
$
2,998

 
 
 
 
 
 
Commercial and Consumer Banking production volumes:
 
 
 
 
 
Multifamily mortgage originations
$
90,968

 
$
112,074

 
$
125,676

Multifamily mortgage loans sold
$
104,016

 
$
118,805

 
$
119,477


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

Commercial and Consumer Banking net income was $2.6 million for the year ended December 31, 2013 , an increase of $17.1 million from a net loss of $14.5 million for the year ended December 31, 2012 . The increase in net income in 2013 was primarily the result of a $12.5 million increase in net interest income, which reflected improvements in our deposit product and pricing strategy. That strategy included reducing our higher-cost deposits and converting customers with maturing certificates of deposit to transaction and savings deposits. Additionally, improved credit quality of the Company's loan portfolio resulted in a $10.6 million lower provision for loan losses in 2013 compared to 2012 .

Commercial and Consumer Banking had a net loss of $14.5 million for the year ended December 31, 2012 , compared to a net loss of $25.3 million for the year ended December 31, 2011. The improvement in 2012 was primarily due to an increase in net interest income, which in large part reflects the execution of our deposit product and pricing strategies.

Commercial and Consumer Banking servicing income consisted of the following.

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
Servicing fees and other
$
3,174

 
$
3,396

 
$
4,258

Amortization of multifamily MSRs
(1,803
)
 
(2,014
)
 
(1,487
)
Commercial mortgage servicing income
$
1,371

 
$
1,382

 
$
2,771



74


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

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Commercial
 
 
 
Multifamily
$
720,429

 
$
727,118

Other
95,673

 
53,235

Total commercial loans serviced for others
$
816,102

 
$
780,353


Commercial and Consumer Banking noninterest expense of $63.8 million increased $540 thousand , or 0.9% , from $63.2 million in 2012 , primarily due to increased salaries and related costs, reflecting the growth of our commercial real estate and commercial business lending units and the expansion of our branch banking network, partially offset by the elimination of certain positions in commercial lending and administration in response to our acquisitions and which was intended to improve efficiency and performance.

Mortgage Banking Segment

Mortgage Banking originates and purchases single family residential mortgage loans for sale to investors in the secondary market. We purchase loans from WMS Series LLC through a correspondent arrangement between HomeStreet Bank and that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. A small percentage of our loans are brokered or sold on a servicing-released basis to correspondent lenders. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained servicing rights within this business segment.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net interest income
$
15,272

 
$
14,117

 
$
3,918

Noninterest income
182,704

 
228,234

 
84,006

Noninterest expense
165,728

 
120,364

 
46,601

Income before income taxes
32,248

 
121,987

 
41,323

Income tax expense
11,076

 
25,367

 
(103
)
Net income
$
21,172

 
$
96,620

 
$
41,426

 
 
 
 
 
 
Average assets
$
595,368

 
$
554,824

 
$
230,850

Efficiency ratio (1)
83.71
%
 
49.67
%
 
53.00
%
Full-time equivalent employees (ending)
925

 
686

 
300

Production volumes for sale to the secondary market:
 
 
 
 
 
Single family mortgage closed loan volume  (2)(3)
$
4,459,649

 
$
4,668,167

 
$
1,701,608

Single family mortgage interest rate lock commitments (2)
3,907,274

 
4,786,667

 
1,772,617

Single family mortgage loans sold (2)
4,733,473

 
4,170,840

 
1,739,220

(1)
Noninterest expense divided by total net revenue (net interest income and noninterest income).
(2)
Includes loans originated by WMS Services LLC ("WMS") and purchased by HomeStreet Bank.
(3)
Represents single family mortgage production volume designated for sale to the secondary market during each respective period.

Mortgage Banking net income was $21.2 million for the year ended December 31, 2013 , a decrease of $75.4 million , or 78.1% , from net income of $96.6 million for the year ended December 31, 2012 . The decrease in Mortgage Banking net income for 2013 was driven primarily by higher mortgage interest rates that led to a sharp decrease in interest rate lock commitment volume. Since a substantial amount of the gain on loan origination and sale activities is recognized at the time of interest rate lock, higher mortgage interest rates in 2013 created an imbalance between the volume of interest rate lock commitments and

75

closed loans. In periods where the volume of closed loans significantly exceeds the volume of interest rate lock commitments, noninterest expense will be higher relative to noninterest income because variable costs, notably commissions and incentives, are recognized at the time of closing the loan.

Mortgage Banking net income of $96.6 million for the year ended December 31, 2012 increased $55.2 million , or 133.2% , from $41.4 million for the year ended December 31, 2011. The increase in net income primarily reflected elevated mortgage production volumes as net gain on mortgage loan origination and sale activities increased with the expansion of single family lending operations.

Mortgage Banking net gain on sale to the secondary market is detailed in the following table.
 
 
Year Ended December 31,
(in thousands)
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
Net gain on mortgage loan origination and sale activities: (1)
 
 
 
 
 
 
Single family:
 
 
 
 
 
 
Servicing value and secondary market gains (2)
 
$
128,391

 
$
178,624

 
$
34,287

Provision for repurchase losses (3)
 
—

 
(2,969
)
 
(764
)
Net gain from secondary market activities
 
128,391

 
175,655

 
33,523

Loan origination and funding fees
 
30,051

 
30,037

 
11,946

Total mortgage banking net gain on mortgage loan origination and sale activities (1)
 
$
158,442

 
$
205,692

 
$
45,469

(1)
Excludes inter-segment activities.
(2)
Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and the estimated fair value of the repurchase or indemnity obligation recognized on new loan sales.
(3)
Represents changes in estimated probable future repurchase losses on previously sold loans.

Net gain on mortgage loan origination and sale activities was $158.4 million for the year ended December 31, 2013 , a decrease of $45.9 million , or 21.8% , from $205.7 million for the year ended December 31, 2012 . This decrease is primarily the result of a 18.4% decrease in interest rate lock commitments, which was mainly driven by an increase in mortgage interest rates which began in the latter part of the second quarter of 2013 , which led to a decrease in refinance mortgage volume, and a shift to a purchase mortgage-dominated market.

Mortgage Banking servicing income consisted of the following.

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
Servicing fees and other
$
30,999

 
$
24,437

 
$
21,867

Changes in fair value of MSRs due to modeled amortization (1)
25,668

 
(20,662
)
 
(14,421
)
 
56,667

 
3,775

 
7,446

Risk management:
 
 
 
 
 
Changes in fair value of MSRs due to changes in model inputs and/or assumptions (2)
(20,533
)
 
(11,018
)
 
$
(25,579
)
Net gain from derivatives economically hedging MSRs
(20,432
)
 
21,982

 
53,418

 
(40,965
)
 
10,964

 
27,839

Mortgage Banking servicing income
$
15,702

 
$
14,739

 
$
35,285

(1)
Represents changes due to collection/realization of expected cash flows and curtailments.
(2)
Principally reflects changes in model assumptions, including prepayment speed assumptions, which are primarily affected by changes in mortgage interest rates.
Single family mortgage servicing income of $15.7 million in the year ended December 31, 2013 increased by $1.0 million from $14.7 million in the year ended December 31, 2012 . This increase was primarily due to increased servicing fees collected on

76

the Company's single family mortgages, partially offset by mortgage servicing rights ("MSR") risk management results. Risk management results represent changes in the fair value of single family MSRs due to changes in model inputs and assumptions net of the gain/(loss) from derivatives economically hedging MSRs. 
Single family mortgage servicing fees collected in the year ended December 31, 2013 increased $6.6 million , or 26.9% , from the year ended December 31, 2012 primarily as a result of growth in the portfolio of single family loans serviced for others, which increased to $11.80 billion at December 31, 2013 compared to $8.87 billion at December 31, 2012 .
Single family mortgage servicing income of $14.7 million for the year ended December 31, 2012 decreased $20.5 million from the year ended December 31, 2011, primarily due to risk management activities.

Single family loans serviced for others consisted of the following.

 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Single family
 
 
 
U.S. government and agency
$
11,467,853

 
$
8,508,458

Other
327,768

 
362,230

Total single family loans serviced for others
$
11,795,621

 
$
8,870,688


Mortgage Banking noninterest expense of $165.7 million for the year ended December 31, 2013 increased $45.4 million , or 37.7% , from $120.4 million in 2012. This increase was primarily attributable to increased salaries and related costs due to our continued growth in loan production personnel and our expansion into new markets.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments (which include commitments to originate loans and commitments to purchase loans) include potential credit risk in excess of the amount recognized in the accompanying consolidated financial statements. These transactions are designed to (1) meet the financial needs of our customers, (2) manage our credit, market or liquidity risks, (3) diversify our funding sources and/or (4) optimize capital.

For more information on off-balance sheet arrangements, including derivative counterparty credit risk, see the " Commitments, Guarantees and Contingencies" discussions within Management's Discussion and Analysis, as well as Note 14, Commitments , Guarantees and Contingencies to the financial statements of this Form 10-K.

Commitments, Guarantees and Contingencies

We may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. Our known contingent liabilities include:
•
Unfunded loan commitments. We make certain unfunded loan commitments as part of our lending activities that have not been recognized in the Company’s financial statements. These include commitments to extend credit made as part of our mortgage lending activities and interest rate lock commitments on loans we intend to hold in our loans held for investment portfolio. The aggregate amount of these unrecognized unfunded loan commitments existing at December 31, 2013 and December 31, 2012 was $18.4 million and $76.8 million , respectively.
•
Credit agreements. We extend secured and unsecured open-end loans to meet the financing needs of our customers. These commitments, which primarily related to unused home equity and commercial real estate lines of credit and business banking funding lines, totaled $154.0 million and $91.1 million at December 31, 2013 and December 31, 2012 . Undistributed construction loan proceeds, where the Company has an obligation to advance funds for construction progress payments, was $168.5 million and $34.5 million at December 31, 2013 and December 31, 2012 , respectively. 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.

77

•
Interest rate lock commitments . The Company writes options in the form of interest rate lock commitments on single family mortgage loans that are exercisable at the option of the borrower. We are exposed to market risk on interest rate lock commitments. The fair value of interest rate lock commitments existing at December 31, 2013 and December 31, 2012 , was $6.0 million and $22.5 million , respectively. We mitigate the risk of future changes in the fair value of interest rate lock commitments primarily through the use of forward sale commitments.
•
Credit loss sharing. We originate, sell and service multifamily loans through the Fannie Mae DUS program. Multifamily loans are sold to Fannie Mae subject to a loss sharing arrangement. HomeStreet Capital 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 DUS 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. The total principal balance of loans outstanding under the DUS program as of December 31, 2013 and December 31, 2012 was $720.4 million and $727.1 million , respectively, and our loss reserve was $2.0 million and $3.3 million as of December 31, 2013 and December 31, 2012 , respectively.        
•
Mortgage repurchase liability . In our single family lending business, we sell residential mortgage loans to GSEs that include the mortgage loans in GSE-guaranteed mortgage securitizations. In addition, the Company pools FHA-insured and Department of Veterans' Affairs ("VA")-guaranteed mortgage loans that are used to back Ginnie Mae-guaranteed securities. We have made representations and warranties that the loans sold meet certain requirements. We 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 us 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 we 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.
We do not typically receive repurchase requests from Ginnie Mae, FHA or VA. As an originator of FHA insured or VA guaranteed loans, we are 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, we may be required to indemnify FHA or VA against loss.  The loans remain in Ginnie Mae pools unless and until they qualify for voluntary repurchase by the Company.  In general, once a FHA or VA loan becomes 90 days past due, we repurchase 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.
As of December 31, 2013 and December 31, 2012 , the total principal balance of loans sold that were subject to the terms and conditions of these representations and warranties totaled $11.89 billion and $8.92 billion . We recorded a mortgage repurchase liability of $1.3 million and $2.0 million at December 31, 2013 and 2012, respectively, to reflect management’s estimate of losses for loans for which we could have a repurchase obligation. Actual repurchase losses of $2.5 million , $2.8 million and $826 thousand were incurred for the years ended December 31, 2013 , 2012 and 2011, respectively.
•
Leases . The Company is obligated under non-cancelable leases for office space. The office leases also contain renewal and space options. Rental expense under non-cancelable operating leases totaled $11.4 million , $7.1 million and $5.7 million for the years ended December 31, 2013 , 2012 and 2011, respectively.



78

Derivative Counterparty Credit Risk

Derivative financial instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where we are in a favorable position. Credit risk related to derivative financial instruments is considered within the fair value measurement of the instrument. We manage the credit risk associated with our various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. From time to time, we may provide or obtain collateral from certain counterparties for amounts in excess of exposure limits as outlined by the counterparty credit policies of the parties. We have entered into agreements with derivative counterparties that include netting arrangements whereby the counterparties are entitled to settle their positions on a net basis. At December 31, 2013 and 2012, our net exposure to the credit risk of derivative counterparties was $10.2 million and $22.7 million .

Contractual Obligations

The following table summarizes our significant fixed and determinable contractual obligations, within the categories described below, by payment date or contractual maturity as of December 31, 2013 . The payment amounts for financial instruments shown below represent principal amounts contractually due to the recipient and do not include any unamortized premiums or discounts, or other similar carrying value adjustments.
 
(in thousands)
Within
one year
 
After one but
within three  years
 
After three but
within five
 
More than
five years
 
Total
 
 
 
 
 
 
 
 
 
 
Deposits (1)
$
2,095,020

 
$
96,571

 
$
19,230

 
$
—

 
$
2,210,821

FHLB advances
431,000

 
—

 
—

 
15,590

 
446,590

Trust preferred securities (2)
—

 
—

 
—

 
64,950

 
64,950

Interest (3)
5,963

 
9,521

 
5,837

 
24,265

 
45,586

Operating leases
11,856

 
23,433

 
14,421

 
4,115

 
53,825

Purchase obligations (4)
4,147

 
5,578

 
—

 
—

 
9,725

Total
$
2,547,986

 
$
135,103

 
$
39,488

 
$
108,920

 
$
2,831,497

   
(1)
Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations due less than one year.
(2)
Trust preferred securities is included in long-term debt on the consolidated statements of financial condition.
(3)
Represents the future interest obligations related to interest-bearing time deposits and long-term debt in the normal course of business. These interest obligations assume no early debt redemption. We estimated variable interest rate payments using December 31, 2013 rates, which we held constant until maturity.
(4)
Represents agreements to purchase goods or services.

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.
The Company's Board of Directors (the "Board") and executive management have overall and ultimate responsibility for management of these risks. The Board, its committees and senior managers oversee the management of various risks. We review and assess these risks on an enterprise-wide basis periodically and as part of the annual strategic planning process. We use internal audits, quality control and loan review functions to assess the strength of and adherence to risk management policies, internal controls and regulatory requirements. Similarly, external reviews, examinations and audits are conducted by regulators and others. In addition, our compliance, appraisal, corporate security and information security personnel provide additional risk management services in their areas of expertise.
The Board and its committees (both for the Company and its subsidiaries) work closely with senior management in overseeing risk. Management recommends the appropriate level of risk in our strategic and business plans and in our board-approved credit and operating policies and has responsibility for measuring, managing, controlling and reporting on risks. The Board and its committees oversee the monitoring and controlling of significant risk exposures, including the policies governing risk management. The Board authorizes its committees to take any action on its behalf as described in their respective charter or as

79

otherwise delegated by the Board, except as otherwise specifically reserved by law, regulation, other committees' charters or the Company's charter documents for action solely by the full board or another board committee. These committees include:
•
Audit Committee. The Audit Committee oversees the policies and management activities relating to our financial reporting, internal and external audit, regulatory, legal and compliance risks.
•
Finance Committee. The Finance Committee oversees the consolidated companies' activities related to balance sheet management, major financial risks including market, interest rate, liquidity and funding risks and counterparty risk management, including trading limits.
•
Credit Committee. The Credit Committee oversees the annual Loan Review Plan, lending policies, credit performance and trends, the allowance for credit loss policy and loan loss reserves, large borrower exposure and concentrations, and approval of broker/dealer relationships.
•
Human Resources and Corporate Governance Committee . The Human Resources and Corporate Governance Committee (the "HRCG") of HomeStreet, Inc. reviews all matters concerning our human resources, compensation, benefits, and corporate governance. HRCG's policy objectives are to ensure that HomeStreet and its operating subsidiaries meet their corporate objectives of attracting and retaining a well-qualified workforce, to oversee our human resource strategies and policies and to ensure processes are in place to assure compliance with employment laws and regulations.
•
Enterprise Risk Management Committee. The Enterprise Risk Management Committee (the "ERMC") oversees the Company's enterprise-wide risk management framework, including evaluating management's identification and assessment of the significant risks and the related infrastructure to address such risks and monitors the Company's compliance with its risk appetite and risk limit structures and effective remediation of non-compliance on an ongoing, enterprise-wide, and individual entity basis. The ERMC does not duplicate the risk oversight of the Board's other committees, but rather helps ensure end-to-end understanding and oversight of all risk issues in one Board committee and enhances the Board's and management's understanding of the Company's aggregate enterprise-wide risk appetite.

The following is a discussion of our risk management practices. The risks related to credit, liquidity, interest rate and price warrant in-depth discussion due to the significance of these risks and the impact they may have on our business.

Credit Risk Management

Credit risk is defined as the risk to current or anticipated earnings or capital arising from an obligor’s failure to meet the terms of any contract with the Company, including those in the lending, securities and derivative portfolios, or otherwise perform as agreed. Factors relating to the degree of credit risk include the size of the asset or transaction, the contractual terms of the related documents, the credit characteristics of the borrower, the channel through which assets are acquired, the features of loan products or derivatives, the existence and strength of guarantor support, the availability, quality and adequacy of any underlying collateral and the economic environment after the loan is originated or the asset is acquired. Our overall portfolio credit risk is also impacted by asset concentrations within the portfolio.

Our credit risk management process is primarily governed centrally. Our overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling and loan review, quality control and audit processes. In addition, we have an independent loan review function that reports directly to the Credit Committee of the Board, and internal auditors and regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.

The Chief Credit Officer’s primary responsibilities include directing the activities of the credit risk management function as it relates to the loan portfolio, overseeing loan portfolio performance and ensuring compliance with regulatory requirements and the Company's established credit policies, standards and limits, determining the reasonableness of our allowance for loan losses, reviewing and approving large credit exposures and delegating credit approval authorities. Senior credit administrators who oversee the lines of business have both transaction approval authority and governance authority for the approval of procedures within established policies, standards and limits. The Chief Credit Officer reports directly to the Chief Executive Officer.

The Loan Committee provides direction and oversight within our risk management framework. The committee seeks to ensure effective portfolio risk analysis and policy review and to support sound implementation of defined business and risk strategies. Additionally, the Loan Committee periodically approves credits larger than the Chief Credit Officer’s or Chief Executive

80

Officer’s individual approval authorities allow. The members of the Loan Committee are the Chief Executive Officer, Chief Credit Officer and the Commercial Banking Director.

The loan review department's primary responsibility includes the review of our loan portfolios to provide an independent assessment of credit quality, portfolio oversight and credit management, including accuracy of loan grading. Loan review also conducts targeted credit-related reviews and credit process reviews at the request of the Board and management and reviews a sample of newly originated loans for compliance with closing conditions and accuracy of loan grades. Loan review reports directly to the Credit Committee and administratively to the Compliance and Regulatory Affairs Director.

Credit limits for capital markets counterparties, including derivative counterparties, are defined in the Company's Counterparty Risk policy, which is reviewed annually by the Bank Loan Committee, with final approval by the Board Credit Committee. The treasury function is responsible for directing the activities related to securities and derivative portfolios, including overseeing derivative portfolio performance and ensuring compliance with established credit policies, standards and limits. The Chief Investment Officer and Treasurer reports directly to the Chief Executive Officer.

Appraisal Policy

An integral part of our credit risk management process is the valuation of the collateral supporting the loan portfolio, which is primarily comprised of loans secured by real estate. We maintain a Board-approved appraisal policy for real estate appraisals that conforms to the Uniform Standards of Professional Appraisal Practice (“USPAP”) and FDIC regulatory requirements. Our Chief Appraiser, who is independent of the business unit and credit administration departments, is responsible for maintaining the appraisal policy and recommending changes to the policy subject to Loan Committee and Credit Committee approval.

Real Estate

Our appraisal policy requires that market value appraisals or evaluations be prepared at loan origination, subsequent loan extensions and for loan monitoring purposes. Our appraisals are prepared by independent third-party appraisers and our staff appraisers. Evaluations are prepared by independent qualified third-party providers. We use state certified and licensed appraisers with appropriate expertise as it relates to the subject property type and location. All appraisals contain “as is” values based upon the definition of market value as set forth in the FDIC appraisal regulations. For commercial properties we may also obtain “upon completion” and “upon stabilization” values as appropriate to the loan type and status. The appraisal standard for the non-tract development properties (four units or less) is retail value of individual units. For tract development properties with five or more units, the appraisal standard is the bulk value of the tract as a whole.

We review all appraisals and evaluations prior to approval of a loan transaction. Commercial real estate appraisals and evaluations are reviewed by our in-house appraisal staff. Non-complex single family appraisal reviews are conducted by our single family loan underwriters or appraisal department staff. Complex single family appraisals or appraisals with unusual characteristics are referred to our appraisal department for review.

For loan monitoring and problem loan management purposes our appraisal practices are as follows:
•
We generally do not perform valuation monitoring for pass-graded credits due to minimal credit risk.
•
For loans graded special mention, an appraisal is performed at the time of loan downgrade, and an appraisal or evaluation is performed at least every two years thereafter, depending upon property complexity, market area, market conditions, intended use and other considerations.
•
For loans graded substandard or doubtful and for all OREO properties, we require an independent third-party appraisal at the time of downgrade or transfer to OREO and at least every twelve months thereafter until disposition or loan upgrade. For loans where foreclosure is probable, an appraisal or evaluation is prepared at the intervening six-month period prior to foreclosure.
•
In addition, if we determine that market conditions, changes to the property, changes in the intended use of the property or other factors indicate an appraisal is no longer reliable, we will also obtain an updated appraisal or evaluation and assess whether a change in collateral value requires an additional adjustment to carrying value.

Other

Our appraisal requirements for loans not secured by real estate, such as business loans secured by equipment, include valuation methods ranging from evidence of sales price or verification with a recognized guide for new equipment to a valuation opinion by a professional appraiser for multiple pieces of used equipment.

81


Loan modifications

We have modified loans for various reasons for borrowers not experiencing financial difficulties. For example, we have extended maturities on certain loans to allow additional time for sales or leasing of residential and commercial real estate construction or rehabilitation projects. Other short-term extensions have been granted to allow time for receipt of appraisals and other financial reporting information to facilitate underwriting of loan extensions and renewals.
When there is a well-conceived and prudent workout plan that supports the ultimate collection of principal and interest, we may enter into a loan modification to help maximize the likelihood of success for a given workout strategy. In each case we also assess whether it is in the best interests of the Company to foreclose or modify the terms. We have made concessions such as interest-only payment terms, interest rate reductions, principal and interest forgiveness and payment restructures. Additionally, we have provided for concessions to construction and land development borrowers that focused primarily on forgiveness of principal in conjunction with settlement activities so as to allow us to acquire control of the real estate collateral. For single family mortgage borrowers, we have generally provided for granting interest rate reductions for periods of three years or less to reduce payments and provide the borrower time to resolve their financial difficulties. In each case, we carefully analyze the borrower’s current financial condition to assure that they can make the modified payment.

Asset Quality and Nonperforming Assets

The primary markets in which we do business were impacted by the deterioration in the U.S. housing market that began in 2007. Faced with unfavorable market conditions, more borrowers with residential and commercial loans defaulted on their loans, thereby contributing to an increase in delinquency rates, which peaked in our loan portfolio during 2009 and continued to be higher than historical averages through 2012. We generally stopped our origination of new loans held for investment in 2008 to enable us to focus on problem loan resolution and improve overall asset quality. Beginning in 2009, we tightened our lending practices and underwriting standards as we shifted to primarily originating single family loans that conform to GSE parameters and Fannie Mae DUS multifamily loans, substantially all of which were designated for sale. With the successful completion of our initial public offering and the termination of the Bank Order, we restarted all of our traditional lines of lending in 2012 and again began to grow our loans held for investment portfolio.

Nonperforming assets decreased to $38.6 million , or 1.26% of total assets at December 31, 2013 , compared to $53.8 million , or 2.05% of total assets at December 31, 2012 . Nonaccrual loans of $25.7 million , or 1.36% of total loans at December 31, 2013 , declined $4.2 million , or 14.0% , from $29.9 million , or 2.24% of total loans at December 31, 2012 . OREO balances of $12.9 million at December 31, 2013 declined $11.0 million , or 46.1% , from $23.9 million at December 31, 2012 . Net charge-offs in 2013 were $4.6 million compared to $26.5 million in 2012 and $25.1 million in 2011.

As problem loans are resolved and credit losses are realized, the credit risk inherent within the loans held for investment portfolio declines. Consequently, the level of our allowance for loan losses has also declined. At December 31, 2013 , our loans held for investment portfolio, excluding the allowance for loan losses, was $1.90 billion , an increase of $559.2 million from December 31, 2012 , while the allowance for loan losses decreased to $23.9 million , or 1.26% of loans held for investment, compared to $27.6 million , or 2.06% of loans held for investment at December 31, 2012 . The decrease in the allowance for loan losses as a percentage of loans held for investment primarily reflected improved credit quality of our loan portfolio.

Our provision for loan losses for 2013 was $900 thousand compared to $11.5 million for 2012 and $3.3 million for 2011 . 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.


82

The following table presents the activity in our allowance for credit losses and those amounts that were collectively and individually evaluated for impairment at December 31, 2013 , 2012 and 2011 .  
 
December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Allowance for credit losses:
 
 
 
 
 
Beginning balance
$
27,751

 
$
42,800

 
$
64,566

Charge-offs
(6,854
)
 
(29,875
)
 
(31,944
)
Recoveries
2,292

 
3,326

 
6,878

Provision
900

 
11,500

 
3,300

Ending balance
$
24,089

 
$
27,751

 
$
42,800

 
 
 
 
 
 
Collectively evaluated for impairment
$
21,518

 
$
21,383

 
$
24,083

Individually evaluated for impairment
2,571

 
6,368

 
18,717

Total
$
24,089

 
$
27,751

 
$
42,800

Loans held for investment:
 
 
 
 
 
Collectively evaluated for impairment
$
1,779,071

 
$
1,216,146

 
$
1,170,259

Individually evaluated for impairment
119,869

 
123,965

 
177,365

Total
$
1,898,940

 
$
1,340,111

 
$
1,347,624


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 Management's Discussion and Analysis of this Form 10-K.

The following table presents the recorded investment, unpaid principal balance and related allowance for impaired loans, broken down by those with and those without a specific reserve.
(in thousands)
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
December 31, 2013
 
 
 
 
 
Loans with no related allowance recorded
$
81,301

 
$
112,795

 
$
—

Loans with an allowance recorded
38,568

 
38,959

 
2,571

Total
$
119,869

 
$
151,754

 
$
2,571

December 31, 2012
 
 
 
 
 
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

December 31, 2011
 
 
 
 
 
Loans with no related allowance recorded
$
94,825

 
$
108,112

 
$
—

Loans with an allowance recorded
82,540

 
87,781

 
18,717

Total
$
177,365

 
$
195,893

 
$
18,717


The Company had 216 impaired relationships totaling $119.9 million at December 31, 2013 , and 167 impaired relationships totaling $124.0 million at December 31, 2012 . Included in the total impaired loan amounts were 169 single family troubled debt restructuring ("TDR") loan relationships totaling $74.3 million at December 31, 2013 and 126 single family TDR relationships totaling $67.5 million at December 31, 2012 . The increase in the number of impaired loan relationships at December 31, 2013 from 2012 was primarily due to an increase in the number of single family impaired loans. At December 31, 2013 , there were 153 single family impaired relationships totaling $68.6 million that were performing per their current contractual terms. Additionally, the impaired loan balance included $17.8 million of loans insured by the FHA or guaranteed by the VA. The average recorded investment in these loans for the year ended December 31, 2013 was $122.8

83

million compared to $148.6 million for the year ended December 31, 2012 . Impaired loans of $38.6 million and $70.4 million had a valuation allowance of $2.6 million and $6.4 million at December 31, 2013 and 2012 , respectively.


The following table presents the allowance for credit losses, including reserves for unfunded commitments, by loan class.
 
 
At December 31,
 
2013
 
2012
 
2011
(in thousands)
Amount
 
Percent of
allowance
to total
allowance
 
Loan
category
as a % of
total loans
 
Amount
 
Percent of
allowance
to total
allowance
 
Loan
category
as a % of
total loans
 
Amount
 
Percent of
allowance
to total
allowance
 
Loan
category
as a % of
total loans
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
11,990

 
49.8
%
 
47.7
%
 
$
13,388

 
48.2
%
 
50.3
%
 
$
10,671

 
24.9
%
 
36.9
%
Home equity
3,987

 
16.6

 
7.1

 
4,648

 
16.8

 
10.2

 
4,623

 
10.8

 
11.8

 
15,977

 
66.4

 
54.8

 
18,036

 
65.0

 
60.5

 
15,294

 
35.7

 
48.7

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
16.6

 
25.2

 
5,312

 
19.2

 
27.0

 
4,321

 
10.1

 
29.8

Multifamily
942

 
3.9

 
4.2

 
622

 
2.2

 
1.3

 
335

 
0.8

 
4.2

Construction/land development
1,414

 
5.9

 
6.9

 
1,580

 
5.7

 
5.3

 
21,237

 
49.6

 
12.9

Commercial business
1,744

 
7.2

 
8.9

 
2,201

 
7.9

 
5.9

 
1,613

 
3.8

 
4.4

 
8,112

 
33.6

 
45.2

 
9,715

 
35.0

 
39.5

 
27,506

 
64.3

 
51.3

Total allowance for credit losses
$
24,089

 
100.0
%
 
100.0
%
 
$
27,751

 
100.0
%
 
100.0
%
 
$
42,800

 
100.0
%
 
100.0
%
 


84

The following table presents activity in our allowance for credit losses, which includes reserves for unfunded commitments.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Allowance at the beginning of period
$
27,751

 
$
42,800

 
$
64,566

Provision for loan losses
900

 
11,500

 
3,300

Recoveries:
 
 
 
 
 
Consumer
 
 
 
 
 
Single family
536

 
657

 
208

Home equity
583

 
631

 
132

 
1,119

 
1,288

 
340

Commercial
 
 
 
 
 
Commercial real estate
134

 
259

 
—

Multifamily residential
—

 
10

 
—

Construction/land development
767

 
1,042

 
6,274

Commercial business
272

 
727

 
264

 
1,173

 
2,038

 
6,538

Total recoveries
2,292

 
3,326

 
6,878

Charge-offs:
 
 
 
 
 
Consumer
 
 
 
 
 
Single family
2,967

 
5,939

 
8,347

Home equity
1,960

 
4,264

 
5,062

 
4,927

 
10,203

 
13,409

Commercial
 
 
 
 
 
Commercial real estate
1,448

 
4,253

 
817

Construction/land development
458

 
14,861

 
16,890

Commercial business
21

 
558

 
828

 
1,927

 
19,672

 
18,535

Total charge-offs
6,854

 
29,875

 
31,944

(Charge-offs), net of recoveries
(4,562
)
 
(26,549
)
 
(25,066
)
Balance at end of period
$
24,089

 
$
27,751

 
$
42,800

Net charge-offs to average loans receivable, net
0.30
%
 
2.04
%
 
1.70
%

We manage asset quality and control credit risk by diversifying our loan portfolio and by applying policies designed to promote sound underwriting and loan monitoring practices. The Credit Administration department is charged with monitoring asset quality, establishing credit policies and procedures, and enforcing the consistent application of these policies and procedures across the organization. For further discussion related to credit quality, see Note 6, Loans and Credit Quality to the financial statements of this Form 10-K.




85

The following tables contain the amount of TDRs by loan type on accrual and nonaccrual status.

 
At December 31, 2013
 
 
(in thousands)
Accrual
 
Number of accrual relationships
 
Nonaccrual
 
Number of nonaccrual relationships
 
Total
 
Total number of relationships
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Single family (1)
$
70,304

 
160
 
$
4,017

 
9

 
$
74,321

 
169
Home equity
2,558

 
23
 
86

 
2

 
2,644

 
25
 
72,862

 
183
 
4,103

 
11

 
76,965

 
194
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
19,620

 
2
 
628

 
1

 
20,248

 
3
Multifamily residential
3,163

 
2
 
—

 
—

 
3,163

 
2
Construction/land development
6,148

 
4
 
—

 
—

 
6,148

 
4
Commercial business
112

 
1
 
—

 
—

 
112

 
1
 
29,043

 
9
 
628

 
1

 
29,671

 
10
 
$
101,905

 
192
 
$
4,731

 
12

 
$
106,636

 
204

(1)    Includes $17.8 million of loans insured by the FHA or guaranteed by the VA.
 
 
At December 31, 2012
 
 
(in thousands)
Accrual
 
Number of accrual relationships
 
Nonaccrual
 
Number of nonaccrual relationships
 
Total
 
Total number of relationships
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 
 
 
 
 
 
 
 
 
 
Single family
$
67,483

 
120
 
$
3,931

 
$
6

 
$
71,414

 
126
Home equity
2,288

 
21
 
465

 
3

 
2,753

 
24
 
69,771

 
141
 
4,396

 
9

 
74,167

 
150
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
21,071

 
2
 
770

 
1

 
21,841

 
3
Multifamily residential
3,221

 
2
 
—

 
—

 
3,221

 
2
Construction/land development
6,365

 
4
 
5,042

 
2

 
11,407

 
6
Commercial business
147

 
1
 
—

 
—

 
147

 
1
 
30,804

 
9
 
5,812

 
3

 
36,616

 
12
 
$
100,575

 
150
 
$
10,208

 
12

 
$
110,783

 
162

(1)    Includes $13.1 million of loans insured by the FHA or guaranteed by the VA.

The Company had 204 loan relationships classified as TDRs totaling $106.6 million at December 31, 2013 with related unfunded commitments of $47 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 December 31, 2013 from 2012 was primarily due to an increase in the number of single family loan TDRs. TDR loans within the loans held for investment portfolio and the related reserves are included in the impaired loan tables above. TDR loans held for sale totaled $1.9 million comprised of five relationships, and $1.4 million comprised of six relationships, as of December 31, 2013 and 2012 , respectively, and were predominantly comprised of loans repurchased from Ginnie Mae and cured by modifying interest rate terms.


86

The following table presents nonperforming assets, contractually past due assets, and accruing and nonaccrual restructured loans.
 
 
At December 31,
(in thousands)
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
Loans accounted for on a nonaccrual basis: (1)
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
Single family
$
8,861

 
$
13,304

 
$
12,104

 
$
13,938

 
$
48,400

Home equity
1,846

 
2,970

 
2,464

 
2,535

 
2,187

 
10,707

 
16,274

 
14,568

 
16,473

 
50,587

Commercial
 
 
 
 
 
 
 
 
 
Commercial real estate
12,257

 
6,403

 
10,184

 
20,259

 
15,981

Multifamily residential
—

 
—

 
2,394

 
8,167

 
8,489

Construction/land development
—

 
5,042

 
48,387

 
65,952

 
295,966

Commercial business
2,743

 
2,173

 
951

 
2,359

 
3,195

 
15,000

 
13,618

 
61,916

 
96,737

 
323,631

Total loans on nonaccrual
25,707

 
29,892

 
76,484

 
113,210

 
374,218

Other real estate owned
12,911

 
23,941

 
38,572

 
170,455

 
107,782

Total nonperforming assets
$
38,618

 
$
53,833

 
$
115,056

 
$
283,665

 
$
482,000

Loans 90 days or more past due and accruing (2)
$
46,811

 
$
40,658

 
$
35,757

 
$
43,503

 
$
11,439

Accruing TDR loans (3)
101,905

 
100,575

 
$
104,931

 
31,806

 
42,746

Nonaccrual TDR loans (3)
4,731

 
10,208

 
23,540

 
25,063

 
19,069

Total TDR loans
$
106,636

 
$
110,783

 
$
128,471

 
$
56,869

 
$
61,815

Allowance for loan losses as a percent of nonaccrual loans
93.00
%
 
92.20
%
 
55.81
%
 
56.69
%
 
29.25
%
Nonaccrual loans as a percentage of total loans
1.36
%
 
2.24
%
 
5.69
%
 
7.06
%
 
18.04
%
Nonperforming assets as a percentage of total assets
1.26
%
 
2.05
%
 
5.08
%
 
11.41
%
 
15.02
%
 
(1)
If interest on nonaccrual loans under the original terms had been recognized, such income is estimated to have been $686 thousand , $1.1 million and $4.9 million for the years ended December 31, 2013 , 2012 and 2011 .
(2)
FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on an accrual status if they have been determined to have little or no risk of loss.
(3)
At December 31, 2013 , TDRs (performing and nonperforming) were comprised of 204 loan relationships totaling $106.6 million .



87

The following tables present delinquent loans and OREO by loan type.

 
At December 31, 2013
(in thousands)
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Nonaccrual
 
90 Days or More
Past Due and Accruing  (1)
 
Total
Past Due
Loans
 
Other
Real Estate
Owned
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family
$
6,466

 
$
4,901

 
$
8,861

 
$
46,811

 
$
67,039

 
$
5,246

Home equity
375

 
75

 
1,846

 
—

 
2,296

 
—

 
6,841

 
4,976

 
10,707

 
46,811

 
69,335

 
5,246

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
12,257

 
—

 
12,257

 
1,688

Construction/land development
—

 
—

 
—

 
—

 
—

 
5,977

Commercial business
—

 
—

 
2,743

 
—

 
2,743

 
—

 
—

 
—

 
15,000

 
—

 
15,000

 
7,665

Total
$
6,841

 
$
4,976

 
$
25,707

 
$
46,811

 
$
84,335

 
$
12,911


 
 
At December 31, 2012
(in thousands)
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Nonaccrual
 
90 Days or More
Past Due and 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

 

88

 
At December 31, 2011
(in thousands)
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Nonaccrual
 
90 Days or More
Past Due and Accruing (1)
 
Total
Past Due
Loans
 
Other
Real Estate
Owned
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family
$
7,694

 
$
8,552

 
$
12,104

 
$
35,757

 
$
64,107

 
$
6,600

Home equity
957

 
500

 
2,464

 
—

 
3,921

 
—

 
8,651

 
9,052

 
14,568

 
35,757

 
68,028

 
6,600

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
10,184

 
—

 
10,184

 
2,055

Multifamily
—

 
—

 
2,394

 
—

 
2,394

 
—

Construction/land development
9,916

 
—

 
48,387

 
—

 
58,303

 
29,917

Commercial business
—

 
—

 
951

 
—

 
951

 
—

 
9,916

 
—

 
61,916

 
—

 
71,832

 
31,972

Total
$
18,567

 
$
9,052

 
$
76,484

 
$
35,757

 
$
139,860

 
$
38,572

 
(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. All single family loans in this category are Ginnie Mae loans.




89

The following table presents nonperforming assets by loan type by region at December 31, 2013 .
 
 
Washington
 
Puget Sound
 
Vancouver &
Other  (2)(3)
 
 
 
Kitsap/Jefferson/Clallam (1)
(in thousands)
King  (1)
 
Snohomish (3)
 
Pierce  (1)
 
Thurston (3)
 
 
Spokane  (2)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans on nonaccrual status:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
3,032

 
$
1,469

 
$
1,821

 
$
213

 
$
292

 
$
802

 
$
—

Home equity
596

 
117

 
386

 
22

 
49

 
77

 
—

 
3,628

 
1,586

 
2,207

 
235

 
341

 
879

 
—

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
7,076

 
2,274

 
—

 
—

 
—

 
208

 
—

Commercial business
2,520

 
—

 
—

 
—

 
—

 
223

 
—

 
9,596

 
2,274

 
—

 
—

 
—

 
431

 
—

Total loans on nonaccrual status
$
13,224

 
$
3,860

 
$
2,207

 
$
235

 
$
341

 
$
1,310

 
$
—

Other real estate owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
923

 
$
105

 
$
577

 
$
—

 
$
—

 
$
—

 
$
—

 
923

 
105

 
577

 
—

 
—

 
—

 
—

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
—

 
958

Construction/land development
—

 
—

 
325

 
6,219

 
—

 
—

 
—

 
—

 
—

 
325

 
6,219

 
—

 
—

 
958

Total other real estate owned
$
923

 
$
105

 
$
902

 
$
6,219

 
$
—

 
$
—

 
$
958

Total nonperforming assets
$
14,147

 
$
3,965

 
$
3,109

 
$
6,454

 
$
341

 
$
1,310

 
$
958




90

 
Idaho
 
Oregon
 
 
 
 
(in thousands)
Boise  (2)
 
Portland  (2)(3)
 
Bend  (2)(3)
 
Salem  (2)
 
Hawaii
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Loans on nonaccrual status:
 
 
 
 
 
 
 
 
 
 
 
Single family
$
—

 
$
271

 
$
301

 


 
$
660

 
$
8,861

Home equity
—

 
251

 
—

 
85

 
263

 
1,846

 
—

 
522

 
301

 
85

 
923

 
10,707

Commercial real estate
—

 
2,699

 


 
—

 
—

 
12,257

Commercial business
—

 
—

 
—

 
—

 
—

 
2,743

 
—

 
2,699

 
—

 
—

 
—

 
15,000

Total loans on nonaccrual status
$
—

 
$
3,221

 
$
301

 
$
85

 
$
923

 
$
25,707

Other real estate owned:
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
Single family
$
—

 
$
1,334

 


 
$
1,410

 
$
897

 
$
5,246

 
—

 
1,334

 
—

 
1,410

 
897

 
5,246

Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
—

 
—

 
—

 
958

Construction/land development
—

 
163

 
—

 
—

 
—

 
6,707

 
—

 
163

 
—

 
—

 
—

 
7,665

Total other real estate owned
$
—

 
$
1,497

 
$
—

 
$
1,410

 
$
897

 
$
12,911

Total nonperforming assets
$
—

 
$
4,718

 
$
301

 
$
1,495

 
$
1,820

 
$
38,618


(1)
Refers to a specific county.
(2)
Refers to a specific city.
(3)
Also includes surrounding counties.





91

The following table presents nonperforming assets by loan type by region at December 31, 2012 .

 
Washington
 
Puget Sound
 
Vancouver &
Other  (2)(3)
 
 
 
Kitsap/Jefferson/Clallam (1)
(in thousands)
King  (1)
 
Snohomish (3)
 
Pierce  (1)
 
Thurston (3)
 
 
Spokane  (2)(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans on nonaccrual status:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
4,344

 
$
2,699

 
$
1,361

 
$
187

 
$
—

 
$
715

 
$
—

Home equity
1,659

 
97

 
401

 
14

 
124

 
81

 
28

 
6,003

 
2,796

 
1,762

 
201

 
124

 
796

 
28

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,131

 
4,502

 
—

 
—

 
—

 
—

 
—

Construction/land development
—

 
—

 
311

 
—

 
1,112

 
3,619

 
—

Commercial business
2,173

 
—

 
—

 
—

 
—

 
—

 
—

 
3,304

 
4,502

 
311

 
—

 
1,112

 
3,619

 
—

Total loans on nonaccrual status
$
9,307

 
$
7,298

 
$
2,073

 
$
201

 
$
1,236

 
$
4,415

 
$
28

Other real estate owned:
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
1,179

 
$
920

 
$
246

 
$
—

 
$
—

 
$
425

 
$
—

 
1,179

 
920

 
246

 
—

 
—

 
425

 
—

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
1,207

 
1,636

 
6,957

 
—

 
—

 
—

 
—

Construction/land development
—

 
—

 
7,172

 
2,415

 
—

 
—

 
—

 
1,207

 
1,636

 
14,129

 
2,415

 
—

 
—

 
—

Total other real estate owned
$
2,386

 
$
2,556

 
$
14,375

 
$
2,415

 
$
—

 
$
425

 
$
—

Total nonperforming assets
$
11,693

 
$
9,854

 
$
16,448

 
$
2,616

 
$
1,236

 
$
4,840

 
$
28



92

 
Idaho
 
Oregon
 
 
 
 
(in thousands)
Boise  (2)
 
Portland  (2)(3)
 
Bend  (2)(3)
 
Salem  (2)
 
Hawaii
 
Total
Loans on nonaccrual status:
 
 
 
 
 
 
 
 
 
 
 
Single family
$
205

 
$
2,458

 
$
—

 
$
—

 
$
1,335

 
$
13,304

Home equity
—

 
221

 
5

 
94

 
246

 
2,970

 
205

 
2,679

 
5

 
94

 
1,581

 
16,274

Commercial real estate
—

 
—

 
770

 
—

 
—

 
6,403

Construction/land development
—

 
—

 
—

 
—

 
—

 
5,042

Commercial business
—

 
 
 
—

 
—

 
—

 
2,173

 
—

 
—

 
770

 
—

 
—

 
13,618

Total loans on nonaccrual status
$
205

 
$
2,679

 
$
775

 
$
94

 
$
1,581

 
$
29,892

Other real estate owned:
 
 
 
 
 
 
 
 
 
 
 
Consumer
 
 
 
 
 
 
 
 
 
 
 
Single family
$
—

 
$
148

 
$
—

 
$
1,153

 
$
—

 
$
4,071

 
—

 
148

 
—

 
1,153

 
—

 
4,071

Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
483

 
—

 
—

 
10,283

Construction/land development
—

 
—

 
—

 
—

 
—

 
9,587

 
—

 
—

 
483

 
—

 
—

 
19,870

Total other real estate owned
$
—

 
$
148

 
$
483

 
$
1,153

 
$
—

 
$
23,941

Total nonperforming assets
$
205

 
$
2,827

 
$
1,258

 
$
1,247

 
$
1,581

 
$
53,833


(1)
Refers to a specific county.
(2)
Refers to a specific city.
(3)
Also includes surrounding counties.



The following tables present the single family loan held for investment portfolio by original FICO score.
At December 31, 2013
 
Greater Than
 
Less Than or Equal To
 
Percentage
(1)
N/A
(2)
N/A
(2)
3.9%
 
<
 
500
 
0.1%
 
500
 
549
 
0.1%
 
550
 
599
 
0.9%
 
600
 
649
 
3.3%
 
650
 
699
 
13.8%
 
700
 
749
 
25.2%
 
750
 
>
 
52.7%
 
 
 
TOTAL
 
100.0%
 

(1)
Percentages based on aggregate loan amounts.
(2)
Information is not available.



93

At December 31, 2012
 
Greater Than
 
Less Than or Equal To
 
Percentage
(1)
N/A
(2)
N/A
(2)
5.2%
 
<
 
500
 
0.1%
 
500
 
549
 
0.1%
 
550
 
599
 
1.2%
 
600
 
649
 
4.6%
 
650
 
699
 
16.2%
 
700
 
749
 
26.9%
 
750
 
>
 
45.7%
 
 
 
TOTAL
 
100.0%
 
 
(1)
Percentages based on aggregate loan amounts.
(2)
Information is not available.

Our underwriting standards for single family and home equity loans require evaluating and understanding a borrower’s credit, collateral and ability to repay the loan. Credit is determined based on how well a borrower manages their current and prior debts, documented by a credit report that provides credit scores and the borrower’s current and past information about their credit history. Collateral is based on the type and use of property, occupancy and market value, largely determined by property appraisals. A borrower's ability to repay the loan is based on several factors, including employment, income, current debt, assets and level of equity in the property. We also consider loan-to-property value and debt-to-income ratios, loan amount and lien position in assessing whether to originate a loan. Single family and home equity borrowers are particularly susceptible to downturns in economic trends that negatively affect housing prices and demand and levels of unemployment.

For commercial, multifamily and construction lending, we consider the same factors with regard to the borrower and the guarantors. In addition, we evaluate liquidity, net worth, leverage, other outstanding indebtedness of the borrower, an analysis of cash expected to flow through the borrower (including the outflow to other lenders) and prior experience with the borrower. We use this information to assess financial capacity, profitability and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.

Liquidity Risk and Capital Resources

Liquidity risk management is primarily intended to ensure we are able to maintain cash flows adequate to fund operations and meet our obligations, including demands from depositors, draws on lines of credit and paying any creditors, on a timely and cost-effective basis in various market conditions. Our liquidity profile is influenced by changes in market conditions, the composition of the balance sheet and risk tolerance levels. HomeStreet, Inc., HomeStreet Capital ("HSC") and the Bank
have established liquidity guidelines and operating plans that detail the sources and uses of cash and liquidity.

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

HomeStreet, Inc.

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

On February 15, 2012, we completed our initial public offering of 8,723,632 shares of common stock for an initial offering price of $11.00 per share ( after giving effect to the 2-for-1 forward stock split effective March 6, 2012 and the 2-for-1 forward stock split effective November 5, 2012 ). The net increase in HomeStreet's capital was $86.4 million, which included net cash proceeds of $87.7 million received in 2012, less $1.4 million of issuance costs paid in 2011. The Company contributed $55.0 million to the Bank on February 24, 2012 and an additional $10.0 million on April 26, 2012, leaving approximately $22.7 million of net proceeds at the Company to be used for general corporate purposes.


94

HomeStreet Capital

HomeStreet Capital generates positive cash flow from its servicing fee income on the DUS portfolio, net of its costs to service the portfolio. Partially offsetting this are HomeStreet Capital's costs to purchase the servicing rights on new production from the Bank. Liquidity management and reporting requirements for DUS lenders such as HomeStreet Capital are set by Fannie Mae. HomeStreet Capital's liquidity management therefore consists of meeting Fannie Mae requirements and its own operational needs.

HomeStreet Bank

The Bank’s primary short-term sources of funds include deposits, advances from the FHLB, repayments and prepayments of loans, proceeds from the sale of loans and investment securities and interest from our loans and investment securities. We have also raised short-term funds through the sale of securities under agreements to repurchase. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit inflows and outflows and loan prepayments are greatly influenced by interest rates, economic conditions and competition. The primary liquidity ratio is defined as net cash, short-term investments and other marketable assets as a percent of net deposits and short-term borrowings. At December 31, 2013 our primary liquidity ratio was 26.9% , compared with 43.9% at December 31, 2012 .

At December 31, 2013 and 2012 , the Bank had borrowing capacity of $228.5 million and $55.7 million from the FHLB, and $332.7 million and $124.3 million from the FRBSF, 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 FHLB has not declared a default under this agreement, and has not notified the Bank that future advances would not be made available, although it has required the Bank to deliver physical possession of certain negotiable instruments and related documentation as collateral for borrowings under that agreement.

In recognition of the significant improvement in the Bank's financial condition, results of operations and risk profile, the Federal Reserve Bank on July 10, 2012 granted full access to all Federal Reserve Bank lending and depository services.

Cash Flows

For the years ended December 31, 2013 , 2012 and 2011 cash and cash equivalents increased $8.6 million , decreased $238.0 million , and increased $190.7 million , respectively. The following discussion highlights the major activities and transactions that affected HomeStreet's cash flows during 2013, 2012 and 2011.

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 year ended December 31, 2013 , net cash of $304.0 million was provided by operating activities, as proceeds from the sale of loans held for sale exceeded cash used to fund loans held for sale production. During 2013 , the Company transferred $93.6 million of loans from loans held for investment to 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 year ended December 31, 2012 , net cash of $391.9 million was used by operating activities, as higher mortgage production volumes during 2012 resulted in higher average balances of loans held for sale. Cash used to fund loans held for sale production was largely offset by proceeds from the sale of such loans. For the year ended December 31, 2011 , net cash of $89.7 million was provided by operating activities, resulting from the decision to accelerate the settlement of single family 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 year ended December 31, 2013 , net cash of $459.9 million was used in investing activities. We used cash of $447.9 million in net originations and principal repayments of loans held for investment during 2013 , as a result of increased originations of mortgages that exceed conventional conforming loan limits. Net purchases in our investment securities portfolio were $190.0 million during 2013. Additionally, cash of $24.0 million was provided in connection with the purchases of YNB, Fortune Bank and two AmericanWest Bank branches. For the year ended December 31, 2012 , net cash of $102.9 million was used by investing activities, as we used the proceeds from our stock issuance to purchase available-for-sale securities. Net

95

purchases in our investment securities portfolio were $119.0 million during 2012. Additionally, we realized net proceeds of $49.6 million from the sale of OREO properties during 2012. For the year ended December 31, 2011 , net cash of $331.9 million was provided by investing activities mainly in connection with net proceeds from our investment loan portfolio and the sale of OREO properties in 2011 . Net proceeds from our investment loan portfolio were $196.1 million during 2011. Additionally, we realized net proceeds of $144.6 million from the sale of OREO properties during 2011.

Cash flows from financing activities

The Company's financing activities are primarily related to customer deposits and net proceeds from the FHLB. For the year ended December 31, 2013 , net cash of $164.5 million was provided by financing activities, as we increased our lower cost short-term advances from the FHLB. For the year ended December 31, 2012 , net cash of $256.7 million was provided by financing activities. We had net proceeds of $200.2 million from FHLB advances as the Company prepaid higher cost long-term FHLB advances, replacing these borrowings with lower cost short-term advances from the FHLB. Additionally, the Company had net proceeds of $88.2 million from the issuance of common stock through our initial public offering and option exercises, which we used to invest in investment securities. For the year ended December 31, 2011 , net cash of $230.9 million was used in financing activities, as we reduced our FHLB advances as part of our balance sheet restructuring activities .

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) total risk-based capital ratio, (2) Tier 1 risk-based capital ratio and (3) Tier 1 leverage ratio. In order to qualify as “well capitalized,” a bank must have a total risk-based capital ratio of at least 10.0% , a Tier 1 risk-based capital ratio of at least 6.0% and a Tier 1 leverage ratio of at least 5.0% . In order to be deemed “adequately capitalized,” a bank generally must have a total risk-based capital ratio of at least 8.0% , a Tier 1 risk-based capital ratio of at least 4.0% and a Tier 1 leverage ratio of at least 4.0% . The FDIC retains the right to require a depository institution to maintain a higher capital level based on its particular risk profile.

As of December 31, 2013 , the Bank had a total risk-based capital ratio, Tier 1 risk-based capital ratio and Tier 1 leverage capital ratio of 15.46% , 14.28% and 9.96% , respectively, compared with 19.31% , 18.05% and 11.78% , as of December 31, 2012 . At December 31, 2013 the Bank's capital ratios continued to meet the regulatory capital category of “well capitalized” as defined by the FDIC’s prompt corrective action rules. The decline in the Bank's capital ratios from December 31, 2012 was primarily attributable to the fourth quarter acquisitions of Fortune Bank, Yakima National Bank and two branches from AmericanWest Bank, which created $13.6 million of intangible assets which are not included in the calculation of our capital for regulatory purposes and which resulted in an increase in average and risk-weighted assets, as well as the equity impact of lower net income in 2013 .

The following table presents the Bank’s capital amounts and ratios.
 
 
At December 31, 2013
 
Actual
 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
(in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital
(to average assets)
$
291,673

 
9.96
%
 
$
117,182

 
4.0
%
 
$
146,478

 
5.0
%
Tier 1 risk-based capital
(to risk-weighted assets)
291,673

 
14.28
%
 
81,708

 
4.0
%
 
122,562

 
6.0
%
Total risk-based capital
(to risk-weighted assets)
315,762

 
15.46
%
 
163,415

 
8.0
%
 
204,269

 
10.0
%



96

 
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
%


 
At December 31, 2011
 
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)
$
135,383

 
6.04
%
 
$
89,705

 
4.0
%
 
$
112,132

 
5.0
%
Tier 1 risk-based capital
(to risk-weighted assets)
135,383

 
9.88
%
 
54,814

 
4.0
%
 
82,220

 
6.0
%
Total risk-based capital
(to risk-weighted assets)
152,829

 
11.15
%
 
109,627

 
8.0
%
 
137,034

 
10.0
%


New Capital Regulations

In July 2013, federal banking regulators (including the FDIC and the FRB) adopted new capital rules (the “Rules”). The Rules apply to both depository institutions (such as the Bank) and their holding companies (such as the Company). The Rules reflect, in part, certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010 (which standards are commonly referred to as “Basel III”) as well as requirements contemplated by the Dodd-Frank Act.
Under the Rules, both the Company and the Bank will be required to meet certain minimum capital requirements. The Rules implement a new capital ratio of common equity Tier 1 capital to risk-based assets. Common equity Tier 1 capital generally consists of retained earnings and common stock instruments (subject to certain adjustments), as well as accumulated other comprehensive income (“AOCI”) except to the extent that the Company and the Bank exercise a one-time irrevocable option to exclude certain components of AOCI. Both the Company and the Bank expect to elect this one-time option to exclude certain components of AOCI. Both the Company and the Bank are required to have a common equity Tier 1 capital ratio of 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%. In addition to the preceding requirements, both the Company and the Bank are required to establish a “conservation buffer”, consisting of common equity Tier 1 capital,which is at least 2.5% above each of the preceding common equity Tier 1 capital ratios, the Tier 1 risk-based ratio and the total risk based ratio. An institution that does not meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The prompt corrective action rules, which apply to the Bank but not the Company, are modified to include a common equity Tier 1 risk-based ratio and to increase certain other capital requirements for the various thresholds. For example, the requirements for the Bank to be considered well-capitalized under the Rules are a 5.0% Tier 1 leverage ratio, a 6.5% common equity Tier 1 risk-based ratio, an 8.0% Tier 1 risk-based capital ratio and a 10.0% total risk-based capital ratio. To be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively.
The Rules modify the manner in which certain capital elements are determined, including but not limited to, requiring certain deductions related to mortgage servicing rights and deferred tax assets. When the federal banking regulators initially proposed new capital rules in 2012, the rules would have phased out trust preferred securities as a component of Tier 1 capital. As finally adopted, however, the Rules permit holding companies with less than 815 billion in total assets as of December 31, 2009

97

(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.
Impact of Inflation

The consolidated financial statements presented in this Form 10-K have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollar amounts or market value without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the cost of our operations as incurred. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.

Operational Risk Management

Operational risk is defined as the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, misconduct or errors, and adverse external events.

Each line of business has primary responsibility for identifying, monitoring and controlling its operational risks. In addition, centralized departments such as our credit administration, enterprise risk management, compliance and regulatory affairs, legal, security, information security, finance and human resources provide support to the business lines as they develop and implement risk management practices specific to their needs. Our internal audit department provides independent feedback on the strength of operational risk controls and compliance with Company policies and procedures. Additionally, we maintain mature change management, business resumption and data and customer information security processes. We also maintain a code of conduct with periodic training, setting a “tone from the top” that articulates a strong focus on compliance and ethical standards and a zero tolerance approach to unethical or fraudulent behavior.


98

Compliance/Regulatory Risk Management

Compliance risk is the risk to current or anticipated earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policy and procedures or ethical standards.

As a regulated financial institution with a significant mortgage banking operation, we have significant compliance and regulatory risk. Historically, we have maintained a strong compliance culture and compliance management processes as evidenced by minimal compliance issues. Each business unit is responsible for compliance with laws and regulations and has identified an individual to participate on our compliance committee, which is chaired by the Compliance Officer. The Compliance Officer monitors all new regulations and changes to existing regulations and the new requirements are discussed at the management compliance committee to determine impact to the business units and to assign responsibilities and timelines for implementation.

Management has established a tracking process for monitoring the status of pending regulations and for implementing the regulatory requirements as they are published and become effective.

Strategic Risk Management

Strategic risk is the risk to current or anticipated earnings, capital or enterprise value arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes.

Strategic risk is managed by the Board and senior management through development of strategic plans, successful implementation of business initiatives and reporting to the Board and its committees.

Reputation Risk Management

Reputation risk is defined as the risk to current or anticipated earnings, capital or enterprise value arising from negative public opinion.

We believe that we have an excellent reputation in the community primarily due to our longevity and significant outreach to the communities we serve. The Bank has earned “Outstanding” ratings on every one of its Bank Community Reinvestment Act (CRA) examinations since 1986.

Accounting Developments

See Financial Statements and Supplementary Data— Note 1, Summary of Significant Accounting Policies , for a discussion of accounting developments.


ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

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

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


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Table of Contents

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

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

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

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


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The following table presents sensitivity gaps for these different intervals.
 
 
December 31, 2013
(dollars in thousands)
3 Mos.
or Less
 
More Than
3 Mos.
to 6 Mos.
 
More Than
6 Mos.
to 12 Mos.
 
More Than
12 Mos.
to 3 Yrs.
 
More Than
3 Yrs.
to 5 Yrs.
 
More Than
5 Yrs.
 
Non-Rate-
Sensitive
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash & cash equivalents
$
33,908

 
$
—

 
$
—

 
$
—


$
—

 
$
—

 
$
—

 
$
33,908

FHLB Stock
—

 
—

 
—

 
—

 
—

 
35,288

 
—

 
35,288

Investment securities (1)
14,112

 
15,472

 
31,307

 
114,058

 
62,472

 
261,395

 
—

 
498,816

Mortgage loans held for sale
279,941

 
—

 
—

 
—

 
—

 
—

 
—

 
279,941

Loans held for investment (1)
473,350

 
160,518

 
270,969

 
494,503

 
243,174

 
253,207

 
—

 
1,895,721

Total interest-earning assets
801,311

 
175,990

 
302,276

 
608,561

 
305,646

 
549,890

 
—

 
2,743,674

Non-interest-earning assets
—

 
—

 
—

 
—

 
—

 
—

 
322,380

 
322,380

Total assets
$
801,311

 
$
175,990

 
$
302,276

 
$
608,561

 
$
305,646

 
$
549,890

 
$
322,380

 
$
3,066,054

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW accounts (2)
$
297,965

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
297,965

Statement savings accounts (2)
156,181

 
—

 
—

 
—

 
—

 
—

 
—

 
156,181

Money market accounts (2)
919,322

 
—

 
—

 
—

 
—

 
—

 
—

 
919,322

Certificates of deposit
174,399

 
102,600

 
124,093

 
94,375

 
18,788

 
146

 
—

 
514,401

FHLB advances
431,000

 
—

 
—

 
—

 
—

 
15,590

 
—

 
446,590

Long-term debt (3)
61,857

 
—

 
—

 
—

 
2,954

 
—

 
—

 
64,811

Total interest-bearing liabilities
2,040,724

 
102,600

 
124,093

 
94,375

 
21,742

 
15,736

 
—

 
2,399,270

Non-interest bearing liabilities
—

 
—

 
—

 
—

 
—

 
—

 
400,858

 
400,858

Equity
—

 
—

 
—

 
—

 
—

 
—

 
265,926

 
265,926

Total liabilities and shareholders’ equity
$
2,040,724

 
$
102,600

 
$
124,093

 
$
94,375

 
$
21,742

 
$
15,736

 
$
666,784

 
$
3,066,054

Interest sensitivity gap
$
(1,239,413
)
 
$
73,390

 
$
178,183

 
$
514,186

 
$
283,904

 
$
534,154

 
 
 
 
Cumulative interest sensitivity gap
$
(1,239,413
)
 
$
(1,166,023
)
 
$
(987,840
)
 
$
(473,654
)
 
$
(189,750
)
 
$
344,404

 
 
 
 
Cumulative interest sensitivity gap as a percentage of total assets
(40.4
)%
 
(38.0
)%
 
(32.2
)%
 
(15.4
)%
 
(6.2
)%
 
11.2
%
 
 
 
 
Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities
39
 %
 
46
 %
 
56
 %
 
80
 %
 
92
 %
 
114
%
 
 
 
 
 
(1)
Based on contractual maturities, repricing dates and forecasted principal payments assuming normal amortization and, where applicable, prepayments.
(2)
Assumes 100% of interest-bearing non-maturity deposits are subject to repricing in three months or less.
(3)
Based on contractual maturity .

As of December 31, 2013, the Bank was asset sensitive overall, but liability sensitive in the "three months or less," the “more than three months to six months” and the "more than six months to twelve months" periods. The positive gap in the interest rate sensitivity analysis indicates that our net interest income would rise in the long term if market interest rates increase and generally fall in the long term if market interest rates decline.

Changes in the mix of interest-earning assets or interest-bearing liabilities can either increase or decrease the net interest margin, without affecting interest rate sensitivity. In addition, the interest rate spread between an earning asset and its funding liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thereby impacting net interest income. This characteristic is referred to as basis risk. Varying interest rate environments can create

101
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unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin. Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of our actual exposure to changes in interest rates.

The estimated impact on our net interest income over a time horizon of one year and the change in net portfolio value as of December 31, 2013 and December 31, 2012 are provided in the table below. For the scenarios shown, the interest rate simulation assumes an instantaneous and sustained shift in market interest rates over a twelve-month period and no change in the composition or size of the balance sheet.
 
 
 
December 31, 2013
 
December 31, 2012
Change in Interest Rates
(basis points)
 
Percentage Change
 
Net Interest Income  (1)
 
Net Portfolio Value  (2)
 
Net Interest Income  (1)
 
Net Portfolio Value  (2)
+200
 
(4.4
)%
 
(21.2
)%
 
(0.9
)%
 
(24.7
)%
+100
 
(1.6
)
 
(10.9
)
 
(0.3
)
 
(10.8
)
-100
 
(1.9
)
 
7.8

 
(2.4
)
 
3.2

-200
 
(3.0
)%
 
6.7
 %
 
(2.0
)%
 
6.7
 %
 
(1)
This percentage change represents the impact to net interest income and servicing income for a one-year period, assuming there is no change in the structure of the balance sheet.
(2)
This percentage change represents the impact to the net present value of equity, assuming there is no change in the structure of the balance sheet.

At December 31, 2013, we believe our net interest income did not exhibit a strong bias to either an increase in interest rates or a decline in interest rates. It is expected that, as interest rates change, net interest income will be positively correlated, +/- 100 (asset sensitive), however, if they continue to shift, net interest income becomes negatively correlated, +/- 200 (liability sensitive).  This is typically caused by the repricing characteristics whereby an increase in market interest rates would have a slightly positive effect on net interest income. A large decrease in market interest rates would have a greater negative effect on net interest income because assets would reprice more quickly than liabilities, decreasing revenue. Some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. In addition, the simulation model does not take into account any future actions that we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposit base.

Risk Management Instruments

We originate fixed-rate residential home mortgages primarily for sale into the secondary market. These loans are hedged against interest rate fluctuations from the time of the loan commitment until the loans are sold.

We have been able to manage interest rate risk by matching both on- and off-balance sheet assets and liabilities, within reasonable limits, through a range of potential rate and repricing characteristics. Where appropriate, we also use hedging techniques including the use of forward sale commitments, option contracts and interest rate swaps.

In order to protect the economic value of our mortgage servicing rights, we employ hedging strategies utilizing derivative financial instruments including forward interest rate swaps, options on interest rate swap contracts and commitments to purchase mortgage backed securities. We utilize these instruments as economic hedges and changes in the fair value of these instruments are recognized in current income as a component of mortgage servicing income. Our mortgage servicing rights hedging policy requires management to hedge the impact on the value of our mortgage servicing rights for a low-probability, extreme and sudden increase in interest rates. This policy requires that we hedge estimated losses to a maximum of a $2.0 million loss, subject to the limitations of hedging effectiveness including market risk, basis risk, counterparty credit risk and others.


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The following table presents the financial instruments we used for hedging purposes.
 
 
At December 31, 2013
 
Notional amount
 
Fair value
 
Hedged risk
(in thousands)
Asset
derivatives
 
Liability
derivatives
 
Asset  (1)  interest rate locks
 
Asset (1)  loans held for sale
 
Asset  (1)
MSR
 
Asset (2)
loans held for
investment
Forward sale commitments
$
526,382

 
$
3,630

 
$
(578
)
 
$
—

 
$
3,578

 
$
(526
)
 
$
—

Interest rate swaptions
110,000

 
858

 
(199
)
 
—

 
—

 
658

 
—

Interest rate lock commitments
261,070

 
6,012

 
(40
)
 
5,972

 
—

 
—

 
—

Interest rate swaps
508,004

 
1,088

 
(9,548
)
 
—

 
—

 
(3,832
)
 
(4,628
)
 
$
1,405,456

 
$
11,588

 
$
(10,365
)
 
$
5,972

 
$
3,578

 
$
(3,700
)
 
$
(4,628
)

(1)
Economic fair value hedge.
(2)
Fair value hedge in accordance with hedge accounting standards.

We may implement other hedge transactions using forward loan sales, futures, option contracts and interest rate swaps, interest rate floors, financial futures, forward rate agreements and U.S. Treasury options on futures or bonds. Prior to considering any hedging activities, we analyze the costs and benefits of the hedge in comparison to other viable alternative strategies.


103
Table of Contents

ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
HomeStreet, Inc.
Seattle, Washington

We have audited the accompanying statement of financial condition of HomeStreet, Inc. and subsidiaries (the "Company") as of December 31, 2013, and the related statements of operations, comprehensive income, shareholders' equity, and cash flows for the year ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 31, 2012, and 2011, before the effects of the retrospective adjustments to the disclosures for a change in the composition of reportable segments discussed in Note 20 to the consolidated financial statements, were audited by other auditors whose report, dated March 15, 2013, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of HomeStreet, Inc. and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited the adjustments to the 2012 and 2011 consolidated financial statements to retrospectively adjust the disclosures for a change in the composition of reportable segments in 2013, as discussed in Note 20 to the consolidated financial statements. Our procedures included (1) comparing the adjustment amounts of segment net income and average assets to the Company's underlying analysis and (2) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our opinion, such retrospective adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2012 and 2011 consolidated financial statements of the Company other than with respect to the retrospective adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2012 and 2011 consolidated financial statements taken as a whole.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.


/s/ Deloitte & Touche LLP

Seattle, Washington
March 17, 2014


104



Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
HomeStreet, Inc.:
We have audited, before the effects of changes to reportable segments that resulted in retrospective restatement of the segment disclosures as described in Note 20, the accompanying consolidated statement of financial condition of HomeStreet, Inc. and subsidiaries (the Company) as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. The 2012 and 2011 consolidated financial statements before the effects of the adjustments discussed in Note 20 are not presented herein. The 2012 and 2011 consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2012 and 2011 consolidated financial statements, before the effects of changes to reportable segments that resulted in retrospective restatement of the segment disclosures as described in Note 20, referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.
We were not engaged to audit, review, or apply any procedures to the adjustments to segment disclosures described in Note 20, and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by a successor auditor.
(signed) KPMG LLP
Seattle, Washington
March 15, 2013


105

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 
At December 31,
(in thousands, except share data)
2013
 
2012
 
 
 
 
ASSETS
 
 
 
Cash and cash equivalents (including interest-bearing instruments of $9,436 and $12,414)
$
33,908

 
$
25,285

Investment securities (includes $481,683 and $416,329 carried at fair value)
498,816

 
416,517

Loans held for sale (includes $279,385 and $607,578 carried at fair value)
279,941

 
620,799

Loans held for investment (net of allowance for loan losses of $23,908 and $27,561)
1,871,813

 
1,308,974

Mortgage servicing rights (includes $153,128 and $87,396 carried at fair value)
162,463

 
95,493

Other real estate owned
12,911

 
23,941

Federal Home Loan Bank stock, at cost
35,288

 
36,367

Premises and equipment, net
36,612

 
15,232

Goodwill
12,063

 
424

Accounts receivable and other assets
122,239

 
88,198

Total assets
$
3,066,054

 
$
2,631,230

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits
$
2,210,821

 
$
1,976,835

Federal Home Loan Bank advances
446,590

 
259,090

Accounts payable and other liabilities
77,906

 
69,686

Long-term debt
64,811

 
61,857

Total liabilities
2,800,128

 
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, 14,799,991 shares and 14,382,638 shares
511

 
511

Additional paid-in capital
94,474

 
90,189

Retained earnings
182,935

 
163,872

Accumulated other comprehensive income
(11,994
)
 
9,190

Total shareholders' equity
265,926

 
263,762

Total liabilities and shareholders' equity
$
3,066,054

 
$
2,631,230

 
See accompanying notes to consolidated financial statements.


106
Table of Contents

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

 
Year Ended December 31,
(in thousands, except share data)
2013
 
2012
 
2011
 
 
 
 
 
 
Interest income:
 
 
 
 
 
Loans
$
76,442

 
$
71,057

 
$
71,794

Investment securities available for sale
12,391

 
9,391

 
6,921

Other
143

 
243

 
477

 
88,976

 
80,691

 
79,192

Interest expense:
 
 
 
 
 
Deposits
10,416

 
16,741

 
24,815

Federal Home Loan Bank advances
1,532

 
1,788

 
3,821

Securities sold under agreements to repurchase
11

 
70

 
—

Long-term debt
2,546

 
1,333

 
2,046

Other
27

 
16

 
16

 
14,532

 
19,948

 
30,698

Net interest income
74,444

 
60,743

 
48,494

Provision for credit losses
900

 
11,500

 
3,300

Net interest income after provision for credit losses
73,544

 
49,243

 
45,194

Noninterest income:
 
 
 
 
 
Net gain on mortgage loan origination and sale activities
164,712

 
210,564

 
48,467

Mortgage servicing income
17,073

 
16,121

 
38,056

Income from WMS Series LLC
704

 
4,264

 
2,119

(Loss) gain on debt extinguishment
—

 
(939
)
 
2,000

Depositor and other retail banking fees
3,172

 
3,062

 
3,061

Insurance agency commissions
864

 
743

 
910

Gain on sale of investment securities available for sale (includes unrealized gains reclassified from accumulated other comprehensive income of $1,772, $1,490 and $1,102)
1,772

 
1,490

 
1,102

Other
2,448

 
2,715

 
1,490

 
190,745

 
238,020

 
97,205

Noninterest expense:
 
 
 
 
 
Salaries and related costs
149,440

 
119,829

 
53,519

General and administrative
40,366

 
27,838

 
18,490

Legal
2,552

 
1,796

 
3,360

Consulting
5,637

 
3,037

 
2,644

Federal Deposit Insurance Corporation assessments
1,433

 
3,554

 
5,534

Occupancy
13,765

 
8,585

 
6,764

Information services
14,491

 
8,867

 
5,902

Net cost of operation and sale of other real estate owned
1,811

 
10,085

 
30,281

 
229,495

 
183,591

 
126,494

Income before income taxes
34,794

 
103,672

 
15,905

Income tax expense (benefit) (includes reclassification adjustments of $620, $522 and $0)
10,985

 
21,546

 
(214
)
NET INCOME
$
23,809

 
$
82,126

 
$
16,119

Basic income per share
$
1.65

 
$
6.17

 
$
2.98

Diluted income per share
$
1.61

 
$
5.98

 
$
2.80

Basic weighted average number of shares outstanding
14,412,059

 
13,312,939

 
5,403,498

Diluted weighted average number of shares outstanding
14,798,168

 
13,739,398

 
5,748,342


See accompanying notes to consolidated financial statements.



107
Table of Contents

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net income
$
23,809

 
$
82,126

 
$
16,119

Other comprehensive income, net of tax:
 
 
 
 
 
Unrealized gain (loss) on investment securities available for sale:
 
 
 
 
 
Unrealized holding (loss) gain arising during the year, net of tax (benefit) expense of $(10,786), $3,098 and $0
(20,032
)
 
6,039

 
12,587

Reclassification adjustment for net gains included in net income, net of tax expense of $620, $522 and $0
(1,152
)
 
(968
)
 
(1,103
)
Other comprehensive income
(21,184
)
 
5,071

 
11,484

Comprehensive income
$
2,625

 
$
87,197

 
$
27,603


See accompanying notes to consolidated financial statements.


108
Table of Contents

HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


(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, 2011
5,403,498

 
$
511

 
$
16

 
$
65,627

 
$
(7,365
)
 
$
58,789

Net income
—

 
—

 
—

 
16,119

 
—

 
16,119

Share-based compensation expense
—

 
—

 
15

 
—

 
—

 
15

Other comprehensive income
—

 
—

 
—

 
—

 
11,484

 
11,484

Balance, December 31, 2011
5,403,498

 
511

 
31

 
81,746

 
4,119

 
86,407

Net income
—

 
—

 
—

 
82,126

 
—

 
82,126

Share-based compensation expense
—

 
—

 
3,308

 
—

 
—

 
3,308

Common stock issued
8,979,140

 
—

 
86,850

 
—

 
—

 
86,850

Other comprehensive income
—

 
—

 
—

 
—

 
5,071

 
5,071

Balance, December 31, 2012
14,382,638

 
511

 
90,189

 
163,872

 
9,190

 
263,762

Net income
—

 
—

 
—

 
23,809

 
—

 
23,809

Dividends declared ($0.33 per share)
—

 
—

 
—

 
(4,746
)
 
—

 
(4,746
)
Share-based compensation expense
—

 
—

 
4,097

 
—

 
—

 
4,097

Common stock issued
417,353

 
—

 
188

 
—

 
—

 
188

Other comprehensive income
—

 
—

 
—

 
—

 
(21,184
)
 
(21,184
)
Balance, December 31, 2013
14,799,991

 
$
511

 
$
94,474

 
$
182,935

 
$
(11,994
)
 
$
265,926


See accompanying notes to consolidated financial statements.






HOMESTREET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net income
$
23,809

 
$
82,126

 
$
16,119

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation, amortization and accretion
14,947

 
9,953

 
5,856

Provision for credit losses
900

 
11,500

 
3,300

Provision for losses on other real estate owned
603

 
12,171

 
27,079

Fair value adjustment of loans held for sale
23,776

 
(24,665
)
 
(5,100
)
Origination of mortgage servicing rights
(63,604
)
 
(51,838
)
 
(31,449
)
Change in fair value of mortgage servicing rights
(5,134
)
 
31,680

 
40,000

Net gain on sale of investment securities
(1,772
)
 
(1,490
)
 
(1,102
)
Net fair value adjustment and gain on sale of other real estate owned
(940
)
 
(3,400
)
 
(190
)
Loss (gain) on early retirement of long-term debt
—

 
939

 
(2,000
)
Net deferred income tax expense (benefit)
21,076

 
(5,110
)
 
(16
)
Share-based compensation expense
1,498

 
2,773

 
15

Origination of loans held for sale
(4,428,569
)
 
(5,173,725
)
 
(1,942,587
)
Proceeds from sale of loans originated as held for sale
4,745,651

 
4,728,000

 
2,009,880

Cash used by changes in operating assets and liabilities:
 
 
 
 
 
(Increase) decrease in accounts receivable and other assets
(11,212
)
 
(28,181
)
 
(14,955
)
Increase (decrease) in accounts payable and other liabilities
(16,999
)
 
17,397

 
(15,130
)
Net cash provided by (used in) operating activities
304,030

 
(391,870
)
 
89,720

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
 
Purchase of investment securities
(317,695
)
 
(285,165
)
 
(308,428
)
Proceeds from sale of investment securities
127,648

 
166,187

 
239,878

Principal repayments and maturities of investment securities
70,962

 
35,813

 
62,507

Proceeds from sale of other real estate owned
19,656

 
49,566

 
144,646

Proceeds from sale of loans originated as held for investment
86,327

 
9,966

 
—

Purchase of Yakima National and Fortune Banks and AmericanWest branches, net of cash acquired
23,971

 
—

 
—

Mortgage servicing rights purchased from others
(22
)
 
(68
)
 
(87
)
Capital expenditures related to other real estate owned
(22
)
 
(4,676
)
 
(958
)
Origination of loans held for investment and principal repayments, net
(447,873
)
 
(63,079
)
 
196,080

Property and equipment purchased
(22,836
)
 
(11,402
)
 
(1,758
)
Net cash (used in) provided by investing activities
(459,884
)
 
(102,858
)
 
331,880



109
Table of Contents

(continued from prior page)

 
Year Ended December 31,
 
2013
 
2012
 
2011
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Decrease in deposits, net
$
(27,129
)
 
$
(32,920
)
 
$
(119,987
)
Proceeds from Federal Home Loan Bank advances
5,847,392

 
9,924,854

 
35,068

Repayment of Federal Home Loan Bank advances
(5,659,892
)
 
(9,724,622
)
 
(143,018
)
Proceeds from securities sold under agreements to repurchase
159,790

 
424,672

 
—

Repayment of securities sold under agreements to repurchase
(159,790
)
 
(424,672
)
 
—

Proceeds from Federal Home Loan Bank stock repurchase
1,319

 
660

 
—

Repayment of long-term debt
—

 
—

 
(3,000
)
Proceeds from stock issuance, net
188

 
88,204

 
—

Excess tax benefits related to exercise of stock options
2,599

 
535

 
—

Net cash provided by (used in) financing activities
164,477

 
256,711

 
(230,937
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
8,623

 
(238,017
)
 
190,663

CASH AND CASH EQUIVALENTS:
 
 
 
 
 
Beginning of year
25,285

 
263,302

 
72,639

End of period
$
33,908

 
$
25,285

 
$
263,302

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
$
28,373

 
$
21,304

 
$
31,638

Federal and state income taxes
6,799

 
26,376

 
1,115

Non-cash activities:
 
 
 
 
 
Loans held for investment foreclosed and transferred to other real estate owned
12,807

 
51,128

 
38,694

Loans originated to finance the sales of other real estate owned
—

 
—

 
750

Loans transferred from held for investment to held for sale
93,567

 
9,966

 
—

Ginnie Mae loans recognized with the right to repurchase, net
$
6,360

 
$
5,674

 
$
(280
)

See accompanying notes to consolidated financial statements.



110
Table of Contents

HomeStreet, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

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, including the fair value of assets acquired and liabilities assumed in business combinations (Note 3, Business Combinations ), allowance for credit losses (Note 6, Loans and Credit Quality ), valuation of residential mortgage servicing rights and loans held for sale (Note 13, Mortgage Banking Activities ), loans held for investment (Note 6, Loans and Credit Quality ), investment securities (Note 5, Investment Securities ), derivatives (Note 12, Derivatives ), other real estate owned (Note 7, Other Real Estate Owned ), and taxes (Note 15, Income Taxes ). 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.

Consolidation

The Company consolidates legal entities in which it has a controlling financial interest. The Company determines whether it has a controlling financial interest by first evaluating whether an entity is a variable interest entity ("VIE"). If an entity is determined to not be a VIE, it is considered to be a voting interest entity.

Variable Interest Entities

The Company may have variable interests in VIEs arising from debt, equity or other monetary interests in an entity, which change with fluctuations in the fair value of the entity's assets. VIEs are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity's operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

The primary beneficiary of a VIE (i.e., the party that has a controlling financial interest) is required to consolidate the assets and liabilities of the VIE. The primary beneficiary is the party that has both (1) the power to direct the activities of an entity that most significantly impact the VIE's economic performance; and (2) through its interests in the VIE, the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company's loans held for sale are sold predominantly to government-sponsored enterprises ("GSEs") Fannie Mae, Freddie Mac and Ginnie Mae for the purpose of securitization by the GSEs, who also provide credit enhancement of the loans through certain guarantee provisions. The Company typical retains the right to service the loans. Because of the power of the GSEs over the VIEs that hold the assets from these residential mortgage loan securitizations, the Company is not the primary beneficiary of the VIEs and therefore the VIEs are not consolidated.

The Company performs on-going reassessments of: (1) whether entities previously evaluated under the majority voting-interest framework have become VIEs, based on certain events, and therefore become subject to the VIE consolidation framework; and (2) whether changes in the facts and circumstances regarding the Company's involvement with a VIE cause the Company's consolidation determination to change.


111

Voting Interest Entities

Voting interest entities are entities that have sufficient equity and provide the equity investors voting rights that enable them to make significant decisions relating to the entity's operations. For these types of entities, the Company's determination of whether it has a controlling financial interest is primarily based on the amount of voting equity interests held. Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities' voting equity interests, or through other contractual rights that give the Company control, are consolidated by the Company. Investments in entities in which the Company has significant influence over operating and financing decisions (but does not own a majority of the voting equity interests) are accounted for in accordance with the equity method of accounting (which requires the Company to recognize its proportionate share of the entity's net earnings). These investments are generally included in other assets.

The Company may have investments in limited partnerships or limited liability companies. The Company generally consolidates entities where it is the general partner or managing member. However, certain entities may provide limited partners or members the ability to remove the Company as the general partner or managing member without cause (i.e., kick-out rights), based on a simple majority vote, or the limited partners or members have rights to participate in important decisions of the entity. Accordingly, the Company does not consolidate these entities, in which case they are accounted for in accordance with the equity method of accounting. For equity method investments holding real estate acquired in any manner for debts previously contracted with the Company, the investment is included in other real estate owned in the consolidated statements of financial condition and the proportionate share of the entity's net earnings are included in other real estate owned expense in the consolidated statements of operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash, interest-earning overnight deposits at other financial institutions, and other investments with original maturities equal to three months or less. For the consolidated statements of cash flows, the Company considered cash equivalents to be investments that are readily convertible to known amounts, so near to their maturity that they present an insignificant risk of change in fair value due to change in interest rates, and purchased in conjunction with cash management activities. Restricted cash of $2.4 million and $2.4 million as of December 31, 2013 and 2012 , respectively, is included in accounts receivable and other assets for reinsurance-related reserves.

Investment Securities

Investment securities that we might not hold until maturity are classified as available for sale ("AFS") and are reported at fair value in the statement of financial condition. Fair value measurement is based upon quoted market prices in active markets, if available. If quoted prices in active markets are not available, fair value is measured using pricing models or other model-based valuation techniques such as the present value of future cash flows, which consider prepayment assumptions and other factors such as credit losses and market liquidity. Unrealized gains and losses are excluded from earnings and reported, net of tax, in other comprehensive income (“OCI”). Purchase premiums and discounts are recognized in interest income using the effective interest method over the life of the securities. Purchase premiums or discounts related to mortgage-backed securities are amortized or accreted using projected prepayment speeds. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

AFS investment securities in unrealized loss positions are evaluated for other-than-temporary impairment (“OTTI”) at least quarterly. For AFS debt securities, decline in fair value is considered to be other-than-temporary if the Company does not expect to recover the entire amortized cost basis of the security. For AFS equity securities, the Company considers a decline in fair value to be other-than-temporary if it is probable that the Company will not recover its amortized cost basis.

Impairment may result from credit deterioration of the issuer or collateral underlying the security. In performing an assessment of recoverability, all relevant information is considered, including the length of time and extent to which fair value has been less than the amortized cost basis, the cause of the price decline, credit performance of the issuer and underlying collateral, and recoveries or further declines in fair value subsequent to the balance sheet date.

For debt securities, the Company measures and recognizes OTTI losses through earnings if (1) the Company has the intent to sell the security or (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. In these circumstances, the impairment loss is equal to the full difference between the amortized cost basis and the fair value of the security. For securities that are considered other-than-temporarily-impaired that the Company has the intent and ability to hold in an unrealized loss position, the OTTI write-down is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to other factors, which is recognized as a component of OCI.

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For equity securities, the Company recognizes OTTI losses through earnings if the Company intends to sell the security. The Company also considers other relevant factors, including its intent and ability to retain the security for a period of time sufficient to allow for any anticipated recovery in market value, and whether evidence exists to support a realizable value equal to or greater than the carrying value. Any impairment loss on an equity security is equal to the full difference between the amortized cost basis and the fair value of the security.

Federal Home Loan Bank Stock

As a borrower from the Federal Home Loan Bank of Seattle ("FHLB"), the Company is required to purchase an amount of FHLB stock based our outstanding borrowings with the FHLB. This stock is used as collateral to secure the borrowings from the FHLB and is accounted for as a cost-method investment. FHLB stock is reviewed at least quarterly for possible OTTI, which includes an analysis of the FHLB's cash flows, capital needs and long-term viability.

Loans Held for Sale

Loans originated for sale in the secondary market, which is our principal market, or as whole loan sales are classified as loans held for sale. Management has elected the fair value option for all single family loans held for sale and records these loans at fair value. The fair value of loans held for sale is generally based on observable market prices from other loans in the secondary market that have similar collateral, credit, and interest rate characteristics. If quoted market prices are not readily available, the Company may consider other observable market data such as dealer quotes for similar loans or forward sale commitments. In certain cases, the fair value may be based on a discounted cash flow model. Gains and losses from changes in fair value on loans held for sale are recognized in net gain on mortgage loan origination and sale activities within noninterest income. Direct loan origination costs and fees for single family loans classified as held for sale are recognized in earnings.

Multifamily loans held for sale are accounted for at the lower of amortized cost or fair value. Related gains and losses are recognized in net gain on mortgage loan origination and sale activities. Direct loan origination costs and fees for multifamily loans classified as held for sale are deferred at origination and recognized in earnings at the time of sale.

Loans Held for Investment
Loans held for investment are reported at the principal amount outstanding, net of cumulative charge-offs, interest applied to principal (for loans accounted for using the cost recovery method), unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Deferred fees and costs and premiums and discounts are amortized over the contractual terms of the underlying loans using the constant effective yield (the interest method). Interest on loans is accrued and recognized as interest income at the contractual rate of interest. Loan commitment fees are generally deferred and amortized into noninterest income on a straight-line basis over the commitment period. A determination is made as of the loan commitment date as to whether a loan will be held for sale or held for investment. This determination is based primarily on the type of loan or loan program and its related profitability characteristics.
When a loan is designated as held for investment, the intent is to hold these loans for the foreseeable future or until maturity or pay-off. If subsequent changes occur, the Company may change its intent to hold these loans. Once a determination has been made to sell such loans, they are immediately transferred to loans held for sale and carried at the lower of cost or fair value.
From time to time, the Company will originate loans to facilitate the sale of other real estate owned without a sufficient down payment from the borrower. Such loans are accounted for using the installment method and any gain on sale is deferred.
Nonaccrual 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.
All payments received on nonaccrual loans are accounted for using the cost recovery method. Under the cost recovery method, all cash collected is applied to first reduce the principal balance. A loan may be returned to accrual status if all delinquent principal and interest payments are brought current and the collectability of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans that are well-secured and in the collection process are maintained on accrual status, even if they are 90 days or more past due. Loans whose repayments are insured by the Federal Housing Authority ("FHA") or guaranteed by the Department of Veterans' Affairs ("VA") are maintained on accrual status even if 90 days or more past due.

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Impaired Loans
A loan is considered impaired when it is probable that all contractual principal and interest payments due will not be collected in accordance with the terms of the loan agreement. Factors considered by management in determining whether a loan is impaired include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.
Troubled Debt Restructurings
A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons, we grant a concession to a borrower experiencing financial difficulty that we would not otherwise consider. A restructuring that results in only an insignificant delay in payment is not considered a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal or collateral value and the contractual amount due, or the delay in timing of the restructured payment period is insignificant relative to the frequency of payments, the debt's original contractual maturity or original expected duration. 
TDRs are designated as impaired because interest and principal payments will not be received in accordance with original contract terms. TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are nonperforming as of the date of modification generally remain as nonaccrual until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period, normally at least six months. TDRs with temporary below-market concessions remain designated as a TDR and impaired regardless of the accrual or performance status until the loan is paid off.
Allowance for Credit Losses

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses. The allowance for credit losses is maintained at a level that, in management's judgment, is appropriate to cover losses inherent within the Company’s loans held for investment portfolio, including unfunded credit commitments, as of the balance sheet date. The allowance for loan losses, as reported in our consolidated statements of financial condition, is adjusted by a provision for loan losses, which is recognized in earnings, and reduced by the charge-off of loan amounts, net of recoveries.

The loss estimation process involves procedures to appropriately consider the unique characteristics of its two loan portfolio segments, the consumer loan portfolio segment and the commercial loan portfolio segment. These two segments are further disaggregated into loan classes, the level at which credit risk is monitored. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the overall loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.

Credit quality is assessed and monitored by evaluating various attributes and utilizes such information in our evaluation of the adequacy of the allowance for credit losses. The following provides the credit quality indicators and risk elements that are most relevant and most carefully considered and monitored for each loan portfolio segment.

Consumer Loan Portfolio Segment

The consumer loan portfolio segment is comprised of the single family and home equity loan classes, which are underwritten after evaluating a borrower’s capacity, credit, and collateral. Capacity refers to a borrower’s ability to make payments on the loan. Several factors are considered when assessing a borrower’s capacity, including the borrower’s employment, income, current debt, assets, and level of equity in the property. Credit refers to how well a borrower manages their current and prior debts as documented by a credit report that provides credit scores and the borrower’s current and past information about their credit history. Collateral refers to the type and use of property, occupancy, and market value. Property appraisals are obtained to assist in evaluating collateral. Loan-to-property value and debt-to-income ratios, loan amount, and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends such as conditions that negatively affect housing prices and demand and levels of unemployment.


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Commercial Loan Portfolio Segment

The commercial loan portfolio segment is comprised of the commercial real estate, multifamily residential, construction/land development and commercial business loan classes, whose underwriting standards consider the factors described for single family and home equity loan classes as well as others when assessing the borrower’s and associated guarantors or other related party’s financial position. These other factors include assessing liquidity, the level and composition of net worth, leverage, considering all other lender amounts and position, an analysis of cash expected to flow through the obligors including the outflow to other lenders, and prior experience with the borrower. This information is used to assess adequate financial capacity, profitability, and experience. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity, and availability of long-term financing.

Loan Loss Measurement

Allowance levels are influenced by loan volumes, loan asset quality ratings ("AQR") migration or delinquency status, historic loss experience and other conditions influencing loss expectations, such as economic conditions. The methodology for evaluating the adequacy of the allowance for loan losses has two basic components: first, an asset-specific component involving the identification of impaired loans and the measurement of impairment for each individual loan identified; and second, a formula-based component for estimating probable principle losses for all other loans

Impaired Loans

When a loan is identified as impaired, impairment is measured based on net realizable value, or the difference between the discounted value of the expected future cash flows, based on the original effective interest rate, and the recorded investment balance of the loan. For impaired loans, we recognize impairment if we determine that the net realizable value of the impaired loan is less than the recorded investment of the loan (net of previous charge-offs and deferred loan fees and costs), except when the sole remaining source of collection is the underlying collateral. In these cases impairment is measured as the difference between the recorded investment balance of the loan and the fair value of the collateral. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than only on the operation) of the collateral.

The starting point for determining the fair value of collateral is through obtaining external appraisals. Generally, collateral values for impaired loans are updated every twelve months, either from external third parties or in-house certified appraisers. A third party appraisal is required at least annually. Third party appraisals are obtained from a pre-approved list of independent, third party, local appraisal firms. Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. Generally, appraisals are internally reviewed by the appraisal services group to ensure the quality of the appraisal and the expertise and independence of the appraiser. Once the impairment amount is determined an asset-specific allowance is provided for equal to the calculated impairment and included in the allowance for loan losses. If the calculated impairment is determined to be permanent or not recoverable, the impairment will be charged off. Factors considered by management in determining if impairment is permanent or not recoverable include whether management judges the loan to be uncollectible, repayment is deemed to be protracted beyond reasonable time frames or the loss becomes evident owing to the borrower’s lack of assets or, for single family loans, the loan is 180 days or more past due unless both well-secured and in the process of collection.

Estimate of Probable Loan Losses

In estimating the formula-based component of the allowance for loan losses, loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration.

In determining the allowance for loan losses we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and AQR or delinquency bucket. This model calculates an expected loss percentage for each loan category by considering the probability of default, based on the migration of loans from performing to loss by AQR or delinquency buckets using one-year analysis periods, and the potential severity of loss, based on the aggregate net lifetime losses incurred per loan class.

The formula-based component of the allowance for loan losses also considers qualitative factors for each loan class, including changes in the following: (1) lending policies and procedures; (2) international, national, regional and local economic business conditions and developments that affect the collectability of the portfolio, including the condition of various markets; (3) the nature and volume of the loan portfolio including the terms of the loans; (4) the experience, ability, and depth of the lending

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management and other relevant staff; (5) the volume and severity of past due and adversely classified or graded loans and the volume of nonaccrual loans; (6) the quality of our loan review system; (7) the value of underlying collateral for collateral-dependent loans. Additional factors include (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations and (9) the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio. Qualitative factors are expressed in basis points and are adjusted downward or upward based on management’s judgment as to the potential loss impact of each qualitative factor to a particular loan pool at the date of the analysis.

Unfunded Loan Commitments

The Company maintains a separate allowance for losses on unfunded loan commitments, which is included in accounts payable and other liabilities on the consolidated statements of financial condition. Management estimates the amount of probable losses by applying the loss factors used in the allowance for loan loss methodology to estimate the liability for credit losses related to unfunded commitments for each loan type.

Other Real Estate Owned

Other real estate owned ("OREO") represents real estate acquired for debts previously contracted with the Company, generally through the foreclosure of loans. In certain cases, such as foreclosures on loans involving both the Company and other participating lenders, other real estate owned may be held in the form of an investment in an unconsolidated legal entity that is in-substance real estate. These properties are initially recorded at the net realizable value (fair value of collateral less estimated costs to sell). Upon transfer of a loan to other real estate owned, an appraisal is obtained and any excess of the loan balance over the net realizable value is charged against the allowance for loan losses. The Company allows up to 90 days after foreclosure to finalize determination of net realizable value. Subsequent declines in net realizable value identified from the ongoing analysis of such properties are recognized in current period earnings within noninterest expense as a provision for losses on other real estate owned. The net realizable value of these assets is reviewed and updated at least every six months depending on the type of property, or more frequently as circumstances warrant.

As part of our subsequent events analysis process, we review updated independent third-party appraisals received and internal collateral valuations received subsequent to the reporting period-end to determine whether the fair value of loan collateral or OREO has changed. Additionally, we review agreements to sell OREO properties executed prior to and subsequent to the reporting period-end to identify changes in the fair value of OREO properties. If we determine that current valuations have changed materially from the prior valuations, we record any additional loan impairments or adjustments to OREO carrying values as of the end of the prior reporting period.

From time to time the Company may elect to accelerate the disposition of certain OREO properties in a time frame faster than the expected marketing period assumed in the appraisal supporting our valuation of such properties. At the time a property is identified and the decision to accelerate its disposition is made, that property’s underlying fair value is re-measured. Generally, to achieve an accelerated time frame in which to sell a property, the price that the Company is willing to accept for the disposition of the property decreases. Accordingly, the net realizable value of these properties is adjusted to reflect this change in valuation. Any resulting downward valuation adjustments are recorded in earnings at the time the property is identified and the decision to accelerate its disposition is made and any future changes in net realizable value are measured based on the accelerated time frame.

Mortgage Servicing Rights

We initially record all mortgage servicing rights ("MSRs") at fair value. For subsequent measurement of MSRs, accounting standards permit the election of either fair value or the lower of amortized cost or fair value. Management has elected to account for single family MSRs at fair value during the life of the MSR, with changes in fair value recorded through current period earnings. Fair value adjustments encompass market-driven valuation changes as well as modeled amortization involving the run-off of value that occurs due to the passage of time as individual loans are paid by borrowers. We account for multifamily MSRs at the lower of amortized cost or fair value.

MSRs are recorded as separate assets on our consolidated statements of financial condition upon purchase of the rights or when we retain the right to service loans that we have sold. Net gains on mortgage loan origination and sale activities depend, in part, on the initial fair value of MSRs, which is based on a discounted cash flow model.

Mortgage servicing income includes the changes in fair value over the reporting period of both our single family MSRs and the derivatives used to economically hedge our single family MSRs. Subsequent fair value measurements of single family MSRs,

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which are not traded in an active market with readily observable market prices, are determined by considering the present value of estimated future net servicing cash flows. Changes in the fair value of single family MSRs result from changes in (1) model inputs and assumptions and (2) modeled amortization, representing the collection and realization of expected cash flows and curtailments over time. The significant model inputs used to measure the fair value of single family MSRs include assumptions regarding market interest rates, projected prepayment speeds, discount rates, estimated costs of servicing and other income and additional expenses associated with the collection of delinquent loans.

Market expectations about loan duration, and correspondingly the expected term of future servicing cash flows, may vary from time to time due to changes in expected prepayment activity, especially when interest rates rise or fall. Market expectations of increased loan prepayment speeds may negatively impact the fair value of the single family MSRs. Fair value is also dependent on the discount rate used in calculating present value, which is imputed from observable market activity and market participants. Management reviews and adjusts the discount rate on an ongoing basis. An increase in the discount rate would reduce the estimated fair value of the single family MSRs asset.

For further 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 13, Mortgage Banking Operations .

Investment in WMS Series LLC

HomeStreet/WMS, Inc. (Windermere Mortgage Services, Inc.), a wholly owned and consolidated subsidiary of the Bank, has an affiliated business arrangement with Windermere Real Estate, WMS Series Limited Liability Company ("WMS LLC"). The Company and Windermere Real Estate each have 50% joint control over the governance of WMS LLC. The operations of WMS LLC, which is subdivided into 27 individual operating series, are recorded using the equity method of accounting. The Company recognizes its proportionate share of the results of operations of WMS LLC as income from WMS Series LLC in noninterest income within the Company's consolidated statements of operations.

The Company has determined that WMS LLC is not a VIE and further does not consolidate WMS LLC under the voting interest model. The 27 individual operating series, which are divisions of WMS LLC that are allocated assets and liabilities and allow certain forms of legal isolation, are not considered to be stand-alone subsidiary legal entities for purposes of applying the consolidation guidance under U.S. GAAP. As a result, the 27 individual operating series are not considered to be VIEs based on the determination that WMS LLC is not a VIE. The investment is reviewed for possible other-than-temporary impairment quarterly, or more frequently if warranted. The review typically includes an analysis of facts and circumstances of the investment and expectations regarding the investment’s future cash flows. The Company has not recorded other-than-temporary impairment on this investment.

Equity method investment income from WMS LLC was $1.7 million , $4.0 million , and $2.3 million for the years ended December 31, 2013 , 2012 , and 2011 , respectively. The Company’s investment in WMS LLC was $2.7 million and $3.3 million , which is included in accounts receivable and other assets at December 31, 2013 and 2012 , respectively.

The Company provides contracted services to WMS LLC related to accounting, loan shipping, loan underwriting, quality control, secondary marketing, and information systems support performed by Company employees on behalf of WMS LLC. The Company recorded contracted services income/(loss) of $(951) thousand , $279 thousand , and $(152) thousand for the years ended December 31, 2013 , 2012 , and 2011 , respectively. Income related to WMS LLC, including equity method investment income and contracted services, is classified as income from WMS Series LLC in noninterest income within the consolidated statements of operations.

The Company provides a $25.0 million secured line of credit that allows WMS LLC to fund and close single family mortgage loans in the name of WMS LLC. The outstanding balance of the secured line of credit was $5.7 million and $19.5 million at December 31, 2013 , and 2012 , respectively. The highest outstanding balance of the secured line of credit was $21.4 million and $24.5 million during 2013 and 2012 , respectively. The line of credit matures July 1, 2014 .


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Premises and Equipment

Furniture and equipment and leasehold improvements are stated at cost less accumulated depreciation or amortization and depreciated or amortized over the shorter of the useful life of the related asset or the term of the lease, generally 3 to 15 years, using the straight-line method. Management periodically evaluates furniture and equipment and leasehold improvements for impairment.

Goodwill

Goodwill is recorded upon completion of a business combination as the difference between the purchase price and the fair value of net identifiable assets acquired. Subsequent to initial recognition, the Company tests goodwill for impairment during the third quarter of each fiscal year, or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment. Goodwill was not impaired at December 31, 2013 or 2012, nor was any goodwill written off due to impairment during 2013, 2012 or 2011.

Trust Preferred Securities ("TruPS")

TruPS allow investors the ability to invest in junior subordinated debentures of the Company, which provide the Company with long-term financing. The transaction begins with the formation of a VIE established as a trust by the Company. This trust issues two classes of securities: common securities, all of which are purchased and held by the Company and recorded in other assets on the consolidated statements of financial position, and TruPS, which are sold to third-party investors. The trust holds subordinated debentures (debt) issued by the Company, which the Company records in long-term debt on the consolidated statement of financial position. The trust finances the purchase the subordinated debentures with the proceeds from the sale of its common and preferred securities.

The junior subordinated debentures are the sole assets of the trust, and the coupon rate on the debt mirrors the dividend payment on the preferred security. The Company also has the right to defer interest payments for up to five years and has the right to call the preferred securities. These preferred securities are non-voting and do not have the right to convert to shares of the issuer. The trust's common equity securities issued to the Company are not considered to be equity at risk because the equity securities were financed by the trust through the purchase of the debentures from the Company. As a consequence, the Company holds no variable interest in the trust, and therefore, is not the trust's primary beneficiary.

Securities Sold Under Agreements to Repurchase

From time to time, the Company may enter into sales of securities under agreements to repurchase the same securities (“repurchase agreements”). Repurchase agreements are accounted for as secured financing arrangements with the obligation to repurchase securities sold reflected as a liability in the consolidated statements of financial condition. The dollar amount of securities underlying the agreements remains in investment securities available for sale.

Income Taxes

In establishing an income tax provision, management applies judgment and interpretations about the application of complex tax laws, which includes making estimates about when certain items will affect future taxable income. Income taxes are accounted for using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, a deferred tax asset or liability is determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized through the provision for income taxes in the period that includes the enactment date.

The Company records net deferred tax assets to the extent it is believed that these assets will more likely than not be realized. In making this determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and recent financial operations. After reviewing and weighing all of the positive and negative evidence, if the positive evidence outweighs the negative evidence, then the Company does not record a valuation allowance for deferred tax assets. If the negative evidence outweighs the positive evidence, then a valuation allowance for all or a portion of the deferred tax assets is recorded.


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The Company recognizes interest and penalties related to unrecognized tax benefits, if any, as income tax expense in the consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated statements of financial condition.

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, interest rate futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy.

All free-standing derivatives are required to be recorded on the consolidated statements of financial condition at fair value. As permitted under U.S. GAAP, the Company nets derivative assets and liabilities, and related collateral, when a legally enforceable master netting agreement exists between the Company and the derivative counterparty. The accounting for changes in fair value of a derivative depends on whether or not the transaction has been designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are reported and measured at fair value through earnings. The Company does not use derivatives for trading purposes.

Before initiating a position where hedge accounting treatment is desired, the Company formally documents the relationship between the hedging instrument(s) and the hedged item(s), as well as its risk management objective and strategy.

For derivative instruments qualifying for hedge accounting treatment, the instrument is designed as either: (1) a hedge of changes in fair value of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), or (2) a hedge of the variability in expected future cash flows associated with an existing recognized asset or liability or a probable forecasted transaction (a cash flow hedge).

Derivatives where the Company has not attempted to achieve or attempted but did not achieve hedge accounting treatment are referred to as economic hedges. The changes in fair value of these instruments are recorded in our consolidated statements of operations in the period in which the change occurs.

In a fair value hedge, changes in the fair value of the derivative and, to the extent that it is effective, changes in the fair value of the hedged asset or liability attributable to the hedged risk are recorded through current period earnings in the same financial statement category as the hedged item.

In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings during the same period in which the hedged item affects earnings. The ineffective portion is recognized immediately in noninterest income – other.

The Company discontinues hedge accounting when (1) it determines that the derivative is no longer expected to be highly effective in offsetting changes in fair value or cash flows of the designated item; (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is de-designated from the hedge relationship; or (4) it is no longer probable that a hedged forecasted transaction will occur by the end of the originally specified time period.

If the Company determines that the derivative no longer qualifies as a fair value or cash flow hedge and therefore hedge accounting is discontinued, the derivative (if retained) will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

When the Company discontinues hedge accounting because it is not probable that a forecasted transaction will occur, the derivative will continue to be recorded on the balance sheet at its fair value with changes in fair value included in current earnings, and the gains and losses in accumulated other comprehensive income will be recognized immediately in earnings. When the Company discontinues hedge accounting because the hedging instrument is sold, terminated, or de-designated as a hedge, the amount reported in accumulated other comprehensive income through the date of sale, termination, or de-designation will continue to be reported in accumulated other comprehensive income until the forecasted transaction affects earnings.

Interest rate lock commitments ("IRLCs") for single family mortgage loans that we intend to sell are considered free-standing derivatives. For determining the fair value measurement of IRLCs we consider several factors including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan and the probability that the loan will not fund according to the terms of the

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commitment (referred to as a fall-out factor). The value of the underlying loan is affected primarily by changes in interest rates. Management uses forward sales commitments to hedge the interest rate exposure from IRLCs. A forward loan sale commitment protects the Company from losses on sales of loans arising from the exercise of the loan commitments by securing the ultimate sales price and delivery date of the loan. The Company takes into account various factors and strategies in determining the portion of the mortgage pipeline it wants to hedge economically. Unrealized and realized gains and losses on derivative contracts utilized for economically hedging the mortgage pipeline are recognized as part of the net gain on mortgage loan origination and sale activities within noninterest income.

The Company is exposed to credit risk if derivative counterparties to derivative contracts do not perform as expected. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, as appropriate.

Share-Based Employee Compensation

The Company has share-based employee compensation plans as more fully discussed in Note 17, Share-Based Compensation Plan s. Under the accounting guidance for stock compensation, compensation expense recognized includes the cost for share-based awards, such as nonqualified stock options and restricted stock grants, which are recognized as compensation expense over the requisite service period (generally the vesting period) on a straight line basis. For stock awards that vest upon the satisfaction of a market condition, the Company estimates the service period over which the award is expected to vest. If all conditions to the vesting of an award are satisfied prior to the end of the estimated vesting period, any unrecognized compensation costs associated with the portion of the award that vested earlier than expected are immediately recognized in earnings.

Fair Value Measurement

The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company’s approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market value inputs for internal valuation models, used for estimating fair value. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation. See Note 18, Fair Value Measurement .

Commitments, Guarantees, and Contingencies

U.S. GAAP requires that a guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair value of the obligation undertaken in issuing the guarantee. A guarantee is a contract that contingently requires the guarantor to pay a guaranteed party based upon: (a) changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a third party’s failure to perform under a specified agreement. The Company initially records guarantees at the inception date fair value of the obligation assumed and records the amount in other liabilities. For indemnifications provided in sales agreements, a portion of the sale proceeds is allocated to the guarantee, which adjusts the gain or loss that would otherwise result from the transaction. For these indemnifications, the initial liability is amortized to income as the Company’s risk is reduced (i.e., over time as the Company's exposure is reduced or when the indemnification expires).

Contingent liabilities, including those that exists as a result of a guarantee or indemnification, are recognized when it becomes probable that a loss has been incurred and the amount of the loss is reasonably estimable. The contingent portion of a guarantee is not recognized if the estimated amount of loss is less than the carrying amount of the liability recognized at inception of the guarantee (as adjusted for any amortization).

The Company typically sells loans servicing retained in either a pooled loan securitization transaction with a GSE, a whole loan sale to a GSE, or much less frequently a whole loan sale to market participants such as other financial institutions, who purchase the loans for investment purposes or include them in a private label securitization transaction, or the loans are pooled and sold into a conforming loan securitization with a government-sponsored enterprise (“GSE”), provided loan origination

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parameters conform to GSE guidelines. Substantially all of the Company’s loan sales are pooled loan securitization transactions with GSEs. These conforming loan securitizations are guaranteed by GSEs, such as Fannie Mae, Ginnie Mae and Freddie Mac.

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. See Note 14, Commitments, Guarantees, and Contingencies .

The Company sells multifamily loans through the Fannie Mae Delegated Underwriting and Servicing Program ("DUS" ® ) (DUS® is a registered trademark of Fannie Mae.) that are subject to a credit loss sharing arrangement. The Company may also from time to time sell loans with recourse. When loans are sold with recourse or subject to a loss sharing arrangement, a liability is recorded based on the estimated fair value of the obligation under the accounting guidance for guarantees. These liabilities are included within other liabilities. See Note 14, Commitments, Guarantees, and Contingencies .

Earnings per Share

Basic earnings per share ("EPS") is computed by dividing net income available to common shareholders by the weighted average common shares outstanding during the period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average common shares outstanding, plus the effect of common stock equivalents (for example, stock options and unvested restricted stock). Stock options issued under stock-based compensation plans that have an antidilutive effect and shares of restricted stock whose vesting is contingent upon conditions that have not been satisfied at the end of the period are excluded from the computation of diluted EPS. Weighted average common shares outstanding include shares held by the Company’s Employee Stock Ownership Plan. Shares outstanding and per share information presented in the consolidated financial statements have been adjusted to reflect the 2-for-1 forward stock splits effective on November 5, 2012 and on March 6, 2012, as well as the 1-for-2.5 reverse stock split effective on July 19, 2011.

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 regularly reviewed by the Company's chief operating decision maker for the purpose of allocating resources and evaluating the performance of the Company's businesses. The results for these business segments are based on management’s accounting process, which assigns income statement items and assets to each responsible operating segment. This process is dynamic and is based on management's view of the Company's operations. If the management structure and/or the allocation process changes, allocations, transfers, and assignments may change. See Note 20, Business Segments .

Recent Accounting Developments

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Disclosures about Offsetting Assets and Liabilities , which requires enhanced disclosures about certain assets and liabilities that are subject to legally enforceable master netting or similar agreements, or that have otherwise been offset on the balance sheet under certain specific conditions that permit net presentation. In January 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities , which clarifies that the scope of the enhanced disclosure requirements applies only to derivative instruments, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. The application of this guidance, which was effective in the first quarter of 2013, only affects the disclosure of these instruments and had no impact on the Company’s consolidated statements of financial condition or results of operations.

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , which modifies the presentation of accumulated other comprehensive income in the financial statements. Among other things, the ASU requires (with certain exceptions) the presentation of significant amounts reclassified from each component of accumulated other comprehensive income and the line items on the consolidated statement of operations affected by the reclassification. For public companies the guidance is effective for interim and annual reporting periods beginning after December 15, 2012. The application of this guidance only affected the presentation of the Company's financial statements and had no impact on the consolidated statements of financial condition or results of operations.

121

In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects , regarding investments in affordable housing projects that qualify for the low-income housing tax credit. The guidance replaces the effective yield method and allows companies to make an accounting policy election to amortize the cost of its investments in proportion to the tax benefits received if certain criteria are met, and present the amortization as a component of income tax expense. The guidance will become effective in the first quarter of 2015, with early adoption permitted in the first quarter of 2014. The Company is currently evaluating this guidance to determine any potential impact to its consolidated statements of financial condition and results of operations.

NOTE 2 – SIGNIFICANT RISKS AND UNCERTAINTIES:

Our earnings are dependent on our ability to originate loans and either sell them into the secondary market or hold them in our loan portfolio and collect principal and interest as they come due. When loans become nonperforming or their ultimate collection is in doubt, our income is adversely affected. Our ability to sustain profitability will depend significantly on our loan production and our ability to manage the credit quality of our loan portfolio.

For the years ended December 31, 2013 , 2012 and 2011 , substantially all the Company’s loan production represented single family mortgages designated for sale. Single family mortgage loans originated predominantly conform to government-sponsored enterprise underwriting standards. 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. For further information on the mortgage repurchase liability, see Note 14, Commitments, Guarantees and Contingencies .

Credit Quality

Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected in the allowance for credit losses. Allowance levels are influenced by loan volumes, loan AQR or delinquency status, historic loss experience and other conditions influencing loss expectations, such as economic conditions.

We employ a disciplined process and methodology to establish our allowance for credit losses each quarter. This process takes into consideration many factors to measure credit risk, which will vary based on the size of the loan, the contractual terms of the agreement, the credit characteristics of the borrower, the features of loan products, the existence and strength of guarantor support, and the availability, quality, and adequacy of any underlying collateral. The degree of credit risk and level of credit losses is highly dependent on the economic environment that unfolds subsequent to originating or acquiring assets. The extent of asset diversification and concentration also affect total credit risk. Credit risk is assessed through analyzing these and other factors.

The credit risk management process is governed centrally. The overall credit process includes comprehensive credit policies, judgmental or statistical credit underwriting, frequent and detailed risk measurement and modeling and loan review, quality control and audit processes. In addition, we have an independent loan review function that reports to the Credit Committee of our Board of Directors ("Credit Committee"), and internal auditors and regulatory examiners review and perform detailed tests of our credit underwriting, loan administration and allowance processes.

The Chief Credit Officer's primary responsibilities include directing the activities of the credit risk management function as it relates to the loan portfolio, overseeing loan portfolio performance and ensuring compliance with established credit policies, standards and limits, determining the reasonableness of our allowance for loan losses, reviewing and approving large credit exposures and delegating credit approval authorities. Senior credit administrators who oversee the lines of business have both transaction approval authority and governance authority for the approval of procedures within established policies, standards and limits. The Chief Credit Officer reports directly to the President and Chief Executive Officer.

The Company's Loan Committee (the "Loan Committee"), established by the Credit Committee of the Company's Board of Directors, provides direction and oversight within our risk management framework. The Loan Committee seeks to ensure effective portfolio risk analysis and policy review and to support sound implementation of defined business and risk strategies. Additionally, the Loan Committee periodically approves credits larger than the Chief Credit Officer's or Chief Executive Officer's individual approval authorities allow. The members of the Loan Committee are the Chief Executive Officer, Chief Credit Officer and the Commercial Banking Director.


122

Credit Risk Concentrations

Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities in the same geographic region, or when they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions.

Loans held for investment are primarily secured by real estate located in the states of Washington, Oregon, Idaho and Hawaii.
At December 31, 2013 we had concentrations representing 10% or more of the total portfolio by state and property type for the loan classes of single family and commercial real estate within the state of Washington, which represented 37.3% and 21.2% of the total portfolio, respectively. 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 metropolitan area of Puget Sound, particularly within King County.

Regulatory Agreements

The Company previously was subject to an Order to Cease and Desist issued by the OTS on May 18, 2009 and subsequently administered by the Federal Reserve. This order was terminated by the Federal Reserve effective March 26, 2013.

NOTE 3–BUSINESS COMBINATIONS:

On December 6, 2013, the Company acquired two retail deposit branches and some related assets from AmericanWest Bank, a Washington state-chartered bank. The branches are located on Bainbridge Island and in West Seattle. Deposits with face value of $32.0 million were acquired for a premium of $804 thousand .

On November 1, 2013, the Company completed its acquisition of Fortune Bank (“Fortune”) and YNB Financial Services Corp. (“YNB”), the parent of Yakima National Bank. The Company acquired all of the voting equity interests of Fortune Bank and YNB in exchange for cash consideration. Immediately following completion of the acquisitions, YNB was merged into HomeStreet, Inc. Additionally, Fortune Bank and Yakima National Bank were merged into HomeStreet Bank.

The primary objective for the acquisitions is to grow the Company’s Commercial and Consumer Banking business. Additionally, the acquisition of Yakima National Bank expands the Company's geographic footprint, which is consistent with the Company's ongoing growth strategy.

The assets acquired and liabilities assumed in the acquisitions described above have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The amounts currently recognized in the financial statements for acquired loans and core deposit intangibles have been determined provisionally as the completion of a fair value analysis for these items is still in progress.

The application of the acquisition method of accounting resulted, in the aggregate, in the recognition of goodwill of $11.6 million and core deposit intangible assets of $2.3 million . The goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. The goodwill is not deductible for income tax purposes. All of the goodwill has been assigned to the Commercial and Consumer Banking business segment. The acquired core deposit intangibles in the aggregate have been determined to have a weighted-average useful life of approximately 6.4 years and will be amortized on an accelerated basis.

The table below summarizes the aggregate amount recognized as of the acquisition date for each major class of assets acquired and liabilities assumed in the acquisitions of Fortune and YNB on November 1, 2013 and in the acquisition of two retail deposit branches from AmericanWest Bank on December 6, 2013:

123

(in thousands)
 
Year Ended December 31, 2013
 
 
 
Purchase price (1)
 
$
36,890

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:
 
 
Cash and cash equivalents
 
60,861

Investment securities
 
1,241

Acquired loans
 
206,737

Other real estate owned
 
740

Federal Home Loan Bank stock, at cost
 
240

Premises and equipment, net
 
3,156

Core deposit intangibles
 
2,317

Accounts receivable and other assets
 
15,006

Deposits
 
(261,116
)
Accounts payable and accrued expenses
 
(977
)
Long-term debt
 
(2,954
)
Total fair value of identifiable net assets
 
25,251

Goodwill
 
$
11,639


(1)
The purchase price represents the total amount of cash consideration transferred.

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities for the period November 1, 2013 to December 31, 2013 for the acquired banks and for the period December 6, 2013 to December 31, 2013 for the two retail deposit branches acquired from AmericanWest Bank.

In connection with the aforementioned acquisitions, HomeStreet recognized $4.5 million of acquisition-related expenses for the year ended December 31, 2013 as follows:
(in thousands)
 
Year Ended December 31, 2013
 
 
 
Acquisition-related costs recognized in noninterest expense:
 
 
Salaries and related costs
 
$
864

General and administrative
 
206

Legal
 
407

Consulting
 
3,007

Federal Deposit Insurance Corporation assessments
 
15

Occupancy
 
2

Information services
 
48

 
 
$
4,549



The table below details the estimated aggregate amount of contractually required payments, contractual cash flows not expected to be collected and cash flows expected to be collected as of the acquisition date on loans acquired in connection with the acquisitions of Fortune and YNB on November 1, 2013 and for the two retail deposit branches acquired from AmericanWest Bank on December 6, 2013:


124

(in thousands)
 
Year Ended December 31, 2013
 
 
 
Contractually required repayments including interest  (1)
 
$
265,215

Less: Contractual cash flows not expected to be collected
 
(4,646
)
Cash flows expected to be collected
 
$
260,569


(1)
Denotes required payments based on a loan's current contractual rate and contractual schedule, assuming no loss or prepayment.


NOTE 4–REGULATORY CAPITAL REQUIREMENTS:

HomeStreet, Inc., as a unitary savings and loan holding company, is not subject to minimum regulatory capital requirements. However, the Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average assets (as defined in the regulations). The regulators also have the ability to impose elevated capital requirements in certain circumstances. At December 31, 2013 the Bank's capital ratios meet the regulatory capital category of “well capitalized” as defined by the FDIC's prompt corrective action rules.

The Bank’s actual capital amounts and ratios are included in the following table:
 
 
At December 31, 2013
 
Actual
 
For Minimum Capital
Adequacy Purposes
 
To Be Categorized As
“Well Capitalized” Under
Prompt Corrective
Action Provisions
(in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage capital
(to average assets)
$
291,673

 
9.96
%
 
$
117,182

 
4.0
%
 
$
146,478

 
5.0
%
Tier 1 risk-based capital
(to risk-weighted assets)
291,673

 
14.28

 
81,708

 
4.0

 
122,562

 
6.0

Total risk-based capital
(to risk-weighted assets)
315,762

 
15.46

 
163,415

 
8.0

 
204,269

 
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



125

At periodic intervals, the FDIC and the WDFI routinely examine the Bank’s financial statements as part of their legally prescribed oversight of the banking industry. Based on their examinations, these regulators can direct that the Bank’s financial statements be adjusted in accordance with their findings.


NOTE 5–INVESTMENT SECURITIES:

The following table sets forth certain information regarding the amortized cost and fair values of our investment securities available for sale.
 
 
At December 31, 2013
(in thousands)
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
Residential
$
137,602

 
$
187

 
$
(3,879
)
 
$
133,910

Commercial
13,391

 
45

 
(3
)
 
13,433

Municipal bonds
136,937

 
185

 
(6,272
)
 
130,850

Collateralized mortgage obligations:
 
 
 
 
 
 
 
Residential
93,112

 
85

 
(2,870
)
 
90,327

Commercial
17,333

 
—

 
(488
)
 
16,845

Corporate debt securities
75,542

 
—

 
(6,676
)
 
68,866

U.S. Treasury securities
27,478

 
1

 
(27
)
 
27,452

 
$
501,395

 
$
503

 
$
(20,215
)
 
$
481,683



 
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 December 31, 2013 and 2012 , 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 December 31, 2013 and 2012 , substantially all securities held had ratings available by external ratings agencies.




126

Investment securities available for sale that were in an unrealized loss position are presented in the following tables based on the length of time the individual securities have been in an unrealized loss position.
 
 
At December 31, 2013
 
Less than 12 months
 
12 months or more
 
Total
(in thousands)
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
Gross
unrealized
losses
 
Fair
value
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Residential
$
(3,767
)
 
$
98,717

 
$
(112
)
 
$
6,728

 
$
(3,879
)
 
$
105,445

Commercial
(3
)
 
7,661

 
—

 
—

 
(3
)
 
7,661

Municipal bonds
(5,991
)
 
106,985

 
(281
)
 
3,490

 
(6,272
)
 
110,475

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
Residential
(2,120
)
 
63,738

 
(750
)
 
15,081

 
(2,870
)
 
78,819

Commercial
(488
)
 
16,845

 
—

 
—

 
(488
)
 
16,845

Corporate debt securities
(6,676
)
 
68,844

 
—

 
—

 
(6,676
)
 
68,844

U.S. Treasury securities
(27
)
 
25,452

 
—

 
—

 
(27
)
 
25,452

 
$
(19,072
)
 
$
388,242

 
$
(1,143
)
 
$
25,299

 
$
(20,215
)
 
$
413,541


 
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 Company has evaluated securities available for sale that are in an unrealized loss position and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company- or industry-specific credit event. As of December 31, 2013 and 2012 , the present value of the cash flows expected to be collected on all of the Company debt securities was greater than amortized cost of those securities. In addition, as of December 31, 2013 and 2012 , the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company did not hold any equity securities as of December 31, 2013 and 2012 .


127

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 December 31, 2013
 
Within one year
 
After one year
through five years
 
After five years
through ten years
 
After ten years
 
Total
(in thousands)
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
Fair
Value
 
Weighted
Average
Yield
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
$
—

 
—
%
 
$
—

 
—
%
 
$
10,581

 
1.63
%
 
$
123,329

 
1.82
%
 
$
133,910

 
1.81
%
Commercial
—

 
—

 
—

 
—

 
—

 
—

 
13,433

 
4.51

 
13,433

 
4.51

Municipal bonds
—

 
—

 
—

 
—

 
19,598

 
3.51

 
111,252

 
4.29

 
130,850

 
4.17

Collateralized mortgage obligations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
—

 
—

 
—

 
—

 
19,987

 
2.31

 
70,340

 
2.17

 
90,327

 
2.20

Commercial
—

 
—

 
—

 
—

 
5,270

 
1.90

 
11,575

 
1.42

 
16,845

 
1.57

Corporate debt securities
—

 
—

 
—

 
—

 
32,848

 
3.31

 
36,018

 
3.75

 
68,866

 
3.54

U.S. Treasury securities
1,001

 
0.18

 
26,451

 
0.30

 
—

 
—

 
—

 
—

 
27,452

 
0.29

Total available for sale
$
1,001

 
0.18
%
 
$
26,451

 
0.30
%
 
$
88,284

 
2.84
%
 
$
365,947

 
2.92
%
 
$
481,683

 
2.75
%
 
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
%


128

Sales of investment securities available for sale were as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Proceeds
$
127,648

 
$
166,187

 
$
239,878

Gross gains
2,089

 
1,921

 
1,378

Gross losses
(315
)
 
(431
)
 
(276
)

There were $47.3 million and $51.9 million in investment securities pledged to secure advances from the FHLB at December 31, 2013 and December 31, 2012 . At December 31, 2013 and 2012 , there were $37.7 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 totaling $4.0 million , $4.3 million , and $401 thousand for the years ended December 31, 2013 , 2012 , and 2011 , respectively, were recorded in the Company’s consolidated statements of operations.

NOTE 6–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.

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:
 
 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Consumer loans
 
 
 
Single family
$
904,913

 
$
673,865

Home equity
135,650

 
136,746

 
1,040,563

 
810,611

Commercial loans
 
 
 
Commercial real estate
477,642

 
361,879

Multifamily
79,216

 
17,012

Construction/land development
130,465

 
71,033

Commercial business
171,054

 
79,576

 
858,377

 
529,500

 
1,898,940

 
1,340,111

Net deferred loan fees and discounts
(3,219
)
 
(3,576
)
 
1,895,721

 
1,336,535

Allowance for loan losses
(23,908
)
 
(27,561
)
 
$
1,871,813

 
$
1,308,974


Loans in the amount of $800.5 million and $469.8 million at December 31, 2013 and 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 re-pledge these loans.


129

It is the Company’s policy to make loans to officers, directors, and their associates in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons. The following is a summary of activity during the years ended December 31, 2013 and 2012 with respect to such aggregate loans to these related parties and their associates:
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Beginning balance, January 1
$
11,763

 
$
5,869

New loans
2,178

 
5,982

Principal repayments and advances, net
(4,203
)
 
(88
)
Ending balance, December 31
$
9,738

 
$
11,763


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 December 31, 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.

Activity in the allowance for credit losses was as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Allowance for credit losses (roll-forward):
 
 
 
 
 
Beginning balance
$
27,751

 
$
42,800

 
$
64,566

Provision for credit losses
900

 
11,500

 
3,300

(Charge-offs), net of recoveries
(4,562
)
 
(26,549
)
 
(25,066
)
Ending balance
$
24,089

 
$
27,751

 
$
42,800

Components:
 
 
 
 
 
Allowance for loan losses
$
23,908

 
$
27,561

 
$
42,689

Allowance for unfunded commitments
181

 
190

 
111

Allowance for credit losses
$
24,089

 
$
27,751

 
$
42,800




130

Activity in the allowance for credit losses by loan portfolio and loan class was as follows.
 
 
Year Ended December 31, 2013
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
13,388

 
$
(2,967
)
 
$
536

 
$
1,033

 
$
11,990

Home equity
4,648

 
(1,960
)
 
583

 
716

 
3,987

 
18,036

 
(4,927
)
 
1,119

 
1,749

 
15,977

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
5,312

 
(1,448
)
 
134

 
14

 
4,012

Multifamily
622

 
—

 
—

 
320

 
942

Construction/land development
1,580

 
(458
)
 
767

 
(475
)
 
1,414

Commercial business
2,201

 
(21
)
 
272

 
(708
)
 
1,744

 
9,715

 
(1,927
)
 
1,173

 
(849
)
 
8,112

Total allowance for credit losses
$
27,751

 
$
(6,854
)
 
$
2,292

 
$
900

 
$
24,089



 
Year Ended December 31, 2012
(in thousands)
Beginning
balance
 
Charge-offs
 
Recoveries
 
Provision
 
Ending
balance
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
10,671

 
$
(5,939
)
 
$
657

 
$
7,999

 
$
13,388

Home equity
4,623

 
(4,264
)
 
631

 
3,658

 
4,648

 
15,294

 
(10,203
)
 
1,288

 
11,657

 
18,036

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
4,321

 
(4,253
)
 
259

 
4,985

 
5,312

Multifamily
335

 
—

 
10

 
277

 
622

Construction/land development
21,237

 
(14,861
)
 
1,042

 
(5,838
)
 
1,580

Commercial business
1,613

 
(558
)
 
727

 
419

 
2,201

 
27,506

 
(19,672
)
 
2,038

 
(157
)
 
9,715

Total allowance for credit losses
$
42,800

 
$
(29,875
)
 
$
3,326

 
$
11,500

 
$
27,751




131

The following table disaggregates our allowance for credit losses and recorded investment in loans by impairment methodology.
 
 
At December 31, 2013
(in thousands)
Allowance: collectively
evaluated for
impairment
 
Allowance: individually
evaluated for
impairment
 
Total
 
Loans:
collectively
evaluated for
impairment
 
Loans:
individually
evaluated for
impairment
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
Single family
$
10,632

 
$
1,358

 
$
11,990

 
$
831,730

 
$
73,183

 
$
904,913

Home equity
3,903

 
84

 
3,987

 
133,006

 
2,644

 
135,650

 
14,535

 
1,442

 
15,977

 
964,736

 
75,827

 
1,040,563

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
4,012

 
—

 
4,012

 
445,766

 
31,876

 
477,642

Multifamily
515

 
427

 
942

 
76,053

 
3,163

 
79,216

Construction/land development
1,414

 
—

 
1,414

 
124,317

 
6,148

 
130,465

Commercial business
1,042

 
702

 
1,744

 
168,199

 
2,855

 
171,054

 
6,983

 
1,129

 
8,112

 
814,335

 
44,042

 
858,377

Total
$
21,518

 
$
2,571

 
$
24,089

 
$
1,779,071

 
$
119,869

 
$
1,898,940

    

 
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




132

Impaired Loans

The following tables present impaired loans by loan portfolio segment and loan class.
 
 
At December 31, 2013
(in thousands)
Recorded
investment  (1)
 
Unpaid
principal
balance (2)
 
Related
allowance
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
39,341

 
$
41,935

 
$
—

Home equity
1,895

 
1,968

 
—

 
41,236

 
43,903

 
—

Commercial loans
 
 
 
 
 
Commercial real estate
31,876

 
45,921

 
—

Multifamily
508

 
508

 
—

Construction/land development
6,148

 
15,299

 
—

Commercial business
1,533

 
7,164

 
—

 
40,065

 
68,892

 
—

 
$
81,301

 
$
112,795

 
$
—

With an allowance recorded:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
33,842

 
$
33,900

 
$
1,358

Home equity
749

 
749

 
84

 
34,591

 
34,649

 
1,442

Commercial loans
 
 
 
 
 
Multifamily
2,655

 
2,832

 
427

Commercial business
1,322

 
1,478

 
702

 
3,977

 
4,310

 
1,129

 
$
38,568

 
$
38,959

 
$
2,571

Total:
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family (3)
$
73,183

 
$
75,835

 
$
1,358

Home equity
2,644

 
2,717

 
84

 
75,827

 
78,552

 
1,442

Commercial loans
 
 
 
 
 
Commercial real estate
31,876

 
45,921

 
—

Multifamily
3,163

 
3,340

 
427

Construction/land development
6,148

 
15,299

 
—

Commercial business
2,855

 
8,642

 
702

 
44,042

 
73,202

 
1,129

Total impaired loans
$
119,869

 
$
151,754

 
$
2,571


(1)
Includes partial charge-offs and nonaccrual interest paid.
(2)
Unpaid principal balance does not includes partial charge-offs or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $70.3 million in performing TDRs.


133


 
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 (3)
$
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 includes partial charge-offs or nonaccrual interest paid. Related allowance is calculated on net book balances not unpaid principal balances.
(3)
Includes $67.5 million in performing TDRs.


134

The following table provides the average recorded investment in impaired loans by portfolio segment and class.

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Consumer loans
 
 
 
Single family
$
76,910

 
$
68,439

Home equity
3,204

 
2,974

 
80,114

 
71,413

Commercial loans
 
 
 
Commercial real estate
28,595

 
32,246

Multifamily
3,197

 
5,854

Construction/land development
8,790

 
37,506

Commercial business
2,108

 
1,567

 
42,690

 
77,173

 
$
122,804

 
$
148,586


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 Company’s internal AQR grading scale is comprised of 10 grades. Each individual loan is given an internal risk rating scale from 1 through 10. A brief description of these grades is as follows:
•
Pass. We have five pass classification grades which represent a level of credit quality that ranges from no well-defined deficiency or weakness to some noted weakness, however the risk of default on any loan classified as pass is expected to be remote.
•
Watch. A loan graded as watch has a remote risk of default, but is exhibiting deficiency or weakness that requires monitoring by management.
•
Special Mention. A special mention loan does not currently expose us to a sufficient degree of risk to warrant an adverse classification, but does possess a correctable deficiency or potential weakness deserving management’s close attention.
•
Substandard. A substandard loan is inadequately protected by the current secured worth and paying capacity of the borrower or of collateral pledged on the loan, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, such as a high probability of payment default and are characterized by the distinct possibility that the institution will sustain some loss if deficiencies are not corrected.
•
Doubtful. A loan classified as doubtful has all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable. Doubtful is considered to be a temporary classification until resolution of pending weaknesses enables us to more fully evaluate the potential for loss.
•
Loss. That portion of a loan classified as loss is considered uncollectible and of so little value that its characterization as an asset is not warranted. A loss classification does not mean that an asset has absolutely no recovery or salvage value, but rather it is not reasonable to defer charging off all or that portion of the asset deemed uncollectible even though partial recovery may occur in the future.




135

The following tables present designated loan grades by loan portfolio segment and loan class.
 
 
At December 31, 2013
(in thousands)
Pass
 
Watch
 
Special mention
 
Substandard
 
Total
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
Single family
$
817,877

 
$
53,711

 
$
12,746

 
$
20,579

 
$
904,913

Home equity
132,086

 
1,442

 
276

 
1,846

 
135,650

 
949,963

 
55,153

 
13,022

 
22,425

 
1,040,563

Commercial loans
 
 
 
 
 
 
 
 
 
Commercial real estate
368,817

 
63,579

 
37,758

 
7,488

 
477,642

Multifamily
74,509

 
1,544

 
3,163

 
—

 
79,216

Construction/land development
121,026

 
3,414

 
2,895

 
3,130

 
130,465

Commercial business
145,760

 
20,062

 
586

 
4,646

 
171,054

 
710,112

 
88,599

 
44,402

 
15,264

 
858,377

 
$
1,660,075

 
$
143,752

 
$
57,424

 
$
37,689

 
$
1,898,940


 
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 ("OREO"). As of December 31, 2013 and 2012 , none of the Company's loans were rated Doubtful or Loss. The total amount of adversely classified assets was $50.6 million and $86.3 million as of December 31, 2013 and 2012 , respectively.


136

Nonaccrual and Past Due Loans

Loans are placed on nonaccrual status when the full and timely collection of principal and interest is doubtful, generally when the loan becomes 90 days or more past due for principal or interest payment or if part of the principal balance has been charged off. Loans whose repayments are insured by the FHA or guaranteed by the VA are generally maintained on accrual status even if 90 days or more past due.
The following table presents an aging analysis of past due loans by loan portfolio segment and loan class.
 
 
At December 31, 2013
(in thousands)
30-59 days
past due
 
60-89 days
past due
 
90 days or
more
past due
 
Total past
due
 
Current
 
Total
loans
 
90 days or
more past
due and accruing (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
6,466

 
$
4,901

 
$
55,672

 
$
67,039

 
$
837,874

 
$
904,913

 
$
46,811

Home equity
375

 
75

 
1,846

 
2,296

 
133,354

 
135,650

 
—

 
6,841

 
4,976

 
57,518

 
69,335

 
971,228

 
1,040,563

 
46,811

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate
—

 
—

 
12,257

 
12,257

 
465,385

 
477,642

 
—

Multifamily
—

 
—

 
—

 
—

 
79,216

 
79,216

 
—

Construction/land development
—

 
—

 
—

 
—

 
130,465

 
130,465

 
—

Commercial business
—

 
—

 
2,743

 
2,743

 
168,311

 
171,054

 
—

 
—

 
—

 
15,000

 
15,000

 
843,377

 
858,377

 
—

 
$
6,841

 
$
4,976

 
$
72,518

 
$
84,335

 
$
1,814,605

 
$
1,898,940

 
$
46,811


 
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 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)
FHA-insured and VA-guaranteed single family loans that are 90 days or more past due are maintained on accrual status if they are determined to have little to no risk of loss.

137


The following tables present performing and nonperforming loan balances by loan portfolio segment and loan class.
 
 
At December 31, 2013
(in thousands)
Accrual
 
Nonaccrual
 
Total
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
Single family
$
896,052

 
$
8,861

 
$
904,913

Home equity
133,804

 
1,846

 
135,650

 
1,029,856

 
10,707

 
1,040,563

Commercial loans
 
 
 
 
 
Commercial real estate
465,385

 
12,257

 
477,642

Multifamily
79,216

 
—

 
79,216

Construction/land development
130,465

 
—

 
130,465

Commercial business
168,311

 
2,743

 
171,054

 
843,377

 
15,000

 
858,377

 
$
1,873,233

 
$
25,707

 
$
1,898,940

 
 
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




138

The following tables present information about TDR activity during the periods presented.
 
Year Ended December 31, 2013
(dollars in thousands)
Concession type
 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
Single family
 
 
 
 
 
 
 
 
Interest rate reduction
 
104

 
$
22,605

 
$
—

 
 
 
104

 
22,605

 
—

Home equity
 
 
 
 
 
 
 
 
Interest rate reduction
 
9

 
571

 
—

 
 
 
9

 
$
571

 
—

Total consumer
 
 
 
 
 
 
 
 
Interest rate reduction
 
113

 
23,176

 
—

 
 
 
113

 
23,176

 
—

Total loans
 
 
 
 
 
 
 
 
Interest rate reduction
 
113

 
23,176

 
—

 
 
 
113

 
$
23,176

 
$
—


139


 
Year Ended December 31, 2012
(dollars in thousands)
Concession type
 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
Single family
 
 
 
 
 
 
 
 
Interest rate reduction
 
84

 
$
15,487

 
$
—

 
Payment restructure
 
1

 
280

 
—

 
 
 
85

 
$
15,767

 
$
—

Home equity
 
 
 
 
 
 
 
 
Interest rate reduction
 
7

 
$
527

 
$
—

 
 
 
7

 
$
527

 
$
—

Total consumer
 
 
 
 
 
 
 
 
Interest rate reduction
 
91

 
$
16,014

 
$
—

 
Payment restructure
 
1

 
280

 
—

 
 
 
92

 
$
16,294

 
$
—

Commercial loans
 
 
 
 
 
 
 
Commercial real estate
 
 
 
 
 
 
 
 
Interest rate reduction
 
2

 
$
6,070

 
$
1,000

 
 
 
2

 
$
6,070

 
$
1,000

Construction/land development
 
 
 
 
 
 
 
 
Forgiveness of principal
 
2

 
304

 
—

 
 
 
2

 
$
304

 
$
—

Total commercial
 
 
 
 
 
 
 
 
Interest rate reduction
 
2

 
$
6,070

 
$
1,000

 
Payment restructure
 
—

 
—

 
—

 
Forgiveness of principal
 
2

 
304

 
—

 
 
 
4

 
$
6,374

 
$
1,000

Total loans
 
 
 
 
 
 
 
 
Interest rate reduction
 
93

 
$
22,084

 
$
1,000

 
Payment restructure
 
1

 
280

 
—

 
Forgiveness of principal
 
2

 
304

 
—

 
 
 
96

 
$
22,668

 
$
1,000



140

 
Year Ended December 31, 2011
(dollars in thousands)
Concession type
 
Number of loan
modifications
 
Recorded
investment
 
Related charge-
offs
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
Single family
 
 
 
 
 
 
 
 
Interest rate reduction
 
150

 
$
41,765

 
$
—

 
Payment restructure
 
14

 
2,871

 
—

 
 
 
164

 
$
44,636

 
$
—

Home equity
 
 
 
 
 
 
 
 
Interest rate reduction
 
7

 
$
472

 
$
—

 
Payment restructure
 
6

 
212

 
—

 
 
 
13

 
$
684

 
$
—

Total consumer
 
 
 
 
 
 
 
 
Interest rate reduction
 
157

 
$
42,237

 
$
—

 
Payment restructure
 
20

 
3,083

 
—

 
 
 
177

 
$
45,320

 
$
—

Commercial loans
 
 
 
 
 
 
 
Commercial real estate
 
 
 
 
 
 
 
 
Payment restructure
 
1

 
9,321

 
—

 
 
 
1

 
$
9,321

 
$
—

Multifamily
 
 
 
 
 
 
 
 
Interest rate reduction
 
1

 
$
508

 
$
—

 
 
 
1

 
$
508

 
$
—

Construction/land development
 
 
 
 
 
 
 
 
Interest rate reduction
 
52

 
$
13,032

 
$
866

 
Payment restructure
 
1

 
2,750

 
—

 
Forgiveness of principal
 
10

 
1,395

 
—

 
 
 
63

 
$
17,177

 
$
866

Commercial business
 
 
 
 
 
 
 
 
Payment restructure
 
4

 
1,060

 
—

 
 
 
4

 
$
1,060

 
$
—

Total commercial
 
 
 
 
 
 
 
 
Interest rate reduction
 
53

 
$
13,540

 
$
866

 
Payment restructure
 
6

 
13,131

 
—

 
Forgiveness of principal
 
10

 
1,395

 
—

 
 
 
69

 
$
28,066

 
$
866

Total loans
 
 
 
 
 
 
 
 
Interest rate reduction
 
210

 
$
55,777

 
$
866

 
Payment restructure
 
26

 
16,214

 
—

 
Forgiveness of principal
 
10

 
1,395

 
—

 
 
 
246

 
$
73,386

 
$
866



141

The following table presents loans that were modified as TDRs within the previous 12 months and subsequently re-defaulted during the years ended December 31, 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.
 
 
Year Ended December 31,
 
2013
 
2012
(dollars in thousands)
Number of loan relationships that subsequently re-defaulted
 
Recorded
investment
 
Number of loan relationships that subsequently re-defaulted
 
Recorded
investment
 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
Single family
17

 
$
2,840

 
23

 
$
8,633

Home equity
1

 
22

 
1

 
34

 
18

 
2,862

 
24

 
8,667

Commercial loans
 
 
 
 
 
 
 
Commercial real estate
1

 
770

 
1

 
7,716

Commercial business
—

 
—

 
1

 
29

 
1

 
770

 
2

 
7,745

 
19

 
$
3,632

 
26

 
$
16,412



NOTE 7–OTHER REAL ESTATE OWNED:

Other real estate owned consisted of the following.
 
 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Single family
$
5,522

 
$
4,118

Commercial real estate
958

 
10,447

Construction/land development
8,128

 
24,341

 
14,608

 
38,906

Valuation allowance
(1,697
)
 
(14,965
)
 
$
12,911

 
$
23,941


Activity in other real estate owned was as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Beginning balance
$
23,941

 
$
38,572

Additions
8,199

 
44,195

Loss provisions
(603
)
 
(12,171
)
Reductions related to sales
(18,626
)
 
(46,655
)
Ending balance
$
12,911

 
$
23,941



142

Activity in the valuation allowance for other real estate owned was as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Beginning balance
$
14,965

 
$
21,502

 
$
29,099

Loss provisions
603

 
12,171

 
27,079

(Charge-offs), net of recoveries
(13,871
)
 
(18,708
)
 
(34,676
)
Ending balance
$
1,697

 
$
14,965

 
$
21,502


The components of other real estate owned expense are as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Maintenance costs
$
840

 
$
1,289

 
$
3,755

Loss provisions
603

 
12,171

 
27,079

Net gain on sales
(722
)
 
(2,508
)
 
(190
)
Gain on transfer
(119
)
 
(489
)
 
—

Net operating income (loss)
1,209

 
(378
)
 
(363
)
Total other real estate owned expense
$
1,811

 
$
10,085

 
$
30,281


At December 31, 2013 , we had concentrations within the state of Washington, primarily in Thurston County, representing 70.5% of the total balance of other real estate owned. At December 31, 2012 , we had concentrations within the state of Washington representing 92.5% of the total balance of other real estate owned.


NOTE 8–PREMISES AND EQUIPMENT, NET:

Premises and equipment consisted of the following.
 
 
December 31,
(in thousands)
2013
 
2012
 
 
 
 
Furniture and equipment
$
47,247

 
$
32,279

Leasehold improvements
17,525

 
10,798

Land and buildings
2,095

 
—

 
66,867

 
43,077

Less: accumulated depreciation
(30,255
)
 
(27,845
)
 
$
36,612

 
$
15,232


Depreciation expense for the years ending December 31, 2013 , 2012 , and 2011 , was $4.6 million , $2.7 million , and $2.0 million , respectively.


143

NOTE 9–DEPOSITS:

Deposit balances, including stated rates, were as follows.
 
 
At December 31,
( in thousands)
2013
 
2012
 
 
 
 
Noninterest-bearing accounts
$
322,952

 
$
358,831

NOW accounts, 0.00% to 0.75% at December 31, 2013 and December 31, 2012
297,966

 
174,699

Statement savings accounts, due on demand, 0.20% to 2.00% at December 31, 2013 and 0.20% to 0.85% at December 31, 2012
156,181

 
103,932

Money market accounts, due on demand, 0.00% to 1.50% at December 31, 2013 and December 31, 2012
919,322

 
683,906

Certificates of deposit, 0.10% to 3.80% at December 31, 2013 and 0.10% to 4.70% at December 31, 2012
514,400

 
655,467

 
$
2,210,821

 
$
1,976,835


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

Interest expense on deposits was as follows.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
NOW accounts
$
924

 
$
498

 
$
575

Statement savings accounts
546

 
395

 
335

Money market accounts
3,899

 
3,248

 
3,020

Certificates of deposit
5,047

 
12,600

 
20,885

 
$
10,416

 
$
16,741

 
$
24,815


The weighted-average interest rates on certificates of deposit at December 31, 2013 , 2012 , and 2011 were 0.71% , 1.59% , and 1.66% , respectively.

Certificates of deposit outstanding mature as follows.
 
(in thousands)
 
At December 31, 2013
 
 
 
Within one year
 
$
398,599

One to two years
 
48,226

Two to three years
 
48,345

Three to four years
 
13,176

Four to five years
 
6,054

 
 
$
514,400


The aggregate amount of time deposits in denominations of $100 thousand or more at December 31, 2013 and 2012 , was $216.5 million and $300.4 million , respectively. The aggregate amount of time deposits in denominations of more than $250 thousand at December 31, 2013 and 2012 was $26.3 million and $45.3 million , respectively. There were $144.3 million of brokered deposits as of December 31, 2013 , and none at December 31, 2012 .


144

NOTE 10–FEDERAL HOME LOAN BANK AND OTHER:

The Company borrows through advances from the FHLB. FHLB advances totaled $446.6 million and $259.1 million as of December 31, 2013 , and December 31, 2012 , respectively.

Weighted-average interest rates on the advances were 0.43% , 0.60% , and 4.67% at December 31, 2013 , 2012 and 2011 , respectively. The advances may be collateralized by stock in the FHLB, pledged securities, and unencumbered qualifying loans. The Company has an available line of credit with the FHLB equal to 25 percent of assets, subject to collateralization requirements. Based on the amount of qualifying collateral available, borrowing capacity from the FHLB was $228.5 million as of December 31, 2013 . The FHLB is not contractually bound to continue to offer credit to the Company, and the Company’s access to credit from this agency for future borrowings may be discontinued at any time.

FHLB advances outstanding by contractual maturities were as follows.
 
 
At December 31, 2013
(in thousands)
Advances
outstanding
 
Weighted-average
interest rate
 
 
 
 
2014
$
431,000

 
0.27
%
2015
—

 
—

2016
—

 
—

2017
—

 
—

2018 and thereafter
15,590

 
4.64

 
$
446,590

 
0.43
%

The Company, as a member of the FHLB, is required to own shares of FHLB stock. This requirement is based upon the amount of either the eligible collateral or advances outstanding from the FHLB. As of December 31, 2013 and 2012 , the Company held $35.3 million and $36.4 million , respectively, of FHLB stock. FHLB stock is carried at par value and is restricted to transactions between the FHLB and its member institutions. FHLB stock can only be purchased or redeemed at par value. Both cash and dividends received on FHLB stock are reported in earnings.

On November 6, 2009, the Federal Housing Finance Agency (the "Finance Agency") regulator reaffirmed its capital classification of the FHLB as undercapitalized. Under the Finance Agency regulations, a FHLB that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock. As such, the FHLB will not be able to redeem, repurchase, or declare dividends on stock outstanding while the risk-based capital deficiency exists. In September 2012, the Finance Agency reclassified the FHLB as adequately capitalized but the FHLB remained subject to the Consent Order. On November 22, 2013, the Finance Agency issued an amended Consent Order, which modifies and supersedes the October 2010 Consent Order. The amended Consent Order acknowledges the FHLB’s fulfillment of many of the requirements set forth in the 2010 Consent Order and improvements in the FHLB’s financial performance, while continuing to impose certain restrictions on its ability to repurchase, redeem, and pay dividends on its capital stock. As such, Finance Agency approval or non-objection will continue to be required for all repurchases, redemptions, and dividend payments on capital stock.

At December 31, 2013 , there has been no change in the restrictions regarding the FHLB's ability to redeem, repurchase or declare dividends on stock outstanding.

Management periodically evaluates FHLB stock for other-than-temporary impairment. Management’s determination of whether these investments are impaired is based on its assessment of ultimate recoverability of par value rather than recognizing temporary declines in value. The determination of whether the decline affects the ultimate recoverability is influenced by criteria such as: (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB; and (4) the liquidity position of the FHLB. Based on this evaluation, the Company determined there is not an other-than-temporary impairment of the FHLB stock investment as of December 31, 2013 , or 2012 .


145

The Company may also borrow on a collateralized basis from the Federal Reserve Bank of San Francisco (“FRBSF”). At December 31, 2013 and 2012 , there were no outstanding borrowings from the FRBSF. Based on the amount of qualifying collateral available, borrowing capacity from the FRBSF was $332.7 million at December 31, 2013 . The FRB of San Francisco is not contractually bound to offer credit to the Company, and the Company’s access to credit from this agency for future borrowings may be discontinued at any time.

NOTE 11–LONG-TERM DEBT:

The Company raised capital by issuing trust preferred securities ("TruPS") during the period from 2005 through 2007, resulting in a debt balance of $61.9 million at December 31, 2012. We acquired $3.1 million of TruPS debt through the acquisiton of YNB in 2013, bringing our total TruPS long-term debt to $64.8 million which remains outstanding at December 31, 2013 . In connection with the issuance of TruPS, HomeStreet, Inc. issued to HomeStreet Statutory Trust Junior Subordinated Deferrable Interest Debentures and YNB had issued Yakima Statutory Trust Debentures (collectively, the “Subordinated Debt Securities”).

The Subordinated Debt Securities are as follows:
 
 
HomeStreet Statutory
 
Yakima Statutory
(in thousands)
I
 
II
 
III
 
IV
 
I
 
 
 
 
 
 
 
 
 
 
Date issued
June 2005
 
September 2005
 
February 2006
 
March 2007
 
May 2007
Amount
$5,155
 
$20,619
 
$20,619
 
$15,464
 
$3,093
Interest rate
3 MO LIBOR + 1.70%
 
3 MO LIBOR + 1.50%
 
3 MO LIBOR + 1.37%
 
3 MO LIBOR + 1.68%
 
6.88%
Maturity date
June 2035
 
December 2035
 
March 2036
 
June 2037
 
June 2037
Call option (1)
5 years
 
5 years
 
5 years
 
5 years
 
5 years
(1) Call options are exercisable at par.

Following the first call date, the HomeStreet Statutory TruPS debt adjusts quarterly with the change in the three-month LIBOR rate. The sole assets of the HomeStreet Statutory Trust are the Subordinated Debt Securities I, II, III, and IV.

The sole assets of the Yakima Statutory TruPS are the Subordinated Debt Securities I.

The Company deferred the payment of interest on its outstanding TruPS from December 15, 2008 until March 15, 2013, when all deferred and current interest owed on our outstanding TruPS was paid.

During 2011, we recorded a gain on debt extinguishment of $2.0 million upon the early retirement of senior debt, which totaled $5.0 million and was settled for $3.0 million .


NOTE 12–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 ("MSRs"), the Company utilizes derivatives, such as forward sale commitments, futures, option contracts, interest rate swaps and swaptions as risk management instruments in its hedging strategy. Derivative transactions are measured in terms of notional amount, which is not recorded in the consolidated statements of financial condition. The notional amount is generally not exchanged and is used as the basis for interest and other contractual payments.

The use of derivatives as interest rate risk management instruments helps minimize significant, unplanned fluctuations in earnings, fair value of assets and liabilities, and cash flows caused by interest rate volatility. This approach involves mitigating the repricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant adverse effect on net interest margin and cash flows. As a result of interest rate fluctuations, hedged assets and liabilities will gain or lose market value. In a fair value hedging strategy, the effect of this gain or loss will generally be offset by the gain or loss on the derivatives linked to hedged assets or liabilities. In a cash flow hedging strategy, management manages the variability of cash payments due to interest rate fluctuations by the effective use of derivatives linked to hedged assets and liabilities. We held no derivatives designated as a cash flow or foreign currency hedge instrument at December 31, 2013 or 2012 . Derivatives are

146

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 5, Investment Securities of this Form 10-K for further information on securities collateral pledged. At December 31, 2013 and 2012 , the Company did not hold any collateral received from counterparties under derivative transactions.

The Company’s derivative activities are monitored by the asset/liability management committee. The treasury function, which includes asset/liability management, is responsible for hedging strategies developed through analysis of data from financial models and other internal and industry sources. The resulting hedging strategies are incorporated into the overall risk management strategies.

For further information on the policies that govern derivative and hedging activities, see Note1, Summary of Significant Accounting Policies of this form 10-K.

The notional amounts and fair values for derivatives consist of the following:
 
 
At December 31, 2013
 
Notional amount
 
Fair value derivatives
(in thousands)
 
 
Asset
 
Liability
 
 
 
 
 
 
Forward sale commitments
$
526,382

 
$
3,630

 
$
(578
)
Interest rate swaptions
110,000

 
858

 
(199
)
Interest rate lock commitments
261,070

 
6,012

 
(40
)
Interest rate swaps
508,004

 
1,088

 
(9,548
)
Total derivatives before netting
$
1,405,456

 
$
11,588

 
$
(10,365
)
Netting adjustments (1)
 
 
(1,363
)
 
1,363

Carrying value on consolidated statements of financial position
 
 
$
10,225

 
$
(9,002
)
 
 
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 position
 
 
$
22,655

 
$
(11,069
)



147

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

 
At December 31, 2013
(in thousands)
Gross fair value
 
Netting adjustments
 
Carrying value
 
Cash collateral paid (1)
 
Securities pledged
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
Forward sale commitments
$
3,630

 
$
(33
)
 
$
3,597

 
$
—

 
$
—

 
$
3,597

Interest rate swaps
1,946

 
(1,330
)
 
616

 
—

 
—

 
616

Total derivatives subject to legally enforceable master netting agreements
5,576

 
(1,363
)
 
4,213

 
—

 
—

 
4,213

Interest rate lock commitments
6,012

 
—

 
6,012

 
—

 
—

 
6,012

Total derivative assets
$
11,588

 
$
(1,363
)
 
$
10,225

 
$
—

 
$
—

 
$
10,225

 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
Forward sale commitments
$
(578
)
 
$
33

 
$
(545
)
 
$
115

 
$
410

 
$
(20
)
Interest rate swaps
(9,747
)
 
1,330

 
(8,417
)
 
8,376

 
41

 
—

Total derivatives subject to legally enforceable master netting agreements
(10,325
)
 
1,363

 
(8,962
)
 
8,491

 
451

 
(20
)
Interest rate lock commitments
(40
)
 
—

 
(40
)
 
—

 
—

 
(40
)
Total derivative liabilities
$
(10,365
)
 
$
1,363

 
$
(9,002
)
 
$
8,491

 
$
451

 
$
(60
)


 
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 $18.5 million and $18.0 million at December 31, 2013 and 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 receivables and payables, because, at an individual counterparty level, the collateral exceeded the fair value exposure at both December 31, 2013 and 2012 .

Management uses derivatives that are designated as qualifying hedge contracts as defined by Accounting Standards Codification (ASC) 815, Derivatives and Hedging, as fair value hedges, which are comprised of interest rate swap contracts. Interest rate swap contracts are used to convert commercial business loans held for investment from fixed to floating rates to

148

hedge against exposure to changes in benchmark interest rates. All parts of the gain or loss due to the hedged risk (e.g., fair value changes due to changes in benchmark interest rates) are included in the assessment of hedge effectiveness. These swap contracts are carried at fair value, with the net settlement of the derivatives reported in loans receivable interest income and ineffectiveness for these swap contracts reported in other noninterest income.

For fair value hedging relationships, the dollar-offset method is used to assess hedge effectiveness, both at the inception of the hedging relationship and on an ongoing basis. Hedge effectiveness is evaluated prospectively as well as through retrospective evaluations. For prospective considerations, we develop an expectation that the relationship will be highly effective over future periods. For retrospective evaluations management determines whether the hedging relationship has been highly effective. The dollar-offset method compares the change in the fair value of the hedging instrument with the changes in the fair value of the hedged item attributable to the hedged risk. The results of the dollar-offset method along with other relevant information are the basis for evaluating hedge effectiveness prospectively.

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 $151 thousand and $114 thousand for the years ended December 31, 2013 and 2012 , respectively.

Free-standing derivatives are also used for fair value interest rate risk management purposes that do not qualify for hedge accounting treatment, referred to as economic hedges. Economic hedges are used to hedge against adverse changes in fair value of single family mortgage servicing rights (“single family MSRs”), interest rate lock commitments (“IRLCs”) for single family mortgage loans that the Company intends to sell, and single family mortgage loans held for sale.

Free-standing derivatives used as economic hedges for single family MSRs typically include positions in interest rate futures, options on 10-year treasury contracts, forward sales commitments on mortgage-backed securities, and interest rate swap and swaption contracts. The single family MSRs and the free-standing derivatives are carried at fair value with changes in fair value included in mortgage servicing income.

The free-standing derivatives used as economic hedges for IRLCs and single family mortgage loans held for sale are forward sales commitments on mortgage-backed securities and option contracts. IRLCs, single family mortgage loans held for sale, and the free-standing derivatives (“economic hedges”) are carried at fair value with changes in fair value included in net gain (loss) on mortgage loan origination and sale activities.

The following table presents the net gain (loss) recognized on derivatives, including economic hedge derivatives, within the respective line items in the statement of operations for the periods indicated.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Recognized in noninterest income:
 
 
 
 
 
Net gain (loss) on mortgage loan origination and sale activities (1)
$
12,904

 
$
(14,382
)
 
$
(15,260
)
Mortgage servicing income  (2)
(20,432
)
 
21,982

 
53,418

 
$
(7,528
)
 
$
7,600

 
$
38,158

 
(1)
Comprised of 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.


149

NOTE 13–MORTGAGE BANKING OPERATIONS:

Loans held for sale consisted of the following.
 
 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Single family
$
279,385

 
$
607,578

Multifamily
556

 
13,221

 
$
279,941

 
$
620,799


Loans sold consisted of the following.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Single family
$
4,733,473

 
$
4,170,840

 
$
1,739,220

Multifamily
104,016

 
118,805

 
119,477

 
$
4,837,489

 
$
4,289,645

 
$
1,858,697


Net gain on mortgage loan origination and sale activities, including the effects of derivative risk management instruments, consisted of the following.
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Single family:
 
 
 
 
 
Servicing value and secondary market gains (1)
$
128,391

 
$
175,655

 
$
33,523

Loan origination and funding fees
30,051

 
30,037

 
11,946

Total single family
158,442

 
205,692

 
45,469

Multifamily
5,306

 
4,872

 
2,998

Other
964

 
—

 
—

Total net gain on mortgage loan origination and sale activities
$
164,712

 
$
210,564

 
$
48,467

 
(1)
Comprised of gains and losses on interest rate lock commitments (which considers the value of servicing), single family loans held for sale, forward sale commitments used to economically hedge secondary market activities, and changes in the Company's repurchase liability for loans that have been sold.

The Company’s portfolio of loans serviced for others is primarily comprised of loans held in U.S. government and agency MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae. Loans serviced for others are not included in the consolidated statements of financial condition as they are not assets of the Company. The composition of loans serviced for others is presented below at the unpaid principal balance.
 

150

 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Single family
 
 
 
U.S. government and agency
$
11,467,853

 
$
8,508,458

Other
327,768

 
362,230

 
11,795,621

 
8,870,688

Commercial
 
 
 
Multifamily
720,429

 
727,118

Other
95,673

 
53,235

 
816,102

 
780,353

Total loans serviced for others
$
12,611,723

 
$
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 14, Commitments, Guarantees and Contingencies . The following is a summary of changes in the Company's liability for estimated mortgage repurchase losses.
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Balance, beginning of year
$
1,955

 
$
471

Additions (1)
1,828

 
4,317

Realized losses (2)
(2,523
)
 
(2,833
)
Balance, end of year
$
1,260

 
$
1,955

 
(1)
Includes additions for new loan sales and changes in estimated probable future repurchase losses on previously sold loans.
(2)
Includes principal losses and accrued interest on repurchased loans, “make-whole” settlements, settlements with claimants and certain related expense.

Advances are made to Ginnie Mae mortgage pools for delinquent loan payments. We also fund foreclosure costs and we repurchase loans from Ginnie Mae mortgage pools prior to recovery of guaranteed amounts. Ginnie Mae advances of $7.1 million and $5.9 million were recorded in accounts receivable and other assets as of December 31, 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 December 31, 2013 and 2012 , delinquent or defaulted mortgage loans currently in Ginnie Mae pools that the Company has recognized on its consolidated statement of financial condition totaled $14.3 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.


151

 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Servicing income, net:
 
 
 
 
 
Servicing fees and other
$
34,173

 
$
27,833

 
$
26,125

Changes in fair value of single family MSRs due to modeled amortization (1)
(20,533
)
 
(20,662
)
 
(14,435
)
Amortization of multifamily MSRs
(1,803
)
 
(2,014
)
 
(1,487
)
 
11,837

 
5,157

 
10,203

Risk management, single family MSRs:
 
 
 
 
 
Changes in fair value due to changes in model inputs and/or assumptions (2)
25,668

 
(11,018
)
 
(25,565
)
Net gain from derivatives economically hedging MSR
(20,432
)
 
21,982

 
53,418

 
5,236

 
10,964

 
27,853

Mortgage servicing income
$
17,073

 
$
16,121

 
$
38,056

 
(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.

 
Year Ended December 31,
(rates per annum)  (1)
2013
 
2012
 
2011
 
 
 
 
 
 
Constant prepayment rate  (2)
9.28
%
 
11.64
%
 
12.21
%
Discount rate
10.25
%
 
10.28
%
 
10.35
%
 
(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.


152

 
(in thousands)
At December 31, 2013
 
 
Fair value of single family MSR
$
153,128

Expected weighted-average life (in years)
7.13

Constant prepayment rate (1)
10.27
%
Impact on fair value of 25 basis adverse change
$
(5,031
)
Impact on fair value of 50 basis adverse change
$
(11,112
)
Discount rate
10.50
%
Impact on fair value of 100 basis points increase
$
(5,861
)
Impact on fair value of 200 basis points increase
$
(11,303
)
 
(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.


153

The changes in single family MSRs measured at fair value are as follows.
 
 
At December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Beginning balance
$
87,396

 
$
70,169

 
$
81,197

 
 
 
 
 
 
Originations
60,576

 
48,839

 
28,885

Purchases
21

 
68

 
87

Changes due to modeled amortization (1)
(20,533
)
 
(20,662
)
 
(14,435
)
Net additions and amortization
40,064

 
28,245

 
14,537

Changes in fair value due to changes in model inputs and/or assumptions (2)
25,668

 
(11,018
)
 
(25,565
)
Ending balance
$
153,128

 
$
87,396

 
$
70,169

 
(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.
 
 
December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Beginning balance
$
8,097

 
$
7,112

 
$
6,035

Origination
3,027

 
2,999

 
2,564

Amortization
(1,789
)
 
(2,014
)
 
(1,487
)
Ending balance
$
9,335

 
$
8,097

 
$
7,112


At December 31, 2013 , the expected weighted-average life of the Company’s multifamily MSRs was 9.07 years. Projected amortization expense for the gross carrying value of multifamily MSRs is estimated as follows.
 
(in thousands)
At December 31, 2013
 
 
2014
$
1,614

2015
1,450

2016
1,336

2017
1,213

2018
1,056

2019 and thereafter
2,666

Carrying value of multifamily MSR
$
9,335


The projected amortization expense of multifamily MSRs is an estimate and should be used with caution. The amortization expense for future periods was calculated by applying the same quantitative factors, such as actual MSR prepayment experience and discount rates, which were used to determine amortization expense. These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in interest rates may have on expected loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the conditions that existed at the time the calculations were performed and may not be indicative of actual amortization expense that will be recorded in future periods.

154

NOTE 14–COMMITMENTS, GUARANTEES, AND CONTINGENCIES:

Commitments

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

The Company makes certain unfunded loan commitments as part of its lending activities that have not been recognized in the Company’s financial statements. These include commitments to extend credit made as part of the Company's mortgage lending activities and interest rate lock commitments on loans the Company intends to hold in its loans held for investment portfolio. The aggregate amount of these unrecognized unfunded loan commitments existing at December 31, 2013 and December 31, 2012 was $18.4 million and $76.8 million , respectively.
In the ordinary course of business, the Company extends secured and unsecured open-end loans to meet the financing needs of its customers. These commitments, which primarily related to unused home equity and business banking funding lines, totaled $154.0 million and $91.1 million at December 31, 2013 and December 31, 2012 , respectively. Undistributed construction loan commitments, where the Company has an obligation to advance funds for construction progress payments, were $168.5 million and $34.5 million at December 31, 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 $181 thousand and $190 thousand at December 31, 2013 and December 31, 2012 , respectively.

The Company is obligated under non-cancelable leases for office space. Generally, the office leases also contain five-year renewal and space options. Rental expense under non-cancelable operating leases totaled $11.4 million , $7.1 million , and $5.7 million for the years ended December 31, 2013 , 2012 , and 2011 , respectively.

Minimum rental payments for all non-cancelable leases were as follows.
 
(in thousands)
At December 31, 2013
 
 
2014
$
11,856

2015
12,062

2016
11,371

2017
10,478

2018
3,943

2019 and thereafter
4,115

 
$
53,825


Guarantees

In the ordinary course of business, the Company sells multifamily loans through the Fannie Mae Multifamily Delegated Underwriting and Servicing Program (“DUS®”) 1 that are subject to a credit loss sharing arrangement. The Company services the loans for Fannie Mae and shares in the risk of loss with Fannie Mae under the terms of the DUS contracts. Under the program, the DUS lender is contractually responsible for the first 5% of losses and then shares equally in the remainder of losses with Fannie Mae with a maximum lender loss of 20% of the original principal balance of each DUS loan. For loans that have been sold through this program, a liability is recorded for this loss sharing arrangement under the accounting guidance for guarantees. As of December 31, 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 $2.0 million and $3.3 million at December 31, 2013 and 2012 , respectively. There were no actual losses incurred under this arrangement during the years ended December 31, 2013 , 2012 , and 2011 .

Mortgage repurchase liability

In the ordinary course of business, the Company sells residential mortgage loans to GSEs that include the mortgage loans in GSE-guaranteed mortgage securitizations. In addition, the Company sells FHA-insured and VA-guaranteed mortgage loans that are sold to Ginnie Mae and are used to back Ginnie Mae-guaranteed securities. The Company has made representations and

155

warranties that the loans sold meet certain requirements. The Company may be required to repurchase mortgage loans or indemnify loan purchasers due to defects in the origination process of the loan, such as documentation errors, underwriting errors and judgments, early payment defaults and fraud.

These obligations expose the Company to any credit loss on the repurchased mortgage loans after accounting for any mortgage insurance that it may receive. Generally, the maximum amount of future payments the Company would be required to make for breaches of these representations and warranties would be equal to the unpaid principal balance of such loans that are deemed to have defects that were sold to purchasers plus, in certain circumstances, accrued and unpaid interest on such loans and certain expenses.

The Company does not typically receive repurchase requests from Ginnie Mae, FHA or VA. As an originator of FHA-insured or VA-guaranteed loans, the Company is responsible for obtaining the insurance with FHA or the guarantee with the VA. If loans are later found not to meet the requirements of FHA or VA, through required internal quality control reviews or through agency audits, the Company may be required to indemnify FHA or VA against losses.  The loans remain in Ginnie Mae pools unless and until they are repurchased by the Company.  In general, once a FHA or VA loan becomes 90 days past due, the Company repurchases the FHA or VA residential mortgage loan to minimize the cost of interest advances on the loan.  If the loan is cured through borrower efforts or through loss mitigation activities, the loan may be resold into a Ginnie Mae pool. The Company's liability for mortgage loan repurchase losses incorporates probable losses associated with such indemnification.

The total unpaid principal balance of loans sold that were subject to the terms and conditions of these representations and warranties totaled $11.89 billion and $8.92 billion as of December 31, 2013 and 2012 , respectively. At December 31, 2013 and 2012 , the Company had recorded a mortgage repurchase liability, included in accounts payable and other liabilities on the consolidated statements of financial condition, of $1.3 million and $2.0 million , respectively. The Company's mortgage repurchase liability reflects management's estimate of losses for loans for which we could have a repurchase obligation. Actual repurchase losses of $2.5 million , $2.8 million and $826 thousand were incurred for the years ended December 31, 2013 , 2012 , and 2011 , 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 December 31, 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 December 31, 2013 .

NOTE 15–INCOME TAXES:

Income tax expense (benefit) consisted of following:
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Current (benefit) expense
$
(21,166
)
 
$
26,656

 
$
(198
)
Deferred expense (benefit)
32,151

 
(5,110
)
 
(16
)
Total income tax expense
$
10,985

 
$
21,546

 
$
(214
)


156

Income tax expense differed from amounts computed at the federal income tax statutory rate as follows:
 
 
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Income taxes at statutory rate
$
12,178

 
$
36,285

 
$
5,567

Tax-exempt interest
(1,452
)
 
(1,162
)
 
(235
)
State income tax expense net of federal tax benefit
148

 
333

 
68

Valuation allowance
—

 
(14,423
)
 
(5,475
)
Tax credits
(293
)
 
—

 
—

Other, net
404

 
513

 
(139
)
Total income tax expense
$
10,985

 
$
21,546

 
$
(214
)


Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those amounts used for tax return purposes. The tax effect of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities consisted of the following:
 
 
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Deferred tax assets:
 
 
 
Provision for loan losses
$
11,165

 
$
12,948

Net operating loss and built-in loss carryforwards
17,201

 
14,577

Other real estate owned
977

 
5,674

Accrued liabilities
1,975

 
2,768

Other investments
326

 
315

Leases
1,018

 
745

Unrealized gain on investment securities available for sale
7,051

 
—

Tax credits
2,443

 
1,148

Other, net
665

 
379

 
42,821

 
38,554

Valuation allowance
—

 
—

 
42,821

 
38,554

Deferred tax liabilities:
 
 
 
Mortgage servicing rights
(48,402
)
 
(26,062
)
Unrealized gain on investment securities available for sale
—

 
(4,356
)
FHLB dividends
(4,310
)
 
(4,491
)
Deferred loan fees and costs
(2,290
)
 
(2,100
)
Premises and equipment
(859
)
 
(1,134
)
Other, net
(760
)
 
(302
)
 
(56,621
)
 
(38,445
)
Net deferred tax (liability) asset
$
(13,800
)
 
$
109


Net deferred tax assets are included in the accounts receivable and other assets line item within the consolidated statements of financial condition. Net deferred tax liabilities are included in accounts payable and other liabilities on the consolidated statements of financial condition.

As a consequence of our initial public offering in February 2012, the Company experienced a change of control within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended. Section 382 substantially limits the ability of a

157

corporate taxpayer to use recognized built-in losses and net operating loss carryforwards incurred prior to the change of control against income earned after a change of control. Based on our analysis, the change of control will not result in a loss of deferred tax benefits other than a small impact on deferred tax assets related to state income taxes in Oregon.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. During the second quarter of 2012, management analyzed the positive and negative evidence which included the Company reporting its fifth consecutive quarter of profitability, the future reversals of deferred tax assets and deferred tax liabilities over a similar period of time, future expectations of profitability, significant improvement in overall asset quality and related credit/risk metrics and the expectation that we will be able to exit a three-year cumulative pre-tax loss position in 2012. Based on these factors, we determined as of December 31, 2013 that sufficient objective positive evidence existed to support the future utilization of the deferred tax assets.

At December 31, 2013 , the Company has federal net operating loss carryforwards totaling $27.4 million , which expire between 2024 and 2031 . The Company has a Section 382 recognized built-in loss carryforwards of $20.0 million as of December 31, 2013 which expires in 2032 . In addition, as of December 31, 2013 , the Company has an alternative minimum tax credit of $2.4 million that may be carried forward indefinitely. The Company also has state net operating loss carryforwards of $67.3 million that expire between 2014 and 2024.

Retained earnings at December 31, 2013 and 2012 include approximately $12.7 million in tax basis bad debt reserves for which no income tax liability has been recorded. In the future, if this tax basis bad debt reserve is used for purposes other than to absorb bad debts or the Company no longer qualifies as a bank, the Company will incur a federal tax liability at the then prevailing corporate tax rate estimated at $4.4 million as of December 31, 2013 .

There were no unrecognized tax benefits at December 31, 2013 and 2012 . The Company does not anticipate a significant increase with respect to its unrecognized tax benefits within the next twelve months.

The Company’s income tax returns are open for examination for the tax years 2009 through 2013.


NOTE 16–401(k) SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLAN:

The Company maintains a 401(k) Savings and Employee Stock Ownership Plan (the “Plan”) for the benefit of its employees. Effective January 1, 2011, the employee stock ownership plan portion of the Plan became a separate plan named the HomeStreet, Inc. Employee Stock Ownership Plan and Trust (the “ESOP”). Net assets of approximately $6.7 million were transferred from the Plan to the ESOP. The Plan was renamed the HomeStreet, Inc. 401(k) Savings Plan. The ESOP and 401(k) Savings Plan covers substantially all employees of the Company after completion of the required length of service and provides for payment of retirement benefits to employees pursuant to the provisions of the plans. Effective July 31, 2012, the ESOP was merged into the Plan.

Prior to September 1, 2012, the Company employer-matching contribution to the 401(k) Savings Plan was 50% of the first 6% of an employee’s eligible compensation that was contributed by the employee. Effective September 1, 2012, new employees are automatically enrolled in the 401(k) Savings Plan at a 3% deferral rate unless they elect otherwise. Participants receive a vested employer matching contribution equal to 100% of the first 3% of eligible compensation deferred by the participant and 50% of the next 2% of eligible compensation deferred by the participant.

Salaries and related costs for the years ended December 31, 2013 , 2012 , and 2011 , included employer contributions of $3.7 million , $1.4 million and $707 thousand , respectively.

NOTE 17–SHARE-BASED COMPENSATION PLANS:

For the years ended December 31, 2013 , 2012 , and 2011 , the Company recognized $1.1 million , $2.8 million , and $22 thousand of compensation cost, respectively, for share-based compensation awards.

2010 Equity Incentive Plan

In January 2010, the shareholders approved the Company's 2010 Equity Incentive Plan (the “2010 EIP”). Under the 2010 EIP, all of the Company’s officers, employees, directors and/or consultants are eligible to receive awards. Awards that may be granted under the 2010 EIP include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, stock bonus awards and incentive bonus awards, or a combination of the foregoing.

158

The 2010 ESOP became effective during February 2012, upon the completion of the Company’s initial public offering. The maximum amount of HomeStreet, Inc. common stock available for grant under the 2010 EIP is 94,294 as of December 31, 2013 .

Under the 2010 EIP, the exercise price of an option may not be less than the fair market value of a share of common stock at the grant date. The options generally vest on a graded schedule from one to five years, depending on the terms of the grant, and generally expire ten years from the grant date.

Nonqualified Stock Options

During the latter part of 2010, nonqualified stock options were granted outside of, but under substantially the same terms as, the 2010 EIP. This issuance was assessed against the maximum number of shares available for grant under the 2010 EIP. This issuance was approved by the Board of Directors and appropriate regulatory agencies and option grants were issued to key senior management personnel.

Upon the successful completion of the initial public offering in February of 2012, nonqualified stock options were granted to key senior management personnel. A summary of changes in nonqualified stock options granted is as follows:
 
 
Number
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic Value  (2)
(in thousands)
 
 
 
 
 
 
 
 
Options outstanding at December 31, 2012
1,049,366

 
$
7.66

 
8.7 years
 
$
18,776

Granted
7,758

 
22.22

 
9.4 years
 
—

Cancelled or forfeited
(27,064
)
 
9.79

 
0.0 years
 
276

Exercised
(375,844
)
 
1.05

 
6.9 years
 
7,328

Options outstanding at December 31, 2013
654,216

 
11.54

 
8.1 years
 
5,559

Options that are exercisable and expected to be exercisable   (1)
647,421

 
11.54

 
8.1 years
 
5,499

Options exercisable
241,458

 
$
10.07

 
7.9 years
 
$
2,398

 
(1)
Adjusted for estimated forfeitures.
(2)
Intrinsic value is the amount by which fair value of the underlying stock exceeds the exercise price.

Under this plan, 375,844 options have been exercised during the year ended December 31, 2013 , resulting in cash received and related income tax benefits totaling $395 thousand . As of December 31, 2013 , there was $1.1 million of total unrecognized compensation costs related to stock options. Compensation costs are recognized over the requisite service period, which typically is the vesting period. Unrecognized compensation costs are expected to be recognized over the remaining weighted-average requisite service period of 1.2 years .

As observable market prices are generally not available for estimating the fair value of stock options, an option-pricing model is utilized to estimate fair value. The fair value of the options granted was estimated as of the grant date using a Black-Scholes Merton (“Black-Scholes”) model and the assumptions noted in the following table.
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
 
 
 
 
 
 
Weighted-average fair value per share
$
8.78

 
$
4.00

 
$
0.95

Expected term of the option
6 years

 
6 years

 
6 years

Expected stock price volatility
50.04
%
 
33.13
%
 
48.96
%
Annual risk-free interest rate
1.18
%
 
1.23
%
 
2.23
%
Expected annual dividend yield
2.03
%
 
2.26
%
 
—
%


159

The weighted-average expected term of approximately six years used to value option awards issued is an estimate based on an expectation that the holders of the stock options, once vested, will exercise them – ultimately reflecting the settlement of all vested options. As the Company does not have historical exercise behavior to reference for these types of options, the Company leveraged the “simplified” method for estimating the expected term of these “plain vanilla” stock options.

When estimating expected volatility and the dividend yield, the Company considered historical data of other similar entities that are publicly traded over a period commensurate with the life of the options. A single median was derived for each input from this population.

Restricted Shares

The Company grants restricted stock awards to key senior management personnel and directors. A summary of changes in the Company's restricted stock awards is as follows.
 
 
Number
 
Weighted
Average
Grant Date Fair Value
 
 
 
 
Restricted shares outstanding at December 31, 2012
35,831

 
$
14.79

Granted
35,893

 
20.80

Cancelled or forfeited
(4,239
)
 
25.22

Vested
(13,534
)
 
13.75

Restricted shares outstanding at December 31, 2013
53,951

 
18.18

Nonvested at December 31, 2013
53,951

 
$
18.18


The Company recognized $242 thousand in compensation expense for restricted shares during the year ended December 31, 2013 . At December 31, 2013 , there was $845 thousand of total unrecognized compensation cost related to nonvested restricted shares. Unrecognized compensation cost is generally expected to be recognized over a weighted average period of 2.6 years . Restricted shares granted to non-employee directors vest one-third at each one year anniversary from the grant date. Restricted shares granted to senior management vest based upon the achievement of certain market conditions. One-third vested when the 30-day rolling average share price exceeded 25% of the grant date fair value; one-third vested when the 30-day rolling average share price exceeded 40% of the grant date fair value; and one-third vested when the 30-day rolling average share price exceeded 50% of the grant date fair value. The Company accrues compensation expense based upon an estimate of the awards' expected vesting period. If a market condition is satisfied prior to the end of the estimated vesting period any unrecognized compensation costs associated with the portion of restricted shares that vested earlier than expected are immediately recognized in earnings.

NOTE 18–FAIR VALUE MEASUREMENT:

The term "fair value" is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The Company’s approach is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

Fair Value Hierarchy
A three-level valuation hierarchy has been established under ASC 820 for disclosure of fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels are defined as follows:
•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

160

•
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. This includes quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability for substantially the full term of the financial instrument.
•
Level 3 – Unobservable inputs for the asset or liability. These inputs reflect the Company’s assumptions of what market participants would use in pricing the asset or liability.

The Company's policy regarding transfers between levels of the fair value hierarchy is that all transfers are assumed to occur at the end of the reporting period.

Valuation Processes
The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. The Finance Committee provides oversight and approves the Company’s Asset/Liability Management Policy ("ALMP"). The Company's ALMP governs, among other things, the application and control of the valuation models used to measure fair value. On a quarterly basis, the Company’s Asset/Liability Management Committee ("ALCO") and the Finance Committee of the Board review significant modeling variables used to measure the fair value of the Company’s financial instruments, including the significant inputs used in the valuation of single family MSRs. Additionally, at least annually ALCO obtains an independent review of the MSR valuation process and procedures, including a review of the model architecture and the valuation assumptions. The Company obtains an MSR valuation from an independent valuation firm monthly to assist with the validation of the fair value estimate and the reasonableness of the assumptions used in measuring fair value.

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

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

Estimation of Fair Value
Fair value is based on quoted market prices, when available. In cases where a quoted price for an asset or liability is not available, the Company uses valuation models to estimate fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities, and pricing spreads utilizing market-based inputs where readily available. The Company believes its valuation methods are appropriate and consistent with those that would be used by other market participants. However, imprecision in estimating unobservable inputs and other factors may result in these fair value measurements not reflecting the amount realized in an actual sale or transfer of the asset or liability in a current market exchange.


161

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.  



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 propertie s
  
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.



162

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 13, 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.

Level 2 recurring fair value measurement prior to December 31, 2012.
Other real estate owned (“OREO”)
  
Fair value is based on appraised value of collateral, less the estimated cost to sell. See discussion of "loans held for investment, collateral dependent" above for further information on appraisals.
  
Carried at lower of amortized cost or fair value of collateral (Level 3), less the estimated cost to sell.
Federal Home Loan Bank stock
  
Carrying value approximates fair value as FHLB stock can only be purchased or redeemed at par value.
  
Carried at par value.
 
Estimated fair value classified as Level 2.
Deposits
  
 
  
 
Demand deposits
  
Fair value is estimated as the amount payable on demand at the reporting date.
  
Carried at historical cost.
 
Estimated fair value classified as Level 2.
Fixed-maturity certificates of deposit
  
Fair value is estimated using discounted cash flows based on market rates currently offered for deposits of similar remaining time to maturity.
  
Carried at historical cost.
 
Estimated fair value classified as Level 2.
Federal Home Loan Bank advances
  
Fair value is estimated using discounted cash flows based on rates currently available for advances with similar terms and remaining time to maturity.
  
Carried at historical cost.
 
Estimated fair value classified as Level 2.
Long-term debt
  
Fair value is estimated using discounted cash flows based on current lending rates for similar long-term debt instruments with similar terms and remaining time to maturity.
  
Carried at historical cost.
 
Estimated fair value classified as Level 2.



163

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 December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment securities available for sale
 
 
 
 
 
 
 
Mortgage backed securities:
 
 
 
 
 
 
 
Residential
$
133,910

 
$
—

 
$
133,910

 
$
—

Commercial
13,433

 
—

 
13,433

 
—

Municipal bonds
130,850

 
—

 
130,850

 
—

Collateralized mortgage obligations:

 
 
 
 
 
 
Residential
90,327

 
—

 
90,327

 
—

Commercial
16,845

 
—

 
16,845

 
—

Corporate debt securities
68,866

 
—

 
68,866

 
—

U.S. Treasury securities
27,452

 
—

 
27,452

 
—

Single family mortgage servicing rights
153,128

 
—

 
—

 
153,128

Single family loans held for sale
279,385

 
—

 
279,385

 
—

Derivatives
 
 
 
 
 
 
 
Forward sale commitments
3,630

 
—

 
3,630

 
—

Interest rate swaptions
858

 
—

 
858

 
—

Interest rate lock commitments
6,012

 
—

 
—

 
6,012

Interest rate swaps
1,088

 
—

 
1,088

 
—

Total assets
$
925,784

 
$
—

 
$
766,644

 
$
159,140

Liabilities:
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Forward sale commitments
578

 
$
—

 
$
578

 
$
—

Interest rate swaptions
199

 
—

 
199

 
—

Interest rate lock commitments
40

 
—

 
—

 
40

Interest rate swaps
9,548

 
—

 
9,548

 
—

Total liabilities
$
10,365

 
$
—

 
$
10,325

 
$
40

 


164

(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

 
—

Swaptions
—

 
—

 
—

 
—

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


Effective December 31, 2012, the Company began to classify interest rate lock commitments (“IRLC”) as Level 3, reflecting management's judgment regarding the transparency and significance of the fall-out factor and initial value of servicing to the fair value measurement of these instruments in their entirety.

Level 3 Recurring Fair Value Measurements

The Company's level 3 recurring fair value measurements consist of single family mortgage servicing rights and interest rate lock commitments, which are accounted for as derivatives. For information regarding fair value changes and activity for single family MSRs during the year ended December 31, 2013 and 2012 , see Note 13, Mortgage Banking Operations .

The fair value of IRLCs considers several factors including the fair value in the secondary market of the underlying loan resulting from the exercise of the commitment, the expected net future cash flows related to the associated servicing of the loan (referred to as the value of servicing) and the probability that the commitment will not be converted into a funded loan (referred to as a fall-out factor). The fair value of IRLCs on loans held for sale, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans.  The significance of the fall-out factor to the fair value measurement of an individual IRLC is generally highest at the time that the rate lock is initiated and declines as closing procedures are performed and the underlying loan gets closer to funding. The fall-out factor applied is based on historical experience. The value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs, and underlying portfolio characteristics. Because these inputs are not observable in market trades, the fall-out factor and value of servicing are considered to be level 3 inputs. The fair value of IRLCs 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 other significant unobservable inputs.

The Company recognizes unrealized gains and losses from the time that an IRLC is initiated until the gain or loss is realized at the time the loan closes, which generally occurs within 30-90 days.  For IRLCs that fall out, any unrealized gain or loss is reversed, which generally occurs at the end of the commitment period.  The gains and losses recognized on IRLC derivatives

165

generally correlates to volume of single family interest rate lock commitments made during the reporting period (after adjusting for estimated fallout) while the amount of unrealized gains and losses realized at settlement generally correlates to the volume of single family closed loans during the reporting period.

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

(in thousands)
 
Year Ended December 31, 2013
 
 
 
Beginning balance, net
 
$
22,528

Total realized/unrealized gains (1)
 
123,068

Settlements
 
(139,624
)
Ending balance, net
 
$
5,972

(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 year ended December 31, 2013 there were net unrealized (losses) gains of $6.0 million recognized on interest rate lock commitments still outstanding at December 31, 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 December 31, 2013
Fair Value
 
Valuation
Technique
 
Significant Unobservable
Input
 
Low
 
High
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments, net
$
5,972

 
Income approach
 
Fall out factor
 
0.5%
 
97.0%
 
17.8%
 
 
 
 
 
Value of servicing
 
0.62%
 
2.65%
 
1.22%

(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%

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 table presents assets that were recorded at fair value during the years ended December 31, 2013 and 2012 and still held at the end of the respective reporting period.


166

 
For the Twelve Months Ended December 31, 2013
(in thousands)
Fair Value of Assets Held at December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total Gains (Losses)
 
 
 
 
 
 
 
 
 
 
Loans held for investment (1)
$
44,422

 
—

 
—

 
$
44,422

 
$
(1,629
)
Other real estate owned (2)
12,959

 
—

 
—

 
12,959

 
574

Total
$
57,381

 
$
—

 
$
—

 
$
57,381

 
$
(1,055
)
 
 
For the Twelve Months Ended December 31, 2012
(in thousands)
Fair Value of Assets Held at December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total Losses
 
 
 
 
 
 
 
 
 
 
Loans held for investment (1)
$
39,816

 
—

 
—

 
$
39,816

 
$
(6,241
)
Other real estate owned (2)
11,012

 
—

 
—

 
11,012

 
(6,298
)
Total
$
50,828

 
$
—

 
$
—

 
$
50,828

 
$
(12,539
)
 
(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 twelve months ended December 31, 2013 and 2012 for assets still held at the end of the respective reporting period.

(dollars in thousands)
Fair Value of Assets Held at December 31, 2013 (1)
 
Valuation
Technique
 
Significant Unobservable
Input
 
Year Ended December 31, 2013
 
 
 
Low
 
High
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
$
14,534

 
Market approach
 
Comparable sale adjustments (2)
 
0%
 
45%
 
20%
 
14,534

 
Income approach
 
Discount rate
 
8.2%
 
9.5%
 
8.9%
Other real estate owned
$
5,814

 
Market approach
 
Comparable sale adjustments (2)
 
0%
 
50%
 
25%


167


(dollars in thousands)
Fair Value of Assets Held at December 31, 2012 (1)
 
Valuation
Technique
 
Significant Unobservable
Input
 
Year Ended December 31, 2012
 
 
 
Low
 
High
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for investment
$
39,816

 
Market approach
 
Comparable sale adjustments (2)
 
20%
 
45%
 
29%
 
 
 
Income approach
 
Terminal capitalization rate
 
8%
 
8%
 
8%
 
 
 
 
 
Discount rate
 
9%
 
9%
 
9%
Other real estate owned
$
11,012

 
Market approach
 
Comparable sale adjustments (2)
 
2%
 
6%
 
3%
 
 
 
 
 
Other discounts (3)
 
16%
 
16%
 
16%
 
(1)
Assets that are valued using more than one valuation technique are presented within multiple categories for each valuation technique used. Excludes unobservable inputs that we consider, both individually and in the aggregate, to have been insignificant relative to our overall nonrecurring Level 3 measurements recorded during the period.
(2)
Represents the range of net adjustments reflecting differences between a comparable sale and the property being appraised, expressed as an absolute value.
(3)
Includes bulk sale discounts applied to the aggregate retail value of tract development properties, accelerated marketing period discounts and time-hold or other discounts applied to derive the “as is” market value of certain properties requiring a holding period before reaching a state of feasibility or completion (e.g., “upon completion” or "upon stabilization" value) and management discounts based on the Company's experience with actual liquidation values.

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

In addition to the instruments disclosed in the table above, certain nonrecurring fair value measurements of residential properties were based on unadjusted third-party appraisals. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.


168

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 December 31, 2013
(in thousands)
Carrying
Value
 
Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
33,908

 
$
33,908

 
$
33,908

 
$
—

 
$
—

Loans held for investment
1,871,813

 
1,900,349

 
—

 
—

 
1,900,349

Loans held for sale – multifamily
556

 
556

 
—

 
556

 
—

Mortgage servicing rights – multifamily
9,335

 
10,839

 
—

 
—

 
10,839

Federal Home Loan Bank stock
35,288

 
35,288

 
—

 
35,288

 
—

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
2,210,821

 
$
2,058,533

 
$
—

 
$
2,058,533

 
$
—

Federal Home Loan Bank advances
446,590

 
449,109

 
—

 
449,109

 
—

Long-term debt
64,811

 
63,849

 
—

 
63,849

 
—

 
 
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

 
13,221

 
—

 
13,221

 
—

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 $977 thousand and $216 thousand at December 31, 2013 and 2012 , respectively.


169

NOTE 19–EARNINGS PER SHARE:

The following table summarizes the calculation of earnings per share.
 
 
Year Ended December 31,
(in thousands, except share data)
2013
 
2012
 
2011
 
 
 
 
 
 
Net income
$
23,809

 
$
82,126

 
$
16,119

Weighted-average shares:
 
 
 
 
 
Basic weighted-average number of common shares outstanding
14,412,059

 
13,312,939

 
5,403,498

Dilutive effect of outstanding common stock equivalents  (1)
386,109

 
426,459

 
344,844

Diluted weighted-average number of common shares outstanding
14,798,168

 
13,739,398

 
5,748,342

Earnings per share:
 
 
 
 
 
Basic earnings per share
$
1.65

 
$
6.17

 
$
2.98

Diluted earnings per share
$
1.61

 
$
5.98

 
$
2.80

 
 
 
 
 
 
Dividends per share
$
0.33

 
$
—

 
$
—

 
(1)
Excluded from the computation of diluted earnings per share (due to their antidilutive effect) for the twelve months ended December 31, 2013 were certain stock options and unvested restricted stock issued to key senior management personnel and directors of the Company. The aggregate number of common stock equivalents related to such options and unvested restricted shares, which could potentially be dilutive in future periods, was 103,674 and 121,283 at December 31, 2013 and December 31, 2012 , respectively. There were no outstanding common stock equivalents during the twelve months ended December 31, 2012 excluded from the computation of diluted EPS.


NOTE 20–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: Commercial and Consumer Banking segment and Mortgage Banking segment. In conjunction with this realignment, the Company modified its internal reporting to provide discrete financial information to management for these two business segments. The information that follows has been revised to reflect the current business segments.

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

Commercial and Consumer Banking provides diversified financial products and services to our commercial and consumer customers through bank branches and through ATMs, online, mobile and telephone banking. These products and services include deposit products; residential, consumer and business portfolio loans; non-deposit investment products; insurance products and cash management services. We originate residential and commercial construction loans, bridge loans and permanent loans for our portfolio primarily on single family residences, and on office, retail, industrial and multifamily property types. We originate commercial real estate loans including multifamily lending through our Fannie Mae DUS business, whereby loans are sold to or securitized by Fannie Mae, while the Company generally retains the servicing rights. This segment is also responsible for the management of the Company's portfolio of investment securities.

Mortgage Banking originates and purchases single family residential mortgage loans for sale in the secondary markets. We purchase loans from WMS Series LLC through a correspondent arrangement with that company. The majority of our mortgage loans are sold to or securitized by Fannie Mae, Freddie Mac or Ginnie Mae, while we retain the right to service these loans. A small percentage of our loans are brokered or sold on a servicing-released basis to correspondent lenders. We manage the loan funding and the interest rate risk associated with the secondary market loan sales and the retained servicing rights within this business segment.


170

We use various management accounting methodologies to assign certain income statement items to the responsible operating segment, including:
•
a funds transfer pricing (“FTP”) system, which allocates interest income credits and funding charges between the segments and the Treasury division within the All Other category, which then assigns to each segment a funding credit for its liabilities, such as deposits, and a charge to fund its assets;
•
an allocation of charges for services rendered to the segments by centralized functions, such as corporate overhead, which are generally based on each segment’s consumption patterns; and
•
an allocation of the Company's consolidated income taxes which are based on the effective tax rate applied to the segment's pretax income or loss.

Effective January 1, 2012 management updated the FTP methodology it uses for reviewing segment results and managing the Company’s lines of business. Under the previous FTP methodology, we computed the cost of funds from our current period’s financial results and then allocated a portion of that cost of funds to each respective operating segment. This approach was based on internal financial results and updated for current period information, thereby providing an updated funding cost applied to certain assets or liabilities originated in prior periods.

The updated methodology is based on external market factors and more closely aligns the expected weighted-average life of the financial asset or liability to external economic data, such as the U.S. Dollar LIBOR/Swap curve, and provides a more consistent basis for determining the cost of funds to be allocated to each operating segment. The updated approach is also more consistent with FTP measurement techniques employed by other industry participants. We have reclassified all prior period amounts to conform to the current period’s methodology and presentation.

In general, the impact of the FTP change resulted in a lower cost of funds as compared with the previous method as the Company’s funding costs have generally been higher than market prices due to the historical structure of the deposit portfolio and wholesale borrowings.

Financial highlights by operating segment were as follows.
 
 
Year Ended December 31, 2013
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 
Total
 
 
 
 
 
 
Condensed income statement:
 
 
 
 
 
Net interest income  (1)
$
15,272

 
$
59,172

 
$
74,444

Provision for loan losses
—

 
900

 
900

Noninterest income
182,704

 
8,041

 
190,745

Noninterest expense
165,728

 
63,767

 
229,495

Income (loss) before income taxes
32,248

 
2,546

 
34,794

Income tax (benefit) expense
11,076

 
(91
)
 
10,985

Net income (loss)
$
21,172

 
$
2,637

 
$
23,809

Average assets
$
595,368

 
$
2,122,846

 
$
2,718,214

 

171

 
Year Ended December 31, 2012
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 
Total
 
 
 
 
 
 
Condensed income statement:
 
 
 
 
 
Net interest income (1)
$
14,117

 
$
46,626

 
$
60,743

Provision for loan losses
—

 
11,500

 
11,500

Noninterest income
228,234

 
9,786

 
238,020

Noninterest expense
120,364

 
63,227

 
183,591

Income (loss) before income taxes
121,987

 
(18,315
)
 
103,672

Income tax (benefit) expense
25,367

 
(3,821
)
 
21,546

Net income (loss)
$
96,620

 
$
(14,494
)
 
$
82,126

Average assets
$
554,824

 
$
1,849,036

 
$
2,403,860

 
 
Year Ended December 31, 2011
(in thousands)
Mortgage
Banking
 
Commercial and
Consumer Banking
 
Total
 
 
 
 
 
 
Condensed income statement:
 
 
 
 
 
Net interest income (expense) (1)
$
3,918

 
$
44,576

 
$
48,494

Provision for loan losses
—

 
3,300

 
3,300

Noninterest income
84,006

 
13,199

 
97,205

Noninterest expense
46,601

 
79,893

 
126,494

Income (loss) before income taxes
41,323

 
(25,418
)
 
15,905

Income tax expense (benefit)
(103
)
 
(111
)
 
(214
)
Net income (loss)
$
41,426

 
$
(25,307
)
 
$
16,119

Average assets
$
230,850

 
$
2,068,951

 
$
2,299,801


(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.


172

NOTE 21–PARENT COMPANY FINANCIAL STATEMENTS:

Condensed financial information for HomeStreet, Inc. is as follows.
 
Condensed Statements of Financial Condition
At December 31,
(in thousands)
2013
 
2012
 
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
4,334

 
$
22,568

Other assets
10,340

 
3,314

Investment in stock of subsidiaries
316,384

 
311,779

 
$
331,058

 
$
337,661

Liabilities :
 
 
 
Other liabilities
321

 
12,042

Long-term debt
64,811

 
61,857

 
65,132

 
73,899

Shareholders’ Equity:
 
 
 
Preferred stock, no par value
—

 
—

Common stock, no par value
511

 
511

Additional paid-in capital
94,474

 
90,189

Retained earnings
182,935

 
163,872

Accumulated other comprehensive (loss) income
(11,994
)
 
9,190

 
265,926

 
263,762

 
$
331,058

 
$
337,661

 
Condensed Statements of Operations
Year Ended December 31,
(in thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net interest expense
$
(2,545
)
 
$
(1,324
)
 
$
(2,026
)
Noninterest income
970

 
800

 
13,665

Income (loss) before income tax benefit and equity in income of subsidiaries
(1,575
)
 
(524
)
 
11,639

Dividend from HomeStreet Capital to parent
19,600

 
—

 
(10,700
)
Income from subsidiaries
6,591

 
84,504

 
19,508

 
24,616

 
83,980

 
20,447

Noninterest expense
2,281

 
3,152

 
4,328

Income before income tax benefit
22,335

 
80,828

 
16,119

Income tax benefit
(1,474
)
 
(1,298
)
 
—

Net income
$
23,809

 
$
82,126

 
$
16,119

 
 
 
 
 
 
Other comprehensive income
(21,184
)
 
5,071

 
11,484

Comprehensive income
$
2,625

 
$
87,197

 
$
27,603

 


173

Condensed Statements of Cash Flows
Year Ended December 31,
(in thousands)
2013
 
2012
 
 
 
 
Net cash (used in) provided by operating activities
(20,083
)
 
(2,023
)
Cash flows from investing activities
 
 
 
Purchases of and proceeds from investment securities
(5,797
)
 
1,058

Payments for investments in and advances to subsidiaries
$
(12,172
)
 
$
(65,000
)
Net cash (used in) provided by investing activities
(17,969
)
 
(63,942
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock
188

 
88,178

Proceeds from advances from subsidiaries
30

 
34

Dividend from banking subsidiary
19,600

 
—

Net cash provided by financing activities
19,818

 
88,212

(Decrease) increase in cash and cash equivalents
(18,234
)
 
22,247

Cash and cash equivalents at beginning of year
22,568

 
321

Cash and cash equivalents at end of year
$
4,334

 
$
22,568



174

NOTE 22–UNAUDITED QUARTERLY FINANCIAL DATA:

Our supplemental quarterly consolidated financial information is as follows.
 
 
Quarter ended
 
Quarter ended
(in thousands, except share data)
Dec. 31, 2013
 
Sept. 30, 2013
 
June 30, 2013
 
Mar. 31, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
 
June 30, 2012
 
Mar. 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
24,422

 
$
23,348

 
$
20,468

 
$
20,738

 
$
20,926

 
$
21,053

 
$
19,856

 
$
18,856

Interest expense
3,040

 
2,936

 
3,053

 
5,503

 
4,335

 
4,533

 
5,057

 
6,023

Net interest income
21,382

 
20,412

 
17,415

 
15,235

 
16,591

 
16,520

 
14,799

 
12,833

Provision (reversal of provision) for credit losses
—

 
(1,500
)
 
400

 
2,000

 
4,000

 
5,500

 
2,000

 
—

Net interest income after provision for credit losses
21,382

 
21,912

 
17,015

 
13,235

 
12,591

 
11,020

 
12,799

 
12,833

Noninterest income
36,072

 
38,174

 
57,556

 
58,943

 
71,932

 
69,091

 
56,850

 
40,150

Noninterest expense
58,868

 
58,116

 
56,712

 
55,799

 
55,966

 
45,934

 
46,954

 
34,740

(Loss) income before income tax expense
(1,414
)
 
1,970

 
17,859

 
16,379

 
28,557

 
34,177

 
22,695

 
18,243

Income tax (benefit) expense
(553
)
 
308

 
5,791

 
5,439

 
7,060

 
12,186

 
4,017

 
(1,716
)
Net (loss) income
$
(861
)
 
$
1,662

 
$
12,068

 
$
10,940

 
$
21,497

 
$
21,991

 
$
18,678

 
$
19,959

Basic (loss) earnings per share
$
(0.06
)
 
$
0.12

 
$
0.84

 
$
0.76

 
$
1.50

 
$
1.53

 
$
1.31

 
$
1.94

Diluted (loss) earnings per share
$
(0.06
)
 
$
0.11

 
$
0.82

 
$
0.74

 
$
1.46

 
$
1.50

 
$
1.26

 
$
1.86




NOTE 23–SUBSEQUENT EVENTS:


The Company has evaluated the effects of events that have occurred subsequent to the year ended December 31, 2013 , and has included all material events that would require recognition in the 2013 consolidated financial statements or disclosure in the notes to the consolidated financial statements.

On March 5, 2014, the Company announced its intent to sell two pools of residential loans, while retaining the right to service such loans. The first pool is comprised of fixed-rate residential mortgage loans with outstanding principal balances of approximately $105 million . The second pool is comprised of adjustable rate residential mortgage loans with outstanding principal balances of approximately $222 million . The mortgage loans subject to these sales are located in Washington, Oregon, Idaho and Hawaii. The $105 million pool sale is expected to close in March 2014 and the $222 million pool sale is expected to close in April 2014. These sales are subject to numerous contingencies, including the successful negotiation and execution of final agreements between the parties.

ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No disclosure required pursuant to Item 304 of Regulation S-K.


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ITEM 9A
CONTROLS AND PROCEDURES

Evaluation of 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 December 31, 2013 .

Management's Report on Internal Controls Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2013 , using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (1992). Management excluded from its assessment the internal control over financial reporting at Fortune Bank (“Fortune”) and YNB Financial Services Corp. (“YNB”), the parent company of Yakima National Bank, which were acquired on November 1, 2013 and whose financial statements constituted, of the consolidated financial statement amounts, 11% of loans held for investment (net of allowance for loan losses), 9% of deposits, 9% of total assets and 2% of net interest income as of and for the year ended December 31, 2013.

Based on this assessment, management concluded that as of December 31, 2013 , the Company's internal control over financial reporting was effective.

Changes in Internal Controls Over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during any quarter in the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
HomeStreet, Inc.
Seattle, Washington

We have audited the internal control over financial reporting of HomeStreet, Inc. and subsidiaries (the “Company”) as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because management’s assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Reports of Condition and Income for Schedules RC, RI, and RI-A. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
As described in Management's Report on Internal Controls Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Fortune Bank (“Fortune”) and YNB Financial Services Corp. (“YNB”), the parent company of Yakima National Bank, which were acquired on November 1, 2013 and whose financial statements constitute approximately 11% of loans held for investment (net of allowance for loan losses), 9% of deposits, 9% of total assets, and 2% of net interest income as of and for the year ended December 31, 2013. Accordingly, our audit did not include the internal control over financial reporting at Fortune and YNB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately, and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the

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company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2013, of the Company and our report dated March 17, 2014, expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 17, 2014


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ITEM 9B    OTHER INFORMATION

None.
PART III
 
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be set forth in our definitive proxy statement with respect to our 2014 annual meeting of stockholders (the “2014 Proxy Statement”) to be filed with the SEC, which is expected to be filed not later than 120 days after the end of our fiscal year ended December 31, 2013 , and is incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Business Conduct and Ethics is posted on our website at http://ir.homestreet.com.

We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Business Conduct and Ethics by posting such information on our corporate website, at the address and location specified above and, to the extent required by the listing standards of the NASDAQ Global Select Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.

ITEM 11
EXECUTIVE COMPENSATION

The information required by this item will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.

ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.

ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by this item will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.

ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be set forth in the 2014 Proxy Statement and is incorporated herein by reference.


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Table of Contents

PART IV
 
ITEM 15
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)
Financial Statements and Financial Statement Schedules
(i)
Financial Statements
The following consolidated financial statements of the registrant and its subsidiaries are included in Part II Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2013 and 2012
Consolidated Statements of Operations for the three years ended December 31, 2013
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2013
Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2013
Consolidated Statements of Cash Flows for the three years ended December 31, 2013
Notes to Consolidated Financial Statements
(ii)
Financial Statement Schedules
II—Valuation and Qualifying Accounts
All financial statement schedules for the Company have been included in the consolidated financial statements or the related footnotes, or are either inapplicable or not required.
(iii)
Exhibits
EXHIBIT INDEX

Exhibit
Number
 
Description
 
 
 
3.1 (1)
 
Amended and Restated Articles of Incorporation of HomeStreet, Inc.
 
 
 
3.2  (1)
 
Amended and Restated Bylaws of HomeStreet, Inc.
 
 
 
3.3 (3)
 
Second Amended and Restated Bylaws of HomeStreet, Inc.
 
 
 
3.4 (4)
 
Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
 
 
 
3.5  (6)
 
First Amendment to Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
 
 
 
3.6 (7)
 
Amendment to Second Amended and Restated Articles of Incorporation of HomeStreet, Inc.
 
 
 
4.1 (5)
 
Form of Common Stock Certificate
 
 
 
4.2
 
Reference is made to Exhibit 3.1
 
 
 
4.3
 
Instruments with respect to long-term debt of HomeStreet, Inc. and its consolidated subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of HomeStreet, Inc. and its subsidiaries on a consolidated basis. HomeStreet, Inc. hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
 
 
 
10.1 (1)
 
HomeStreet, Inc. 2010 Equity Incentive Plan
 
 
 
10.2
 
HomeStreet, Inc. 401(k) Savings Plan, restated as of January 1, 2011, and amendments to the HomeStreet, Inc. 401(k) Savings Plan adopted as of February 24, 2011, November 1, 2011, January 1, 2012, July 26, 2012, September 1, 2012 and January 1, 2014
 
 
 
10.3  (1)
 
HomeStreet, Inc. Directors’ Deferred Compensation Plan, effective February 1, 2004, as amended and restated December 19, 2008, executed by HomeStreet, Inc. and HomeStreet Bank
 
 
 

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Table of Contents

10.4 (1)
 
HomeStreet, Inc. Executive Deferred Compensation Plan, effective February 1, 2004, as amended and restated December 19, 2008, executed by HomeStreet, Inc., HomeStreet Bank and HomeStreet Capital Corporation
 
 
 
10.5 (2)
 
Form of HomeStreet, Inc. Award Agreement for Nonqualified Stock Options and Standard Terms and Conditions for Nonqualified Stock Options, granted October 22, 2010 and November 29, 2010
 
 
 
10.6  (2)
 
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Mark Mason
 
 
 
10.7 (3)
 
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Godfrey Evans
 
 
 
10.8  (2)
 
Employment Agreement between HomeStreet, Inc., HomeStreet Bank, and Jay Iseman
 
 
 
10.9 (1)
 
Form of Officer Indemnification Agreement for HomeStreet, Inc.
 
 
 
10.10 (1)
 
Form of Director Indemnification Agreement for HomeStreet, Inc.
 
 
 
10.11 (1)
 
Form of 2011 Director and Officer Indemnification for HomeStreet, Inc.
 
 
 
10.12  †
 
Office Lease, dated March 5, 1992, between Continental, Inc. and One Union Square Venture, as amended by Supplemental Lease Agreement dated August 25, 1992, Second Amendment to Lease dated May 6, 1998, Third Amendment to Lease dated June 17, 1998, Fourth Amendment to Lease dated February 15, 2000, Fifth Amendment to Lease dated July 30, 2001, Sixth Amendment to Lease dated March 5, 2002, Seventh Amendment to Lease dated May 19, 2004, Eighth Amendment to Lease dated August 31, 2004, Ninth Amendment to Lease dated April 19, 2006, Tenth Amendment to Lease dated July 20, 2006, Eleventh Amendment to Lease dated December 27, 2006, Twelfth Amendment to Lease dated October 1, 2007, Thirteenth Amendment to Lease dated January 26, 2010, Fourteenth Amendment to Lease dated January 19, 2012, Fifteenth Amendment to Lease dated May 24, 2012, Sixteenth Amendment to Lease dated September 12, 2012, Seventeenth Amendment to Lease dated November 8, 2012, Eighteenth Amendment to Lease dated May 3, 2013, Nineteenth Amendment to Lease dated May 28, 2013 and Twentieth Amendment to Lease dated June 19, 2013.
 
 
 
10.13
 
Advances, Security and Deposit Agreement, dated as of February 1, 2013, between HomeStreet Bank and the Federal Home Loan Bank of Seattle
 
 
 
10.14
 
Letter Agreement, dated January 15, 2013, by HomeStreet Bank to Federal Reserve Bank of San Francisco
 
 
 
10.15 (1)
 
Master Custodial Agreement for Custody of Single Family MBS Pool Mortgage Loans, dated October 2009, between HomeStreet Bank, Federal National Mortgage Association, and U.S. Bank, N.A.
 
 
 
10.16 (2) †
 
Master Agreement ML 02783 between HomeStreet Bank and Fannie Mae, dated March 15, 2010, amended by Letter Agreement dated March 15, 2011
 
 
 
10.17 (1)
 
Master Agreement, dated as of June 17, 2010, between HomeStreet Bank and Freddie Mac
 
 
 
10.18 (2)  †
 
Cash Pledge Agreement, dated as of June 1, 2010, between HomeStreet Bank and Federal Home Loan Mortgage Corporation
 
 
 
10.19  (3)
 
Amended and Restated Limited Liability Company Agreement of Windermere Mortgage Services Series LLC, dated May 1, 2005, including form of separate series designation
 
 
 
10.20 (1)
 
Correspondent Purchase and Sale Agreement, effective September 1, 2010, between HomeStreet Bank and Windermere Mortgage Services Series LLC
 
 
 
10.21
 
HomeStreet, Inc., 2013 Management/Support Performance Based Annual Incentive Plan
 
 
 
10.22 (2)
 
Master Agreement between HomeStreet Bank and Government National Mortgage Association effective January 3, 2011
 
 
 
10.23  (3)
 
HomeStreet, Inc. 2011 Director Equity Compensation Plan
 
 
 
16.1 (8)
 
Letter from KPMG LLP regarding change in certifying accountant
 
 
 
21
 
Subsidiaries of HomeStreet, Inc.
 
 
 
23.1
 
Consent of Deloitte & Touche LLP
 
 
 
23.2
 
Consent of KPMG LLP
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 

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31.2
 
Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.
 
 
 
101.INS (9) (10)
  
XBRL Instance Document
 
 
 
101.SCH (9)
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL (9)
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF (9)
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.LAB (9)
  
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.PRE (9)
  
XBRL Taxonomy Extension Definitions Linkbase Document

(1)
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 1 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on May 19, 2011, and incorporated herein by reference.
 
 
(2)
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 2 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on June 21, 2011, and incorporated herein by reference.
 
 
(3)
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 3 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on July 8, 2011, and incorporated herein by reference.
 
 
(4)
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 4 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on July 26, 2011, and incorporated herein by reference.
 
 
(5)
Filed as an exhibit to HomeStreet, Inc.’s Amendment No. 5 to Registration Statement on Form S-1 (SEC File No. 333-173980) filed on August 9, 2011, and incorporated herein by reference.
 
 
(6)
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on February 29, 2012, and incorporated herein by reference.
 
 
(7)
Filed as an exhibit to HomeStreet, Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on October 25, 2012, and incorporated herein by reference.
 
 
(8)
Filed as an exhibit to HomeStreet Inc.’s Current Report on Form 8-K (SEC File No. 001-35424) filed on March 21, 2013, and incorporated herein by reference.
 
 
(9)
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.
 
 
(10)
Pursuant to Rule 405 of Regulation S-T, includes the following financial information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language) interactive data files: (i) the Consolidated Statements of Operations for the three years ended December 31, 2012, (ii) the Consolidated Statements of Financial Condition as of December 31, 2012 and December 31, 2011, (iii) the Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the three years ended December 31, 2012, (iv) the Consolidated Statements of Cash Flows for the three years ended December 31, 2012, and (v) the Notes to Consolidated Financial Statements.
 
 
†
Portions of this exhibit have been omitted pursuant to a confidential treatment order by the Securities and Exchange Commission.

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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 March 17, 2014.

 
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
 
 


183
Table of Contents


POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark K. Mason and Cory Stewart, and each of them his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendment to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ David A. Ederer
 
Chairman of the Board and Director
 
March 17, 2014
David A. Ederer, Chairman
 
 
 
 
 
 
 
 
 
/s/ Mark K. Mason
 
President, Chief Executive Officer and Director (Principal Executive Officer)
 
March 17, 2014
Mark K. Mason
 
 
 
 
 
 
 
 
/s/ Cory D. Stewart
 
Executive Vice President, Chief Accounting Officer (Principal Accounting Officer and Principal Financial Officer)
 
March 17, 2014
Cory D. Stewart
 
 
 
 
 
 
 
 
/s/ Scott M. Boggs
 
Director
 
March 17, 2014
Scott M. Boggs
 
 
 
 
 
 
 
 
 
/s/ Victor H. Indiek
 
Director
 
March 17, 2014
Victor H. Indiek
 
 
 
 
 
 
 
 
 
/s/ Thomas E. King
 
Director
 
March 17, 2014
Thomas E. King
 
 
 
 
 
 
 
 
 
/s/ George Kirk
 
Director
 
March 17, 2014
George Kirk
 
 
 
 
 
 
 
 
 
/s/ Michael J. Malone
 
Director
 
March 17, 2014
Michael J. Malone
 
 
 
 
 
 
 
 
 
/s/ Douglas I. Smith
 
Director
 
March 17, 2014
Douglas I. Smith
 
 
 
 
 
 
 
 
 
/s/ Bruce W. Williams
 
Director
 
March 17, 2014
Bruce W. Williams
 
 
 
 



184


EXHIBIT 10.2




HOMESTREET, INC.
401(k) SAVINGS PLAN
AS OF JANUARY 1, 2011
TABLE OF CONTENTS
 




 
 
 
 
 
Page
 
 
 
ARTICLE I
Name
1

 
 
 
ARTICLE II
Definitions
2

 
 
 
A.
“Accrued Benefit”
2

B.
“Anniversary Date”
2

C.
“Board”
2

D.
“Code”
2

E.
“Committee”
2

F.
“Compensation”
2

G.
“Effective Date”
5

H.
“Eligibility Computation Period”
6

I.
“Employee”
6

J.
“Enrollment Date”
6

K.
“ERISA”
6

L.
“Event of Forfeiture”
6

M.
“Fiscal Year”
6

N.
“Fund”
6

O.
“Highly-Compensated Employee”
7

P.
“Hour of Service”
7

Q.
“One-Year Break in Service”
8

R.
“Participant”
8

S.
“Plan”
9

T.
“Plan Year”
9

U.
“Spouse”
9

V.
“Trust”
9

W.
“Trustee”
9

X.
“Valuation Date”
9

Y.
“Vesting Computation Period”
9

Z.
“Year of Service”
9

AA.
“Miscellaneous”
9

BB.
“WMS 401(k) Plan”
9

CC.
“WMS Money Purchase Pension Plan”
9

DD.
“HomeSelect Plan”
9

 
 
 
ARTICLE III
Eligible Employees
9

 
 
 
A.
Exclusions
10

B.
Eligibility for Employer Contributions
10

C.
Eligibility to Make Employee Pre-Tax Contributions
10

 
ii
 
 
 
D.
Other Eligibility Provisions
10

 
 
 




ARTICLE IV
Contributions
11

 
 
 
A.
Employer Discretionary Profit Sharing Contribution
11

B.
Employee Pre-Tax Contributions
11

C.
Employer Matching Contributions
14

D.
Nondiscrimination Test Applicable to Employee Pre-Tax Contributions
14

E.
Nondiscrimination Test Applicable to Employer Matching Contributions
17

F.
Distribution of Excess Aggregate Contributions
19

G.
Hardship Withdrawals of Employee Pre-Tax Contributions
21

H.
Date of Payment
22

I.
Profit Sharing Plan
22

 
 
 
ARTICLE V
Participant’s Accounts, Valuation, Maximum Contribution
22

 
 
 
A.
Participant’s Accounts
22

B.
Allocations of Contributions
22

C.
Active Participants Receive Allocations of Employer Discretionary Profit Sharing Contributions
23

D.
Trust Valuation
23

E.
Maximum Contributions
24

 
1.         Annual Addition
24

 
2.         Excess Annual Addition
24

F.
Forfeitures and Reinstatement of Forfeitures
25

 
 
 
ARTICLE VI
Nonforfeitable Accrued Benefit
26

 
 
 
A.
Allocations Not Vested
26

B.
Vesting Period
26

C.
Amendment to Vesting Computation Period or Vesting Schedule
27

D.
Full Vesting
28

E.
Participant’s Commencement of Excluded Employment
28

F.
Transfer of Participants
28

 
 
 
ARTICLE VII
Distribution of Benefits
29

 
 
 
A.
Retirement Age and Options
29

 
1.         Employment After Normal Retirement Age
29

 
a.         Election to Receive Benefits While Still Employed
29

 
b.         Required Receipt of Benefits
29

 
2.         Date of Retired Participant’s First Payment
30

 
3.         Deferral of Benefits
30

 
4.         Form of Payment
30

 
6.         Minimum Required Distribution Under Final Regulations
30

 
6.         Minimum Required Distribution Under Final Regulations
30

B.
Death
35

 
1.         Death Prior to Commencement of Benefits
35

C.
Disability
37





D.
Termination of Employment
37

 
iii
 
 
 
E.
Time of First Payment
38

F.
Distribution of Allocation Attributable to Last Year of Participation
38

G.
Distribution to Minors or Incompetents
39

H.
No Reduction in Benefits by Reason of Increase in Social Security Benefits
39

 
 
ARTICLE VIII                 Provision Against Anticipation
40

 
 
 
A.
No Alienation of Benefits
40

B.
Qualified Domestic Relations Orders
40

C.
Assignment of Benefits
41

 
 
ARTICLE IX                 Loans to Participants
42

 
 
ARTICLE X                 Administrative Committee - Named Fiduciary and Administrator
43

 
 
 
A.
Appointment of Committee
43

B.
Committee Action
43

C.
Rights and Duties
44

D.
Investments
44

E.
Information - Reporting and Disclosure
44

F.
Standard of Care Imposed Upon the Committee
45

G.
Allocation and Delegation of Responsibility
45

H.
Bonding
45

I.
Claims Procedure
45

J.
Funding Policy
46

K.
Indemnification
46

L.
Compensation, Expenses
46

 
 
ARTICLE XI                 Investment of Trust Funds
46

 
 
 
A.
Investment of Employee Pre-Tax Contribution Accounts, Employer Matching Contribution Accounts, and Rollover Accounts
46

B.
Standard of Care Imposed Upon Trustee
47

 
 
ARTICLE XII                 Mergers and Consolidations
47

 
 
ARTICLE XIII                 Amendment and Termination of Plan and Trust
47

 
 
 
A.
Right to Amend and Terminate
47

B.
No Revesting
48

C.
Exclusive Benefit of Employees
48

D.
Termination
48

 
 
ARTICLE XIV                 Top Heavy Plans Defined and Other Definitions
49

 
 
 




A.
Top Heavy Plan
49

B.
Additional Definitions for Use in this Article and Article XV
49

 
1.         Accrued Benefits
49

 
2.         Controlled Group
50

 
3.         Determination Date
50

 
4.         Key Employee
50

 
5.         Minimum Benefit Accrual
51

 
iv
 
 
 
 
6.         Non-key Employee
51

 
7.         Permissively Aggregated
51

 
8.         Required Aggregation Group
51

 
 
ARTICLE XV             Additional Requirements Applicable to Top Heavy Plans
51

 
 
 
A.
Minimum Vesting Requirements
51

B.
Minimum Employer Contributions
52

 
1.         General Rule
52

 
2.         Exceptions
52

 
3.         Employee Participating in Defined Benefit Plan
53

 
4.         Specific Rules
53

 
 
ARTICLE XVI             Right to Discharge Employees
53

 
 
ARTICLE XVII           Return of Contributions; Declaration of Trust Contingent on Internal Revenue Service Approval
53

 
 
ARTICLE XVIII          Rollover Contributions; Trust to Trust Transfers
54

 
 
 
A.
Rollover Contributions To This Plan
54

B.
Trust to Trust Transfers
55

C.
Definitions
55

 
1.         Eligible Rollover Distribution
55

 
2,         Eligible Retirement Plan
55

 
3.         Distributee
56

 
4.         Direct Rollover
56

 
 
ARTICLE XIX             Transfers of Employment
56

 
v
HOMESTREET, INC.
401(k) SAVINGS PLAN
THIS AGREEMENT is made and entered into at Seattle, Washington, by and between HomeStreet, Inc. (known as Continental, Inc. prior to May 15, 2000), HomeStreet Bank (known as Continental Savings Bank prior to May 15, 2000), and HomeStreet Capital Corporation (known as Continental Mortgage Company, Inc. prior to May 15, 2000), Washington corporations having their principal place of business at Seattle, Washington, hereinafter called the “Employer.”




WHEREAS, effective January 1, 1976, the Employer established for the exclusive benefit of its Employees eligible to participate, and their beneficiaries, a profit sharing plan to accumulate from profits a fund for the payment of retirement benefits;
WHEREAS, effective July 1, 1999, the Plan was amended and restated as a 401(k) savings and employee stock ownership plan;
WHEREAS, effective May 1, 2000, the Plan was amended and restated to change the names of the co-sponsors of the Plan effective May 15, 2000; to remove the Windermere Mortgage Services LLCs as co-sponsors of the Plan effective May 1, 2000; to authorize the direct transfer in-kind on or after May 1, 2000 of the Plan account balances (except shares of HomeStreet, Inc. stock) of all current and certain former employees of the Windermere Mortgage Services LLCs (the “WMS LLCs”) to the Windermere Mortgage Services LLCs 401(k) Savings Plan and Trust (the “WMS 401(k) Plan”);
WHEREAS, the Plan was also previously amended and restated for compliance with other applicable law and to make certain other design changes;
WHEREAS, effective January 1, 2011, the Board of Directors of HomeStreet, Inc. wishes to (1) spin-off the ESOP portion of this Plan into a separate plan to be known as the HomeStreet, Inc. Employee Stock Ownership Plan and Trust (the “ESOP”), so that this Plan is no longer an employee ownership plan and is instead only a profit sharing plan with 401(k) and 401(m) features , (2) rename this Plan the HomeStreet, Inc. 401(k) Savings Plan, (3) incorporate previously adopted amendments, and (4) make certain other administrative changes to the Plan;
NOW, THEREFORE, it is agreed that the Plan shall be amended and restated in its entirety, effective as of January 1, 2011, or such other applicable dates as specifically provided herein, as follows:
ARTICLE I
Name
The Plan shall be known as the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”). The Plan and its Trust were previously known as (1) the HomeStreet, Inc. 401(k) Savings and Employee Stock Ownership Plan and Trust from May 15,2000 through December 31, 2010,
(2) the Continental, Inc. 401(k) Savings and Employee Stock Ownership Plan and Trust from July 1, 1999 through May 14, 2000, and (3) the Continental, Inc. Profit Sharing Plan and Trust prior to July 1, 1999. This amended and restated Plan controls the rights of all Participants who accrue benefits hereunder on or after January 1, 2011. The rights of persons who received Plan benefits prior to January 1, 2011, or persons who terminated employment with the Employer before January 1, 2011 with a vested Accrued Benefit, are controlled by the terms of the Plan in existence prior to January 1, 2011.
ARTICLE II
Definitions
A. “Accrued Benefit” means the balance of a Participant’s accounts at any time.
B. “Anniversary Date” means the last day of each Plan Year.
C. “Board” means the Board of Directors of HomeStreet, Inc.
D. “Code” means the Internal Revenue Code of 1986, as amended from time to time.
E. “Committee” means the Administrative Committee appointed by the Board.
F. “Compensation” for Plan contribution purposes for Employees other than Single Family Retail Permanent Loan Officers and residential branch managers means an Employee’s regular base salary or wages from the Employer before any deferral of income pursuant to Paragraph B of Article IV and before any salary reduction contributions to the Employer’s Internal Revenue Code Section 125 flexible benefits plan and Code Section 132(f)(4) transportation fringe benefit plan } if any, but excluding all incentive-based compensation, bonuses, overtime, commissions, Employer contributions hereunder pursuant to Paragraphs A and C of Article IV, Employer contributions to any other similar retirement plan, and payments by the Employer (other than Section 125 contributions) on account of medical, disability and life insurance. Notwithstanding the foregoing, for purposes of computing Employee Pre-Tax Contributions under Paragraph B of Article IV, Compensation shall also include one hundred percent (100%) of short-term incentive-based compensation, bonuses, overtime, and commissions for a Plan Year (“Variable Compensation”), and for purposes of computing Employer Matching Contributions under Paragraph C




of Article IV, Compensation shall also include fifty percent (50%) of such Variable Compensation, provided, however, that the total amount of Compensation considered may not exceed the Internal Revenue Code Section 401(a)(l 7) limits as described later in this Paragraph F.
“Compensation” for Plan contribution purposes for Single Family Retail Permanent Loan Officers means 40% of commissions, draws, bonuses, and base salary, up to $50,000. Compensation is subject to the Internal Revenue Code Section 401(a)(17) limits as described later in this Paragraph G and is determined before any deferral of income pursuant to Paragraph B of Article IV and before any salary reduction contributions to the Employer’s Internal Revenue Code Section 125 flexible benefits plan and Code Section 132(f)(4)
transportation fringe benefit plan, if any, but excluding Employer contributions hereunder pursuant to Paragraphs A and C of Article IV, Employer contributions to any other similar retirement plan, and payments by the Employer (other than Section 125 contributions) on account of medical, disability, and life insurance. Notwithstanding the foregoing, for purposes of computing Employee Pre-Tax Contributions under Paragraph B of Article IV, Compensation for Single Family Retail Permanent Loan Officers shall include 100% of commissions, draws, bonuses, and base salary up to the Internal Revenue Code Section 401(a)(l7) limits, and for purposes of computing Employer Matching Contributions under Paragraph C of Article IV, Compensation for Single Family Retail Permanent Loan Officers means 65% of commissions, draws, bonuses, and base pay, up to the Internal Revenue Code Section 401(a)(17) limits.
“Compensation” for Plan contribution purposes for residential branch managers means 100% of base salary, short-term incentive based compensation, commissions and overrides, up to $75,000. Compensation considered may not exceed the Internal Revenue Code Section 401(a)(17) limits as described later in this Paragraph G, and is determined before any deferral of income pursuant to Paragraph B of Article IV and before any salary reduction contributions to the Employer’s Internal Revenue Code Section 125 flexible benefits plan and Code Section 132(f)(4) transportation fringe benefit plan, if any, but excluding Employer contributions hereunder pursuant to Paragraphs A and C of Article IV, Employer contributions to any similar retirement plan, and payments by the Employer (other than Section 125 contributions) on account of medical, disability and life insurance. Notwithstanding the foregoing, for purposes of computing Employee Pre-Tax Contributions under Paragraph B of Article IV, Compensation shall mean 100% of base salary, short-term incentive based compensation, commissions and overrides up to the Internal Revenue Code Section 401(a)(17) limits, and for purposes of computing Employer Matching Contributions under Paragraph C of Article IV, Compensation shall mean 100% of base salary and 50% of short-term incentive based compensation, commissions and overrides, provided, however, that the total amount of Compensation considered may not exceed the Code Section 401(a)(l 7) limits as described later in this Paragraph G.
Notwithstanding any provision of this Plan to the contrary and consistent with the Employer’s administration of the Plan, any long-term incentive compensation shall be excluded from Compensation on which the Plan contributions are based.
Effective January 1, 2009, (i) an individual receiving a differential wage payment, as defined by Code Section 3401(h)(2), is treated as an Employee of the Employer making the payment, (ii) the differential wage payment is treated as Compensation, and (iii) the Plan is not treated as failing to meet the requirements of any provision described in Code Section 414(u)(l)(C) by reason of any contribution or benefit which is based on the differential wage payment However, subsection (iii) applies only if all Employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 3401(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the Employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)).
Effective as of January 1, 2008, for purposes of Plan contributions. Compensation shall also include Compensation received during the applicable post-severance period only to the extent included in the definition of Compensation for Code Section 415 purposes below, and unless otherwise excluded under this Article II, Paragraph F, of the Plan. Any amount includible in a Participant’s gross income due to noncompliance with Code Section 409A shall be included in Compensation for purposes of Code Section 415 limitations on contributions and benefits.
Effective January 1, 2008, for purposes of applying the Code Section 415 limitations on contributions and benefits, the following Compensation shall be considered: (1) a Participant’s regular Compensation received for services rendered during the Participant’s regular working hours that is paid during a post-severance payment period, and (2) a Participant’s Compensation for services rendered outside his regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments that would have been paid to the Participant before a severance of employment had the Participant continued in employment with the Employer (provided such amounts are paid during the post-severance payment period). The post-severance period is the period from the Participant’s severance from employment until the later of 2-1/2 months after severance or the end of the Limitation Year in which severance occurred. Through December 31, 2008 only, Compensation for purposes of applying the Code Section 415 limitations on contributions and benefits shall also include, if paid during the post-severance period, payments for unused accrued bona fide sick, vacation, or other leave, but only to the extent that (a) the Participant would have been able to use the leave if employment had continued, and (b) the amounts would have been included in the




definition of Compensation for purposes of applying the Code Section 415 limitations if they were paid prior to the Participant’s severance from employment with the Employer. In no event shall the Compensation for purposes of Code Section 415 for a given limitation year exceed the maximum amount of Compensation recognized for purposes of limiting contributions or benefits payable with respect to a plan under Code Section 401(a)(17) for that same limitation year.
If the Employer so elects, effective January 1, 2008, Compensation for purposes of applying the Code Section 415 limitations on contributions and benefits for a limitation year shall include amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly-situated participants, and no compensation is included in more than one limitation year.
As modified by the preceding two paragraphs, for purposes of the Code Section 415 limitations on contributions and benefits (Article V, Paragraph E, hereof) and the Code Section 416 top heavy requirements (Articles XIV and XV hereof), and for purposes of determining a Highly Compensated Employee (Article II, Paragraph O, hereof), “Compensation” means wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employers maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance
premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances), Code Section 132(f)(4) transportation fringe benefit plan salary reduction contributions, and any elective deferrals as defined in Code Section 402(g)(3), and any amount which is contributed or deferred by the Employers at the election of the Employee and which is not includable in the gross income of the Employee by reason of Code Section 125 or 457. Such compensation does not include:
1. Contributions to a plan of deferred compensation which are not includible in the Employee’s gross income for the taxable year in which contributed;
2. Employer contributions to a simplified employee pension described in Section 408(k) of the Code to the extent deductible by the Employee;
3. Distributions from a plan of deferred compensation regardless of whether such amounts are includible in gross income when distributed (except that amounts paid to an Employee under an unfunded nonqualified plan of deferred compensation will be considered as compensation for Code Sections 415 and 416 in the year such amounts are includible in gross income);
4. Amounts realized from the exercise of a nonqualified stock option or when restricted property becomes freely transferable or is no longer subject to a substantial risk of forfeiture;
5. Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option;
6. Other amounts which receive special tax benefits such as premiums for group term life insurance (but only to the extent that the premiums are not includible in gross income) or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not contributions are excludable from gross income).
In addition to other applicable limitations set forth in this Plan, and notwithstanding any other provision of this Plan to the contrary, the annual Compensation of each Employee taken into account under this Plan shall not exceed the annual compensation limit as provided in Code Section 401(a)(17). The annual compensation limit (e.g., $245,000 for the 2010 Plan Year), shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.
G. “Effective Date” unless otherwise stated in this Plan means January 1, 2011, the effective date of the amendment and restatement of this Plan, except as otherwise specifically provided herein. The Employer’s plan was originally adopted effective January 1, 1976.
H. “Eligibility Computation Period” initially means the 12-consecutive-month period beginning with the date on which the Employee first performs an Hour of Service for the Employer (the “Employment Commencement Date”), or in the case of an Employee who has had a One-Year Break in Service, the 12-consecutive-month period beginning with the first date on which the Employee completes an Hour of Service following the last computation period in which a One-Year Break in Service occurred (the “Reemployment Commencement Date”). After the initial Computation Period, the succeeding Eligibility Computation Periods shall be the Plan Year which includes the first anniversary of the Employment Commencement Date or Reemployment Commencement Date and each succeeding Plan Year.




I. “Employee” means any person in the service of the Employer receiving a regular wage or salary. A leased employee as defined in Code Section 414(n)(2) shall be considered an Employee hereunder solely for purposes of Code Section 414(n)(3) unless (i) leased employees constitute less than twenty percent (20%) of the Employer’s non-highly-compensated workforce as defined in Code Section 414(n)(5)(c)(ii) and (ii) the leased employee is a participant in a plan described in Code Section 414(n)(5)(B). A leased employee for purposes of Code Section 414(n)(3) means any person who is not an Employee of the Employer and who provides services for the Employer pursuant to an agreement between the Employer and a leasing organization, who has performed such services for the Employer and related persons on a substantially full-time basis for a period of at least one year, and whose services are performed under the primary direction or control of the Employer. Notwithstanding that a leased employee is treated as an Employee hereunder solely for purposes of Code Section 414(n)(3), such a leased employee shall not be considered an eligible Employee or receive credit for service or share in Employer contributions under this Plan.
J. “Enrollment Date” means the date on which an Employee who has complied with the eligibility requirements shall become eligible to participate in the Plan. The Enrollment Dates with respect to Employee pre-tax contributions shall be as soon as administratively feasible after becoming an eligible Employee and attainment of age 18, and the Enrollment Dates with respect to all other contributions shall be the first day of each calendar month.
K. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
L. “Event of Forfeiture” means with respect to a Participant who terminates employment, either the incurring of five consecutive One-Year Breaks in Service or a cash-out payment in full in a single lump sum of all of his vested Accrued Benefit, subject to the reinstatement of forfeitures requirements of Article V, Paragraph F. A Participant who terminates employment with no vested Accrued Benefit shall be deemed to have received a cash-out payment.
M. “Fiscal Year” means the Employer’s fiscal year for federal tax purposes. The Employer’s fiscal year begins on January 1 and ends on December 31.
N. “Fund” means the trust fund established pursuant to the Trust Agreement in which all of the assets of the Plan are held. With respect to Employee Pre-Tax Contribution Accounts,
Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts, the Fund shall be divided into a number of separate investment funds selected by the Committee and communicated to Participants.
O. “Highly-Compensated Employee” means any Employee who during the Plan Year or the preceding Plan Year is a more than five percent owner (as defined by Code Section 416(i)(1)) or an Employee who for the preceding Plan Year received Compensation in excess of $80,000 adjusted as provided in Code Section 414(q)(1), and effective January 1, 1999 who was a member of the top-paid 20% group of Employees (based on Compensation for the preceding Plan Year).
Effective January 1, 2008, for purposes of determining whether an Employee is a Highly-Compensated Employee, annual Compensation means Compensation within the meaning of Code Section 415(c)(3) as set forth in Article II, Paragraph F, for purposes of applying the Code Section 415 limitations on contributions and benefits for the applicable Plan Year or preceding Plan Year.
The Committee must make the determination of who is a Highly Compensated Employee.
The Employer for purposes of this Paragraph is the entity employing the Employee and includes all other entities aggregated with such employing entity under the aggregation requirements of Code Sections 414(b), (c), (m) or (o).
A former Employee shall be considered a Highly-Compensated Employee if he was a Highly-Compensated Employee when he separated from service or if he was a Highly-Compensated Employee at any time after attaining age 55.
P. “Hour of Service” means:
a. Each hour for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties. These hours shall be credited to the Employee for the computation period or periods in which the duties are performed. Effective with respect to reemployments initiated on or after December 12, 1994, an Employee in qualified military service as defined in Code Section 414(u)(5) shall be credited with Hours of Service at his customary rate; and
b. Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship was terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. No more than 501 Hours of Service shall be credited under this subsection (b) for any single continuous period (whether or not such period occurs in a single computation period). Notwithstanding the foregoing, an Employee in qualified military service shall receive credit in accordance with Code Section 414(u). Hours under this subsection (b) shall be calculated and




credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and
c. Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited under subsection (a) or (b), as the case may be, and under this subsection (c). These hours shall be credited to the Employee for the Eligibility or Vesting Computation Period or Periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made.
Provided, for the purpose of determining whether an Employee has incurred a One-Year Break in Service (i) Hours of Service described in subsection (b) shall be credited without regard to the 501-hour limitation of subsection (b); (ii) hours at the Employee’s customary rate shall be credited during any period the Employee is on authorized leave of absence or temporary layoff, and (iii) in the case of an Employee who is absent from work for any period by reason of pregnancy, birth of a child, placement with the Employee of a child for adoption, or caring for such child immediately following birth or placement, Hours of Service (up to 501 hours) shall be credited equal to the Hours of Service that otherwise would normally have been credited to the Employee but for such absence (or if such hours cannot be determined, equal to 8 Hours of Service per day of absence). The hours credited under (iii) above shall be credited to the applicable computation period in which the absence begins if such crediting will prevent a One-Year Break in Service, or otherwise to the following computation period. No such credit shall be given unless the Employee provides the Committee with timely information (including, if requested, a written statement of a doctor or adoption official) to establish that the absence is for reasons referred to in this paragraph and the number of days for which there was such an absence. Provided, further, there shall be no duplication of credit under the Plan. Authorized leave of absence shall be granted on a nondiscriminatory basis.
Hours of Service will be credited for employment with other members of an affiliated service group (under Code Section 414(m)), a controlled group of corporation (under Code Section 414(b)), or a group of trades or businesses under common control (under Code Section 414(c)) of which the Employer is a member, and any other entity required to be aggregated with the Employer pursuant to Code Section 414(o) and the regulations thereunder.
An exempt salaried Employee who during a semi-monthly payroll period would be entitled to credit for at least one Hour of Service shall receive credit for 95 Hours of Service. All other Employees shall be credited with actual hours (i) for which they are entitled to payment by the Employer, and (ii) for purposes of determining whether a One-Year Break in Service has occurred, at their regular rate during unpaid leave of absence.
Q. “One-Year Break in Service” means the applicable Eligibility or Vesting Computation Period during which an Employee completes less than 501 Hours of Service.
R. “Participant” means an Employee who has satisfied the eligibility requirements of Article III.
S. “Plan” means the 401(k) Savings Plan set forth in this agreement and all subsequent amendments thereto.
T. “Plan Year” means the twelve-month period on which the records of the Plan are kept. Each Plan Year shall end on December 31.
U. “Spouse” means the lawful husband or wife of the Participant.
V. “Trust” means the separate Trust Agreement between the Employer and Charles Schwab Trust Company (or any successor Trustee) and all subsequent amendments thereto.
W. “Trustee” means Charles Schwab Trust Company and any successor Trustee or Trustees hereunder appointed by the Board.
X. “Valuation Date” means the date upon which the assets of the Trust are valued. The Valuation Dates for Participants’ Employee Pre-Tax Contribution Accounts, Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts shall be each business day when the New York Stock Exchange, Schwab Trust Company, and the Plan recordkeeper are open for business. The Committee is authorized to establish additional Valuation Dates in its discretion.
Y. “Vesting Computation Period” for purposes of determining a Participant’s nonforfeitable Accrued Benefit means the Plan Year.
Z. “Year of Service” means the applicable computation period during which the Employee completes not fewer than 1,000 Hours of Service as defined in Paragraph P.




AA. “Miscellaneous.” Unless some other meaning and intent is apparent from the context, the plurals shall mean the singular, and vice versa, and masculine, feminine, and neuter words shall be used interchangeably.
BB. “WMS 401(k) Plan” means the Windermere Mortgage Services Series LLC 401(k) Savings Plan and Trust. The WMS 401(k) Plan was known as the Windermere Mortgage Services LLC 401(k) Savings Plan and Trust from January 1, 2004 through April 30, 2005. Prior to January 1, 2004, the WMS 401(k) Plan was known as the Windermere Mortgage Services LLCs 401 (k) Savings Plan and Trust.
CC. “WMS Money Purchase Pension Plan” means the Windermere Mortgage Services LLCs Money Purchase Pension Plan and Trust. The WMS Money Purchase Pension Plan merged into the WMS 401(k) Plan effective as of the close of business on December 31, 2002.
DD. “HomeSelect Plan” means the HomeSelect Series LLC 401(k) Savings Plan and Trust. The HomeSelect Plan terminated on October 28, 2008.
ARTICLE III
Eligible Employees
A. Exclusions. Employees shall be excluded from those eligible to participate if they are included in a unit of employees covered by a collective bargaining agreement between employee representatives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining and if the collective bargaining agreement does not provide for participation by such Employees. Notwithstanding any Plan provision to the contrary, any individual who is classified as an independent contractor by the Employer, regardless of whether such individual is classified as an employee by a court or by any federal, state or local agency, and any individual who performs services pursuant to an agreement between the Employer and a leasing organization shall not be eligible to participate in this Plan.
B. Eligibility for Employer Contributions. Unless excluded by reason of Paragraph A of this Article III, each Employee who was a Participant on December 31, 2010 shall continue to be a Participant for purposes of eligibility for Employer contributions under Paragraphs A and C of Article IV subject to the provisions of this Plan. Each other Employee not excluded by reason of Paragraph A of this Article III shall become eligible upon the later of January 1, 2011, or his completion of one Year of Service with the Employer and attainment of age 18. Notwithstanding the foregoing, for purposes of eligibility for Employer matching contributions pursuant to Article IV, Paragraph C, only, each other Employee not excluded by reason of Paragraph A of this Article III shall become eligible upon the later of January 1, 2011, or his completion of six months of service with the Employer and attainment of age 18. An Employee shall not be required to complete any specified number of Hours of Service to receive credit for such months of service. However, if an Employee completes a Year of Service in his Eligibility Computation Period, he shall be eligible to participate in this Plan for purposes of Employer matching contributions as of the next Enrollment Date regardless of whether he completed the months of service required to participate in this Plan.
Each eligible Employee shall be enrolled as a Participant as of the Enrollment Date coinciding with or following completion of such requirements, provided the Employee has not separated from service before such Enrollment Date.
C. Eligibility to Make Employee Pre-Tax Contributions. Each Employee who is not otherwise excluded by reason of Paragraph A of this Article III shall become eligible to make Employee pre-tax contributions under Paragraph B of Article IV upon the later of July 1, 2008, or immediately following the later of the Employee’s employment date or attainment of age 18 and shall be enrolled as a Participant for this purpose as soon as administratively feasible following completion of such requirement.
D. Other Eligibility Provisions. In counting Years of Service for eligibility purposes, the Committee shall apply the following rules using the applicable Eligibility Computation Period to determine Years of Service and One-Year Breaks in Service:
a. Except as hereafter provided, the Employee shall receive credit for each Year of Service.
b. In the case of a Participant who has a One-Year Break in Service prior to the time he has any nonforfeitable right to an Accrued Benefit computed pursuant to Article VI,
Paragraph B, and who returns to employment, service prior to the break shall not be counted if the number of his consecutive One-Year Breaks in Service equals or exceeds the aggregate number of Years of Service (whether or not consecutive) prior to the last such break if the number of consecutive One-Year Breaks in Service is five or more.
c. In the case of a Participant who terminates employment and is rehired, and his prior service is not disregarded under (b), he shall become a Participant on the date of his reemployment, which date shall be the date on which he completes one Hour of Service after his termination of employment.




The Committee may request each eligible Employee to apply for Plan participation in writing on a form to be supplied by the Committee, agreeing to the terms of the Plan and giving such information as may be required by the Committee, including beneficiary designation. An Employee shall not be precluded from Plan participation if he does not complete such form.
ARTICLE IV
Contributions
A. Employer Discretionary Profit Sharing Contributions. For each Plan Year, the Employer in its discretion may pay to the Trustee for investment in the Participant-Directed Profit Sharing Accounts of each Active Participant as defined in Article V, Paragraph C, under the Trust such amount as shall be determined by the Board of Directors of the Employer at a meeting held before the time provided by law for filing of the Employer’s income tax return (including extensions).
Notwithstanding any provision of this Plan to the contrary, effective with respect to reemployments initiated on or after December 12, 1994, any Employer discretionary contributions with respect to qualified military service shall be made in accordance with Code Section 414(u).
The Employer’s determination of such contribution shall be binding on all Participants, the Committee, and the Trustee. The Trustee shall have no right or duty to inquire into the amount of the Employer’s contribution or the method used in determining the amount of such contribution, but shall be accountable only for the funds actually received by it.
B. Employee Pre-Tax Contributions. On or prior to an Employee’s Enrollment Date for Employee pre-tax contribution purposes, the Employee may, through use of a telephone voice response system or such other means as are designated by the Committee, direct the Employer (1) to defer a percentage of his Compensation each pay period, commencing as of his Enrollment Date, and (2) to contribute that amount to the Plan within the time required by ERISA. The Committee shall provide each Employee prior to his Enrollment Date instructions about the time period within which the Employee may elect to make pre-tax contributions effective as of his Enrollment Date. A Participant’s pre-tax contributions for any pay period shall be in whole percentages equal to at least one percent (1%) of the Participant’s Compensation but not more than a percentage of Compensation that shall be determined by the
Committee from time to time in a manner that is consistent with applicable law, provided such contributions are within the limits of Article V, Paragraph E. The amount of a Participant’s deferred Compensation shall be rounded to the nearest cent.
Notwithstanding the foregoing, Employee pre-tax contributions on behalf of a Participant in this Plan or any other qualified plan maintained by the Employer during any taxable year may not exceed the limit under Code Section 402(g) in effect for such taxable year ($15,500 for calendar year 2008 and thereafter such amount for a calendar year as adjusted each year by the Secretary of the Treasury), except to the extent permitted under the remainder of this Paragraph B and Section 414(v) of the Code, if applicable. A Participant who makes Code Section 401(k) Employee pre-tax contributions to more than one plan in a calendar year in excess of the applicable dollar limitation must submit to the Committee by March 1 of the year following the year of any excess contributions a written statement including the amount of the excess contributions to be allocated to this Plan. Any excess contributions allocated to this Plan shall be distributed, together with income attributable thereto, by April 15 of the year following the year of the excess contributions.
With respect to excess deferrals (as defined in Code Section 402(g)) made in the taxable year 2007, allocable income must be calculated for the taxable year and also for the gap period (i.e., the period after the close of the taxable year in which the excess deferral occurred and prior to the distribution); provided that the gap period income will be calculated and distributed only if the gap period allocable income would otherwise be allocated to the Participant’s account. With respect to excess deferrals made in taxable years after 2007, gap period income shall not be distributed.
Notwithstanding any provision of this Plan to the contrary, upon a Participant’s return from qualified military service, such Participant may make up Employee pre-tax contributions for the period of qualified military service in accordance with Code Section 414(u), effective with reemployments initiated on or after December 12, 1994.
In the event a Participant terminates employment and is rehired, the Participant may elect to begin deferring a percentage of his Compensation as soon as administrative feasible following his date of rehire, provided that prior to that date and within the timeframe required by the Committee he elects to make Employee pre-tax contributions by following the procedures designated by the Committee.
Effective the first day of any payroll period, each Participant who is deferring an amount of his Compensation may change the percentage of his Compensation to be deferred, and each Participant who is not deferring an amount of his Compensation may elect to begin deferring a percentage of his Compensation. Each Participant who elects to make such a




change or election must follow the procedures established by the Committee and must make such change or election within a reasonable timeframe prior to the beginning of the applicable pay period, as designated by the Committee.
By following the procedures designated by the Committee, a Participant may revoke his Employee pre-tax contribution agreement effective as of the first day of any subsequent pay
period. A Participant who revokes his Employee pre-tax contribution agreement may resume deferring a percentage of his Compensation hereunder at any time, provided he follows procedures designated by the Committee relating to resuming Employee pre-tax contributions, with such election effective as soon as administratively possible thereafter.
Employee pre-tax contributions shall be credited to a separate Employee Pre-Tax Contribution Account for each Participant. A Participant’s Employee Pre-Tax Contribution Account shall be invested, valued, distributed and except as specifically provided herein, in all respects treated in the same manner as the Participant’s Employer Matching Contribution Account, except that the amounts credited to the Participant’s Employee Pre-Tax Contribution Account shall be one hundred percent (100%) vested. Amounts in the Employee Pre-Tax Contribution Account shall not be distributed until the earliest of the Participant’s death, disability, retirement, attainment of age 59  1 / 2 , termination of employment, in accordance with the provisions of Article VII of the Plan, or the occurrence of a hardship as set forth in Paragraph G of this Article.
Such amounts may also be distributed upon:
(1) Termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Code Section 4975(e)(7)), a simplified employee pension plan (as defined in Code Section 408(k)) or a SIMPLE IRA Plan (defined in Code Section 408(p)).
(2) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain the plan after the disposition, but only with respect to employees who continue employment with the corporation acquiring such assets.
(3) The disposition by a corporation to an unrelated entity of such corporation’s interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if such corporation continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary.
All Employees who are eligible to make Employee pre-tax contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Sections 401(k)(3), 401(k)(l1), 401(k)(12), 410(b), or 416, as applicable, by reason of the making of such catch-up contributions. Consistent with the Employer’s administration of the Plan and applicable law, catch-up contributions shall be treated in the same manner as Employee pre-tax contributions for purposes of Participant loans pursuant to Article IX of this Plan and for purposes of any in-service withdrawals.
Effective January 1, 2009, a Participant shall be treated as having a severance from employment and therefore eligible for a distribution of his Employee Pre-Tax Contribution Account during any period the Participant is performing service in the uniformed services for more than 30 days as described in Code Section 3401(h)(2)(A). In the event that such a Participant elects to receive a distribution by reason of severance from employment, the Participant may not make an elective deferral to the Plan during the 6-month period beginning on the date of the distribution.
C. Employer Matching Contributions. The Employer may, in its sole discretion, contribute on behalf of each Participant who makes Employee pre-tax contributions an Employer matching contribution equal to such percentage of each Participant’s Employee pre-tax contributions as shall be determined by the Board of Directors in its discretion, provided that such Employer Matching Contributions (a) shall be based only on a Participant’s Employee pre tax contributions of up to 6% of Compensation or such other maximum as set by the Board, and (b) shall not result in an excess contribution as defined in Paragraph E below or exceed the applicable limits of Paragraph E of Article V. The Board may determine the time period for which such match will be made (e.g. a quarter or Plan Year), either prospectively or retroactively for the time period. If a match is made retroactively for a time period, the Participant must be employed on the last day of such period (an Active Participant) to receive the match. If Employer Matching Contributions are made for a time period, such Employer Matching Contributions may be made each pay period within it based on the Participant’s Employee pre tax contributions and Compensation for each such pay period, or may be allocated based on the Participant’s Employee pre-tax contributions and Compensation during the entire time period, as determined by the Board.




Notwithstanding any provisions of this Plan to the contrary, upon a Participant’s return from qualified military service, Employer matching contributions shall be made to the extent they would have been made with respect to Employee pre-tax contributions that are attributable to a period of qualified military service in accordance with Code Section 414(u).
Notwithstanding any provisions of this Plan to the contrary, Employee pre-tax contributions that are catch-up contributions made pursuant to Paragraph B of Article IV shall not be eligible for Employer Matching Contributions under this Paragraph C.
D. Nondiscrimination Test Applicable to Employee Pre-Tax Contributions. The maximum amount of Tax-Deferred Contributions that may be made by Highly-Compensated Employees is subject to the requirement that it meets one of the following nondiscrimination tests during each Plan Year:
(1) The Actual Deferral Percentage for the group of Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the Plan Year may not be more than the Actual Deferral Percentage for the group of non-Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the current Plan Year multiplied by 1.25; or
(2) The excess of the Actual Deferral Percentage for the group of Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the Plan Year over the Actual Deferral Percentage of non-Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the current Plan Year may not be more than two percentage points, and the Actual Deferral Percentage for the group of Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the Plan Year may not be more than the Actual Deferral Percentage of the group of non-Highly-Compensated Employees who are Participants for Tax-Deferred Contribution purposes for the current Plan Year multiplied by 2.0.
For purposes of this Paragraph, the following definitions shall apply:
(a) “Actual Deferral Percentage” or “ADP” shall mean the average of the Actual Deferral Ratios of the Eligible Participants in a group;
(b) “Actual Deferral Ratios” shall mean the ratio (calculated separately for each Participant and expressed as a percentage) of the Employer Tested Contributions on behalf of any Participant for the Plan Year to the Participant’s Compensation for the Plan Year;
(c) “Employer Tested Contributions” on behalf of any Participant shall include: (i) any Tax-Deferred Contributions made pursuant to the Participant’s deferral election (including excess Tax-Deferred Contributions of Highly-Compensated Employees), but excluding a) excess Tax-Deferred Contributions of non-Highly-Compensated Employees that arise solely from Tax-Deferred Contributions made under this Plan or plans of this Employer and b) Tax-Deferred Contributions that are taken into account in the Contribution Percentage test in Paragraph E of this Article IV (provided the ADP test is satisfied both with and without exclusion of these Tax-Deferred Contributions); and (ii) all Qualified Nonelective Contributions, if applicable; provided that only such Qualified Nonelective Contributions and Qualified Matching Contributions as are needed to meet the ADP test shall be included. Qualified Matching Contributions and Qualified Nonelective Contributions shall have the meaning provided in Reg. Section 1.401(k)-l(g). For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Tax-Deferred Contributions shall be treated as a Participant on whose behalf no Tax-Deferred Contributions are made;
(d) “Eligible Participant” shall mean any Employee who is eligible to make a Tax-Deferred Contribution;
(e) “Compensation” shall mean compensation as defined in Code Section 414(s) and in the seventh through last subparagraphs of Article II, Paragraph F, of the Plan.
(f) “Excess Contributions” shall mean, with respect to any Plan Year, the excess of:
(i) the aggregate amount of Tax-Deferred Contributions on behalf of Participants taken into account in computing the ADP of Highly-Compensated Employees for the Plan Year over
(ii) the maximum amount of such contributions permitted by the ADP test determined by hypothetically reducing Tax-Deferred Contributions made on behalf of Highly-Compensated Employees, beginning with the Highly-Compensated Employee with the highest Actual Deferral Ratio, reducing the contributions until the ratio equals the next highest of such ratios, reducing the contributions of both until they equal the next highest ratio, and proceeding in the same manner until the maximum amount of such contributions is achieved.
Excess Contributions shall be distributed in accordance with Paragraph F of this Article IV.
The Committee may elect, in accordance with IRS Notice 98-1 (or superseding guidance), to use the Actual Deferral Percentage deferred by non-Highly-Compensated Employees in the prior Plan Year instead of in the current Plan Year for the foregoing tests.




The Employer may elect to make Qualified Nonelective Employer Contributions (called Employer Vested Contributions for purposes of this Plan) that are allocated to the accounts of eligible Highly-Compensated Employees and/or any non-Highly-Compensated Employees in any manner that does not impermissibly discriminate against non-Highly-Compensated Employees, and may take into consideration all or any portion of such contributions in order to meet the nondiscrimination test applicable to Tax-Deferred Contributions, subject to the requirements of applicable regulations. Such contributions shall be 100% vested, shall be subject to the same restrictions on withdrawal as Tax-Deferred Contributions, shall meet the requirements of Code Section 401(a)(4) both before and after any portion is used for purposes of meeting the 401(k) and 401(m) nondiscrimination tests, and shall meet the requirements of the applicable regulations.
An Employer may elect to aggregate Tax-Deferred Contributions, 100% vested qualified employer matching contributions as defined by applicable regulations, and Employer Matching Contributions in order to meet the nondiscrimination test applicable to Tax-Deferred Contributions.
Compensation for the applicable year as used in this Paragraph shall mean Compensation as defined in Code Section 414(s) and in the seventh through last subparagraphs of Article II, Paragraph F, of the Plan. Tax-Deferred Contributions that cause this Plan to fail to meet one of the above tests are hereafter Excess Contributions and must be reduced and distributed in accordance with Paragraph F of this Article IV.
This Plan will take Tax-Deferred Contributions into account only if attributable to Compensation that would be received by the Participant during the Plan Year or earned during the Plan Year and received within 2  1 / 2 months after the end of the Plan Year. This Plan will aggregate all arrangements under which a Highly-Compensated Employee is eligible to make
Tax-Deferred Contributions for purposes of applying the nondiscrimination test applicable to Tax-Deferred Contributions.
Tax-Deferred Contributions allocated to a Highly-Compensated Employee as Excess Contributions may be recharacterized (“Recharacterized Contributions”). Recharacterized Contributions are treated as amounts distributed to the Participant and then contributed by the Participant to the Plan as a nondeductible employee contribution. Recharacterized Contributions will remain nonforfeitable and will be subject to all the distribution requirements for Tax-Deferred Contributions. Recharacterized Contributions will be allocated to the Participant’s Recharacterized Contribution Account as of the last day of the Plan Year for which they are recharacterized. Amounts may not be recharacterized by a Highly-Compensated Employee to the extent that such amount in combination with other Tax-Deferred Contributions and/or nondeductible employee contributions made by the Employee would exceed any stated limit under the Plan.
Recharacterization must occur no later than 2-1/2 months after the last day of the Plan Year in which such Excess Contributions arose. Recharacterization is treated as occurring only when the Plan Administrator reports the recharacterized Excess Contributions as nondeductible employee contributions to the Internal Revenue Service and to the Employee by timely providing such Federal tax forms and accompanying instructions and timely taking such other action as is prescribed by applicable guidance published in the Internal Revenue Bulletin and in the applicable tax forms and instructions.
E. Nondiscrimination Test Applicable to Employer Matching Contributions.
The maximum Employer Matching Contributions that may be allocated to Highly-Compensated Employees are subject to the requirement that they meet one of the following tests:
(1) The Actual Contribution Percentage for the group of Highly-Compensated Employees who are Participants for the Plan Year for Employer Matching Contribution purposes may not be more than the Actual Contribution Percentage for the group of non-Highly- Compensated Employees who are Participants for Employer Matching Contribution purposes for the current Plan Year multiplied by 1.25; or
(2) The excess of the Actual Contribution Percentage for the group of Highly- Compensated Employees who are Participants for Employer Matching Contribution purposes for the Plan Year over the Actual Contribution Percentage for the group of non-Highly- Compensated Employees who are Participants for Employer Matching Contribution purposes for the current Plan Year may not be more than two percentage points, and the Actual Contribution Percentage for the group of Highly-Compensated Employees who are Participants for Employer Matching Contribution purposes for the Plan Year may not be more than the Actual Contribution Percentage of the group of non-Highly-Compensated Employees who are Participants for Employer Matching Contribution purposes for the current Plan Year multiplied by two.
For purposes of this Paragraph, the following definitions shall apply:
(a) “Actual Contribution Percentage” or “ACP” shall mean the average of the Contribution Percentages of the Eligible Participants in a group;
(b) “Contribution Percentage” shall mean the ratio (calculated separately for each Participant and expressed as a percentage) of the Participant’s Contribution Percentage Amounts to the Participant’s Compensation for the Plan Year;




(c) “Contribution Percentage Amounts” shall mean the sum of Employer Matching Contributions and Qualified Matching Contributions, if applicable (to the extent not taken into account for purposes of the ADP test) made under this Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Employer Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are excess deferrals, or Excess Contributions, or Excess Aggregate Contributions. The Employer may include all or any portion of Tax-Deferred Contributions and Qualified Nonelective Contributions in the Contribution Percentage Amounts, provided that if the Employer elects the Current Year Testing Method only such Tax-Deferred Contributions and Qualified Nonelective Contributions as are needed to meet this ACP test shall be included. The ADP test must be met before the Tax-Deferred Contributions are used in the ACP test and continue to be met following the exclusion of those Tax-Deferred Contributions that are used to meet the ACP test;
(d) “Eligible Participant” shall mean any Employee who is eligible to make Tax-Deferred Contributions (if the employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive Employer Matching Contributions or a Qualified Matching Contribution;
(e) “Compensation” shall mean compensation as defined in Code Section 414(s) and in the seventh through last subparagraphs of Article II, Paragraph F, of the Plan.
(f) “Excess Aggregate Contributions” shall mean, with respect to any Plan Year, the excess of:
(i) the aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly-Compensated Employees for the Plan Year over
(ii) the maximum Contribution Percentage Amounts permitted by the ACP test determined by hypothetically reducing Contribution Percentage Amounts made on behalf of Highly-Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages, reducing the contributions until the percentage equals the next highest Contribution Percentage, reducing the contributions of both until they equal the next highest percentage, and proceeding in the same manner until the maximum permitted amount of such contribution is achieved. Such determination shall be made after first determining excess Tax-Deferred Contributions and then determining Excess Contributions pursuant to Paragraph D of this Article IV.
For purposes of this section, the Contribution Percentage for any Participant who is a Highly-Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Code Section 401(a), or arrangements described in Code Section 401(k) that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan and arrangement. If a Highly-Compensated Employee participates in two or more such plans or arrangements that have different plan years, all Contribution Percentage Amounts made during the Plan Year under all such plans and arrangements shall be aggregated. For Plan Years beginning before 2006, all such plans and arrangements ending with or within the same calendar year shall be treated as a single plan or arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code Section 401(m).
In the event that this Plan satisfies the requirements of Code Sections 401(m), 401(a)(4) or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this section shall be applied by determining the ACP of employees as if all such plans were a single plan. If more than ten percent of the Employer’s non-Highly Compensated Employees are involved in a plan coverage change as defined in Treas. Reg. 1.401(m)-2(c)(4), then any adjustments to the non-Highly Compensated Employees’ ACP for the prior year will be made in accordance with such regulations, unless the Employer has elected to use the Current Year Testing method. Plans may be aggregated in order to satisfy Code Section 401(m) only if they have the same Plan Year and use the same ACP testing method.
Excess Aggregate Contributions shall be distributed in accordance with Paragraph F of this Article IV.
The Committee may elect, in accordance with IRS Notice 98-1 (or superseding guidance), to use the Actual Contribution Percentage of the non-Highly-Compensated Employees in the prior Plan Year instead of in the current Plan Year for the foregoing tests.
The Employer may elect to make Qualified Nonelective Employer Contributions (called Employer Vested Contributions for purposes of this Plan) that are allocated to the accounts of eligible Highly-Compensated Employees and/or non-Highly-Compensated Employees in any manner that does not impermissibly discriminate against non Highly-Compensated Employees, and may take into consideration all or any portion of such contributions in order to meet the nondiscrimination test applicable to Employer Matching Contributions, subject to the requirements of applicable regulations. Such contributions shall be 100% vested, shall be subject to the same restrictions on withdrawal as Tax-Deferred Contributions, shall meet the requirements of Code Section 401(a)(4) both before and after any portion is used for purposes of meeting the 401(k) and 401(m) nondiscrimination tests, and shall meet the requirements of the applicable regulations.




F. Distribution of Excess Contributions and Excess Aggregate Contributions. Excess Contributions and vested Excess Aggregate Contributions, adjusted for allocable income
and losses, shall be distributed within two and one-half (2  1 / 2 ) months if reasonably practicable, but in no event later than twelve (12) months, after the end of the Plan Year in which such Excess Contributions or Excess Aggregate Contributions are made in accordance with the procedures established by the Committee to assure compliance with Code Section 401(k) and Code Section 401(m). Nonvested Excess Aggregate Contributions shall be forfeited.
The distribution of Excess Contributions shall be accomplished by reducing Tax-Deferred Contributions of the Highly-Compensated Employee(s) with the greatest dollar amount of Tax-Deferred Contributions until the earliest of the following events occurs: (1) all the Excess Contributions are distributed or (2) such Highly-Compensated Employee’s Tax-Deferred Contributions equal the Tax-Deferred Contributions of the Highly-Compensated Employee(s) with the next highest dollar amount of Tax-Deferred Contributions, and this process is repeated, if necessary, until the Excess Contributions are returned. The Committee may first distribute an Employee’s unmatched Tax-Deferred Contributions, and second, distribute an Employee’s matched Tax-Deferred Contributions, distributing Employer Matching Contributions pro rata, adjusted in each case for allocable income and losses for the Plan Year.
The distribution or forfeiture of Excess Aggregate Contributions shall be accomplished by reducing the actual Employer Matching Contributions of the Highly-Compensated Employee(s) with the highest dollar amount of Employer Matching Contributions until the earliest of the following events occurs: (1) the Excess Aggregate Contributions are distributed or (2) such Highly-Compensated Employee’s Employer Matching Contributions equal the Employer Matching Contributions of the Highly-Compensated Employee(s) with the next highest dollar amount of Employer Matching Contributions, and this process is repeated, if necessary, until the Excess Aggregate Contributions are distributed. Such amounts shall be adjusted for allocable income and losses for the Plan Year.
Allocable income or loss through a date no more than seven (7) days before the date of distribution will be computed using any reasonable allocation method(s). Provided, however, that the process for calculating the income or loss must not discriminate in favor of Highly-Compensated Employees and must be used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year. Allocable income or loss for the taxable year with respect to Excess Aggregate Contributions is determined in a similar manner. For Plan Years beginning after December 31, 2007, when distributing Excess Contributions or Excess Aggregate Contributions, allocable income for the gap period (i.e., the period after the close of the Plan Year in which the Excess Contributions or Excess Aggregate Contributions occurred and prior to the distribution) shall not be calculated or distributed.
The amount of excess deferrals attributable to tax-deferred contributions that may be distributed by this Plan for the taxable year of the Employee must be reduced by the amount of excess contributions attributable to Employer Matching Contributions previously distributed for the Plan Year beginning with or within the Employee’s taxable year.
This Plan will take a contribution into account for a Plan Year only if it is allocated to the Participant’s account on a day within the Plan Year.
G. Hardship Withdrawals of Employee Pre-Tax Contributions. The Plan Committee may distribute all or a part of a Participant’s Employee Pre-Tax Contribution Account, prior to the time such Account would otherwise be distributed, upon a showing of immediate and heavy financial hardship by the Participant in accordance with the provisions of this paragraph. A Participant may not withdraw the earnings on his Employee pre-tax contributions on account of hardship. A Participant’s Employee Pre-Tax Contribution Account for purposes of hardship distributions shall be valued as provided in Article VII, Paragraph A(4). A hardship distribution (a) must be on account of an immediate and heavy financial need and may not exceed the amount necessary to meet that need, and (b) must be necessary to satisfy a financial need which the Employee is unable to satisfy from other resources reasonably available to him. An immediate and heavy financial need shall be deemed to exist if the requested distribution is on account of:
(1) Uninsured medical expenses as defined in Code Section 213 that have already been incurred by the Participant, the Participant’s Spouse, child (whether or not custodial), a dependent of the Participant, or the designated beneficiary of the Participant, or such expenses that have not already been incurred, provided prepayment of the expenses is necessary to allow such persons to obtain medical services;
(2) Purchase of the Participant’s principal residence (excluding mortgage or loan payments);
(3) Payment of tuition, room and board expenses, and related educational fees for the next twelve months of post secondary education for the Participant, the Participant’s Spouse, child, dependent, or designated beneficiary, including graduate school and any approved trade or technical school;
(4) Payment to prevent eviction of the Participant from his principal residence or foreclosure of a mortgage or other financing lien on the Participant’s principal residence;




(5) Payment of burial or funeral expenses for the Participant’s deceased parent, Spouse, child, dependent, or designated beneficiary;
(6) Expenses for the repair of damage to the Participant’s principal residence that would qualify as a casualty loss deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of the Participant’s adjusted gross income); or
(7) Any other deemed immediate and heavy financial need that may be prescribed by the Commissioner of Internal Revenue through the publication of revenue rulings, notices, and other documents of general applicability.
Such a distribution may include an amount necessary to pay taxes and penalties on the distribution.
Hardship distributions shall be administered by the Committee in accordance with uniform and nondiscriminatory standards applicable to all Participants.
Any Participant making a hardship withdrawal as permitted hereunder may not make additional Employee contributions (including Section 401(k) pre-tax contributions) to this or any other plan maintained by the Employer for a period of six (6) months from the date of such withdrawal. Effective January 1, 2008, following the end of such a six-month period, a Participant may affirmatively elect to restart his Employee pre-tax contributions as soon as administratively feasible following the end of such six-month period, provided that prior to the date such Employee pre-tax contributions recommence and within the timeframe required by the Committee he elects to make Employee pre-tax contributions by following the procedures designated by the Committee.
H. Date of Payment. The Employer shall pay to the Trustee, within the time provided by law for filing of the Employer’s income tax return (including extensions), the amount to be contributed pursuant to Paragraphs A and C.
The Employer shall pay to the Trustee, within the time required by law for 401(k) contributions, Employee pre-tax contributions for each such pay period on behalf of all Participants pursuant to Paragraph B of this Article IV.
The Trustee shall not be responsible for determining the amount of any Plan contributions nor for collecting contributions not voluntarily paid to the Trustee.
I. Profit Sharing Plan. This Plan is designed to qualify as a profit sharing plan for purposes of Code Section 401(a), 402, 412, and 417. However, notwithstanding any Plan provision to the contrary, all contributions shall be made without regard to current or accumulated earnings and profits.
ARTICLE V
Participant’s Accounts,
Valuation, Maximum Contribution
A. Participant’s Accounts. The Committee or its delegate shall maintain a separate Participant-Directed Profit Sharing Account, a separate Employee Pre-Tax Contribution Account, a separate Employer Matching Contribution Account, and a separate Rollover Account, where applicable for each Participant, which accounts shall reflect the Participant’s Accrued Benefit. The Committee shall furnish each Participant who requests the same in writing a statement reflecting, on the basis of the latest available information, his Accrued Benefit and the nonforfeitable portion thereof or if no benefits are nonforfeitable, the earliest date on which benefits will be nonforfeitable. Only one such statement need be furnished a Participant each 12 months. The Employer may appoint the Trustee or any qualified third party to perform recordkeeping functions.
B. Allocations of Contributions.
1. Allocation of Employer Discretionary Profit Sharing Contributions. The Employer’s discretionary Profit Sharing contributions, if any, for a Plan Year pursuant to Paragraph A of Article IV shall be allocated to the Participant-Directed Profit Sharing Account of each Participant who is an Active Participant (as defined in Paragraph C of this Article V) in the proportion that each Active Participant’s Compensation during the Plan Year bears to the total Compensation of all such Active Participants during such Plan Year. If a person became enrolled as a Participant during a Plan Year on a date other than the first day of the Plan Year, only that portion of his Compensation attributable to Hours of Service performed while he was a Participant shall be considered in determining his allocation of the Employer’s discretionary Profit Sharing contribution to his Participant-Directed Profit Sharing Account for such Plan Year.
2. Allocation of Employer Matching Contributions. The Employer matching contributions if any, for a Plan Year pursuant to Paragraph C of Article IV shall be allocated to the Employer Matching Contribution Account of each Participant who is an Active Participant (as defined in Paragraph C of Article IV).




C. Active Participants Receive Allocations of Employer Discretionary Profit Sharing Contributions. Only an Active Participant shall be entitled to share in the Employer’s discretionary profit sharing contributions, if any, for a particular Plan Year pursuant to Paragraph A of Article IV. For purposes of receiving Employer discretionary profit sharing contributions, an Active Participant means a Participant, employed on the Anniversary Date, who completes a Year of Service during the Plan Year; provided, that if a Participant became enrolled in the Plan on the mid-year Enrollment Date, he shall be deemed an Active Participant for that Plan Year if he completes 1,000 or more Hours of Service as an Employee during that Plan Year and is employed on the Anniversary Date.
If the Participant’s failure to complete a Year of Service in the Plan Year results from his death, disability as defined in Paragraph C of Article VII, retirement on or after age 62 while fully vested, or retirement on or after age 65, he shall be considered an Active Participant for such year.
D. Trust Valuation.
As of each Valuation Date, the Trustee shall determine the fair market value of the trust assets allocated to Participants’ Employee Pre-Tax Contribution Accounts, Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts in order to determine the percentage of increase or decrease in the fair market value of such assets when compared with the fair market value of such assets as of the immediately preceding Valuation Date. The cumulative amount allocated as of the preceding Valuation Date to the Employee Pre-Tax Contribution Account, where applicable, the Participant-Directed Profit Sharing Account, where applicable, the Employer Matching Contribution Account, where applicable, and the Rollover Account, where applicable, of each Participant shall be adjusted to reflect the increase or decrease, as the case may be, by multiplying such account by the percentage so determined. The Employer, the Committee, and the Trustee do not in any manner
or to any extent whatever warrant, guarantee, or represent that the value of a Participant’s account or accounts shall at any time equal or exceed the amount previously contributed thereto.
E. Maximum Contributions.
1. Annual Addition. The term “annual addition” for any Plan Year means the sum of:
a. The Employer’s contributions on a Participant’s behalf to the Employer’s defined contribution plan(s) (any profit sharing and money purchase pension plans) including Employee pre-tax contributions hereunder;
b. The Participant’s voluntary nondeductible contributions, if any, to the defined contribution plan(s) maintained by the Employer;
c. Amounts allocated for a Plan Year beginning after March 31, 1984, to a Code Section 415(1)(2) individual medical account that is part of a pension or annuity plan maintained by the Employer; and
d. Amounts paid or accrued after December 31, 1985, in taxable years ending after that date, for post-retirement benefits allocated to a separate account in a Code Section 419(e) welfare benefit fund maintained by the Employer. These amounts will not be subject to the present limitations of Code Section 415(c)(l)(B).
Notwithstanding any provisions of this Paragraph E to the contrary, except to the extent permitted under Article IV, Paragraph B, and Section 414(v) of the Code, if applicable, the annual addition that may be contributed or allocated to a Participant’s accounts under the Plan for any Plan Year shall not exceed the lesser of: (a) $40,000, as adjusted for increases in the cost-of-living under Section 415(d) of the Code (i.e., $49,000 for 2010), or (b) 100 percent of the Participant’s Compensation, for purposes of Code Section 415. The compensation limit referred to in (b) shall not apply to (i) any contributions for medical benefits after separation from service (within the meaning of Code Section 401(h) or Code Section 419A(f)(2)) and which are otherwise treated as an Annual Addition; or (ii) any amount otherwise treated as an Annual Addition under Code Section 415(l)(1) or 419A(d)(2).
2. Excess Annual Addition. The 415 correction methods set forth in this Article V, Paragraph E.2, shall only apply with respect to limitation years beginning before July 1, 2007. If, as a result of a reasonable error in estimating a Participant’s Compensation, or other facts and circumstances to which Code regulation Section 1.415-6(b)(6) shall be applicable, the annual addition for a Participant exceeds the applicable limitations for the Plan Year, the annual addition shall be reduced as follows:
a. The amount of such excess consisting of the Employee’s unmatched Employee pre-tax contributions shall be paid to the Employee as soon as administratively feasible.
b. The amount of any remaining excess consisting of matched Employee pre-tax contributions on behalf of an Employee and Employer matching contributions on behalf of such Employee shall be reduced pro rata (currently $.50 of Employer matching contributions for every one dollar of matched Employee pre-tax contributions). Such Employee pre-tax contributions shall be paid to the Employee as soon as administratively feasible, and such Employer matching contributions shall be allocated to a suspense account as forfeitures and applied as provided in (c) below).




c. The amount of any remaining excess consisting of Employer discretionary Profit Sharing contributions to this Plan shall be allocated to a suspense account as forfeitures and held therein until the next succeeding date on which such forfeitures could be applied to reduce future Employer contributions under this Plan. In the event of termination of the Plan, the suspense account shall revert to the Employer.
The limitation year is the Plan Year. Notwithstanding any other provisions, the Employer shall not contribute any amount that would cause an allocation to the suspense account as of the date the contribution is allocated. If the contribution is made prior to the date as of which it is to be allocated, then such contribution shall not exceed an amount that would cause an allocation to the suspense account if the date of contribution were an allocation date. If an allocation is made to such suspense account, it shall contain no investment gains and losses or other income. Amounts in the suspense account are allocated as of each allocation date on which forfeitures may be allocated until the account is exhausted.
3. For the purpose of this Paragraph E, the following rules shall control:
a. The $40,000 maximum ($49,000 in 2010) shall be deemed adjusted for any Plan Year to conform to increases in the cost of living in accordance with regulations to be adopted by the Secretary of Treasury.
b. All qualified defined benefit plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined benefit plan, and all qualified defined contribution plans (whether terminated or not) ever maintained by the Employer shall be treated as one defined contribution plan.
c. If the Employer is a member of a controlled group of corporations, trades or businesses under common control (as defined by Code Section 1563(a) or Code Section 414(b) and (c) as modified by Code Section 415(h)) or is a member of an affiliated service group (as defined by Code Section 414(m)), all employees of such employers shall be considered to be employed by a single employer.
F. Forfeitures and Reinstatement of Forfeitures. On each Anniversary Date, the nonvested Accrued Benefit of each Participant with respect to whom an Event of Forfeiture has occurred and who is not in the employ of the Employer on the Anniversary Date shall be forfeited. If a Participant terminates employment with the Employer, incurs an Event of Forfeiture, is thereafter reemployed, and has not incurred five consecutive One-Year Breaks in Service as of the Anniversary Date coinciding with or following the date of his reemployment,
the forfeited dollar amount of his Accrued Benefit shall be reinstated as if that nonvested dollar amount of his Accrued Benefit had not been forfeited, provided the terminated Participant repays the vested dollar amount of his Accrued Benefit previously distributed to him, which was attributable to Employer contributions, back to the Plan Trustee to be credited to the Participant. Any required repayment shall be made in cash and shall be repaid to the Participant’s Participant-Directed Profit Sharing Account, and Employer Matching Contribution Account, as applicable. Any required repayment must occur before the earlier of (1) the date five years after the first date on which the Participant is subsequently re-employed by the Employer, or (2) the date the Participant would have incurred five consecutive One-Year Breaks in Service following the date of the distribution had he not been re-employed. Reinstatement of a Participant’s forfeited Accrued Benefit in accordance with this Paragraph I shall occur on the Anniversary Date coinciding with or following such Participant’s date of repayment by allocating the required amount to the Participant’s Participant-Directed Profit Sharing Account, and Employer Matching Contribution Account, as applicable, first, from forfeitures of Employer Matching Contributions occurring on such Anniversary Date, second, from Trust earnings allocated as of such Anniversary Date, and third, from extraordinary Employer contributions as required.
Forfeitures of amounts in Participants’ Participant-Directed Profit Sharing Accounts and Employer Matching Contribution Accounts shall be applied first to offset eligible Plan expenses in the Plan Year of the forfeiture or the Plan Year immediately following and then to reinstate any nonvested Accrued Benefits required to be reinstated for the Plan Year of the forfeiture or the Plan Year immediately following. Any remaining forfeitures shall be applied to reduce future Employer contributions.
ARTICLE VI
Nonforfeitable Accrued Benefit
A. Allocations Not Vested. Allocations to Participants in accordance with the provisions of Article V shall not vest any right or title to any part of the assets of the Trust.
B. Vesting Period. A Participant’s Employee Pre-Tax Contribution Account and Rollover Account, if applicable, shall be 100% vested at all times. A Participant’s Participant- Directed Profit Sharing Account shall vest in accordance with the following schedule:
 




 
 
Completion of 1 Year of Service
—
%
Completion of 2 Years of Service
—
%
Completion of 3 Years of Service
20
%
Completion of 4 Years of Service
40
%
Completion of 5 Years of Service
60
%
Completion of 6 Years of Service
80
%
Completion of 7 Years of Service
100
%
Notwithstanding the foregoing, effective with respect to a Participant who completes at least one Hour of Service on or after January 1, 2007, such Participant’s Participant-Directed Profit Sharing Account shall vest in accordance with the following schedule:
 
 
Completion of 1 Year of Service
20
%
Completion of 2 Years of Service
40
%
Completion of 3 Years of Service
60
%
Completion of 4 Years of Service
80
%
Completion of 5 Years of Service
100
%
A Participant’s Employer Matching Contribution Account shall vest in accordance with the following schedule:
 
 
 
Completion of 1 Year of Service
20
%
Completion of 2 Years of Service
40
%
Completion of 3 Years of Service
60
%
Completion of 4 Years of Service
80
%
Completion of 5 Years of Service
100
%
In crediting Years of Service to determine a Participant’s nonforfeitable Accrued Benefit, the Committee shall apply the following rules using the Vesting Computation Period for purposes of determining Years of Service and One-Year Breaks in Service:
1. Except as specifically hereinafter provided, all of an Employee’s Years of Service with the Employer both prior to becoming a Participant and thereafter shall be taken into account. Certain Employees’ Years of Service with certain predecessor employers and acquired entities have been taken into account, as provided in this Plan prior to the Effective Date,
2. In the case of a Participant who terminates employment with the Employer and has no nonforfeitable right to an Accrued Benefit, the Employer shall not give credit for Years of Service occurring before a One-Year Break in Service if, on the date the Participant first completes an Hour of Service following the date of termination, the number of his consecutive One-Year Breaks in Service equals or exceeds the aggregate number of Years of Service (whether or not consecutive) prior to the last such break if the number of consecutive One-Year Breaks in Service is five or more. Years of Service before the break shall not include Years of Service not required to be taken into account by reason of any other rule under this Paragraph B.
3. The Employer shall give credit for Years of Service which are not disregarded under subparagraph 2 upon the Participant’s reemployment date, which shall be the date on which he completes one Hour of Service after his termination of employment.
4. The nonforfeitable percentage of a Participant’s Accrued Benefit derived from Employer contributions made prior to five consecutive One-Year Breaks in Service shall be determined without regard to Years of Service occurring after such five consecutive One-Year Breaks in Service. Separate accounting shall be maintained for the pre-break Accrued Benefit.
C. Amendment to Vesting Computation Period or Vesting Schedule. The Employer may amend the Plan to provide for a different Vesting Computation Period so long as the new Vesting Computation Period, as amended, begins prior to the last day of the preceding Vesting Computation Period. No Plan amendment shall reduce a Participant’s nonforfeitable
Accrued Benefit. If the Plan vesting schedule is amended or the Plan is amended in any way that directly or indirectly affects the computation of a Participant’s nonforfeitable percentage, or if a different vesting schedule is applicable because a




previously Top-Heavy Plan is no longer Top-Heavy, each Participant with at least three (3) Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment, to have his nonforfeitable Accrued Benefit (accrued before and after the amendment) computed under the Plan without regard to such amendment. The period during which the election may be made shall commence with the date the amendment is adopted and shall end on the later of:
1. Sixty (60) days after the amendment is adopted;
2. Sixty (60) days after the amendment becomes effective; or
3. Sixty (60) days after the Participant is issued written notice of the amendment by the Employer or Committee.
D. Full Vesting. Upon a Participant’s death while still employed by the Employer, disability while still employed by the Employer, or attainment of normal retirement age while still employed by the Employer, the full amount credited to the Participant’s Participant-Directed Profit Sharing Account and Employer Matching Contribution Account pursuant to Article V shall become fully vested and nonforfeitable.
In the case of a death occurring on or after January 1, 2007, if a Participant dies while performing qualified military service (as defined in Code Section 414(u)), the Participant’s survivors are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service), such as full vesting upon death, provided under the Plan as if the Participant had resumed and then terminated employment on account of death.
E. Participant’s Commencement of Excluded Employment. In the event a Participant transfers to an employment category excluded under Article III, the following shall control:
1. For purposes of determining the Participant’s right to, and the amount of an allocation of the Employer contribution, Hours of Service performed and Compensation received while the Participant was in a category excluded under Article III hereof shall not be counted.
2. For purposes of determining the Participant’s nonforfeitable Accrued Benefit, Hours of Service performed while the Participant was in an excluded category shall be counted.
F. Transfer of Participants. The transfer of a Participant from the employ of one Employer co-sponsoring the Plan to another Employer co-sponsoring the Plan shall for no purpose constitute a termination of employment hereunder for vesting purposes, nor shall such Participant receive a distribution from this Plan until such time as he terminates employment with all such Employers. The respective Employers shall notify the Committee of the transfer of
employment, and the Committee shall adjust its records accordingly. If an Active Participant shall transfer during a Plan Year, he shall receive an allocation of each of his Employer’s discretionary Profit Sharing contributions (if any) based upon his Compensation from each such Employer if he completes a total of at least 1,000 Hours of Service with Employers co-sponsoring the Plan during the Plan Year and is employed by an Employer sponsoring the Plan on the Anniversary Date.
ARTICLE VII
Distribution of Benefits
A. Retirement Age and Options. The normal retirement age shall be age 65 for all Participants, and each Participant or former Participant shall be entitled to retire the first day of the month coinciding with or following attainment of normal retirement age, which day shall be his Normal Retirement Date.
1. Employment After Normal Retirement Age. If a Participant continues in the employ of the Employer beyond his Normal Retirement Date, he shall, pursuant to the terms of this Plan, continue to share in any Employer discretionary Profit Sharing contributions and increases and decreases in value, including fees and expenses until actual retirement and may elect Employee pre-tax contributions and receive Employer matching contributions hereunder.
a. Election to Receive Benefits While Still Employed. A Participant who has attained age 70  1 / 2 may elect in writing to receive his Accrued Benefit prior to his actual retirement date in accordance with procedures established by the Committee; such a Participant shall continue to share in any Employer discretionary Profit Sharing contributions and increases and decreases in value, including fees and expenses, until actual retirement and may elect Employee pre-tax contributions and receive Employer matching contributions hereunder.
b. Required Receipt of Benefits. The required beginning date of a Participant is the later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70  1 / 2 or retires except that benefit distributions to a more than five percent (5%) owner (as defined in Code Section 416) must commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70  1 / 2 .




A participant is treated as a more than five percent (5%) owner for purposes of this section if such participant is a more than five percent (5%) owner as defined in Code Section 416 at any time during the Plan Year ending within the calendar year in which such owner attains age 70  1 / 2 .
A Participant to whom this subparagraph b. applies shall continue to share in any Employer discretionary Profit Sharing contributions, and increases and decreases in value, including fees and expenses, until actual retirement, and may elect Employee pre-tax contributions and receive Employer matching contributions hereunder.
2. Date of Retired Participant’s First Payment. A Participant who retires hereunder shall begin receiving his benefits as soon as is reasonably possible after his retirement date but no later than the date sixty (60) days after the close of the Plan Year in which the Participant retires, unless he elects to defer payment pursuant to subparagraph (3) below.
3. Deferral of Benefits. A Participant who retires hereunder or terminates employment with a nonforfeitable Accrued Benefit in excess of $1,000 shall not be required to receive a distribution without his written consent. The Participant may elect to defer the commencement of his Plan benefits to a later date, but not later than April 1 of the calendar year following the calendar year in which he attains age 70  1 / 2 . Such a Participant must make this election in writing on a form provided by the Committee. Such election shall include the current amount of the Participant’s nonforfeitable Accrued Benefit and the date on which payment shall commence. The Participant may change such election prior to the commencement of his deferred benefits, provided payments commence no later than the date required above.
Failure of a Participant to consent to a distribution while a nonforfeitable Accrued Benefit in excess of $1,000 is immediately distributable shall be deemed an election to defer commencement of payment.
4. Form of Payment. A Participant who is eligible to receive benefits under this paragraph may elect in writing to receive a single payment equal to the Participant’s nonforfeitable Accrued Benefit valued as of the Valuation Date(s) coinciding with or immediately following the Plan’s receipt of the Participant’s distribution request, except that a Participant who elected to receive installment payments prior to the date that installment payments ceased to be an optional form of payment under the Plan may continue to receive such installment payments, pursuant to subparagraph 5. below.
5. Reserved.




6. Minimum Required Distribution Under Final Regulations.
With respect to minimum required distributions made on or after the Effective Date as defined in Paragraph 6.a.i below, the following provisions shall apply:
a. General Rules.
i. Effective Date. The provisions of this Article VII, Paragraph A.6 will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.
ii. Precedence. The requirements of this Article VII, Paragraph A.6 will take precedence over any inconsistent provisions of the Plan as to the required minimum amount payable, provided that any provision of the Plan requiring faster payment or greater payments will remain in effect.
iii. Requirements of Treasury Regulations Incorporated. All distributions required under this Article VII, Paragraph A.6 will be determined and made in accordance with the Treasury regulations under Code Section 401(a)(9).
iv. TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Article VII, distributions may be made under a designation made before January 1,1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA.
b. Time and Manner of Distribution.
i. Required Beginning Date, The Participant’s nonforfeitable Accrued Benefit will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date, as defined in subparagraph e.v. below.
ii. Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant’s nonforfeitable Accrued Benefit will be distributed, or begin to be distributed, no later than as follows:
A. If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70-1/2, if later, unless subparagraph iii. below applies.




B. If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, then distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, unless subparagraph iii. below applies.
C. If there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire nonforfeitable Accrued Benefit will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
D. If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this subparagraph ii, other than subparagraph ii.A, will apply as if the surviving spouse were the Participant.
For purposes of this subparagraph ii. and Article VII, Paragraph A.6.d, unless subparagraph ii.D. above applies, distributions are considered to begin on the Participant’s Required Beginning Date. If subparagraph ii.D. above applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under subparagraph ii.A. above. If the Plan permits an annuity contract as a form of payment and
distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under subparagraph ii.A), the date distributions are considered to begin is the date distributions actually commence.
iii. Five-Year Rule. If the Participant dies before distributions begin and there is a designated beneficiary, distribution to the designated beneficiary is not required to begin by the date specified above in subparagraph b.ii., as long as the Participant’s entire nonforfeitable Accrued Benefit will be distributed to the designated beneficiary by December 31 of the calendar year containing the fifth anniversary of the Participant’s death (“five-year rule”). If the Participant’s surviving spouse is the Participant’s sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to either the Participant or the surviving spouse begin, this election will apply as if the surviving spouse were the Participant.
Beneficiaries may elect on an individual basis whether the foregoing 5-year rule or the life expectancy rule specified in subparagraph b.ii above and subparagraph d.ii below applies to distributions after the death of a Participant who has a designated beneficiary. The election must be made no later than the earlier of (a) December 31 of the calendar year in which distribution would be required to begin under subparagraph b.ii, or (b) December 31 of the calendar year which contains the fifth anniversary of the Participant’s (or, if applicable, surviving spouse’s) death. If the beneficiary does not make an election under this Paragraph, distributions will be made in accordance with the five-year rule.
A designated beneficiary who is receiving payments under the 5-year rule may make a new election to receive payments under the life expectancy rule until December 31,2003, provided that all amounts that would have been required to be distributed under the life expectancy rule for all distribution calendar years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5-year period.
iv. Forms of Distribution. Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, then for each distribution calendar year distributions will be made in accordance with Paragraphs A.6.C and A.6.d of this Article VII. If the Plan permits an annuity contract as a form of payment and the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Section 401(a)(9) of the Code and the Treasury regulations.
c. Required Minimum Distributions During Participant’s Lifetime.
i. Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participant’s lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:
A. the quotient obtained by dividing the Participant’s nonforfeitable Accrued Benefit by the distribution period in the Uniform Lifetime Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant’s age as of the Participant’s birthday in the distribution calendar year; or
B. if the Participant’s sole designated beneficiary for the distribution calendar year is the Participant’s spouse, the quotient obtained by dividing the Participant’s nonforfeitable Accrued Benefit by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury regulations, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the distribution calendar year.
ii. Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death. Required minimum distributions will be determined under this Article VII, Paragraph A.6.c. beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant’s date of death.




d. Required Minimum Distributions After Participant’s Death.
i. Death On or After Date Distributions Begin.
A. Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s nonforfeitable Accrued Benefit by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant’s designated beneficiary, determined as follows:
1. The Participant’s remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
2. If the Participant’s surviving spouse is the Participant’s sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For distribution calendar years after the year of the surviving spouse’s death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.
3. If the Participant’s surviving spouse is not the Participant’s sole designated beneficiary, the designated beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.
B. No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s entire nonforfeitable Accrued Benefit by the Participant’s remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
ii. Death Before Date Distributions Begin.
A. Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s nonforfeitable Accrued Benefit by the remaining life expectancy of the Participant’s designated beneficiary, determined as provided in Article VII, Paragraph A.6.d.i above.
B. No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire nonforfeitable Accrued Benefit will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
C. Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Article VII, Paragraph A.6.b.ii.A above, this Article VII, Paragraph A.6.d.ii will apply as if the surviving spouse were the Participant.
e. Definitions.
i. Designated beneficiary. The individual who is designated as the beneficiary under Article VII, Paragraph B of the Plan (including any individual who is a default beneficiary identified under Article VII, Paragraph B of the Plan), and is the designated beneficiary under Code Section 401(a)(9) and Section 1.401(a)(9)-4, Q&A-l, of the Treasury regulations.
ii. Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first distribution calendar year is the calendar year in which distributions are required to begin under Article VII, Paragraph A.6.b.ii. The required minimum distribution for the Participant’s first distribution calendar year will be made on or before the Participant’s Required Beginning Date. The required minimum distribution for other distribution calendar
years, including the required minimum distribution for the distribution calendar year in which the Participant’s Required Beginning Date occurs, will be made on or before December 31 of that distribution calendar year.




iii. Life expectancy. Life expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury regulations.
iv. Participant’s nonforfeitable Accrued Benefit. The Participant’s nonforfeitable Accrued Benefit as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the nonforfeitable Accrued Benefit as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. The nonforfeitable Accrued Benefit for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.
v. Required Beginning Date. The date specified in Article VII, Paragraph A.1.b. of the Plan.
B. Death. Each Participant shall designate a beneficiary or beneficiaries on a form to be furnished by the Committee. The beneficiary of a married Participant shall be his Spouse, unless the Spouse consents in writing to the designation of another specific beneficiary and acknowledges the effect of the consent. The consent shall be witnessed by a notary public or a Plan representative. Such designation shall be filed with the Committee and may be changed by the Participant from time to time by filing a new designation in writing (together with the Spouse’s consent where required). The designation last filed with the Committee shall control.
If any Participant shall fail to designate a beneficiary or if the person or persons designated predecease the Participant and there is no designated successor, the Participant’s beneficiary shall be the following in the order named:
a. Surviving Spouse at date of death,
b. Then living issue, per stirpes (lawful issue and adopted),
c. Then living parents, in equal shares,
d. Brothers and sisters, in equal shares, provided that if any brother or sister is not then living, his or her share shall be distributed to his or her then living issue, per stirpes, and
e. Estate of the Participant.
1. Death Prior to Commencement of Benefits. A Participant’s beneficiary shall receive the Participant’s nonforfeitable Accrued Benefit in the form of a single lump sum
payment. Such payment shall be valued as of the Valuation Date coinciding with or following the Plan’s receipt of the beneficiary’s distribution request, subject to the following rules:
a. A beneficiary may elect to have payments commence a reasonable time after the Participant’s death.
b. All payments to the beneficiary shall be completed by December 31 of the calendar year in which the fifth anniversary of the Participant’s death occurs, except that such payments may extend beyond that five-year period if the Participant designated a beneficiary who is the Participant’s Spouse, and that beneficiary elects to have payments commence not later than the later of (a) December 31 of the calendar year in which the Participant would have attained age 70  1 / 2 or (b) December 31 of the calendar year in which the fifth anniversary of the Participant’s death occurs.
The beneficiary’s election of a Plan distribution shall be in writing on a form furnished by the Committee. If the beneficiary is the Participant’s Spouse and the Spouse elects to postpone payment of the Participant’s Accrued Benefit, the Spouse shall designate a beneficiary or beneficiaries in accordance with the provisions of this Paragraph B as if the Spouse was the Participant. If such Spouse dies before payments commence hereunder, the provisions of this Paragraph B shall be applied as if the Spouse was the Participant.
If the Participant’s beneficiary fails to make a written election of a Plan distribution before December 31 of the calendar year in which the fifth anniversary of the Participant’s death occurs, and the Participant did not designate his Spouse as beneficiary, the Committee shall direct the Trustee to pay the benefit in a single sum to the Participant’s beneficiary not later than such December 31. If the Participant’s Spouse as designated beneficiary fails to make a written election of a Plan distribution before the later of (i) December 31 after the Participant would have attained age 70  1 / 2 or (ii) December 31 of the calendar year in which the fifth anniversary of the death of the Participant occurs, the Committee shall direct the Trustee to distribute the Participant’s Accrued Benefit in a single sum on or before the later of December 31 of the calendar year in which the Participant would have attained age 70  1 / 2 or December 31 of the calendar year in which the fifth anniversary of the death of the Participant occurs.
Notwithstanding any provision of this Plan to the contrary, in the event that a distribution is required to be made to a beneficiary by December 31 of a Plan Year and has not already been made, such required distribution shall be valued as of the Valuation Date coinciding with or preceding the distribution.




Payments shall be in the form described in Paragraph A(4) of this Article.
Notwithstanding any other provision in this Plan, to the extent permitted by and in accordance with the Code, a Participant or beneficiary who would have been required to receive a minimum distribution under Code Section 401(a)(9) from this Plan for 2009, will not receive such distribution(s) for 2009, unless the participant or beneficiary affirmatively elects to receive such distribution(s). In the event that a beneficiary does not elect to receive such a distribution and the five-year rule set forth in Code Section 401(a)(9)(B)(ii) applies to such beneficiary, the
five-year period shall be determined without regard to the Plan Year the distribution is suspended. In the event a Participant or beneficiary receives a required minimum distribution that was eligible for postponement, such distribution shall not be entitled to be directly rolled over, unless it is part of a larger distribution that was subject to direct rollover. In accordance with the Code, this Plan may accept a rollover of minimum distribution amounts that were subject to postponement. In the absence of an affirmative election by the Participant or beneficiary to receive a 2009 required minimum distribution, such 2009 minimum distributions are suspended. In the event the provisions of Code Section 401(a)(9)(H) are extended beyond 2009, this paragraph shall apply to all subsequent years that receive relief from the minimum distribution requirement.
C. Disability. Disability means that a Participant, by reason of mental or physical disability, is incapable of performing the duties of his customary position with the Employer for an indefinite period which, in the opinion of the Committee, is expected to be of a long continual duration. In the event of disability, said Participant’s Accrued Benefit shall be distributed to him if he so elects in the same manner as if he had attained full retirement age as provided in Paragraph A above. Such benefit shall be valued as of the Valuation Date(s) coinciding with or following the Plan’s receipt of a disabled Participant’s distribution election form. Disability shall be established to the satisfaction of the Committee. If the Participant shall disagree with the Committee’s findings, disability shall be established by the certificate of a physician, selected by the Participant and approved by the Committee, or if the physician selected by the Participant shall not be approved by the Committee, then by a majority of three physicians, one selected by the Participant (or his Spouse, child, parent, or legal representative in the event of his inability to select a physician), one by the Committee, and the third by the two physicians selected by the Participant and the Committee.
D. Termination of Employment. In the event a Participant voluntarily or involuntarily terminates employment with a nonforfeitable Accrued Benefit of $1,000 or less, the Participant shall be paid such nonforfeitable Accrued Benefit in a single cash payment valued as of the Valuation Date(s) coinciding with or immediately following his termination of employment, with such payment made as soon as reasonably possible after such Valuation Date(s). If such a Participant’s nonforfeitable Accrued Benefit exceeds $1,000, such benefit shall be paid in a single sum subject to the terms of Paragraph A.4 of this Article at such time as the Participant elects to commence distribution of his vested Accrued Benefit, but in no event shall such benefit be paid later than April 1 of the calendar year following the calendar year in which he attains age 70-1/2 as provided in Paragraph A.3 of this Article.
If the Participant’s nonforfeitable Accrued Benefit exceeds $1,000 at the time it first becomes available for distribution, such benefit shall be paid as provided in Paragraph A(4) of this Article within 60 days after the close of the Plan Year in which the Participant attains Normal Retirement Age, unless the Participant consents to an earlier distribution or elects to defer payments as provided in Paragraph A(3) of this Article.
If, at the time a Participant terminates employment, the Participant has completed 1,000 Hours of Service in the Plan Year, the vesting percentage used to compute his distribution shall reflect an additional Year of Service.
The Committee shall file such reports with the Secretary of Labor and Treasury and provide such information to a terminated Plan Participant as is required by law and regulations.
Anything in this Article VII, Paragraph D to the contrary notwithstanding, the forfeitable portion of a Participant’s account shall be subject to the forfeiture provisions of Article V, Paragraph F.
In the event the distribution to a terminated Participant is less than his Accrued Benefit, the Committee shall transfer the remainder of the terminated Employee’s Accrued Benefit to a separate account which shall be known as the “Termination Account.” At any relevant time prior to the event of forfeiture, the Participant’s vested portion of his Termination Account shall not be less than an amount (“X”) determined by the following formula:
X = P (AB + (R x D)) - (R x D)
For purposes of applying the formula: P is the vested percentage at the relevant time; AB is the Termination Account balance at the relevant time; R is the ratio of the account balance at the relevant time to the account balance after distribution; and D is the amount distributed when the Employee terminated employment.




E. Time of First Payment. Upon death, attainment of normal retirement age by a Participant who has separated from service with the Employer, termination of employment with a vested Accrued Benefit of $1,000 or less, or receipt by the Committee of a disabled Participant’s election to receive disability benefits, distribution of the affected Participant’s nonforfeitable Accrued Benefit Participant shall commence as soon as is reasonably possible following the Valuation Date(s) coinciding with or immediately following the date such aforementioned event occurs. In no event shall distribution commence later than sixty (60) days following the Plan Year in which such aforementioned event occurs, provided, that if a Participant or beneficiary is entitled to elect to defer receipt of such a distribution pursuant to the provisions of Paragraph A(3) or B of this Article VII and such an election is made, the Participant’s vested Accrued Benefit shall commence as soon as reasonably possible following the Valuation Date coinciding with or following the Plan’s receipt of the Participant’s or beneficiary’s distribution request.
F. Distribution of Allocation Attributable to Last Year of Participation. The amount, if any, allocated to the Participant’s Accounts for the Plan Year in which an event described in Paragraph E occurs shall be paid no later than sixty days after the end of such Plan Year, unless the Participant or beneficiary elects to defer the commencement of benefits in accordance with Paragraph A(3) or B of this Article VII, or fails to consent to the distribution as required by this Article.
G. Facility of Payment. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the Committee receives written notice, in a form and manner acceptable to it, that such person is incompetent or a minor, and that a guardian, conservator, or other person legally vested with the care of his estate has been appointed. In the event that the Committee finds that any person to whom a benefit is payable under the Plan is unable to properly care for his affairs, or is a minor, then any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother, or a sister, or to any person deemed by the Committee to have incurred expense for such person otherwise entitled to payment.
In the event a guardian or conservator of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, payments shall be made to such guardian or conservator, provided that proper proof of appointment is furnished in a form and manner suitable to the Committee.
To the extent permitted by law, any payment made under the provisions of this Paragraph G shall be a complete discharge of liability under the Plan,
H. No Reduction in Benefits by Reason of Increase in Social Security Benefits. Notwithstanding any other provision of the Plan, in the case of a Participant who is receiving benefits under the Plan, or in the case of a Participant who has terminated employment with the Employer and who has a nonforfeitable Accrued Benefit, such benefits will not be decreased by reason of any increase in the benefit levels payable under Title II of the Social Security Act.
ARTICLE VIII
Provision Against Anticipation
A. No Alienation of Benefits. Until distribution pursuant to the terms hereof and except as hereinafter provided in this Article VIII, no Participant shall have the right or power to alienate, anticipate, commute, pledge, encumber, or assign any of the benefits, proceeds, or avails of the funds set aside for him under the terms of this Plan, and no such benefits, proceeds, or avails shall be subject to seizure by any creditor of the eligible Employee under any writ or proceedings at law or in equity.
B. Qualified Domestic Relations Orders. Notwithstanding any other Plan provision, the following procedures shall apply when any domestic relations order (entered on or after January 1, 1985) is received by the Plan with respect to a Participant. The Committee may delegate its authority under this Paragraph B to a third party.
1. The Committee shall promptly notify the Participant, and (a) each person named in the order as entitled to payment of Plan benefits, and (b) any other person entitled to any portion of the Participant’s Plan benefits (persons referred to in (a) and (b) are hereafter alternate payees) of the receipt of such order and of the Committee’s procedures for determining the qualified status of the order. The Committee shall permit each alternate payee to designate a representative for receipt of copies of notices.
2. Immediately upon receipt of such order, the Committee shall direct the Trustee to segregate in a separate account the amounts which are in pay status and which are payable to the alternate payee under the order.
3. The Committee shall meet promptly after receipt of the order and determine whether the order is a Qualified Domestic Relations Order. The Committee shall promptly notify the Participant and each alternate payee of its decision. A Qualified Domestic Relations Order is any judgment, decree or order (including approval of a property settlement agreement) that:
a. Relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child or other dependent of a Participant;




b. Is made pursuant to a State domestic relations law (including a community property law);
c. Creates or recognizes the existence of an alternate payee’s right to receive all or a portion of a Participant’s Plan benefits;
d. Clearly specifies (i) the name and last known mailing address, if any, of the Participant, and the name and mailing address of each alternate payee covered by the order; (ii) the amount or percentage of the Participant’s benefits to be paid by the Plan to each alternate payee, or the manner in which the amount or percentage is to be determined; (iii) the
number of payments or period to which the order applies; and (iv) the plan to which the order applies;
e. Does not require the Plan to provide any form of benefit not otherwise provided by the Plan or any increased benefits, and does not require the payment of benefits to an alternate payee which are required to be paid to another alternate payee under another order previously determined to be a Qualified Domestic Relations Order.
4. The Committee’s decision shall be final unless the Participant or an alternate payee gives written notice of appeal within 60 days after receipt of the Committee’s decision.
5. If within 18 months an order is finally determined to be a Qualified Domestic Relations Order, the segregated amounts plus interest (if any) shall be paid to the persons entitled thereto, and thereafter the alternate payee shall receive payments pursuant to the terms of the order. Amounts subject to the order which are not in pay status shall be transferred to a separate account in the name of the alternate payee and thereafter held for such payee’s benefit pursuant to the terms of the order. If within 18 months the order is determined not to be a Qualified Domestic Relations Order, or if the issue has not been finally determined, the Committee shall pay the segregated amounts to the person who would have been entitled thereto if there had been no order. Any determination that an order is qualified after the close of the 18 month period shall be applied prospectively only.
6. The Committee’s procedures shall generally conform to the Plan’s claims procedures.
7. Notwithstanding any provisions of this Plan to the contrary, an alternate payee pursuant to a Qualified Domestic Relations Order shall be entitled to elect to receive a distribution from the Plan following the date such order is determined by the Committee to be a Qualified Domestic Relations Order and as specified in such Order. Provided, however, that for purposes of such a distribution, the amount distributed shall be valued as of the Valuation Date(s) coinciding with or immediately following the Plan’s receipt of the alternate payee’s distribution request, with payment or payment commencing as soon as reasonably possible after such Valuation Date(s). Payments made pursuant to this paragraph shall not be treated as a violation of the requirements of subsections (a) and (k) of Section 401 or Section 409(d) of the Code.
8. Effective April 6, 2007, a domestic relations order that otherwise satisfies the requirements for a qualified domestic relations order will not fail to be a qualified domestic relations order solely because the order is issued after, or revises, another domestic relations order or qualified domestic relations order or solely because of the time at which the order is issued.
C. Assignment of Benefits. A Participant receiving benefits under the Plan may voluntarily make a revocable assignment not to exceed 10% of any benefit payment so long as the assignment or alienation is not made for purposes of defraying Plan administration costs.
ARTICLE IX
Loans to Participants
A Participant may obtain a loan, first, from his Rollover Account, second, from his Employee Pre-Tax Contribution Account, and third, from his vested Employer Matching Contribution Account under the Plan, in accordance with the terms of the written Participant loan program established by the Committee, the terms and conditions of which are included in the Summary Plan Description and incorporated herein by reference. No loan shall be made which does not meet the following requirements:
A. A Participant shall apply for a loan in writing on a form providing such information as the Committee shall require.
B. The total amount of the loan, together with the outstanding balance of all other Plan loans to the Participant, shall not exceed the lesser of (1) $50,000 reduced by the excess, if any, of the highest outstanding balance of loans during the one year period ending on the day before the loan is made over the outstanding balance of loans from the Plan on the date on which such loan was made, or (2) one-half of the present value of the Participant’s nonforfeitable Accrued Benefit under this Plan. For purposes of the dollar limitations imposed by this Paragraph B, all plans maintained by the Employer and any trade or business which is a member of a controlled group of trades or businesses or an affiliated service group under Code Sections 414(b), 414(c) and 414(m) shall be treated as one Plan.




C. Each loan shall bear interest at a commercially reasonable rate as determined by the Committee. In determining the interest rate, the Committee shall consider interest rates being charged by local financial institutions for similar loans with similar collateral.
D. Each loan shall have a definite maturity date and shall be repayable in level installment payments not less frequently than quarterly, except that during an Employer-approved leave of absence, a Participant may postpone loan payments. The term for repayment shall not exceed five years unless the loan is used to acquire a dwelling unit which within a reasonable time (determined at the time the loan is made) is to be used as the principal residence of the applicant. In that case, the Committee will determine the term for repayment of such a loan, which shall not exceed the term normally available through financial institutions offering such loans in similar amounts with similar collateral.
E. Interest paid on the loan shall accrue to the account of the Participant. All loans outstanding to a Participant shall be secured by not more than 50% of the Participant’s nonforfeitable Accrued Benefit with the determination being made as of the date of the loan approval. The Participant’s loan payments shall be reallocated among the Plan investment funds in accordance with the Participant’s most recent investment directions made pursuant to Article XI of the Plan.
F. Loans shall be available to all Participants on a reasonably equivalent basis. Credit-worthiness may be considered.
G. Loans shall not be made available to Plan Participants who are Highly Compensated Employees (as defined in Section 414(q)) in amounts greater than the amount made available to other Plan Participants based upon a uniform percentage of nonforfeitable Accrued Benefits.
H. If an event occurs which results in a distribution (other than an in-service distribution) to any Participant or former Participant or to a beneficiary and a loan to such Participant is outstanding, the unpaid balance of the principal and interest shall be deducted from the amount of the distribution. A Participant may prepay his loan in full at any time without penalty.
I. Loan payments shall be suspended under this Plan as permitted under Code Section 414(u)(4).
J. The minimum loan that may be made to a Participant is $1,000.
K. Administrative expenses associated with a Participant’s loan shall be paid directly by the Participant or charged to the Participant’s Employee Pre-Tax Contribution Account.
ARTICLE X
Administrative Committee - Named
Fiduciary and Administrator
A. Appointment of Committee. The Board of Directors of HomeStreet, Inc. shall appoint an Administrative Committee of not fewer than three (3) persons (herein referred to as the “Committee”). The Committee shall perform administrative duties set forth in part hereinafter and serve for such terms as the Board of Directors may designate or until a successor has been appointed or until removal by the Board of Directors. The Board of Directors shall advise the Trustee in writing of the names of the members of the Committee and any changes thereafter made in the membership of the Committee. Vacancies due to resignation, death, removal, or other causes shall be filled by the Board of Directors. Members shall serve without compensation for service. All reasonable expenses of the Committee shall be paid by the Employer. The number of Committee members may be changed by the Board of Directors of HomeStreet, Inc. at any time.
B. Committee Action. The Committee shall choose a secretary who shall keep minutes of the Committee’s proceedings and all data, records, and documents pertaining to the Committee’s administration of the Plan. The Committee shall act by a majority of its members at the time in office, and such action may be taken either by a vote at a meeting or in writing without a meeting. The Committee may by such majority action authorize its secretary or any one or more of its members to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee in writing of such action and the name or names of those so designated. The Trustee thereafter shall accept and rely conclusively upon any direction or document executed by such secretary, member, or members as representing action
by the Committee until the Committee shall file with the Trustee a written revocation of such designation. A member of the Committee who is also a Participant hereunder shall not vote or act upon any matter relating solely to himself.
C. Rights and Duties. The Committee shall be the Plan administrator and named fiduciary of the Plan and shall have the power and authority in its sole, absolute and uncontrolled discretion to control and manage the operation and administration of the Plan and shall have all powers necessary to accomplish these purposes. The responsibility and authority of the Committee shall include but shall not be limited to the following:




1. Determining all questions relating to the eligibility of Employees to participate;
2. Computing and certifying to the Trustee the amount and kind of benefit payable to Participants, Spouses and beneficiaries;
3. Authorizing all disbursements by the Trustee from the Trust;
4. Establishing and reducing to writing and distributing to any Participant or beneficiary a claims procedure, and administering that procedure including the processing and determination of all appeals thereunder;
5. Maintaining all necessary records for the administration of the Plan other than those which the Trustee has specifically agreed to maintain pursuant to this Plan and Trust Agreement; and
6. Interpretation of the provisions of the Plan and publication of such rules for the regulation of the Plan as in the Committee’s sole, absolute and uncontrolled discretion are deemed necessary and advisable and which are not inconsistent with the terms of the Plan or ERISA.
D. Investments. With respect to the Employee Pre-Tax Contribution Accounts, Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts held in the Fund, the Committee shall have the responsibility and authority to direct the Trustee and shall be the named fiduciary with respect to the management and control of the assets of the Plan in selecting the investment funds to be offered to Plan Participants and in monitoring the investment performance of those funds, subject to the provisions of Paragraph F of this Article X.
E. Information - Reporting and Disclosure. To enable the Committee to perform its functions, the Employer shall supply full and timely information to the Committee on all matters relating to the compensation of all Participants, their continuous regular employment, their retirement, death, or the cause for termination of employment, and such other pertinent facts as the Committee may require, and the Committee shall furnish the Trustee such information as may be pertinent to the Trustee’s administration of the Plan. The Committee as
Plan Administrator shall have the responsibility of complying with the reporting and disclosure requirements of ERISA to the extent applicable.
F. Standard of Care Imposed Upon the Committee. The Committee shall discharge its duties with respect to the Plan solely in the interest of the Participants and beneficiaries and (1) for the exclusive purpose of providing benefits to Participants and their beneficiaries and defraying reasonable expenses of the Plan; (2) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims; (3) by diversifying the investments of the Plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so; and (4) in accordance with the Plan provisions. Provided, however, that the Committee shall not be liable for any loss or for any breach of fiduciary responsibility which results from a Participant’s exercise of control over all or part of the investment of his Employee Pre-Tax Contribution Account, Participant-Directed Profit Sharing Account, Employer Matching Contribution Account, and Rollover Account. Where a Participant is directing the investment of all or part of such Accounts, the Committee shall have no responsibility to maintain diversification of the self-directed portion of such Accounts.
G. Allocation and Delegation of Responsibility. The Committee may by written rule promulgated under Paragraph C above allocate fiduciary responsibilities among Committee members and may delegate to persons other than Committee members the authority to carry out fiduciary responsibilities under the Plan, provided that no such responsibility shall be allocated or delegated to the Trustee without its written consent.
In the event that a responsibility is allocated to a Committee member, no other Committee member shall be liable for any act or omission of the person to whom the responsibility is allocated except as may be otherwise required by law. If a responsibility is delegated to a person other than a Committee member, the Committee shall not be responsible or liable for an act or omission of such person in carrying out such responsibility except as may otherwise be required by law.
H. Bonding. Where required by law, each fiduciary of the Plan and every person handling Plan funds shall be bonded. It shall be the obligation of the Committee to assure compliance with applicable bonding requirements. The Trustee shall not be responsible for assuring compliance with the bonding requirements.
I. Claims Procedure. As required by Paragraph C, the Committee shall establish a claims procedure which shall be reduced to writing and provided to any Participant or beneficiary whose claim for benefits under the Plan has been denied. The procedure shall provide for adequate notice in writing to any such Participant or beneficiary and the notice shall set forth the specific reasons for denial of benefits written in a manner calculated to be understood by the Participant or beneficiary. The procedure shall afford a reasonable opportunity to the Participant or beneficiary for a full and fair review by the Committee of the




decision denying the claim. The Trustee shall have no responsibility for establishing such a procedure or assuring that it is carried out.
J. Funding Policy. The Committee shall be responsible for establishing and carrying out a funding policy for the Employer’s Plan. In establishing such a policy, the short-term and long-term liquidity needs of the Plan shall be determined to the extent possible by considering among other factors the anticipated retirement date of Participants, turnover and contributions to be made by the Employer. The funding policy and method so established shall be communicated to the Trustee.
K. Indemnification. The Employer does hereby indemnify and hold harmless each Committee member from any loss, claim, or suit arising out of the performance of obligations imposed hereunder and not arising from said Committee member’s willful neglect or misconduct or gross negligence.
L. Compensation, Expenses. The Committee members shall serve without compensation for services under this Plan. All reasonable expenses of Plan administration shall be paid by the Trust to the extent that the Employer does not elect to pay in accordance with applicable law. Such expenses shall include any expenses incident to the functioning of the Committee, including but not limited to accountants, actuary, counsel, and other specialists, and other costs of administering this Plan. Provided, however, that the investment fees relating to the acquisition and disposition of Trust investments shall be a charge against and paid from the appropriate Plan Participants’ accounts. Provided, further, that reasonable administrative fees related to a Participant loan may be charged to that Participant’s Plan accounts. Provided, that reasonable fees may be charged to Participants’ Plan accounts in accordance with applicable law.
ARTICLE XI
Investment of Trust Funds
A. Investment of Employee Pre-Tax Contribution Accounts, Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts. For investment purposes, each Participant shall have the right to allocate contributions made to his Employee Pre-Tax Contribution Account, Participant-Directed Profit Sharing Account, Employer Matching Contribution Account, and Rollover Account, if any, among Plan investment Funds selected by the Committee, in accordance with rules adopted by the Committee and uniformly applied. A Participant may transfer amounts in such Accounts from one investment Fund to another in such increments and at such times as shall be provided by rules adopted by the Committee and uniformly applied. With respect to the assets in such Accounts of Participants who do not allocate contributions on their behalf among those Plan investment Funds, such assets shall be invested in the Plan investment Fund(s) selected by the Committee.
Without limiting the generality of the foregoing, the Trustee in following a Participant’s instructions in accordance with the terms of this Plan or in following the Committee’s instructions as to a Participant who does not elect among the available Plan investment Funds,
shall invest and reinvest the principal and income of the Fund in common investment funds (the terms of which are incorporated herein by reference); real estate; government, municipal or corporation bonds, debentures or notes; common and preferred stocks; interests in investment companies, whether so-called “open-end mutual funds” or “closed-end mutual funds”; or any other form of property, whether real, personal or mixed, including life insurance policies on key employees of the Employer for, the benefit of the Trust; provided, that the Trustee shall not invest in common or preferred stock, bonds, debentures or convertibles issued by the Employer. The Committee and the Trustee shall not be liable for any loss or any breach of fiduciary responsibility which results from a Participant’s exercise of control over all or part of his Employee Pre-Tax Contribution Account, Participant-Directed Profit Sharing Account, Employer Matching Contribution Account, and Rollover Account, if any.
B. Standard of Care Imposed Upon Trustee. The Trustee shall discharge its investment responsibilities hereunder solely in the interests of the Participants and beneficiaries and (1) for the exclusive purpose of providing benefits to Participants and their beneficiaries, and defraying reasonable expenses of administering the Plan; (2) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (3) in accordance with the terms of this Plan and the Trust Agreement.
ARTICLE XII
Mergers and Consolidations




In the case of any merger or consolidation with any other plan or a transfer of assets or liabilities to any other plan, each Participant shall be entitled to receive a benefit immediately after such a merger, consolidation or transfer, which is equal to the benefit he would have been entitled to immediately before if the Plan had been terminated.
ARTICLE XIII
Amendment and Termination of the Plan and Trust
A. Right to Amend and Terminate. HomeStreet, Inc. represents that the Plan is intended to be a continuing and permanent program for Participants, but reserves the right to terminate the Plan or Trust Agreement at any time. The Board of Directors of HomeStreet, Inc. may modify, alter, or amend this Plan or the Trust Agreement in whole or in part, provided that no such modification, alteration, or amendment shall enlarge the duties or liabilities of the Trustee without its consent, nor reduce the Participant’s Accrued Benefit hereunder, except to the extent permitted by Code Section 412(c)(8). For purposes of this Article, a Plan amendment which has the effect of (1) eliminating or reducing an early retirement benefit or retirement-type subsidy, or (2) eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment, shall be treated as reducing the Accrued Benefit. In the case of a retirement-type subsidy, the preceding sentence shall apply only with respect to a Participant who satisfies (either before or after the amendment) the preamendment conditions for the subsidy.
B. No Revesting. No termination, modification, alteration, or amendment shall have the effect of revesting in the Employer any part of the principal or income of the Trust, except as otherwise permitted by the Plan.
C. Exclusive Benefit of Employees. At no time during the existence of this Plan or at its termination may any part of the Trust corpus or income be used for or directed to purposes other than for the exclusive benefit of the Participants hereof or their beneficiaries.
D. Termination.
1. This Plan shall terminate upon the occurrence of any of the following:
a. Written notice of HomeStreet, Inc. to the Trustee;
b. Complete discontinuance of contributions by all of the co-sponsoring Employers;
c. The dissolution or merger of HomeStreet, Inc. unless a successor to the business agrees to continue the Plan and Trust by executing an appropriate agreement, in which event such successor shall succeed to all the rights, powers and duties of the Employer.
2. In the event that HomeStreet, Inc. is taken over by a successor who agrees to continue the Plan, the employment of any Employee who is continued in the employ of such successor shall not be deemed to have been terminated or severed for any purpose hereunder.
3. Notwithstanding any provision hereof to the contrary, upon termination or partial termination of the Plan, or upon complete discontinuance of contributions to the Plan, all affected Participants’ Accounts, and all unallocated units, shares, or amounts shall fully vest and become nonforfeitable. All unallocated assets of the Trust shall be allocated to the Accounts of all Participants as of the next Valuation Date (or if the Plan is being terminated immediately, then on the date of such Plan termination as if it were the next Valuation Date) in accordance with the provisions of the Plan hereof; and shall be applied for the benefit of each such Participant either by a lump-sum distribution, or by the continuance of the Trust and the payments of benefits thereunder in the manner provided in the Plan. The Trustee, in consultation with the Committee, shall decide whether a partial termination of the Plan has occurred.
After the Plan’s initial qualification by the Internal Revenue Service, there will be no reversion of assets to the Employer under any circumstances. All Participants shall be treated in a manner consistent with the terms of this Plan and provisions of the Code and applicable regulations, as may be amended from time to time.
A Participant shall not receive his Employee Pre-Tax Contribution Account, and any income thereon, on account of Plan termination unless the Plan termination occurs without the establishment or maintenance of another defined contribution plan (other than an employee stock ownership plan).
ARTICLE XIV
Top Heavy Plans Defined and Other Definitions
A. Top Heavy Plan. This Plan is Top Heavy and subject to the requirements of this Article and Article XV if for a Plan Year, as of the Determination Date, the Accrued Benefits of Key Employees in this Plan aggregated with the Accrued Benefits of Key Employees in all qualified plans maintained by the Employer and each member of the Controlled Group exceed 60% of




the Accrued Benefits of all employees (excluding Non-Key Employees who were Key Employees in a prior plan year) in all qualified plans maintained by the Employer and all members of the Controlled Group which are in the Required Aggregation Group (the Top Heavy Test). Provided, the foregoing shall not apply and this Plan shall not be Top Heavy if this Plan is Permissively Aggregated and as a result the Top Heavy Test results in a percentage of 60% or less.
B. Additional Definitions for Use in this Article and Article XV.
1. Accrued Benefits. Accrued Benefits means:
a. for each defined contribution plan, the Employee’s account balances as of the Valuation Date coinciding with the Determination Date, adjusted for contributions required to be made under Code Section 412, and to be allocated as of a date not later than the Determination Date, although not yet contributed and
i. Effective for Plan Years beginning after December 31, 2001 increased by the distributions made with respect to the Employee under this Plan and any plan aggregated with this Plan under Code Section 416(g)(2) during the 1-year period ending on the Determination Date.
ii. The preceding shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with this Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than severance from employment, death, or disability, this provision shall be applied by substituting “5-year period” for “1-year period” and
iii. The Accrued Benefits of any individual who has not performed services for the Employer during the 1-year period ending on the determination date shall not be taken into account.
b. for each defined benefit plan, the present value as of the Valuation Date coinciding with the Determination Date of the employee’s accrued benefits determined under (i) the method, if any that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code.
In computing a. and b., all benefits attributable to Employer Contributions and all benefits attributable to Employee contributions (excluding deductible Employee contributions, if any) are to be taken into consideration. All such benefits of individuals who have not performed services for the Employer or a member of the Controlled Group maintaining this Plan any time during the one-year period ending on the Determination Date are not taken into consideration. All distributions made in the Plan Year including the Determination Date are to be added back, including distributions from a terminated plan of a member of the Controlled Group, and excluding amounts which were rolled over or transferred to a plan of a member of the Controlled Group under circumstances which require such amounts to be considered part of the accrued benefit under the recipient plan. Rollovers and transfers to this Plan or a plan of a member of the Controlled Group initiated by an Employee and made in the Plan Year including the Determination Date, are not to be taken into consideration in computing (a) and (b) above. No accrued benefits of a Non-Key Employee with respect to this Plan (or any plan aggregated under Paragraph 7 or 8 below) for a Plan Year shall be taken into consideration if the Non-Key Employee was a Key Employee with respect to such plan for any prior Plan Year.
2. Controlled Group. Controlled Group means all employers required to be aggregated under Code Section 414(b), (c) or (m).
3. Determination Date. Determination Date means the last day of the Plan Year preceding the Plan Year in question or, in the first Plan Year, the last day thereof. Where plans other than this Plan are in question, the Determination Date for each plan shall be the last date of the Plan Year that falls within the same calendar year.
4. Key Employee. Key Employee means, effective for Plan Years beginning after December 31, 2001, any Employee or former Employee (including the beneficiary of any such deceased person) who at any time during the Plan Year that includes the Determination Date is or was:
a. an officer receiving annual Compensation greater than $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2001;
b. an employee owning more than five percent of the Employer;
c. an employee receiving annual Compensation in excess of $150,000 and owning one percent of the employer.
For this purpose, annual Compensation means Compensation within the meaning of Code Section 415(c)(3) as set forth in Article II, Paragraph F. The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.




In determining ownership of an employer, the rules of Code Section 318 shall be applied substituting 5 percent for 50 percent in subparagraph (C) of Code Section 318(a)(2). In the case of an unincorporated employer, ownership shall be determined in accordance with regulations
promulgated by the Secretary of the Treasury. Code Section 414(b), (c) and (m) shall not apply for purposes of determining ownership of an employer.
5. Minimum Benefit Accrual. Minimum Benefit Accrual means a benefit payable in the form of a life annuity at normal retirement age under a defined benefit plan which equals not less than the lesser of (1) 20% of average Compensation or (2) 2% of average Compensation times Years of Service. Average Compensation means the average of the employee’s Compensation for the five consecutive years when the employee had the highest aggregate Compensation. A Year of Service is disregarded if this Plan is not Top Heavy for the Plan Year ending during the Year of Service. Compensation in years following the last Plan Year in which this Plan is top heavy is not taken into account.
6. Non-key Employee. Non-key Employee means any employee who is not a Key Employee.
7. Permissively Aggregated. Permissively Aggregated means:
a. the Required Aggregation Group; and
b. such additional plans that may be aggregated without violating the requirements of Code Sections 410 and 401(a)(4).




8. Required Aggregation Group. Required Aggregation Group means:
a. all qualified plans of the employer and each member of the Controlled Group in which a Key Employee is a participant; and
b. each other qualified plan that must be considered along with the plans in (a) in order for this Plan to meet the requirements of Code Sections 410(b) or 401(a)(4).
ARTICLE XV
Additional Requirements
Applicable to Top Heavy Plans
A. Minimum Vesting Requirements. For each Plan Year that the Plan is subject to the provisions of this Article, a Participant’s nonforfeitable Accrued Benefit in his Participant-Directed Profit Sharing Contribution Account and his Employer Matching Contribution Account, if any shall be determined in accordance with the following schedule:
 
 
 
Years of
Service
Nonforfeitable %
—

—
%
1

20
%
2

40
%
 
 
3

60
%
4

80
%
5

100
%
B. Minimum Employer Contributions.
1. General Rule. Except as provided in Paragraphs 2. and 3. hereof, for each Plan Year that this Plan is subject to the provisions of this Article, each Non-Key Employee Participant shall receive an allocation (Minimum Employer Contribution), without regard to any Social Security contribution, to his Employer Discretionary Contribution Account of the lesser of:
a. three percent of his Compensation (as defined in Article II, Paragraph F), or
b. the highest percentage of Compensation (as defined in Article II, Paragraph F) allocated to the account of a Key Employee. This subparagraph b. shall not apply and the required contribution shall be 3% if exclusion of this Plan from the Required Aggregation Group would cause a defined benefit plan in the Required Aggregation Group to fail to meet the requirements of Code Section 401(a)(4) or 410.
In applying this Paragraph 1, failure of a Participant to complete a Year of Service, make mandatory contributions, if required, or receive Compensation sufficient to justify an allocation during the Plan Year shall not render such Participant ineligible to receive a minimum employer contribution under this Article XV, Paragraph B. In determining such contribution, Compensation for purposes of this Section is compensation attributable to Hours of Service performed while he was a Participant.
Employer Matching Contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of Code Section 416(c)(2) and this Plan. The preceding sentence shall apply with respect to Matching Contributions under this Plan or, if this Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Employer Matching Contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test and other requirements of Code Section 401(m).
2. Exceptions. Subparagraph 1. does not apply with respect to a Participant who
a. terminates employment with the Employer and all members of the Controlled Group prior to the last day of the Plan Year, or
b. is a participant in another defined contribution plan which is in the Required Aggregation Group and receives an allocation to his employer contribution account in such plan equal to the above (for the Plan Year ending on or before the Determination Date), or
c. is a participant in a defined benefit plan, which is in the Required Aggregation Group and receives thereunder for the Plan Year the Minimum Benefit Accrual for the Plan Year ending on or before the Determination Date.
3. Employee Participating in Defined Benefit Plan. For each Non-Key Employee Participant who is also a participant in a defined benefit plan which is in the Required Aggregation Group and which does not provide the Minimum Benefit Accrual for the Plan Year ending on or before the Determination Date, Paragraph 1 shall be applied substituting 5% of compensation for subparagraphs 1.a. and b.
4. Specific Rules. In determining the Minimum Employer Contribution hereunder, the following rules shall govern:
a. The Non-Key Employee’s account will receive the Minimum Employer Contribution notwithstanding a waiver of the minimum funding requirements of Code Section 412.
b. Tax-deferred contributions by Non-Key Employees to a qualified plan shall be disregarded; Tax-Deferred Contributions by Key Employees shall be taken into account in determining the minimum required employer contribution hereunder.
ARTICLE XVI
Right to Discharge Employees
Neither the establishment of the Plan and Trust nor any modification thereof, nor the creation of any funds or accounts nor the payment of any benefit, shall be construed as giving any Participant, or any other person whomsoever, any legal or equitable right against the Employer, the Trustee, or the Committee unless the same shall be specifically provided for in this agreement or conferred by affirmative action of the Committee or the Employer in accordance with the terms and provisions of this agreement or as giving any Employee or Participant the right to be retained in the service of the Employer, and all Employees shall remain subject to discharge by the Employer to the same extent as if this Plan and Trust had never been adopted.
ARTICLE XVII
Return of Contributions;
Declaration of Trust Contingent
on Internal Revenue Service Approval
Contributions made hereto are conditioned on deductibility by the Employer under Section 404 of the Code, and such contributions may not be made under a mistake of fact.
Contributions may be returned to the Employer, in the amount involved, within one year of the mistaken payment of the contribution, or disallowance of a deduction, as the case may be.
This Plan and the Trust shall be contingent upon a favorable Internal Revenue Service ruling as to the initial acceptability under Section 401(a) of the Internal Revenue Code, as amended, and exemption from income taxation under Section 501(a) of the Internal Revenue Code. In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Internal Revenue Code, and if the Employer does not effect an amendment which will cure the defect, then this Plan and Trust will thereupon terminate and be of no further force or effect, and the Trustee shall forthwith return to the Employer the current value of all contributions made incident to that initial qualification by the Employer (plus income, less any fees or expenses allocable thereto) within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer’s return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe.
ARTICLE XVIII
Rollover Contributions; Trust to Trust Transfers




A. Rollover Contributions To This Plan. Subject to such terms and conditions as may from time to time be established by the Committee, an Employee of the Employer, whether or not a Participant, may make a rollover contribution to the Plan, provided that the rollover contribution does not result in this Plan becoming a transferee plan as defined in Code Section 401(a) (11)(B)(iii)(III). If a rollover contribution is to be made to this Plan directly from another plan that is subject to the qualified joint and survivor annuity requirements, the proper participant waiver and required spousal consent to that waiver must be obtained by the other plan prior to the direct rollover contribution to this Plan. The Committee shall be provided evidence to its satisfaction that the distribution is an eligible rollover distribution as defined in Paragraph C.1. below.
If an Employee has received an eligible rollover distribution from another qualified plan, or from an IRA that holds only assets from a qualified plan, the distribution must be contributed to this Plan within sixty (60) days following receipt of such amount by the Employee. All rollover contributions shall be accounted for separately but shall be invested and reinvested along with the assets of the Plan and treated in all respects as other assets of the Plan. The rollover contributions shall be credited to a special Rollover Account on behalf of the Employee. The Rollover Account shall, at all times, be 100% vested and nonforfeitable. An Employee may elect to receive an in-service withdrawal from his Rollover Account prior to his actual retirement date in accordance with procedures established by the Committee.
Notwithstanding the foregoing, with respect to Participant rollover contributions and direct rollovers of distributions made after December 31, 2001, the Plan will accept a direct rollover of an eligible rollover distribution or a Participant contribution of an eligible rollover distribution from: (1) a qualified plan described in Code Section 401(a) or 403(a), excluding after-tax employee contributions; (2) an annuity contract or 403(b)(7) custodial contract described in Code Section 403(b), excluding after-tax employee contributions; and (3) an eligible
plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.
B. Trust to Trust Transfers. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee’s election under this Article, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.
C. Definitions.
1. Eligible Rollover Distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee’s designated beneficiary, or for a specified period often years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); and hardship withdrawals of pre-tax contributions, unless such a distribution is made after a permissible distribution event (other than a hardship withdrawal) occurs under Code Section 401(k)(2)(B).
Provided, however, that with respect to distributions made after December 31, 2001, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section 401(a) or 403(a) that agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible.
With respect to distributions made after December 31, 2001, any amount that is distributed on account of hardship shall not be an eligible rollover distribution and the distributee may not elect to have any portion of such a distribution paid directly to an eligible retirement plan.
2. Eligible Retirement Plan. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee’s eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity.
For purposes of the direct rollover provisions of this Article XVIII, an eligible retirement plan shall also mean an annuity contract or 403(b)(7) custodial contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state which agrees to separately account for amounts transferred into such plan from this Plan. The definition




of eligible retirement plan shall also apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p).
For distributions made after December 31, 2007, an Eligible Retirement Plan shall also include an individual retirement plan described in Code Section 408A(b).
For distributions of after-tax contributions made after December 31, 2006, an Eligible Retirement Plan shall also include an annuity contract described in Code Section 403(b), provided such contract separately accounts for such after-tax amounts.
3. Distributee. A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse and the Employee’s or former Employee’s spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse.
Effective January 1, 2010, a nonspouse “designated beneficiary” within the meaning of Code Section 401(a)(9)(E) may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution made in a direct rollover to an individual retirement account described in Section 408(a) of the Code or to an individual retirement annuity described in Section 408(b) of the Code (other than an endowment contract). Notwithstanding the previous sentence, a distribution to a nonspouse designated beneficiary that is made prior to January 1, 2010 is not subject to the direct rollover requirements of Code Section 401(a)(31) (including Code Section 401(a)(31)(B)), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c).
4. Direct Rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee.
ARTICLE XIX
Transfers of Employment
Except as otherwise specifically provided herein, the provisions of this Article XIX apply to transfers of employment that occur on or after October 1, 2009; transfers of employment occurring prior to October 1, 2009 are subject to the provisions of the Plan as in effect at the time of such transfer. References to the provisions of the WMS 401(k) Plan described herein are included for solely purposes of clarity in describing the transfer provisions; in the event of a conflict between the information set forth herein and the terms of the WMS 401(k) Plan, the terms of the WMS 401(k) Plan shall govern.
A. Transfers out of This Plan. An Employee of an Employer co-sponsoring this Plan who, on or after October 1, 2009, either (1) transfers to employment with an employer co-sponsoring the WMS 401(k) Plan or (2) terminates employment with the Employer and later becomes hired by an employer co-sponsoring the WMS 401(k) Plan (a “Transfer-Out Employee”), shall receive credit for his Years of Service and Hours of Service with the Employer co-sponsoring this Plan for purposes of eligibility and vesting in the WMS 401(k) Plan, as applicable, provided that there shall be no duplication of credit in the year of transfer to or year of hire by an employer co-sponsoring the WMS 401(k) Plan. Notwithstanding the foregoing, no credit for vesting purposes shall be granted prospectively in this Plan based on a Transfer-Out Employee’s Years of Service and Hours of Service with the employer co-sponsoring the WMS 401(k) Plan.
A Transfer-Out Employee’s Accrued Benefit, if any, in this Plan shall remain credited to his accounts in this Plan and shall continue to be subject to the terms and conditions of this Plan. A Transfer-Out Employee may request a distribution from this Plan subject to the provisions of Article VII of this Plan, provided that he is no longer employed by a co-sponsor of this Plan or any other entity aggregated with a co-sponsor of this Plan under the aggregation requirements of Code Sections 414(b), (c), (m) or (o).
To the extent that a Transfer-Out Employee has an original date of hire with the Employer prior to July 1, 2008, he shall be eligible while employed by an employer co-sponsoring the WMS 401(k) Plan to obtain in-service Employee pre-tax 401(k) contributions hardship withdrawals and pre-tax 401(k) contributions withdrawals after age 59  1 / 2 from this Plan, provided the Plan requirements for such withdrawals are met. Notwithstanding the preceding sentence, a Transfer-Out Employee whose original hire date with the Employer is on or after July 1, 2008 shall not be eligible while employed by an employer co-sponsoring the WMS 401(k) Plan to obtain such in-service Employee pre-tax 401(k) contributions hardship withdrawals and pre-tax 401(k) contributions withdrawals after age 59  1 / 2 from this Plan, regardless of the date he transfers employment to a co-sponsor of the WMS 401(k) Plan. A Transfer-Out Employee may not take a new participant loan from this Plan.
A Transfer-Out Employee may make Employee pre-tax contributions and shall receive any Employer contributions to this Plan only for the period of time through which he is employed by an Employer co-sponsoring this Plan in accordance with the terms of this Plan and based on his Compensation from his Employer which co-sponsors this Plan. A Transfer-Out Employee’s Participant-Directed Profit Sharing Account and Employer Matching Contribution Account, if any, in this Plan shall become




100% vested and nonforfeitable if (1) he dies, becomes permanently and totally disabled pursuant to the terms of this Plan, or attains Normal Retirement Age, and (2) such event occurs while the individual is still employed by an Employer co-sponsoring this Plan, or by an employer co-sponsoring the WMS 401(k) Plan.
B. Transfers Into This Plan from the WMS Plan. An employee of a co-sponsor of the WMS 401(k) Plan who, on or after January 1, 2000, either (a) transfers to employment with an Employer co-sponsoring this Plan or (b) terminates employment with an employer co-sponsoring the WMS 401(k) Plan and later becomes hired by an Employer co-sponsoring this Plan (a “Transfer-In Employee”) shall receive credit for his Years of Service and Hours of
Service with the co-sponsors of the WMS 401(k) Plan for purposes of eligibility and vesting in this Plan, provided that there shall be no duplication of credit in the year of transfer to or year of hire by an Employer co-sponsoring this Plan. Notwithstanding the foregoing, whether such a transfer occurred before or after October 1, 2009, no credit for vesting purposes shall be granted prospectively in the WMS 401(k) Plan based on a Transfer-In Employee’s Years of Service and Hours of Service with an employer co-sponsoring this Plan. A Transfer-In Employee shall receive any Employer contributions to this Plan only for the period of time during which he is employed by an Employer co-sponsoring this Plan in accordance with the terms of this Plan and based on his Compensation from his Employer which co-sponsors this Plan.
A Transfer-In Employee’s accrued benefit, if any, in the WMS 401(k) Plan shall remain credited to his accounts in such plan and shall continue to be subject to the terms of such plan. A Transfer-In Employee may request a distribution from the WMS 401(k) Plan, pursuant to the terms of such plan, provided that he is no longer employed by a co-sponsor of the WMS 401(k) Plan or any other entity aggregated with a co-sponsor of such plan under the aggregation requirements of Code Sections 414(b), (c), (m) or (o).
To the extent that a Transfer-In Employee has an original date of hire with the Employer prior to July 1, 2008, he shall be eligible while such employment continues to obtain in-service Employee pre-tax 401(k) contributions hardship withdrawals and pre-tax 401(k) contributions withdrawals after age 59  1 / 2 from the WMS 401(k) Plan, provided the plan requirements for such withdrawals are met. Notwithstanding the preceding sentence, a Transfer-In Employee whose original hire date with the co-sponsor of the WMS 401(k) Plan is on or after July 1, 2008 shall not be eligible while employed by the Employer to obtain such in-service Employee pre-tax 401(k) contributions hardship withdrawals and pre-tax 401(k) contributions withdrawals after age 59  1 / 2 from the WMS 401(k) Plan, regardless of the date he transfers employment to a co-sponsor of this Plan. A Transfer-In Employee may not take a participant loan from the WMS 401(k) Plan.
A Transfer-In Employee may make Employee pre-tax 401(k) contributions to the WMS 401(k) Plan and shall receive Employer contributions to the WMS 401(k) Plan only for the period of time through which he is employed by an employer co-sponsoring such plan in accordance with the terms of such plan and based on his Compensation from his employer which co-sponsors such plan.
C. Other Transfer Provisions. If a Transfer-Out Employee or a Transfer-In Employee incurs an Event of Forfeiture under this Plan, the WMS 401(k) Plan, or both plans, then any forfeitures or reinstatement of forfeitures shall occur as to each plan in accordance with the terms of the respective plan(s), and there shall be no transfer of forfeitures or reinstatements of forfeitures between the plans. A Transfer-Out Employee’s service with a co-sponsor of the WMS 401(k) Plan shall not be considered in determining whether an Event of Forfeiture has been incurred in this Plan. Provided further, that a reinstatement of forfeitures in this Plan shall only apply if such an individual is rehired by a co-sponsor of this Plan, subject to the Plan’s normal rules relating to forfeitures and reinstatements of forfeitures as set forth in Article V, Paragraph F, of this Plan.
Notwithstanding any provision of this Plan to the contrary, no service credit shall be granted for eligibility or vesting purposes in this Plan if such Years of Service and Hours of Service would be disregarded under the Plan’s normal break-in-service rules as described in Article III, Paragraph D, and in subparagraphs 2, 3, and 4. of Article VI, Paragraph B, respectively, computed as if that prior service had been with the Employer. No service credit shall be granted for eligibility or vesting purposes in the WMS 401(k) Plan if such Years of Service and Hours of Service would be disregarded under the WMS 401(k) Plan’s normal break-in-service rules.
IN WITNESS WHEREOF, the parties hereto have caused this Plan and Trust to be executed as of this 9 th day of December, 2010.
 




 
 
 
HOMESTREET, INC.
 
 
By
 
/s/ Mark Mason
 
 
Its Vice Chairman, President & CEO
 
HOMESTREET BANK
 
 
By
 
/s/ Mark Mason
 
 
Its Chairman, President & CEO
 
HOMESTREET CAPITAL CORPORATION
 
 
By
 
/s/ Mark Mason
 
 
Its Chairman, President & CEO






AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN
HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of January 1, 2011:
Article III, Paragraph C, is hereby amended to read as follows, so that it refers to the January 1, 2011 restatement date instead of the prior July 1, 2008 restatement date:
C. Eligibility to Make Employee Pre-Tax Contributions. Each Employee who is not otherwise excluded by reason of Paragraph A of this Article III shall become eligible to make Employee pre-tax contributions under Paragraph B of Article IV upon the later of January 1, 2011, or immediately following the later of the Employee’s employment date or attainment of age 18 and shall be enrolled as a Participant for this purpose as soon as administratively feasible following completion of such requirement.
IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this 24th day of February, 2011.
 
 
 
 
HOMESTREET, INC.
 
 
By
 
/s/ Pamela J. Taylor
Its
 
SVP/H Director


AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN


HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of January 1, 2011:
Article IX, Paragraph B, is hereby amended to read as follows:
B.      The total amount of the loan, together with the outstanding balance of all other Plan loans to the Participant, shall not exceed the lesser of (1) $50,000 reduced by the excess, if any, of the highest outstanding balance of loans during the one year period ending on the day before the loan is made over the outstanding balance of loans from the Plan on the date on which such loan was made, or (2) one-half of the present value of the Participant’s nonforfeitable Accrued Benefit under this Plan.

IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this _______ day of ___________, 2011.
HOMESTREET, INC.



By _________________________________
Its _______________________________







AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN


HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respects, effective as of the dates stated herein:
1.      Article IV is hereby amended to add the following new Paragraph J to the end thereof, effective November 1, 2011:
J.      Roth 401(k) Contributions. Effective beginning November 1, 2011, and thereafter, a Participant may designate all or a portion of his or her salary reduction contributions to this Plan as Roth 401(k) Contributions.
1.      Definitions . Definitions for purposes of this Paragraph J are as follows:
a. Elective Deferrals . Effective beginning November 1, 2011, and thereafter, the term “Elective Deferrals” includes Employee Pre-Tax Contributions and Roth 401(k) Contributions.
b. Employee Pre-Tax Contributions. “Employee Pre-Tax Contributions” means a Participant’s Elective Deferrals which are not includible in the Participant’s gross income at the time deferred and have been irrevocably designated as Employee Pre-Tax Contributions by the Participant in his or her deferral election. A Participant’s Employee Pre-Tax Contributions and withdrawals thereof will be separately accounted for, as will gains and losses attributable to those Employee Pre-Tax Contributions.
c. Roth 401(k) Contributions . “Roth 401(k) Contributions” means a Participant’s Elective Deferrals that are includible in the Participant’s gross income at the time deferred and have been irrevocably designated as Roth 401(k) Contributions by the Participant in his or her deferral election. A Participant’s Roth 401(k) Contributions and withdrawals thereof will be separately accounted for, as will gains and losses attributable to those Roth 401(k) Contributions, and shall be held in that Participant’s Roth 401(k) Contribution Account. Forfeitures may not be allocated to such account. No contributions other than Roth 401(k) Contributions and properly attributable earnings thereon will be credited to each Participant’s Roth 401(k) Contribution Account.
d. Catch-up Contributions . A Participant who is eligible to make Catch-up Contributions pursuant to Article IV, Paragraph B, of this Plan may designate all or a portion of his or her Catch-up Contributions as Roth 401(k) Contributions.
e. Ordering Rules for Total Distributions . In the case of a Participant who receives a total distribution from this Plan, the Roth 401(k) Contributions will be distributed last.
f. Employer Matching Contributions . Roth 401(k) Contributions will be eligible for Employer Matching Contributions in the same manner as Employee Pre-Tax Contributions are eligible for such Employer Matching Contributions, pursuant to Article IV, Paragraph C, of this Plan, provided that the limit on the amount of such Matching Contributions shall be applied to the Participant’s combined Employee Pre-Tax Contributions and Roth 401(k) Contributions.




g. Other Distribution Provisions . Earnings distributed from a Participant’s Roth 401(k) Contribution Account are not taxed if the distribution is made at least five taxable years after the first Roth 401(k) Contributions are made by the Participant, and if the distributions occur after the Participant’s attainment of age 59-1/2, death, or disability. Eligible rollover distributions from a Participant’s Roth 401(k) Contribution Account are taken into account in determining whether the total amount of the Participant’s account balances under this Plan exceeds $1,000 for purposes of mandatory distributions from this Plan.
h. Nondiscrimination Testing . The ADP nondiscrimination test provisions set forth in Article IV, Paragraph D, above shall also apply with respect to Roth 401(k) Contributions.
i. Loans . For purposes of loans to Participants as set forth in Article IX of this Plan, a Participant may elect to a loan from any portion of his or her Roth 401(k) Contribution Account.
j. In-Service Withdrawals . For purposes of age 59-1/2 in-service withdrawals to Participants as set forth in Article IV, Paragraph B, and hardship withdrawals to Participants pursuant to Article IV, Paragraph G, a Participant may elect to take all or a portion of the in-service withdrawal from his or her Roth 401(k) Contribution Account, provided that earnings may not be distributed in the event of a hardship withdrawal.
k. Direct Rollover Provisions . A Participant who is entitled to receive a Plan distribution (other than a hardship withdrawal) may elect a direct rollover of his or her Roth 401(k) Contribution Account to a Roth 401(k) Contribution Rollover Account in another employer’s eligible retirement plan or to a Roth IRA in accordance with the applicable provisions of Article XVIII of this Plan, applying the limits for minimum rollover amounts separately to the Roth 401(k) Contribution Account. The Committee shall establish terms and conditions upon which this Plan will accept direct rollovers from a Participant’s Roth 401(k) Contribution Account in another employer’s eligible retirement plan to the extent permitted under Code Section 402(c). The five-year period referenced in subparagraph g. above shall commence to run as of the first taxable year for which the Participant made the Roth 401(k) contribution to such previously established account of the other plan. A separate Roth 401(k) Contribution Rollover Account shall be established in this Plan on behalf of the Participant for such a Roth 401(k) Contribution Account rollover.
l. Operational Compliance . The Committee will administer Roth 401(k) Contributions in accordance with applicable regulations or other binding authority not reflected in this Article IV. Any applicable regulations or other binding authority shall supersede any contrary provisions of this Article IV.
m. Changes to Deferral Elections. A Participant may change his or her Roth 401(k) Contribution deferral election in accordance with the same procedures and timeframes as set forth in Article IV, Paragraph B, as amended.


2.      The last subparagraph of Article VII, Paragraph B, is hereby moved to the end of Article VII, Paragraph A.6, effective January 1, 2009, to read as follows:
Notwithstanding any other provision in this Plan, to the extent permitted by and in accordance with the Code, a Participant or beneficiary who would have been required to receive a minimum distribution under Code Section 401(a)(9) from this Plan for 2009, will not receive such distribution(s) for 2009, unless the participant or beneficiary affirmatively elects to receive such distribution(s). In the event that a beneficiary does not elect to receive such a distribution and the




five-year rule set forth in Code Section 401(a)(9)(B)(ii) applies to such beneficiary, the five-year period shall be determined without regard to the Plan Year the distribution is suspended. In the event a Participant or beneficiary receives a required minimum distribution that was eligible for postponement, such distribution shall not be entitled to be directly rolled over, unless it is part of a larger distribution that was subject to direct rollover. In accordance with the Code, this Plan may accept a rollover of minimum distribution amounts that were subject to postponement. In the absence of an affirmative election by the Participant or beneficiary to receive a 2009 required minimum distribution, such 2009 minimum distributions are suspended. In the event the provisions of Code Section 401(a)(9)(H) are extended beyond 2009, this paragraph shall apply to all subsequent years that receive relief from the minimum distribution requirement.


IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this _______ day of ___________, 2011.
HOMESTREET, INC.



By _________________________________
Its _______________________________







AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN


HomeStreet, Inc. (the “Employer”), pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of January 1, 2012:
Article II, Paragraph J, is hereby amended to add the following to the end thereof:
For purposes of Code Sections 401(a)(22), 401(a)(28)(c), 409(h)(1)(B), and 409(l), Employer Stock “readily tradable on an established securities market” shall mean that such stock is readily tradable on an established securities market within the meaning of Treasury Regulation Section 1.401(a)(35)-1(f)(5).

IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this _______ day of ___________, 2012.
HOMESTREET, INC.



By ______________________________________
Its ____________________________________






AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN
HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of July 26, 2012, except as otherwise provided.

1.
The second to last paragraph of the Preamble is hereby replaced with the following:

WHEREAS, effective January 1, 2011, the Plan was amended and restated to spin-off the ESOP portion of this Plan into a separate plan to be known as the HomeStreet, Inc. Employee Stock Ownership Plan and Trust (the "ESOP"), so that this Plan is no longer an employee ownership plan and is instead only a profit sharing plan with 40l(k) and 401(m) features; rename this Plan the HomeStreet, Inc. 401(k) Savings Plan; incorporate previously adopted amendments; and make certain other administrative changes to the Plan;

WHEREAS, effective July 26, 2012, the Board of Directors of HomeStreet, Inc. wishes to amend and merge the ESOP into this Plan and transfer the ESOP Stock Account into this Plan’s Employer Stock Account.
                                                                                                             

2.
Article I is hereby amended by adding a new Paragraph J reading as follows:

J.          “Employer Stock” means common stock issued by the Employer that is publicly traded and meets the requirements of Section 407(d)(5) of ERISA.

3.
Article V, Paragraph A is hereby amended to read as follows:
A. Participant's Accounts. The Committee or its delegate shall maintain a separate Participant-Directed Profit Sharing Account, a separate Employee Pre-Tax Contribution Account, a separate Employer Discretionary Matching Contribution Account, separate transferred ESOP cash account, an Employer Stock Account, and a separate Rollover Account, where applicable for each Participant, which accounts shall reflect the Participant's Accrued Benefit. The Committee shall furnish each Participant who requests the same in writing a statement reflecting, on the basis of the latest available information, his Accrued Benefit and the nonforfeitable portion thereof or if no benefits are nonforfeitable, the earliest date on which benefits will be nonforfeitable. Only one such statement need be furnished a Participant each 12 months. The Employer may appoint the Trustee or any qualified third party to perform recordkeeping functions.

4.
Article VI, Paragraph B, is amended to read as follows:
B.      Vesting Period. A Participant’s Tax Contribution Account and Rollover Account, if applicable, shall be one hundred percent (100%) vested at all times. A Participant's Participant­ Directed Profit Sharing Account , transferred ESOP cash account, and Employer Stock Account shall vest in accordance with the following schedule:





Completion of 1 Year of Service          0%     
Completion of 2 Years of Service          0%
Completion of 3 Years of Service          20%
Completion of 4 Years of Service          40%
Completion of 5 Years of Service          60%
Completion of 6 Years of Service          80%
Completion of 7 Years of Service      100%

Notwithstanding the foregoing, effective with respect to a Participant who completes at least one Hour of Service on or after January 1, 2007, such Participant's Participant-Directed Profit Sharing Account , transferred ESOP cash account, and Employer Stock Account shall vest in accordance with the following schedule:

Completion of 1 Year of Service      20% Completion of 2 Years of Service      40% Completion of 3 Years of Service      60% Completion of 4 Years of Service      80%
     Completion of 5 Years of Service 100%

A Participant's Employer Matching Contribution Account shall vest in accordance with the following schedule:

Completion of 1 Year of Service          20%
Completion of 2 Years of Service          40%
Completion of 3 Years of Service          60%
Completion of 4 Years of Service          80%
Completion of 5 Years of Service      100%

Effective with respect to a Participant who is an active Employee on July 26, 2012, or who is rehired after such date and his prior vesting service cannot be disregarded, such Participant’s transferred ESOP cash account and ESOP Stock Account that was transferred to such Participant’s Employer Stock Account shall be 100% vested and nonforfeitable.

5.
Article VII, Paragraph A, Subparagraph 4, is amended to read as follows:

4. Form of Payment . A Participant who is eligible to receive benefits under this paragraph may elect in writing to receive a single payment equal to the Participant's nonforfeitable Accrued Benefit valued as of the Valuation Date(s) coinciding with or immediately following the Plan's receipt of the Participant's distribution request, except that a Participant who elected to receive installment payments prior to the date that installment payments ceased to be an optional form of payment under the Plan may continue to receive such installment payments, pursuant to subparagraph 5 below.

With respect to a Participant who was receiving payments in installments from his ESOP stock account under the restrictions on payment in effect for the ESOP, such Participant may elect to stay on the installment payment schedule begun under the ESOP or to receive a single lump sum payment of the remainder of the Employer Stock Account.





6.
Article IX, Paragraph B, is amended to read as follows:

B. The total amount of the loan, together with the outstanding balance of all other Plan loans to the Participant, shall not exceed the lesser of (1) $50,000 reduced by the excess, if . any, of the highest outstanding balance of loans during the one year period ending on the day before the loan is made over the outstanding balance of loans from the Plan on the date on which such loan was made, or (2) one-half of the present value of the Participant's nonforfeitable Accrued Benefit under this Plan, excluding the Employer Stock Account. For purposes of the dollar limitations imposed by this Paragraph B, all plans maintained by the Employer and any trade or business which is a member of a controlled group of trades or businesses or an affiliated service group under Code Sections 414(b), 414(c) and 414(m) shall be treated as one Plan.


7.
Article XI, Paragraph A, is amended to read as follows:
A. Investment of Employee Pre-Tax Contribution Accounts, Participant-Directed Profit Sharing Accounts, Employer Matching Contribution Accounts, and Rollover Accounts. For investment purposes, each Participant shall have the right to allocate contributions made to his Employee Pre-Tax Contribution Account, Participant-Directed Profit Sharing Account, Employer Matching Contribution Account, Employer Stock Account, and Rollover Account, if any, among Plan investment Funds selected by the Committee, in accordance with rules adopted by the Committee and uniformly applied. The Employer Stock Account includes stock transferred from the ESOP as well as additional investments directed by the Participant. Ownership of Employer Stock is subject to a limitation equal to ten percent (10%) of an employee’s total account balance. If a Participant owns more than ten percent (10%) after Employer Stock is transferred from the Employer Stock Ownership Plan to the Employer Stock Account, such Participant may sell, but not purchase, Employer Stock until such Participant’s Employer Stock percentage is reduced below ten percent (10%). Purchases and sales of Employer Stock shall be subject to such restrictions as to volume and time of sale as are necessary to avoid influencing the market for such common stock under the Securities Exchange Act of 1934, insider training, and other securities laws. A Participant may transfer amounts in such Accounts from one investment Fund to another in such increments and at such times as shall be provided by rules adopted by the Committee and uniformly applied. With respect to the assets in such Accounts of Participants who do not allocate contributions on their behalf among those Plan investment Funds, such assets shall be invested in the Plan investment Fund(s) selected by the Committee.

Without limiting the generality of the foregoing, the Trustee in following a Participant's instructions in accordance with the terms of this Plan or in following the Committee's instructions as to a Participant who does not elect among the available Plan investment Funds, shall invest and reinvest the principal and income of the Fund in common investment funds (the terms of which are incorporated herein by reference); real estate; government, municipal or corporation bonds, debentures or notes; common and preferred stocks; interests in investment companies, whether so-called "open-end mutual funds" or "closed-end mutual funds"; or any other form of property, whether real, personal or mixed, including life insurance policies on key employees of the Employer for the benefit of the Trust; provided, that the Trustee shall not invest in common or preferred stock, bonds, debentures or convertibles issued by the Employer. The Committee and the Trustee shall




not be liable for any loss or any breach of fiduciary responsibility which results from a Participant's exercise of control over all or part of his Employee Pre-Tax Contribution Account, Participant-Directed Profit Sharing Account, Employer Matching Contribution Account, and Rollover Account, if any.

8.
Article XI is amended by adding a new paragraph C reading as follows:

C .      Diversification Requirements for Publicly Traded Employer Stock. The following diversification requirements will apply to Employer Stock held in a Participant’s Account.

1.
If any portion of Employee Pre-Tax Contributions, Employer Matching Contributions, stock transferred from the ESOP, or Rollovers are allowed to be invested in Employer Stock, then the applicable Participant, Beneficiary or Alternate Payee (“Applicable Individual”) may elect to divest such Employer Stock and reinvest an equivalent amount in other investment options meeting the requirements of paragraph (2) below.


2.
The Applicable Individual may direct the proceeds from the divestment of Employer Stock to not less than three (3) investment options, other than Employer Stock. Each such investment option must be diversified and have materially different risk and return characteristics subject to the following:

(a)
The Plan shall not be treated as failing to meet the requirements of this paragraph merely because the Plan Administrator limits the time for divestment and reinvestment to periodic, reasonable opportunities occurring no less frequently than quarterly.
(b)
The Plan shall not meet the requirements of this paragraph if the Plan Administrator imposes restrictions or conditions with respect to the investment of Employer Stock, which are not imposed on the investment of other assets of the Plan.

(c)
A condition or restriction with respect to Employer Stock means:
(i)      A restriction on the Applicable Individual’s right to divest an investment in Employer Stock that is not imposed on an investment that is not Employer Stock; or
(ii)      A benefit conditioned on investment in Employer Stock.

The Plan may not either directly or indirectly impose a restriction on an Applicable Individual’s right to divest an investment in Employer Stock. This subparagraph shall not apply to any restrictions or conditions imposed by reason of the application of securities laws.

(d)
The Plan does not violate the restrictions provisions of this paragraph because it imposes the following indirect restrictions or conditions:
(i)          A Plan is permitted to limit the extent to which an Applicable Individual’s Account Balance can be invested in Employer Stock, provided the limitation applies without regard to a prior exercise of rights to divest Employer Stock.




(ii)          A Plan is permitted to impose reasonable restrictions on the timing and number of investment elections that an Applicable Individual can make to invest in Employer Stock, provided that the restrictions are designed to limit short-term trading in the Employer Stock.
(iii)      A Plan is permitted to allow transfers to be made into or out of a stable value of similar fund more frequently than a fund invested in Employer Stock.
(iv)          A Plan is permitted to provide for transfers out of a Qualified Default Investment Arrangement (“QDIA”) within the meaning in DOL Regulations Section 2550.404c-5(e) more frequently than a fund invested in Employer Stock.
(v)          A Plan is permitted to prohibit any further investment in Employer Stock. A Plan is not treated as imposing an indirect restriction merely because it provides that an Applicable Individual that divests an investment in Employer Stock is not permitted to reinvest in Employer Stock, but only if the Plan does not permit additional contributions or investments to be invested in Employer Stock. For this purpose, a Plan does not provide for further investment in Employer Stock merely because dividends paid on Employer stock under the Plan are reinvested in Employer Stock.

3.
Consistent with Section 1.401(a)(35)-1(e)(2)(iii)(A), the Plan is permitted to restrict the application of the diversification requirements of Section 401(a)(35) for up to 90 days after the Plan becomes an applicable defined contribution plan.

4.
A notice which complies with ERISA Section 101(m) must be provided to Applicable Individuals no later than thirty (30) days before the first date on which the Applicable Individuals are eligible to exercise their diversification rights.


IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this ____ day of _________________, 2012.
HOMESTREET, INC.

By ___________________________
Its ______________





AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN
HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of September 1, 2012, to correct a scrivener’s error:

1.
Article IV, Paragraph B, is hereby amended to correct the 8 th paragraph to read as follows:
Employee pre-tax contributions shall be credited to a separate Employee Pre-Tax Contribution Account for each Participant. A Participant's Employee Pre-Tax Contribution Account shall be invested, valued, distributed and except as specifically provided herein, in all respects treated in the same manner as the Participant's Employer Matching Contribution Account, except that the amounts credited to the Participant's Employee Pre-Tax Contribution Account shall be one hundred percent (100%) vested. Amounts in the Employee Pre-Tax Contribution Account shall not be distributed until the earliest of the Participant's death, disability, retirement, attainment of age 59-1/2, termination of employment, in accordance with the provisions of Article VII of the Plan, or the occurrence of a hardship as set forth in Paragraph G of this Article.


IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this ____ day of _________________, 2013.
HOMESTREET, INC.


By ___________________________
Its ___________________________







AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN
HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respect, effective as of September 1, 2012, except as otherwise provided.
1.
Article I, Paragraph F, is hereby amended to read as follows so that the definition of “Compensation” includes all cash compensation:
F. "Compensation" for Plan contribution purposes means an Employee's regular base salary or wages, short-term incentive-based compensation, bonuses, overtime, and commissions for a Plan Year from the Employer, before any deferral of income pursuant to Paragraph B of Article IV and before any salary reduction contributions to the Employer's Internal Revenue Code Section 125 flexible benefits plan and Code Section 132(f)(4) transportation fringe benefit plan, if any. Compensation excludes Employer contributions hereunder pursuant to Paragraphs A and C of Article IV, Employer contributions to any other similar retirement plan, and payments by the Employer (other than Section 125 contributions) on account of medical, disability and life insurance.

Notwithstanding any provision of this Plan to the contrary and consistent with the Employer's administration of the Plan, any long-term incentive compensation; amounts realized from the exercise of a nonqualified stock option or when restricted property is no longer subject to a substantial risk of forfeiture; and amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option shall be excluded from Compensation on which the Plan contributions are based.

Effective January 1, 2009, (i) an individual receiving a differential wage payment, as defined by Code Section 340l(h)(2), is treated as an Employee of the Employer making the payment, (ii) the differential wage payment is treated as Compensation, and (iii) the Plan is not treated as failing to meet the requirements of any provision described in Code Section 414(u)(l)(C) by reason of any contribution or benefit which is based on the differential wage payment. However, subsection (iii) applies only if all Employees of the Employer performing service in the uniformed services described in Code Section 3401(h)(2)(A) are entitled to receive differential wage payments (as defined in Code Section 340l(h)(2)) on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the Employer, to make contributions based on the payments on reasonably equivalent terms (taking into account Code Sections 410(b)(3), (4), and (5)).

Effective as of January 1, 2008, for purposes of Plan contributions, Compensation shall also include Compensation received during the applicable post-severance period only to the extent included in the definition of Compensation for Code Section 415 purposes below, and unless otherwise excluded under this Article II, Paragraph F, of the Plan. Any amount




includible in a Participant's gross income due to noncompliance with Code Section 409A shall be included in Compensation for purposes of Code Section 415 limitations on contributions and benefits.

Effective January 1, 2008, for purposes of applying the Code Section 415 limitations on contributions and benefits, the following Compensation shall be considered: (1) a Participant's regular Compensation received for services rendered during the Participant's regular working hours that is paid during a post-severance payment period, and (2) a Participant's Compensation for services rendered outside his regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments that would have been paid to the Participant before a severance of employment had the Participant continued in employment with the Employer (provided such amounts are paid during the post-severance payment period). The post-severance period is the period from the Participant's severance from employment until the later of 2-1/2 months after severance or the end of the Limitation Year in which severance occurred. Through December 31, 2008 only, Compensation for purposes of applying the Code Section 415 limitations on contributions and benefits shall also include, if paid during the post­ severance period, payments for unused accrued bona fide sick, vacation, or other leave, but only to the extent that (a) the Participant would have been able to use the leave if employment had continued, and (b) the amounts would have been included in the definition of Compensation for purposes of applying the Code Section 415 limitations if they were paid prior to the Participant's severance from employment with the Employer. In no event shall the Compensation for purposes of Code Section 415 for a given limitation year exceed the maximum amount of Compensation recognized for purposes of limiting contributions or benefits payable with respect to a plan under Code Section 401(a)(17) for that same limitation year.

If the Employer so elects, effective January 1, 2008, Compensation for purposes of applying the Code Section 415 limitations on contributions and benefits for a limitation year shall include amounts earned but not paid during the limitation year solely because of the timing of pay periods and pay dates, provided the amounts are paid during the first few weeks of the next limitation year, the amounts are included on a uniform and consistent basis with respect to all similarly-situated participants, and no compensation is included in more than one limitation year.

As modified by the preceding two paragraphs, for purposes of the Code Section 415 limitations on contributions and benefits (Article V, Paragraph E, hereof) and the Code Section 416 top heavy requirements (Articles XIV and XV hereof), and for purposes of determining a Highly Compensated Employee (Article II, Paragraph 0, hereof), "Compensation" means wages, salaries, fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employers maintaining the Plan to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements, and expense allowances), Code Section 132(f)(4) transportation fringe benefit plan salary reduction contributions, and any elective deferrals as defined in Code Section 402(g)(3), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not




includible in the gross income of the Employee by reason of Code Section 125 or 457. Such compensation does not include:

1. Contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed;

2. Employer contributions to a simplified employee pension described in
Section 401(k) of the Code to the extent deductible by the Employee;

3. Distributions from a plan of deferred compensation regardless of whether such amounts are includible in gross income when distributed (except that amounts paid to an Employee under an unfunded nonqualified plan of deferred compensation will be considered as compensation for Code Sections 415 and 416 in the year such amounts are includible in gross income);

4. Amounts realized from the exercise of a nonqualified stock option or when restricted property becomes freely transferable or is no longer subject to a substantial risk of forfeiture;

5. Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option;

6. Other amounts which receive special tax benefits such as premiums for group term life insurance (but only to the extent that the premiums are not includible in gross income) or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Section 403(b) of the Code (whether or not contributions are excludable from gross income).

In addition to other applicable limitations set forth in this Plan, and notwithstanding any other provision of this Plan to the contrary, the annual Compensation of each Employee taken into account under this Plan shall not exceed the annual compensation limit as provided in Code Section 401(a)(l7). The annual compensation limit (e.g., $250,000 for the 2012 Plan Year), shall be adjusted for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12.



2.
Article I, Paragraph J, is hereby amended to read as follows:
J. "Enrollment Date" means the date on which an Employee who has complied with the eligibility requirements shall become eligible to participate in the Plan. The Enrollment Dates with respect to all contributions shall be the start of the pay period after becoming an eligible Employee so long as administratively feasible.





3.
Article III, Paragraph B, is hereby amended to read as follows so that a Participant is eligible to receive Employer matching contributions upon attainment of age 18:

B. Eligibility for Employer Contributions . Unless excluded by reason of Paragraph A of this Article III, each Employee who was a Participant on December 31, 2010, shall continue to be a Participant for purposes of eligibility for Employer contributions under Paragraphs A and C of Article IV subject to the provisions of this Plan. Each other Employee not excluded by reason of Paragraph A of this Article III shall become eligible upon the later of January 1, 2011, or his completion of one Year of Service with the Employer and attainment of age 18. Effective September 1, 2012, notwithstanding the foregoing, for purposes of eligibility for Employer matching contributions pursuant to Article IV, Paragraph C, only, each other Employee not excluded by reason of Paragraph A of this Article III shall become eligible upon attainment of age 18 and completion of one Hour of Service.

Each eligible Employee shall be enrolled as a Participant as of the Enrollment Date coinciding with or following completion of such requirements, provided the Employee has not separated from service before such Enrollment Date.

4.
Article IV, Paragraph B, is hereby amended to read as follows so that enrollment is automatic for new hires:
B.      Employee Pre-Tax Contributions. Pursuant to IRS Revenue Ruling 2000-8, effective September 1, 2012, and with respect only to those Employees hired or rehired on or after September 1, 2012, this Plan utilizes an automatic election for pre-tax contributions (“Automatic Contribution Arrangement”), unless an Eligible Employee elects otherwise. Specifically, if such an Employee becomes eligible to elect pre-tax contributions and fails to elect to make pre-tax contributions, or fails to affirmatively elect to make zero pre-tax contributions, within a reasonable time established by the Committee, the Employer will automatically reduce the Eligible Employee’s Compensation by three percent (3%) per pay period and treat that sum as a pre-tax contribution. Any automatic pre-tax contributions will be invested in accordance with Article XI, Paragraph A. An affected Employee may at any time revoke the Automatic Contribution Arrangement described in this paragraph by filing a new election form with the Employer (including an election for zero pre-tax contributions). To be effective for the pay period, an election must be completed and submitted to the Employer reasonably prior to the close of the pay period, in accordance with rules established by the Committee.

At least thirty (30) days, but not more than ninety (90) days, before the beginning of the Plan Year the Employer shall distribute an Automatic Contribution Arrangement notice to each Employee at the time he is hired that explains the Automatic Contribution Arrangement and the Employee’s rights and obligations under it. The notice must accurately describe (a) the amount of automatic pre-tax contributions that will be made on the Employee’s behalf in the absence of an affirmative election, (b) the Employee’s right to elect to have no pre-tax contributions made on his or her behalf or to have a different amount of pre-tax contributions




made, and (c) how automatic pre-tax contributions will be invested in the absence of the Employee’s investment instructions.

With respect to Employees who were employed prior to September 1, 2012, on or prior to an Employee's Enrollment Date for Employee pre-tax contribution purposes, the Employee may, through use of a telephone voice response system or such other means as are designated by the Committee, direct the Employer (1) to defer a percentage of his Compensation each pay period, commencing as of his Enrollment Date, and (2) to contribute that amount to the Plan within the time required by ERISA. The Committee shall provide each Employee prior to his Enrollment Date instructions about the time period within which the Employee may elect to make pre-tax contributions effective as of his Enrollment Date. A Participant's pre-tax contributions for any pay period shall be in whole percentages equal to at least one percent (1%) of the Participant's Compensation but not more than a percentage of Compensation that shall be determined by the Committee from time to time in a manner that is consistent with applicable law, provided such contributions are within the limits of Article V, Paragraph E. The amount of a Participant's deferred Compensation shall be rounded to the nearest cent.

Notwithstanding the foregoing, Employee pre-tax contributions on behalf of a Participant in this Plan or any other qualified plan maintained by the Employer during any taxable year may not exceed the limit under Code Section 402(g) in effect for such taxable year ($17,000 for calendar year 2012 and thereafter such amount for a calendar year as adjusted each year by the Secretary of the Treasury), except to the extent permitted under the remainder of this Paragraph B and Section 414(v) of the Code, if applicable. A Participant who makes Code Section 401(k) Employee pre-tax contributions to more than one plan in a calendar year in excess of the applicable dollar limitation must submit to the Committee by March 1 of the year following the year of any excess contributions a written statement including the amount of the excess contributions to be allocated to this Plan. Any excess contributions allocated to this Plan shall be distributed, together with income attributable thereto, by April 15 of the year following the year of the excess contributions.


Notwithstanding any provision of this Plan to the contrary, upon a Participant's return from qualified military service, such Participant may make up Employee pre-tax contributions for the period of qualified military service in accordance with Code Section 414(u), effective with reemployments initiated on or after December 12, 1994.


Effective the first day of any payroll period, each Participant who is deferring an amount of his Compensation may change the percentage of his Compensation to be deferred, and each Participant who is not deferring an amount of his Compensation may elect to begin deferring a percentage of his Compensation. Each Participant who elects to make such a change or election must follow the procedures established by the Committee and must make such change or election within a reasonable timeframe prior to the beginning of the applicable pay period, as designated by the Committee.

By following the procedures designated by the Committee, a Participant may revoke his Employee pre-tax contribution agreement effective as of the first day of any subsequent pay period. A Participant who revokes his Employee pre-tax contribution agreement may resume deferring a percentage of his Compensation hereunder at any time, provided he




follows procedures designated by the Committee relating to resuming Employee pre-tax contributions, with such election effective as soon as administratively possible thereafter.


Employee pre-tax contributions shall be credited to a separate Employee Pre-Tax Contribution Account for each Participant. A Participant's Employee Pre-Tax Contribution Account shall be invested, valued, distributed and except as specifically provided herein, in all respects treated in the same manner as the Participant's Employer Matching Contribution Account, except that the amounts credited to the Participant's Employee Pre-Tax Contribution Account shall be one hundred percent (100%) vested. Amounts in the Employee Pre-Tax Contribution Account shall not be distributed until the earliest of the Participant's death, disability, retirement, attainment of age 59, termination of employment, in accordance with the provisions of Article VII of the Plan, or the occurrence of a hardship as set forth in Paragraph G of this Article.

Such amounts may also be distributed upon:

(1) Termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Code Section 4975(e)(7)), a simplified employee pension plan (as defined in Code Section 408(k)) or a SIMPLE IRA Plan (defined in Code Section 408(p)).

(2) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Code Section 409(d)(2)) used in a trade or business of such corporation if such corporation continues to maintain the plan after the disposition, but only with respect to employees who continue employment with the corporation acquiring such assets.

(3) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Code Section 409(d)(3)) if such corporation continues to maintain the Plan, but only with respect to Employees who continue employment with such subsidiary.

All Employees who are eligible to make Employee pre-tax contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Sections 402(g) and 415 of the Code. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Sections 401(k)(3), 401(k)(ll), 401(k)(12), 410(b), or 416, as applicable, by reason of the making of such catch-up contributions. Consistent with the Employer's administration of the Plan and applicable law, catch-up contributions shall be treated in the same manner as Employee pre-tax contributions for purposes of Participant loans pursuant to Article IX of this Plan and for purposes of any in-service withdrawals.
    
Effective January 1, 2009, a Participant shall be treated as having a severance from employment and therefore eligible for a distribution of his Employee Pre-Tax Contribution Account during any period the Participant is performing service in the uniformed services for more than 30 days as described in Code Section 3401(h)(2)(A). In the event that such a Participant elects to receive a distribution by reason of severance from employment, the




Participant may not make an elective deferral to the Plan during the 6-month period beginning on the date of the distribution.



5.
Article IV, Paragraph C, is hereby amended to read as follows so that the Employer matching contributions meet the safe harbor:

C. Employer Matching Contributions .

Prior to September 1, 2012, the Employer could, in its sole discretion, contribute on behalf of each Participant who makes Employee pre-tax contributions an Employer Discretionary Matching Contribution equal to such percentage of each Participant’s Employee pre-tax contributions as shall be determined by the Board of Directors in its discretion to each Participant’s Employer Discretionary Matching Contribution Account, provided that such Employer discretionary matching contributions (a) was based only on a Participant’s Employee pre-tax contributions of up to 6% of Compensation or such other maximum as set by the Board, and (b) would not result in an excess contribution as defined in Paragraph E below or exceed the applicable limits of Paragraph E of Article V.

During the period beginning on September 1, 2012, and ending on December 31, 2012, the Employer may, in its sole discretion, contribute such percentage of each Participant's Employee pre-tax contributions as shall be determined by the Board of Directors in its discretion to each Participant’s Employer Discretionary Matching Contribution Account, provided that such Employer discretionary matching contributions (a) shall not exceed one hundred (100%) of the first three percent (3%) of Compensation deferred and fifty percent (50%) of the next two percent (2%) of Compensation deferred by the participant, and (b) shall not result in an excess contribution as defined in Paragraph E below or exceed the applicable limits of Paragraph E of Article V. The Board may determine the time period for which such match will be made (e.g. a quarter or Plan Year), either prospectively or retroactively for the time period. If a match is made retroactively for a time period, the Participant must be employed on the last day of such period (an Active Participant) to receive the match. If Employer discretionary matching contributions are made for a time period, such Employer discretionary matching contribution may be made each pay period within it based on the Participant's Employee pre­tax contributions and Compensation for each such pay period, or may be allocated based on the Participant's Employee pre-tax contributions and Compensation during the entire time period, as determined by the Board.

Effective January 1, 2013, the Employer shall contribute on behalf of each Participant who makes Employee pre-tax contributions a safe harbor Employer matching contribution equal to one hundred percent (100%) of the first three percent (3%) of Compensation deferred by the Participant and fifty percent (50%) of the next two percent (2%) of Compensation deferred by the Participant (a “Safe Harbor Employer Matching Contribution”). The Safe Harbor Employer Matching Contribution shall be made and allocated based on the Participant’s pre-tax contributions for the time period determined by the Board (e.g. a quarter or Plan Year) and regardless of whether a Participant is credited with 1,000 Hours of Service during the Plan Year or is employed on the last day of the Plan Year. The Safe Harbor




Employer Matching Contribution may be made each pay period within a time period based on the Participant's Employee pre­tax contributions and Compensation for each such pay period, or may be allocated based on the Participant's Employee pre-tax contributions and Compensation during the entire time period, as determined by the Board. The Safe Harbor Employer Matching Contribution shall be credited to a separate Safe Harbor Employer Matching Contribution Account for each Participant. Amounts credited to the Safe Harbor Employer Matching Contribution shall be one hundred percent (100%) vested and nonforfeitable at all times.

Notwithstanding any provisions of this Plan to the contrary, upon a Participant's return from qualified military service, Employer matching contributions shall be made to the extent they would have been made with respect to Employee pre-tax contributions that are attributable to a period of qualified military service in accordance with Code Section 414(u).

Notwithstanding any provisions of this Plan to the contrary, Employee pre-tax contributions that are catch-up contributions made pursuant to Paragraph B of Article IV shall not be eligible for Employer Matching Contributions under this Paragraph C.

6.
Article IV, Paragraphs D, E and F are hereby amended to add the following sentence to the beginning of the first paragraph:
The following applies to contributions made before January 1, 2013.
7.
Article V, Paragraph A, is hereby amended to read as follows:

A. Participant's Accounts. The Committee or its delegate shall maintain a separate
Participant-Directed Profit Sharing Account, a separate Employee Pre-Tax Contribution Account, a separate Employer Discretionary Matching Contribution Account, separate transferred ESOP cash account, an Employer Stock Account, and a separate Rollover Account, where applicable for each Participant, which accounts shall reflect the Participant's Accrued Benefit. Effective January 1, 2013, the Committee shall also maintain a separate Safe Harbor Employer Matching Contribution Account. The Committee shall furnish each Participant who requests the same in writing a statement reflecting, on the basis of the latest available information, his Accrued Benefit and the nonforfeitable portion thereof or if no benefits are nonforfeitable, the earliest date on which benefits will be nonforfeitable. Only one such statement need be furnished a Participant each 12 months. The Employer may appoint the Trustee or any qualified third party to perform recordkeeping functions.

8.
Article VI, Paragraph B, is hereby amended by adding the following paragraph at the end, so that Participants are immediately vested in their Employer Matching Contribution Account:
Notwithstanding the foregoing, effective with respect to a Participant who completes at least one Hour of Service on or after September 1, 2012, such Participant shall be one hundred percent (100%) vested in such Participant’s Employer Discretionary Matching Contribution




Account. Effective January 1, 2013 a Participant's Safe Harbor Employer Matching Account shall be one hundred percent (100%) vested at all times

9.
Article X, Paragraph G, is hereby amended to add the following sentence after the first paragraph:
The Committee has delegated to corporate management the authority to implement administrative procedures wherever the plan provides the Committee with the authority to adopt or establish rules, procedures, or time limits.

IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this ____ day of _________________, 2012.
HOMESTREET, INC.

By ___________________________
Its ___________________________






AMENDMENT TO THE
HOMESTREET, INC. 401(k) SAVINGS PLAN
HomeStreet, Inc., pursuant to Article XIII, Paragraph A, of the HomeStreet, Inc. 401(k) Savings Plan (the “Plan”), hereby amends the Plan in the following respects, effective as of January 1, 2014.
1.      Article IV, Paragraph A, is hereby amended in its entirety to read as follows:

A.      No Employer Discretionary Profit Sharing Contributions. Notwithstanding any provision of this Plan to the contrary, effective January 1, 2014, no Employer Discretionary Profit Sharing Contributions will be made to the Plan. Any references in this Plan to Employer Discretionary Profit Sharing Contributions or a Participant-Directed Profit Sharing Account shall refer solely to such contributions made in prior Plan Years and earnings as applicable.


2.      Article V, Paragraph B.1, is hereby deleted in its entirety and is replaced with the following:
1.      RESERVED.

3.      Article V, Paragraph C, is hereby deleted in its entirety and is replaced with the following:
C.      RESERVED.

4.      Article V, Paragraph F, is hereby deleted in its entirety and is replaced with the following:
F.      Forfeitures and Reinstatement of Forfeitures. If a Participant terminates employment with the Employer, incurs an Event of Forfeiture, is thereafter reemployed, and has not incurred five consecutive One-Year Breaks in Service as of the Anniversary Date coinciding with or following the date of his reemployment, the forfeited dollar amount of his Accrued Benefit shall be reinstated as if that nonvested dollar amount of his Accrued Benefit had not been forfeited, and shall be 100% vested, provided the terminated Participant repays the vested dollar amount of his Accrued Benefit previously distributed to him, which was attributable to Employer contributions, back to the Plan Trustee to be credited to the Participant. Any required repayment shall be made in cash and shall be repaid to the Participant’s Participant-Directed Profit Sharing Account, and Employer Matching Contribution Account, as applicable. Any required repayment must occur before the earlier of (1) the date five years after the first date on which the Participant is subsequently re-employed by the Employer, or (2) the date the Participant would have incurred five consecutive One-Year Breaks in Service following the date of the distribution had he not been re-employed. Reinstatement of a Participant’s forfeited Accrued Benefit in accordance with this Paragraph F shall occur on the Anniversary Date coinciding with or following such Participant’s date of repayment by allocating the required amount to the Participant’s Participant-Directed Profit Sharing Account, and Employer Matching Contribution Account, as applicable, first, from forfeitures of Employer Matching Contributions occurring on such Anniversary Date, second, from Trust earnings allocated as of such Anniversary Date, and third, from extraordinary Employer contributions as required.

5.      Article VI, Paragraph B, is amended to add the following to the end thereof:
The Participant-Directed Profit Sharing Account of any Participant with such an account balance remaining in the Plan as of January 1, 2014, shall be 100% vested and nonforfeitable.






6.      The first sentence of Article IX is hereby amended to read as follows:
A Participant may obtain a loan, first, from his Rollover Account, second, from his Employer Pre-Tax Contribution Account, third, from his Roth 401(k) Contribution Account, fourth from his vested Employer Matching Contribution Account, and fifth, from his vested Participant-Directed Profit Sharing Account, under the Plan, in accordance with the terms of the written Participant loan program established by the Committee, the terms and conditions of which are included in the Summary Plan Description and incorporated herein by reference.

7.      Article XV, Paragraph A, is hereby amended to read as follows:
A.      Minimum Vesting Requirements. The standard vesting procedures satisfy the vesting requirements of Code Section 416 and accordingly there will be no change in the vesting schedule if this Plan is Top-Heavy.

IN WITNESS WHEREOF, the Employer has caused this amendment to be adopted as of this ____ day of _________________, 2013.

HOMESTREET, INC.


By ____________________________________
Its __________________________________





EXHIBIT 10.12
 
 
 
Original Lease – March 5 1992
 
 
 
Supplemental Lease Agreement – August 25, 1992
 
1

 
 
Second Amendment to Lease – May 6, 1998
 
2

 
 
Third Amendment to Lease – June 17, 1998
 
3

 
 
Fourth Amendment to Lease – February 15, 2000
 
4

 
 
Fifth Amendment to Lease – July 31, 2001
 
5

 
 
Sixth Amendment to Lease – March 5, 2002
 
6

 
 
Seventh Amendment to Lease – May 19, 2004
 
7

 
 
Eighth Amendment to Lease – August 31, 2004
 
8

 
 
Ninth Amendment to Lease – April 19, 2006
 
9

 
 
Tenth Amendment to Lease – August 16, 2006
 
10

 
 
Eleventh Amendment to Lease – January 21, 2007
 
11

 
 
Twelfth Amendment to Lease – November 7, 2007
 
12

 
 
 
13

 
 
 
14

 
 
 
15

[***] Indicates confidential material that has been omitted pursuant to a Confidential Treatment Request filed with the Securities and Exchange Commission. A complete copy of this agreement has been separately filed with the Securities and Exchange Commission.
Continental Savings Bank
Master Lease (March 5, 1992)
Contents
 




 
 
 
Lease
Section
Topic
Page
1
Basic Lease Information
1

1.1
Leased Premises
1

1.2
Floor Areas
2

1.3
Term
2

1.4
Rent
3

1.5
Base Indices
4

1.6
Use
4

1.7
Lessee’s Address for Notices
4

1 8
Lessor’s Address for Notices
4

1.9
Exhibits and Other Attachments
4

1.10
Lessor
5

2
Rent Payment
5

3
Annual Rent Adjustment (Operating Expenses)
6

4
Real Property Description and Taxes
7

5
Possession
9

6
Acceptance and Care of Premises
10

7
Alterations
11

8
Inspection and Repairs
11

9
Services by Lessor
12

10
Fire or Other Casualty
15

11
Waiver of Subrogation
16

12
Uses
16

13
Signage arid Plaza Identification
17

14
Accidents and Indemnity
18

15
Liens and Insolvency
20

16
Default by Lessee and Re-Entry
20

17
Removal of Property and Replacement of Non-Standard Items
20

18
Non-Waiver
21

19
Costs and Attorney’s Fees
21

20
Priority
21

21
Condemnation
22

22
Assignment and Subletting
23

23
Rules, Regulations and Miscellaneous
24

24
Successors
27

25
Shared Tenant Services
27

26
Tenant improvement
27

27
Expansion Options
28

28
Right of First Offer/Right of First Refusal
29

29
Extension Term and Rent
32

Continental Savings Bank
Master Lease (March 5, 1992)
Contents
 




 
 
 
 
 
Lease
Section
  
Topic
  
Page
30
  
Parking
  
33
31
  
Storage Space
  
35
32
  
Satellite Dish
  
35
33
  
Additional Expenses
  
35
34
  
Default by Lessor
  
36
35
  
Regulatory Approval
  
36
36
  
Exclusivity
  
36
37
  
Branch Bank
  
37
38
  
Backup Power
  
37
 
 
 
Exh - A
  
Floor Prints of Leased Premises
  
9 Pgs.
Exh - B
  
Initial Improvement of Leased Premises
  
15 Pgs.
Exh - C
  
Janitorial Specifications
  
7 Pgs.
Exh D-1
  
Nondisturbance and Attornment Form
  
1 Pg.
Exh D-2
  
Subordination, Non-Disturbance and Attornment Agreement
  
7 Pgs.
Exh- E
  
Fireplace Lobby Plan
  
1 Pg.
TWO UNION SQUARE
Seattle, Washington
OFFICE LEASE
THIS LEASE, dated the 5th day of March, 1992, between: ONE UNION SQUARE VENTURE, a joint venture (Lessor) and CONTINENTAL, INC. (Lessee).
Lessee and Lessor, in consideration of this lease, covenant and agree as follows:
1. BASIC LEASE INFORMATION
1.1 Leased Premises . The leased premises are located in the office tower portion and retail portion of the Two Union Square Building (the TUS Building) situated on the land (TUS Land) described in Section 4.1(a). A portion of the leased premises may also be located in retail portion of the One Union Square Building (OUS Building) situated on the land (OUS Land) described in Section 4.1(b). The term “Building” shall mean The TUS Building with respect to the portion of the leased premises in the TUS Building and the OUS Building with respect to the portion (if any) of the leased premises in the OUS Building. The TUS and OUS Lands are collectively called the Land. The initial leased premises shall be comprised of:
(a) Between 45,000 and up to all of the office space on floors 18, 19 and 20 (approximately 60,000 RSF) in the TUS Building.
(b) Approximately 2,511 USF (no load factor to be applied) as outlined in red on attached Exhibit A for Lessee’s branch bank.
(c) Up to 7,000 USF of additional retail space (no load factor to be applied) in one or more of the following locations:
 
i)
All of the upper level of the branch bank location (approximately 2,540 USF in the TUS Building);
 
ii)
All of the former IBM employment center space in the OUS Building (approximately 2,068 USF) (If prior to April 3, 1992, Lessor determines that the adjacent Federal Express space will be available for lease to a party other than Federal Express, Lessor will so advise Lessee and Lessee may include the Federal Express
 
space and the IBM employment center space as part of the initial leased premises pursuant to this Section 1.1(c)(ii), provided the election is made no later than April 3, 1992.);




 
iii)
All of the Security Pacific Branch Bank space in the OUS Building (approximately 1762 USF), if said space becomes available; and/or
 
iv)
All of the upper level of the plaza building at the corner of sixth and Union (approximately 2,000 USF - Dakota, 1,600 USF vacant) in the TUS Building or all of the vacant space or all of the Dakota space, if available and if required governmental approvals for Lessee’s intended use can be obtained. Lessor will use its reasonable best efforts to obtain such approvals.
The space described in Section 1.1(a) and any additional space in the Tower portion of the TUS Building is sometimes referred to as the office space or office area portion of the leased premises. The space described in Sections 1.1(b) and 1.1(c) is sometimes referred to as the retail space or retail area portion of the leased premises.
Lessee shall specify the exact spaces comprising the leased premises (within the parameters specified above) and such spaces shall be outlined in black on prints marked Exhibit A which shall be initialed by the parties and attached to this lease, not later than April 3, 1992 for the retail area portion(s) and May 15, 1992 for the office area portion.
1.2 Floor Areas . The load factors to convert the usable area (USF) of office space in the TUS Building to rentable area (RSF) therein are 1.13 (i.e., 13%) when Lessee occupies part of the office space on a floor and 1.0927 (i.e., 9.27%) when Lessee occupies all of the office space on a floor. The total area of the office and retail space in TUS Building is 1,095,391 square feet (RSF for office plus USF for retail). The total area of office and retail space in the OUS Building is 628,845 square feet (RSF for office plus USF for retail). The total usable area of retail space in the TUS Building and OUS Building is 55,757 square feet. The usable and rentable areas of office space and usable areas of retail space comprising the leased premises shall be calculated from Lessee’s Final Preliminary Plans (defined in Exhibit B), as mutually agreed to by Lessee’s Architect and Lessor’s Architect, and set forth in Exhibit A when it is attached and made part of this lease as above provided. In the event a portion of the Building is damaged or any other event or change occurs which alters the usable or rentable areas of the leased premises or the Building, Lessor may appropriately adjust the foregoing areas . Usable and rentable areas shall mean such areas as defined by the Building Owners and Managers Association International in its “Standard Method for Measuring Floor Area in Office Buildings” (American National Standard ANSIZ 65.1-1980). Whenever areas are herein referred to generally, it shall mean rentable area.
1.3 Term . The lease term shall commence on January 1, 1993 and end December 31, 2002.
A portion of the leased premises shall be deemed to be “Substantially Completed” when all of the tenant improvements for such portion of the leased premises has been completed in accordance with plans and specifications provided by Lessee in accordance with Exhibit B and have been accepted as complete by Lessee’s Architect; such acceptance shall not be unreasonably withheld or delayed, and the existence of typical punchlist items shall not be grounds for withholding such acceptance, provided that Lessor shall correct and/or complete such punchlist items as soon as reasonably possible.
Lessee shall not be required to occupy the leased premises prior to January 1, 1993 without its consent, which consent may be withheld by Lessee in its sole discretion. Prior to January 1, 1993, Lessee shall have the right to occupy all or any portion of the leased premises regardless of whether all or any portion of the leased premises is or is not Substantially Completed, and in such event rent shall commence upon occupancy, but only as to the part of the leased premises occupied by Lessee. However, in no event shall Lessee occupy a portion of the leased premises before the entire leased premises is Substantially Completed if such occupancy would materially interfere with the timely completion of that portion or any other portion of the leased premises or increase costs, unless Lessee agrees to the consequences of such delay and to pay such increase in costs.
1.4 Rent. The base monthly rent, payable without demand in advance on the first day of each calendar month, shall be based on an annual rate of 17.98/RSF/year (USF/year for retail space) for the entire initial lease term through December 31, 2002.
Notwithstanding the foregoing, the rent rate for the first month of full occupancy from and after January 1, 1993 shall be $4.71/RSF/year (USF/year for retail space). In the event Lessee elects to occupy the leased premises (or a portion thereof) prior to January 1, 1993, its base monthly rent during 1992 shall commence upon occupancy and be based on an annual rate of $4.71 per RSF/year (or USF/year for retail space) for the space occupied. Such pre-January 1, 1993 occupancy shall not in any way negate, reduce or otherwise impact the terms of the first sentence of this paragraph.
For occupancy on and after January 1, 1993, rent for the office space portion of the leased premises shall start on the earlier of (a) the date Lessee first occupies the office space portion of the leased premises (or as to the portion occupied if occupied in stages), or (b) five (5) days after the date on which the tenant improvements in the office space portion have been Substantially Completed, except as otherwise provided in Section 5.6 of Exhibit B. Rent for the retail space portion of the leased premises shall start when such space is first occupied by Lessee (or as to the portion occupied if occupied in stages),




except as otherwise provided in Section 5.6 of Exhibit B. The rates for occupancy of office space or retail space prior to January 1, 1993 shall be $4.71 per RSF/year (USF/year for retail space).
Commencing January 1, 1995, Lessee will pay its share of retail area Common Area Maintenance costs, in the ratio that its retail space area bears to total retail space area in the TUS Building and the OUS Building, not to exceed a maximum of $2.00/USF/year. Thereafter (namely, as of the first day of 1996 and the first day of each year thereafter), the maximum rate
will be the sum of the 1995 rate (adjusted to 95% occupancy) and the actual annual increases in such costs, with the actual 1995 costs (adjusted to 95% occupancy) as the base year, not to exceed five percent (5%) per year (cumulative and compounded).
1.5 Base Indices
Consumer Price Index for September 1992.
Cost of electricity per kilowatt-hour (average) for 12 months ending September 30, 1992.
Janitorial hourly labor rate as of September 30, 1992.
Operating Cost Adjustment Base: The lesser of $4.95/RSF/year (USF/year for retail space) or the actual operating costs (adjusted to 95% occupancy) incurred by Lessor in the year ended October 31, 1992.
The first rent adjustment pursuant to Section 3 will be January 1, 1994.
1.6 Use. The leased premises shall be used only for the purposes of general office, banking services, loan production, escrow services, and other banking, real estate and financial service-related uses.
1.7 Lessee’s Address for Notices if Other Than the Leased Premises: Until Lessee has occupied office portion of the leased premises, Lessee’s address for notices shall be The Pacific Building, Eighth Floor, 720 Third Avenue, Seattle, WA 98104, Attention: Richard Swanson.
1.8 Lessor’s Address for Notices and Payment of Rent:
1010 Unigard Financial Center
1215 Fourth Avenue
Seattle, Washington 98161-1001
1.9 Exhibits and Other Attachments Which are Part of the Lease:
 
Exhibit
A: Prints with leased premises outlined in black on standard floor plans.
B: Initial Improvement of Leased Premises.
C: Janitorial Services Outline
D: Non-Disturbance Agreement Form(s)
E: Possible Design Solution for Branch Bank Space
1.10 Lessor . Lessor is a Washington joint venture comprised of (a) Properties Associates, a Washington limited partnership, (b) Security Pacific Premises, Inc., a Washington corporation, and (c) Security and Union Venture, a Washington joint venture. Lessor is the sole owner of the Building and Land. UNICO Properties, Inc. is the manager and authorized rental agent of One and Two Union Square and it has the authority to execute this lease on behalf of Lessor and bind Lessor as provided in this lease, without the need for signature or comment of any other party, other than the consent of State of Washington State Investment Board, beneficiary of the first deed of trust on Two Union Square and second deed of trust on One Union Square. Execution of this lease by Lessor shall be Lessor’s warranty that such consent has been obtained.
2. RENT PAYMENT
Lessee shall pay the rent and other charges provided for in this lease, in lawful money of the United States on or before their specified due dates to Lessor at the address specified in Section 1.8, or to such other party or at such other place as Lessor may hereafter from time to time designate in writing. All rent which is past due shall bear interest at the rate of one percent (1%) per month from the date rent is due until paid. If the maximum annual rate of interest permitted by applicable law shall be less than the rate of interest provided for herein, then all past due payments of rent shall bear interest at the maximum rate permitted by applicable law from due date until paid. Lessee acknowledges that late payment by Lessee to Lessor of rent will cause Lessor to incur costs not contemplated by this lease, the exact amount of such costs being extremely difficult and




economically impractical to ascertain. Therefore, if any payment of rent due from Lessee is not received by Lessor within 10 days after the due date, Lessee shall pay to Lessor (in addition to the interest above provided) a late charge of Fifty Dollars ($50) or two percent (2%) of the overdue rent, whichever shall be greater. Notwithstanding the foregoing, however, Lessee shall be entitled to ten (10) days prior written notice before the application of either the late charge of the above-described interest rate the first time in each calendar year during the term of this lease that Lessee is late with a payment. Moreover, the late charge shall apply only once to a given late payment (for example, if Lessee failed to pay rent for a given month until the fifteenth day of the following month, such late rent payment would be subject only to one two percent late charge. The late charge is in addition to interest payable by Lessee as herein provided.) The parties agree that this late charge represents a fair and reasonable estimate of the costs that Lessor will incur by reason of late payment by Lessee and is in addition to any interest charges on past due rent.
For purposes of the Internal Revenue Code, including Section 467 thereof, rent expense and rental income shall be recognized by the parties as and when rent amounts are payable under the terms of this Lease. Notwithstanding the foregoing, however, if Lessee prepays rent, Lessee shall be entitled to recognize such expense on the date payment is made.

3. ANNUAL RENT ADJUSTMENT (OPERATING EXPENSES)
3.1 A portion of the initial rental rate shall be adjusted January 1 of each year commencing January 1, 1994. Three separate indicators, each to be factored separately by one-third of the Operating Cost Adjustment Base, are used to provide a reasonably broad base to determine the amount of such adjustment. These indicators are the Consumer Price Index, the cost of electricity and janitorial hourly labor rate.
3.2 The base indices for the Consumer Price Index, the cost of electricity and janitorial hourly labor rate, shall be as stated in Section 1.5. Succeeding indices for each of these indices will be calculated annually thereafter, using the succeeding data for the month of September, 12-month period ending September 30, and September 30, respectively. The ratio that each succeeding index bears to its base index shall be reduced by 1.00 and multiplied by one-third of the Operating Cost Adjustment Base, and by the area of the leased premises. Each January 1, commencing January 1, 1994, the monthly rent otherwise provided for in this Lease shall be increased by l/12th of the sum of the amounts so determined.
3.3 The Consumer Price Index to be used shall be the Consumer Price Index for all urban consumers, U.S. city average, all items, series 1982-84 equals 100 (as published by the U.S. Department of Labor, Bureau of Statistics). If this index is revised or changed (as, for example, by taking the average index for different years as the base figure of 100), the base index shall be adjusted accordingly. If this index is discontinued, the index promulgated by the Department of Labor which most closely approximates the above-referenced index, shall be used and the base index shall be adjusted accordingly.
3.4 The cost of electricity to be used shall be the average cost to Lessor per kilowatt-hour of electricity consumed in the TUS Building and OUS Building, respectively, for the 12-month periods ending the September 30 specified in Section 1.5 and each September 30 thereafter.
3.5 The janitorial hourly labor rate to be used shall be the average regular time hourly compensation paid to persons employed as janitors in the TUS Building and OUS Building, respectively, including all applicable taxes and fringe benefits payable by employers. Lessor shall use its reasonable best efforts to keep the costs described in this Section 3.5 as low as possible.
3.6 The rate for additional rent for a calendar year under Section 3 shall not exceed five percent (5%) of the Operating Cost Adjustment Base per year (cumulative and compounded) from January 1, 1993 to the January 1 in question. If the Operating Cost Adjustment base is $4.95, then the rate ($/(RSF)(USF)/year) for additional rent under Section 3 shall not exceed
(a)
$0.24750 for 1994 [(0.05)(4.95)],
(b)
$0.50738 for 1995 [(1.05)(0.05)(4.95) plus 0.24750],
(c)
$0.78025 for 1996 [(1.05)(1.05)(0.05)(4.95) plus 0.50738].
(ci)
$1.06676 for 1997 [(1.05)(1.05)(1.05)(0.05)(4.95)plus $0.78025], etc.
3.7 Lessor shall automatically provide Lessee with reasonable backup documentation supporting all calculations called for in this Section 3 and Lessee shall have the right to review/audit all pertinent information and documentation upon reasonable advance notice to Lessor. The Operating Cost Adjustment Base is subject to only one audit. If Lessee’s audit reveals that Lessor overcharged Lessee (or sought to overcharge Lessee) by more than a factor of three percent (3 %) of the additional rent payable under Section 3 for the period of the audit, Lessor shall reimburse Lessee for all costs incurred by Lessee in conducting such audit. Lessor shall keep all pertinent backup information and documentation for at least five (5) years after the adjustment year in question.




3.8 Separate calculations of additional rent under Section 3 shall be made for the portions of the leased premises in the TUS Building and OUS Building, respectively, using the appropriate indices and areas for the TUS Building and OUS Building, respectively.
4. REAL PROPERTY DESCRIPTION AND TAXES
4.1(a) The legal description of the TUS Land is:
Commencing at the most southwesterly corner of Lot 12, of Block 61, Addition to Town of Seattle (commonly known as A.A. Denny’s Fifth Addition to City of Seattle), according to plat recorded in Volume 1 of Plats, page 89, in King County, Washington; thence north 30°37’08” west along the westerly line of said block 119.84 feet, to the true point of beginning; thence north 59°20’00” east 105.15 feet; thence north 30°40’32” west 38.89 feet; thence north 59° 23’00” east 14.80 feet; thence north 30°37’00” west 0.55 feet; thence north 59°20’14” east 135.80 feet to the easterly line of said block; thence south 30°35’43” east 116.45 feet to the westerly margin of Interstate No. 5; thence north 59°24’17” east 33.00 feet to the centerline of vacated Seventh Avenue; thence north 30°35’43” west along said centerline 311.89 feet to the southerly margin of Union Street as created by City of Seattle Ordinance No. 18188; thence south 59°22’04” west along said southerly margin 288.79 feet to the easterly margin of Sixth Avenue; thence south 30°37’08” east 234.99 feet to the true point of beginning; and Lots 1, 4, 5 and 8 in Block 64, of said addition except the portions thereof condemned under King County Superior Court Cause Nos. 62589, 570519 and 566654; together with portion of vacated alley and Seventh Avenue lying adjacent to and abutting thereon as provided by Ordinance Nos. 107299 and 111138, respectively, of the City of Seattle, and portion of vacated alley conveyed to Lessor by deed recorded under King County Receiving No. 8010090702.
(b)
The legal description of the OUS Land is:
That portion of Block 61 (described above); and of vacated alley lying therein as provided by Ordinance No. 107299 of the City of Seattle; and of vacated Seventh Avenue adjacent, as vacated by City of Seattle Ordinance No. 111138, described as follows:
Beginning at the most southwesterly corner of Lot 12 of said Block 61, thence north 30°37’08” west along the westerly line of said block 119.84 feet; thence north 59° 20’00” east 105.15 feet; thence north 30°40’32” west 38.89 feet; thence north 59°23’00” east 14.80 feet; thence north 30°37’00” west 0.55 feet; thence north 59°20’14” east 135.80 feet to the easterly line of said block; thence south 30° 35’43” east 159.45 feet to the most southeasterly corner of said block; thence south 59°22’32” west 255.64 feet to the point of beginning.
4.2 Lessor shall pay all real property taxes and assessments (including interest thereon) which may be levied against the TUS Building and the TUS Land. If the amount of such real property taxes and assessment installments (including interest thereon) payable in any calendar year during the lease term exceeds the amount thereof payable during the later of 1993 or the first calendar year the TUS Building is assessed and taxed as a completed building with the assessor utilizing occupancy rates and vacancy rates then generally applied by the assessor to completed class A office buildings in downtown Seattle, then each such year, Lessee shall pay Lessor its share of such excess in the ratio that the area of the leased premises in the TUS Building (RSF for office space plus USF for retail space) bears to the area of the TUS Building (RSF for office space plus USF for retail space), payable one half on April 1 and one half on October 1 of each such year.
4.3 Lessor shall pay all real property taxes and assessments (including interest thereon) which may be levied against the OUS Building and the OUS Land. If the amount of such real property taxes and assessment installments (including interest thereon) payable in any calendar year during the lease term exceeds the amount thereof payable during 1993, then each such year, Lessee shall pay Lessor its share of such excess in the ratio that the area of the leased premises in the OUS Building (USF for retail space) bears to the area of the OUS Building (RSF for office space plus USF for retail space), payable one half on April 1 and one half on October 1 of each such year.
4.4 If the real property taxes (excluding assessments) payable in any calendar year for the TUS Building or OUS Building is less than the amount thereof payable during the Building in question’s base year, and provided that such reduction does not result from change(s) in laws which also increase taxes or create new taxes which are payable by Lessor, then Lessee shall receive a credit against future payments due Lessor under this Section 4 equal to seventy-five percent (75%) of the portion of such difference which bears the same ratio to such difference that the area of the leased premises in the Building in question bears to the total area (RSF for office and USF for retail space) of the Building in question. Such credit shall apply only upon future payments due from Lessee to Lessor under this Section 4.
4.5 Upon Lessee’s request, Lessor shall furnish copies of the real property tax statements for the year in which the additional payment is requested and the respective base year(s). All assessments (including interest thereon) shall be paid over the longest period allowable.
4.6 Lessor shall appeal the tax assessor’s valuation whenever in Lessor’s judgment there is a reasonable likelihood for success in such appeal to an extent which justifies such an appeal, and any refunds gained by such appeal shall be applied first




to the cost of the appeal and any excess shall be refunded to Lessee in proportion to the share of the taxes in question paid by Lessee.
4.7 The foregoing charges constitute additional rent which shall be deemed to accrue uniformly during the calendar year in which the payment is due. Payment under the provisions of this Section for the year the lease term ends shall be prorated, based on reasonable projections of the increase through the termination of this lease and shall be due thirty (30) days before such termination.
5. POSSESSION
5.1 In the event of the inability of Lessor to deliver possession of the leased premises or any portion thereof, at the time of the commencement of the term of this lease, Lessor shall not be liable for any damage caused thereby, nor shall this lease thereby become void or voidable, nor shall the term herein specified be in any way extended, but in such event, Lessee shall not be liable for payment of any rent until such time as Lessor can deliver possession, except as may be otherwise provided in Exhibit B to this lease. If Lessor shall deliver possession of the leased premises to Lessee prior to January 1, 1993 and Lessee agrees to accept the same at such time, both Lessor and Lessee agree to be bound by all provisions and obligations of this lease during the prior period.
5.2 Notwithstanding the foregoing, if Lessor fails to deliver all of the office space portion of the leased premises to Lessee in Substantially Completed condition by 5:00 p.m., December 14, 1992, Lessor shall hold Lessee harmless from (a) all rent and other occupancy charges incurred by Lessee with respect to its existing office space premises in the Pacific Building or elsewhere which is in excess of the rent and other charges payable by Lessee for its existing office space Pacific Building premises (at the rent rate and additional rent charges in effect for December 1992) from January 1, 1993 until five (5) days after the date on which the tenant improvement in the office space portion of the leased premises have been Substantially Completed, and (b) reasonable attorneys’ fees and expenses incurred by Lessee with respect to such occupancy beyond December 31, 1992 in its existing Pacific Building premises or elsewhere (other than the Building). Such indemnity shall not apply to the extent such failure would not have occurred but for delay caused by Lessee or its agents (including Lessee’s Architect), including without limitation delay caused by Lessee’s failure to comply with the schedule specified in Exhibit B, change orders requested by Lessee, and the causes listed in Section 5.6 of Exhibit B.
5.3 Notwithstanding the foregoing, if Lessor fails to deliver all of the branch bank portion of the leased premises to Lessee in Substantially Completed condition by 5:00 p.m., December 14, 1992, Lessor shall hold Lessee harmless from (a) all rent and other occupancy charges incurred by Lessee with respect to its existing branch bank premises in the Pacific Building which is in excess of the rent and other charges payable by Lessee for its existing Pacific Building branch bank premises (at the rent rate and additional rent charges in effect for December 1992) from January 1, 1993 until five (5) days after the date on which the tenant improvements in the branch bank portion of the leased premises have been Substantially Completed and (b) reasonable attorneys’ fees and expenses incurred by Lessee with respect to occupancy beyond December 31, 1992 in its existing Pacific Building branch bank premises or elsewhere (other than the Building) from January 1, 1993 until five (5) days after the date on which the tenant improvements in the branch bank portion of the leased premises have been substantially completed. Such indemnity shall not apply to the extent such failure would not have occurred but for (a) delay caused by Lessee or its agents (including Lessee’s Architect), including without limitation delay caused by Lessee’s failure to comply with the schedule specified in Exhibit B, change orders requested by Lessee, and the causes listed in Section 5.6 of Exhibit B, (b) delay caused because the time period to obtain a building permit for the branch bank space exceeded twelve (12) weeks from the date a complete building permit application was submitted to the City of Seattle because Lessee’s design for such space differed materially from the design solution shown in Exhibit E, or (c) Lessee’s failure to occupy the branch bank space when it could be beneficially occupied by Lessee (i.e., branch bank business could be reasonably conducted therein, even though some portions of the work which did not prevent Lessee’s beneficial occupancy were not completed).
5.4 Notwithstanding Section 5.1, Lessor will proceed diligently and in good faith to deliver all of leased premises covered by a building permit to Lessee in a Substantially Completed condition within one hundred twelve (112) days after the building permit for such portion of the leased premises has been received by Lessor from the City of Seattle, or such later date as may be specified in the construction contract for such work, subject to delays caused by Lessee or its agents strikes or other labor disputes, material shortages, fire or other casualty, acts of God or other causes beyond Lessor’s control. From the date hereof until the date rent commences for the entire office portion of the leased premises, Lessee may use Floor 21 of the TUS Building (on an AS IS, WHERE IS, basis) free of any rent to store furniture and equipment which will be installed by Lessee in the leased premises when the term of this lease commences. Costs incurred by Lessee in connection with such use shall be a charge to Tenant Work. All of such furniture and equipment and packaging materials or other debris associated with such use shall be removed from Floor 21 not later than the date rent commences for the entire office portion of the leased premises, and the areas used by Lessee shall be left in a broom clean condition.
6. ACCEPTANCE AND CARE OF PREMISES




6.1 Taking of possession of the leased premises by Lessee shall be conclusive evidence the leased premises were, on that date, in good, clean and tenantable condition and as
represented by Lessor, except as otherwise noted by Lessee in writing to Lessor within thirty (30) days after said date, except for latent defects.
6.2 Lessee shall keep the leased premises neat and clean and in a sanitary condition (subject to Lessor’s janitorial obligations) and shall at all times preserve them in as good condition and repair as they are when first occupied by Lessee, or may hereafter be put into, reasonable use and wear and damage by fire or other casualty excepted. All damage or injury done to the leased premises by Lessee or by any persons who may be in or upon the leased premises with the consent of Lessee, including the cracking or breaking of glass of any windows and doors, shall be paid for by Lessee and Lessee shall pay for all damage to the Building caused by Lessee’s misuse of the leased premises or the appurtenances thereto. Lessee shall not put any curtains, draperies or other hangings on or beside the windows in the leased premises without first obtaining Lessor’s consent. If Lessee shall fail to keep and preserve the leased premises in said condition and state of repair (after notice and opportunity to cure as provided for in Section 16 below, although a shorter cure period (or no cure period at all) shall be permissible in an emergency situation or if necessary in order to avoid further damage (e.g., if an exterior window is broken.)) Lessor may at its option put or cause the same to be put into the condition and state of repair agreed upon, and in such case Lessee, on demand, shall pay the cost thereof.
7. ALTERATIONS
Lessee shall not make any alterations, additions or improvements in or to the leased premises without Lessor’s prior written consent, unless the work in question can lawfully be performed without a building permit, in which case Lessor’s consent shall not be required. Notwithstanding the foregoing, Lessee shall not make changes to locks on doors, or add, disturb or in any way change any plumbing, electrical wiring, HVAC or other Building service components therein, without the prior written consent of Lessor. Lessor may require that any such work be performed by contractors acceptable to Lessor, in Lessor’s reasonable discretion. Lessor, at its option, may at its own expense make any repairs, alterations or improvements which Lessor may deem necessary or advisable for the preservation, safety or improvement of the leased premises or the Building, provided only that Lessee shall at all times have reasonable access to and the use of all of the leased premises.
8. INSPECTION AND REPAIRS
Lessor shall have the right to inspect the leased premises at all reasonable times and the right to enter the same for the purpose of cleaning, repairing, altering or improving the same, or the Building, but nothing contained in this lease shall be construed so as to impose any obligation on Lessor to make any repairs, alterations or improvements except as expressly provided in Section 9. In no event shall Lessor enter any portion of the leased premises without giving Lessee reasonable advance notice, other than in the case of an emergency or entrance in conjunction with normal janitorial work. Moreover, and notwithstanding the foregoing, Lessor acknowledges that a portion of the leased premises will be used for banking activities. As a result, Lessor hereby agrees that it will comply with reasonable security measures required by Lessee for security reasons or for regulatory compliance reasons (e.g., Lessor shall have no
access whatsoever to Lessee’s vault and Lessor’s janitors shall work with lessee’s alarm company to ensure the integrity of Lessee’s alarm system.)
9. SERVICES BY LESSOR
9.1 Lessor will, at its expense, furnish Lessee with the following services and utilities:
(a) Elevator service during normal business hours of the Building and the service of at least one elevator during all other hours. Lessee shall have twenty-four hour per day, three hundred and sixty-five day per year access to all of its space and to the Building and parking garage without need to give any prior notice to Lessor or Lessor’s agents. Acceptable arrangements shall be made for Lessee’s access to the freight elevator and loading dock for after-hour usage.
(b) Heating and air cooling to maintain a temperature condition which provides for reasonably comfortable occupancy of the leased premises under normal business operations from 7 a.m. to 6 p.m. Monday through Friday, and 8:00 a.m. to 1:00 p.m. Saturdays, except for those legal holidays generally observed in the state of Washington, provided Lessee complies with Lessor’s instructions regarding use of drapes and thermostats and Lessee does not utilize heat generating machines or equipment which affect the temperature otherwise maintained by the air cooling system. Upon request Lessor shall make available at Lessee’s expense after hours heat or air cooling. The after hours HVAC service shall be available to Lessee as requested at a rate of $10.00 per hour per floor (or partial floor), initially, subject to reasonable increases during the lease term.
(c) Cold water for the drinking fountain and toilets and , hot and cold water for lavatories located in the core of the office tower portion of the TUS Building, and cold water for any purposes within the leased premises.




(d) Electricity for Building standard lighting and operation of low power usage office machines in quantities usually furnished by Lessor to tenants in the Building for general office use. Low power usage machines are typewriters, desk top calculators, desk top computer terminals and similar equipment with similar power requirements which operate on 110 volt circuits.
(e) Janitorial service and window washing as outlined in Exhibit C attached. This service includes vacuum cleaning of carpets and cleaning of Building standard vinyl composition tile, but no other services with respect to carpets or non-standard floor coverings. Shampoo or similar cleaning of carpets and repair and replacement of carpets shall be Lessee’s responsibility and at Lessee’s expense, except as otherwise provided in Section 26.4. Lessor shall maintain and operate all common areas of the Building (including elevators) in a neat, orderly and first class condition and manner.
(f) Maintain the exterior window blinds, windows, doors, floors, walls, ceilings, plumbing and plumbing fixtures, and electrical distribution system, HVAC system, fire safety
system and all other systems that are common to the Building, and lighting fixtures which are standard for the Building in good condition and repair, except for damage caused by Lessee, its employees, agents, invitees or visitors. Such services and the other services in this Section 9 will also be provided by Lessor as to any of the foregoing items that are not standard for the Building, but possibly at Lessee’s expense as hereafter provided.
(g) Replacement of burned out fluorescent tubes in light fixtures which are standard for the Building and incandescent bulbs in elevator lobbies which are standard for the Building. Burned out bulbs, tubes or other light sources in fixtures which are not standard for the Building will also be replaced by Lessor, but at Lessee’s expense. Lessee shall pay Lessor the retail price for non-standard tubes, bulbs or other light sources replaced by Lessor. There shall be no labor charge to Lessee for such replacements. All incandescent bulbs are non-standard, except for the number used in building standard elevator lobbies.
(h) Painting and cleaning of walls and ceilings which are standard for the Building when required due to normal wear and tear in the judgment of Lessor. Otherwise, such painting and cleaning shall be at Lessee’s expense, except as otherwise provided in Section 26.4.
Notwithstanding any statement to the contrary outlined anywhere in this lease, in no event shall Lessee be subjected to any charges whatsoever for the usage of electricity in the leased premises (excluding after-hours usage of the HVAC system, which shall be charged in accordance with the terms of Section 9.1(b) above), regardless of whether such electricity is being used to serve machinery or equipment of the high power usage variety, provided that the machinery or equipment is similar in type and quantity (on a per square foot basis) to the machinery and equipment currently in use in Lessee’s Pacific Building premises (if that is not the case, any excess electricity usage shall be charged to Lessee at rates reasonably estimated to reflect the actual cost of such excess electricity to Lessor). Lessor has toured Lessee’s Pacific Building space. Lessee has provided Lessor with an inventory of the machinery and equipment currently used by Lessee in its Pacific Building premises and a statement setting forth the rentable area of its Pacific Building premises.
In addition, notwithstanding any other statement to the contrary contained anywhere else in this lease, in no event shall Lessee be subject to any charge whatsoever for any normal cleaning or maintenance of any portion of the leased premises, regardless of whether such portion is building standard or not, except that Lessee shall reimburse Lessor for the reasonable costs incurred by Lessor to clean and maintain items which are not standard for the Building, if the cost to normally clean and maintain the leased premises as required under this lease is in Lessor’s judgment (acting in good faith) significantly more than the cost to similarly clean and maintain a leased premises where all items are standard for the Building. With respect to non-standard items substituted for building standard items, the amount to be reimbursed shall be limited to the amount by which the cost to clean and maintain the non-standard item exceeds the cost Lessor would have incurred to clean and maintain the substituted for standard item.
9.2 Lessor shall use reasonable diligence to remedy an interruption in the furnishing of such services and utilities. If, however, any governmental authority imposes regulations,
controls or other restrictions upon Lessor or the Building which would require a change in the services provided by Lessor under this lease, Lessor may comply with such regulations, controls or other restrictions, including without limitation, curtailment, rationing or restrictions on the use of electricity or any other form of energy serving the leased premises. Lessee will cooperate and do such things as are reasonably necessary to enable Lessor to comply with such regulations, controls or other restrictions.
9.3 Whenever heat generating machines or equipment or lighting other than building standard lights are used in the leased premises by Lessee which affect the temperature otherwise maintained by the air cooling system, Lessor shall have the right to install supplementary air cooling units in the leased premises, and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Lessee to Lessor upon billing by Lessor. Subject to the terms of Section 9.1, Lessor may impose a reasonable charge for utilities and services, including without limitation, air cooling, electric




current and water, required to be provided the leased premises by reason of, (a) any substantial recurrent use of the leased premises at any time other than the hours of 7:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m. Saturday, (b) any use beyond what Lessor agrees to furnish as described above, (c) electricity used by equipment designated by Lessor as high power usage equipment or (d) the installation, maintenance, repair, replacement or operation of supplementary air cooling equipment, additional electrical systems or other equipment required by reason of special electrical, heating, cooling or ventilating requirements of equipment used by Lessee at the leased premises. Lessee shall not be deemed to have triggered the substantial recurrent after-hours use clause outlined above unless it uses more than twenty percent of the leased premises on a night shift or similar regular recurring basis between the hours of 8:00 p.m. and 6:00 a.m. High power usage equipment includes without limitation, data processing machines, punch card machines, computers and machines which operate on 220 volt circuits. Lessee shall not install or operate high power usage equipment on the leased premises without Lessor’s prior written consent, which may be refused unless Lessee confirms in writing its obligation to pay the additional charges necessitated by such equipment (subject to the terms of Section 9.1). At Lessor’s or Lessee’s option, separate meters for such utilities and services may be installed for the leased premises and Lessee upon demand therefor, shall immediately pay Lessor for the installation, maintenance, repair and replacement of such meters.
9.4 Lessor does not warrant that any of the services and utilities referred to above will be free from interruption. Interruption of services and utilities shall not be deemed an eviction or disturbance of Lessee’s use and possession of the leased premises or any part thereof or render Lessor liable to Lessee for damages, or relieve Lessee from performance of Lessee’s obligations under this lease.
If there is an interruption of heating, cooling, electricity, water, sewer or elevator service to the leased premises, and such interruption was not caused by Lessee or by casualty described in Section 10 below, and such interruption materially disrupts the conduct of Lessee’s business upon the leased premises, then such interruption is hereafter referred to as an Essential Service Interruption. If an Essential Service Interruption lasts for more than three (3) consecutive business days, or five (5) days out of any seven (7) day period, the rent under this lease shall
thereafter be abated on the portion of the leased premises affected until restoration of the Essential Service in question, unless the Essential Service Interruption was caused by Lessor’s negligent or willful act, and in such event the rent shall be so abated from the day after the Essential Service Interruption occurs until restoration of the Essential Service in question.
Likewise, if the Essential Service Interruption exists for twenty-five (25) business days out of any sixty (60) day period, Lessee shall have the right to terminate this lease by giving Lessor thirty (30) days prior written notice (such termination notice shall be nullified if the Essential Service in question is restored on a permanent basis during such thirty (30) day period). The provisions of Section 10.4 concerning substitute space shall also be applicable in the event of an Essential Service Interruption which does or is expected to exist for twenty-five (25) business days out of any sixty (60) day period. If such substitute space is provided before the end of said thirty (30) day period, said thirty (30) day period shall be extended to a period ending one hundred eighty (180) days from the commencement of such interruption if Lessor is diligently pursuing the remedy of such interruption and it is reasonably certain that the Essential Service Interruption in question can be and will be restored within one hundred eighty (180) days from the commencement of such interruption.
10. FIRE OR OTHER CASUALTY
10.1 In the event the Building or the leased premises shall be destroyed or rendered untenantable, either wholly or in part, by fire or other casualty, Lessor may, at its option, restore the Building or leased premises to as near their previous condition as is reasonably possible, and in the meantime the rent shall be abated in the same proportion as the untenantable portion of the leased premises bears to the whole thereof; but unless Lessor, within sixty (60) days after the happening of any such casualty, shall notify Lessee of its election to so restore, this lease shall thereupon terminate and end. Such restoration by Lessor shall not include replacement of furniture, equipment or other items that do not become part of the Building or any improvements to the leased premises in excess of those provided for in the allowance
10.2 If Lessee is deprived of elevator access to the office portion of the leased premises as a result of a casualty, all rent shall be abated as to said office portion during the duration of the period in which such access is unavailable.
10.3 Notwithstanding the foregoing, if the casualty in question can be repaired, rebuilt or replaced (i.e., restored) within one hundred eighty (180) days from the date of the casualty (without working overtime), Lessor shall be required to so restore. If Lessor does not warrant to Lessee (a) within sixty (60) days from the date of the casualty, or (b) within ten (10) days after Lessor’s receipt of written request from Lessee which references this Section 10 and asks if such notice will be issued (Lessee’s request to be given not earlier than fifty (50) days after the date of casualty), whichever is later, that Lessor will have completed the restoration work within one hundred eighty (180) days from the date of the casualty, and if the casualty materially disrupts the conduct of Lessee’s business at the office portion, branch bank portion or other portions (if any) of its leased premises,




Lessee shall be entitled to terminate this entire lease (even if the material disruption is only in the branch bank portion) by giving notice of termination to Lessor
on or before that date which is one hundred twenty (120) days from the date of the casualty or three (3) business days after Lessee has received written notice from Lessor that Lessor has received its building permit for the restoration work, whichever occurs first.
If Lessor elects or is required to restore, all parties shall proceed diligently to enable the required building permit to be obtained within ninety (90) days from the date of casualty.
Provided that Lessor has proceeded diligently to obtain the building permit, said one hundred eighty (180) day period shall be extended by the number of days (if any) in excess of ninety (90) days from the date of casualty to the date the building permit is issued, but in no event beyond three hundred sixty (360) days from the date of casualty.
Said original one hundred eighty (180) day period shall be extended by the duration of any delay in substantially restoring the leased premises in question caused by Lessee, strikes, or other labor disputes, material shortages, fire or other casualty, acts of God or other causes beyond Lessor’s control, but in no event beyond three hundred sixty (360) days from the date of casualty, except for delays caused by Lessee.
10.4 Lessor hereby agrees that in the event of a casualty that materially disrupts the conduct of Lessee’s business in the office space portion, branch bank portion or other portion (if any) of the leased premises, Lessor will use its reasonable best efforts to provide Lessee with substitute space (which is the functional equivalent of the space damaged by the casualty) in the Building or in other buildings that Lessor or any affiliate of Lessor may manage, own or control in the central business district of Seattle. Such substitute space shall be provided to Lessee on an “AS IS, WHERE IS” basis and at fair market rent for the substitute space (given the “AS IS, WHERE IS” nature of the tenancy), not to exceed the rent called for herein. Lessee shall pay its own moving expenses. Lessee shall vacate such space promptly after the leased premises have been restored to a tenantable condition.
11. WAIVER OF SUBROGATION
Anything in this lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all claims against the other, its agents, officers, directors, shareholders or employees, for loss or damage to the leased premises or the Building, or any personal property of such party therein, that is caused by or results from fire and other perils insured against under (a) the normal fire with extended coverage insurance policies, or (b) the standard business interruption insurance policies (if any), carried by the parties and in force at the time of damage or loss. Each party shall cause each such insurance policy obtained by it to provide that the insurance company waives all right to recovery by way of subrogation against the other party in connection with any such damage or loss.
12. USES
12.1 The leased premises are to be used only for the uses specified in Section 1.6 hereof, and for no other business or purpose without the prior written consent of Lessor. Lessee
shall not establish a separate and distinct operation within the retail space of the TUS Building which is identifiable by the public as being engaged in the sale of securities, investment banking or stock brokerage, so long as such uses are prohibited by the lease to Dean Witter Reynolds Inc. for its space on the 29th floor of the TUS Building, including assignments or extensions thereof. If the required consent of Dean Witter Reynolds Inc. or its assignee to any or all of such uses has been obtained, Lessor will not unreasonably withhold its consent to any or all of such uses. No act shall be done in or about the leased premises that is unlawful or that will increase the existing rate of insurance on the Building. Lessee shall not commit or allow to be committed any waste upon the leased premises, or any public or private nuisance or other act or thing which disturbs the quiet enjoyment of any other tenant in the Building. Lessee shall not, without the prior written consent of Lessor, use any apparatus, machinery or device in or about the leased premises which will cause any substantial noise or vibration. If any of Lessee’s office machines and equipment should disturb the quiet enjoyment of any other tenant in the Building, then Lessee shall provide adequate insulation, or take such other action as may be necessary to eliminate the disturbance. Lessee shall comply with all laws relating to its use of the leased premises, but Lessee shall not be required to make capital improvements to the leased premises unless the capital improvement is required as a result of Lessee’s unique use of the leased premises, as opposed to a capital improvement that applies generally throughout all or most of the Building or that applies throughout all or most of the retail/public access portions of the Building. Lessee shall however be responsible to cause the leased premises to comply with current or future laws related to disabled or otherwise handicapped persons at all times during the lease term, excluding from the foregoing requirement, the shell (exterior perimeter walls and windows and structural members of the TUS Building) and core (the center area of the tower portion of the TUS Building containing the elevators, elevator lobbies, restrooms, fire stairways




and other common areas or service spaces portions of the TUS Building) or the common areas of the Building, which shell and core and common areas shall be the responsibility of Lessor.
12.2 Lessor represents that there are no provisions in existing leases of space in the TUS or OUS Buildings which restrict Lessee’s use of the leased premises or expansion space added to the leased premises under Sections 27 or 28 for the uses authorized in Section 1.6, except the restrictions in the Dean Witter Reynolds, Inc. lease set forth above in Section 12.1. Lessor will not agree to any amendment of existing leases or the insertion in future leases of space in the TUS or OUS Buildings which would prevent Lessee from using the leased premises (including expansion space added thereto under Sections 27 or 28) for any of the uses authorized in Section 1.6.
13. SIGNAGE AND PLAZA IDENTIFICATION
13.1 Lessee shall not inscribe any inscription or post, place, or in any manner display any sign, notice, picture, placard or poster, or any advertising matter whatsoever, anywhere in or about the office space portion of the leased premises at places visible (either directly or indirectly as an outline or shadow on a glass pane) from anywhere outside the office space portion of the leased premises without first obtaining Lessor’s written consent thereto. Any such consent by Lessor shall be upon the understanding and condition that Lessee will remove the same at the expiration or sooner termination of this lease and Lessee shall pay Lessor the cost to
repair any damage to the leased premises or the Building caused thereby. Lessor shall have the right to prohibit any advertising by Lessee which, in its reasonable opinion, tends to impair the reputation of the Building as a first-class shopping, business or professional area.
13.2 Notwithstanding the foregoing, Lessee shall have the right to install signage on the outer surfaces of any retail spaces it occupies and display promotional materials in the windows of such space. Such signage shall be professional in nature. Lessor agrees to cooperate with Lessee in achieving the maximum permitted signage desired by Lessee for its requirements. However, Lessee shall submit its permanent signage plans to Lessor for advance approval as to style, materials, and aesthetics, such approval not to be unreasonably withheld. Lessee acknowledges that Lessor will require any signage to be professional in appearance and in keeping with the first class nature of the Building. Garish signs will therefore be prohibited. Lessee shall also have the right to use a likeness of the Building or its branch bank location in its promotional materials.
13.3 Lessor agrees to work to minimize any confusion that may occur between the identity and location of Continental Insurance (6th floor) and Lessee (Continental, Inc.), including consideration of how Lessee will be identified on the Building Directory in the main lobby.
13.4 Notwithstanding any statement to the contrary contained anywhere else in this lease, Lessee’s obligations under this lease are hereby made expressly subject to and contingent upon Lessee being satisfied in Lessee’s sole discretion with both (1) the resolution of the issue described in Section 13.3 above and (2) the signage that Lessor has approved pursuant to Section 13.2. above. Lessor and Lessee hereby agree to work together diligently and in good faith to resolve such issues as soon as is reasonably possible after the date on which this lease becomes fully executed. If Lessee has not notified Lessor in writing on or before that day which is thirty (30) days from the date on which this lease becomes fully executed that Lessee is terminating this lease pursuant to the contingency outlined in this Paragraph 13.4, such contingency shall automatically lapse and thereafter be null and void. If necessary, the thirty (30) day period will be extended an additional thirty (30) days upon written notice from Lessee to Lessor, provided Lessee is proceeding as above provided and the notice is received by Lessor prior to the expiration of the initial thirty (30) day period.
14. ACCIDENTS AND INDEMNITY
14.1 Lessee shall protect, defend, indemnify and hold Lessor harmless from all loss, damage, liability or expense, including reasonable attorneys’ fees, resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act, omission or negligence of Lessee or any officer, employee, agent, contractor, invitee, or visitor of Lessee in or about the Leased Premises or the Building, but the foregoing provision shall not be construed to make Lessee responsible for loss, damage, liability or expense resulting from injuries to any person caused by any act, omission or negligence of Lessor, or of any officer, employee, agent, contractor, invitee or visitor of Lessor, or other tenant of the Building.
14.2 Lessor shall protect, defend, indemnify and hold Lessee harmless from all loss, damage, liability or expense, including reasonable attorneys’ fees, resulting from any injury to any person or any loss of or damage to any property caused by or resulting from any act, omission or negligence of Lessor or any officer, employee, agent, contractor, invitee, or visitor of Lessor in or about the Leased Premises or the Building, but the foregoing provision shall not be construed to make Lessor responsible for loss, damage, liability or expense resulting from injuries to any person caused by any act, omission or negligence of Lessee, or of any officer, employee, agent, contractor, invitee or visitor of Lessee, or other tenant of the Building. The general contractor for the Tenant Work described in Exhibit B is Lessor’s contractor.




14.3 If Lessor and Lessee are concurrently negligent for any reason whatsoever, each party shall indemnify or be obligated as hereinabove provided, but only to the extent of the indemnifying or obligated party’s negligence. Any immunity provided for either party under Title 51, RCW, is hereby waived by Lessor and Lessee.
14.4 Lessee’s Insurance . Lessee shall, throughout the term of this lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, (a) a policy of commercial general liability insurance including a contractual liability endorsement covering Lessee’s obligations under this lease, insuring Lessee’s activities upon, in or about the leased premises or the Building against claims of bodily injury or death or property damage or loss with a limit of not less than One Million Dollars ($1,000,000) combined single limit, and (b) what is commonly referred to as “all risk” coverage insurance (but excluding earthquake and flood) on Lessee’s furniture, fixtures, equipment and other personal property in an amount not less than the current One Hundred Percent (100%) replacement value thereof. Such insurance may contain deductibles in such amounts as Lessee in its judgment determines are reasonable.
14.5 Lessor’s Insurance . Lessor shall throughout the term of this lease and any renewal hereof, at its own expense, keep and maintain in full force and effect, (1) what is commonly referred to as “all risk” coverage insurance, (excluding earthquake and flood,) on the Building and the leasehold improvements in the leased premises that become part of the Building in an amount not less than One Hundred Percent (100%) replacement value thereof or such other coverage as is generally maintained by owners of comparable Class A buildings in downtown Seattle; (b) commercial general liability insurance including a contractual liability endorsement covering Lessor’s obligations under this lease with a limit of not less than One Million Dollars ($1,000,000) combined single limit. Such insurance may contain deductibles in such amounts as Lessor shall in its judgment determine are reasonable.
14.6 Insurance Policy Requirements . All insurance under this Section 14 shall be with companies satisfactory to Lessor and authorized to do business in Washington. No insurance policy required hereunder shall be canceled or reduced in coverage and each insurance policy shall provide that it is not subject to cancellation or a reduction in coverage except after thirty (30) days prior written notice to Lessor. Lessee shall deliver to Lessor prior to commencement of the lease term and from time to time thereafter, copies of policies of such insurance or certificates evidencing the existence and amounts of same and naming Lessor as Additional Insured thereunder. In no event shall the limits of any insurance policy required hereunder be
considered as limiting the liability of Lessee or Lessor under this Lease. At Lessee’s request, Lessor will provide Lessee with copies of its required insurance coverages or provide Lessee with access to such policies for Lessee’s inspection.
15. LIENS AND INSOLVENCY
Lessee shall keep the leased premises and the Building free from any liens arising out of any work performed, materials ordered or obligations incurred by Lessee. If Lessee becomes insolvent, voluntarily or involuntarily bankrupt, or if a receiver, or assignee or other liquidating officer is appointed for the business of Lessee, then Lessor, at its option, may immediately or any time thereafter terminate Lessee’s right of possession under this lease, subject to the terms of any applicable laws then in effect.
16. DEFAULT BY LESSEE AND RE-ENTRY
Lessee covenants as a material part of the consideration for this lease to keep and perform each and all of said terms, covenants and conditions by Lessee to be kept and performed and that this lease is made upon the condition of such performance. Except for a default under the preceding Section 15 for which immediate right of termination is given to Lessor, if Lessee fails to pay any installment of rent within ten (10) days after written notice, or to perform any other covenant under this lease within thirty (30) days after written notice from Lessor stating the nature of the default, Lessor may terminate this lease and re-enter and take possession of the leased premises; provided that if the nature of such default other than for non-payment of rent is such that the same cannot reasonably be cured within such thirty-day period, Lessee shall not be deemed to be in default if Lessee shall within such period (i.e., within thirty (30) days after Lessor’s notice) commence such cure and thereafter diligently prosecute the same to completion. Notwithstanding such retaking of possession by Lessor, Lessee’s liability for the rent provided herein shall not be extinguished for the balance of the term of this lease, and Lessee shall make good to Lessor any deficiency arising from a reletting of the leased premises at a lesser rental, plus the costs and expenses of renovating or altering the leased premises (pro rated if the term of the new tenancy extends beyond the remaining term of this lease). Lessee shall pay any such deficiency each month as the amount thereof is ascertained by Lessor. All remedies provided herein are cumulative and are in addition to those provided by law.
17. REMOVAL OF PROPERTY AND REPLACEMENT OF NON-STANDARD ITEMS
Upon the expiration or termination of the lease term, Lessee shall (a) at its expense remove Lessee’s goods and effects and those of all persons claiming under Lessee, and (b) if Lessee caused the leased premises to be improved with other than building standard ceiling suspension system, acoustical tile ceiling, fluorescent light fixtures, millwork detail, doors and door




frames, hardware or hard surface floor tile and base, or any corridor adjacent to the core of the building to be other than building standard width and construction, and if such improvements are made without Lessor’s consent, Lessee shall pay Lessor an amount equal to the cost to replace all such non-standard non-approved items with building standard items and the cost to
replace such non-standard non-approved public corridor with one of building standard width and construction. Any property left in the leased premises after the expiration or termination of the lease term shall be deemed to have been abandoned and the property of Lessor to dispose of as Lessor deems expedient at Lessee’s expense, subject to Lessor’s compliance with any applicable laws then in effect.
18. NON-WAIVER
Failure of either party to insist, in any one or more instances, upon strict performance of any term, covenant or condition of this lease, or to exercise any option herein contained, shall not be construed as a waiver, or a relinquishment for the future, of such term, covenant, condition or option, but the same shall continue and remain in full force and effect. The receipt by Lessor of rents with knowledge of a breach of any of the terms, covenants or conditions of this lease to be kept or performed by Lessee shall not be deemed a waiver of such breach.
19. COSTS AND ATTORNEYS’ FEES
In the event of litigation between the parties hereto declaratory or otherwise, for the enforcement of any of the covenants, terms and conditions of this lease, the losing party shall pay the costs thereof and reasonable attorneys’ fees incurred by the prevailing party, which shall be determined and taxed by the Court as part of the costs of such action.
20. PRIORITY
20.1 Provided that Lessee is given a satisfactory non-disturbance covenant by the lender in question, Lessee agrees that this lease shall be subordinate to any first mortgages or deeds of trust that may hereafter be placed upon the leased premises or the Building containing the same, and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacement and extensions thereof. Within fifteen (15) days after written request from Lessor, Lessee shall execute any documents that may be necessary or desirable to effectuate the subordination of this lease to any such mortgages or deeds of trust and shall execute reasonable estoppel certificates as requested by Lessor from time to time.
20.2 Lessee will be provided non-disturbance agreements, with permanent lien holder(s) in form attached as Exhibit D. Lessor hereby warrants that, simultaneous with Lessor’s execution of this lease, Lessor shall obtain non-disturbance agreements in the form attached as Exhibit D-l from all permanent lien holders with a lien recorded against all or any part of the TUS Building, or the TUS Land as of the date of full execution of this lease, and the holder of the second lien recorded against the OUS Building or the OUS Land, and use its reasonable best efforts to obtain for Lessee non-disturbance agreement in the form attached as D-2 from the holder of the first lien recorded against the OUS Building or the OUS Land.

21. CONDEMNATION
21.1 If all of the leased premises or such portions of the Building as may be required for the reasonable use of the leased premises, are taken by eminent domain, this lease shall automatically terminate as of the date Lessee is required to vacate the leased premises and all rentals shall be paid to that date. In case of a taking of a portion of the leased premises not required for the reasonable use of the leased premises, or a portion of the Building not required for the reasonable use of the leased premises, or a taking of a portion of the leased premises that is required for Lessee’s reasonable use thereof and Lessee does not elect to terminate, then this lease shall continue in full force and effect and the rent shall be equitably reduced based on the proportion by which the floor area of the leased premises is reduced, such rent reduction to be effective as of the date possession of such portion is delivered to the condemning authority.
21.2 In the event of a taking of a portion of the leased premises that is required for Lessee’s reasonable use of the leased premises, Lessee shall have the option to terminate this lease effective the date Lessee is required to vacate such portion, if Lessor is unable to provide satisfactory alternative space in the Building for the space taken on a turnkey basis at Lessor’s sole expense at the same rent and other terms of this lease. Alternative space for office space shall be in the TUS Building. If the alternative office space is comparable to the original office leased premises in all material respects, it will be accepted by Lessee, otherwise its acceptance will be subject to Lessee’s approval in its sole discretion. Alternative space for the branch bank space shall be the functional equivalent of the branch bank space and be in (a) the retail area of the Building with street frontage, or (b) off site at a location approved by Lessee in its sole discretion. Lessor and Lessee hereby agree that if the portion of Lessee’s branch bank space which is taken is a portion required for Lessee’s reasonable use of its branch bank space, it is a taking entitling Lessee to terminate the entire lease unless Lessor provides alternative space which complies with the requirements of the preceding sentence (e.g., off-site alternative space must be at a location approved by Lessee in its sole




discretion). Alternative space for the rest of Lessee’s retail area space may be in the retail or office portions of the Building and subject to Lessee’s approval, acting reasonably.
21.3 Subject to the following provisions of this Section 21, Lessor reserves all rights to the award for any taking of the Building and Land or portions thereof by eminent domain, and Lessee hereby assigns to Lessor any right Lessee may have to such award. Lessee shall make no claim against Lessor for damages for termination of the leasehold interest or interference with Lessee’s Building. Lessee shall have the right, however, to claim and recover from the condemning authority compensation for any loss or damage suffered by Lessee as a result of the termination of Lessee’s leasehold interest, for any loss to which Lessee may be put for Lessee’s moving expenses and for the interruption of or damage to Lessee’s business, provided that such damages may be claimed only if they are awarded separately in the eminent domain proceeding and not as part of the damages recoverable for taking of the leased premises or the Building.

22. ASSIGNMENT AND SUBLETTING
22.1 Lessee shall have the right to assign the Lease and all extension, expansion and other rights related thereto, in its entirety, or to sublease all or any portion of the leased premises, without the consent of Lessor to (a) any party resulting from a merger or consolidation with Lessee, (b) any entity succeeding to the business and assets of Lessee, or (c) a subsidiary, parent or affiliate of Lessee, provided such Assignee shall have a financial worth equal to or greater than Lessee. Notwithstanding the foregoing, however, Lessee shall have the right to assign to Continental Savings Bank without Lessor’s consent, provided that Continental Savings Bank’s financial worth is then at least seventy-five percent (75%) of the financial worth of Lessee.
22.2 All other assignments and subleases shall require Lessor’s consent. Such consent shall not be unreasonably withheld or delayed. The criteria for consent shall be limited to:
(a) financial responsibility, i.e., the proposed transferee is sufficiently creditworthy to lease directly from the Lessor or the average similarly situated lessor at the time of the proposed assignment or sublease; provided, however, that if Lessor chooses not to release Lessee from liability under the Lease, Lessee’s financial backing shall be factored into Lessor’s analysis of this criteria;
(b) the identity and business of the proposed transferee is suitable for the Building;
(c) the proposed use is legal; and
(d) neither the proposed assignee/sublessee nor the proposed use will violate restrictions in any other existing third party lease of space in the Building.
22.3 Any profit, net of subleasing or assignment costs (which costs shall include, but not be limited to, lease commissions, tenant improvement expenses, rent concessions or other concessions granted to the sublessee or assignee), to Lessee from any assignment or sublease requiring Lessor’s consent shall be shared 50% to Lessee and 50% to Lessor.
22.4 If Lessee wishes to assign this Lease or sublet the leased premises or any part thereof other than as outlined above in Section 22.1, Lessee shall first give written notice (“Lessee’s Notice”) to Lessor of its intention to do so, which notice shall contain the name of the proposed assignee or subtenant (collectively “transferee”), the nature of the proposed transferee’s business to be carried on in the leased premises and the terms and provisions of the proposed assignment or sublease. Lessee shall also provide Lessor with a copy of the proposed assignment or sublease when it is available and such financial and other information with respect to the proposed transferee and transfer that Lessor may reasonably require.
22.5 Whether or not Lessor consents to a proposed transfer, Lessee shall reimburse Lessor on demand for any and all costs that may be incurred by Lessor in connection with any
proposed transfer including, without limitation, the cost of investigating the acceptability of the proposed transferee and attorneys’ fees incurred in connection with each proposed transfer. In no event shall such costs exceed Two Hundred Fifty Dollars ($250.00), increased by five percent (5%) per year of the lease term (cumulative and compounded).
22.6 If Lessor consents to any proposed assignment or sublease, (a) Lessee may enter into same, but only upon the specific terms and conditions set forth in Lessee’s Notice, (b) any sublease or assignment shall be subject to, and in full compliance with, all of the terms and provisions of this lease, (c) the consent by Lessor to any assignment or sublease shall not relieve Lessee of any obligation under this lease, and (d) each assignee shall assume in a manner satisfactory to Landlord all obligations of Lessee under this lease and shall be jointly and severally liable with Lessee for the payment of rent, and the performance of all of the terms, covenants, conditions and agreements herein contained on Lessee’s part to be performed.
23. RULES, REGULATIONS AND MISCELLANEOUS




23.1 Lessee shall use the leased premises and the public areas in the Building in accordance with such reasonable rules and regulations as may from time to time be adopted by Lessor for the general safety, care and cleanliness of the leased premises or the Building, and the preservation of good order therein, and shall cause Lessee’s employees, agents, invitees and visitors to abide by such rules and regulations. In no event shall Lessee be obligated to comply with any rule or regulation not expressly stated in this lease to the extent such rule or regulation materially alters Lessee’s express rights and obligations outlined in this lease.
23.2 Lessee shall not place any boxes, cartons, or other rubbish in the corridors or other public areas of the Building.
23.3 Lessor does not guarantee the continued present status of light or air over any premises adjoining or in the vicinity of the Building. Any diminution or shutting off of light, air or view by any structure which may be erected on lands near or adjacent to the Building shall in no way affect this lease or impose any liability on Lessor.
23.4 Lessee shall conserve heat, air-conditioning, water and electricity and shall use due care in the use of the leased premises and of the public areas in the Building, and without qualifying the foregoing, shall not neglect or misuse water fixtures, electric lights and heating and air-conditioning apparatus.
23.5 Lessor will not admit to the branch bank portion of the leased premises the Lessee or any of the Lessee’s agents or employees or other persons claiming the right of admittance, if such persons have no key and are not listed on a list of authorized entrants issued by Lessee to Lessor (persons on such list must have photo identification to obtain entry).
23.6 Lessee shall peaceably and quietly enjoy the premises so long as it pays the rent payable by it hereunder and is not in default in performing all the provisions of this lease.
23.7 The titles to sections of this lease are for convenience only and shall have no effect upon the construction or interpretation of any part thereof. This lease shall be governed by the laws of the State of Washington.
23.8 All notices under this lease shall be in writing and delivered in person or sent by registered or certified mail to Lessor at the same place rent payments are made, and to Lessee at the leased premises, or such addresses as may hereafter or herein be designated by either party in writing. Notices mailed as aforesaid shall be deemed given on the date of receipt or refusal to accept such mailing.
23.9 The rent herein is exclusive of any sales, business and occupation, gross receipts or other tax based on rents or tax upon this lease or tax upon or measured by the number of employees of Lessee or the area of the leased premises or any similar tax or charge. If any such tax or charge be hereafter enacted, Lessee shall reimburse to Lessor the amount thereof together with each monthly rent payment. Lessee shall not be liable to reimburse Lessor for any federal income tax or other income tax of a general nature applicable to Lessor’s income. Notwithstanding the foregoing, however, Lessee’s reimbursement obligations shall be conditioned upon Lessor successfully collecting reimbursement of such taxes from tenants representing at least eighty percent (80%) of the square footage then leased by other tenants in the Building.
23.10 Lessee shall not place any plants, sculptures or other items so as to be located wholly or partially in the public corridor portions of the Building without Lessor’ s prior written approval.
23.11 All improvements, alterations or additions which may be made by either of the parties hereto upon the leased premises, except movable office furnishings, shall become part of the Building when made, and shall remain upon and be surrendered with the leased premises as a part thereof. The maintenance and care of such improvements shall be the responsibility of Lessee, except as otherwise provided in Section 9. Wall paneling, partitions paid for by Lessor, closets, built-in cabinets, sinks, doors, however attached, floor coverings and other built-in units of all kinds are a partial listing of improvements that become property of Lessor as aforesaid. Wall hung office furniture, refrigerator/sink units and other electrical appliances may be removed by Lessee provided the reasonably estimated amount to cap plumbing and repair screw holes or other damage is paid by Lessee to Lessor prior to such removal and such removal does not cause any material damage to the property.
23.12 The freight elevator shall be used by Lessee or others to move furniture, supplies or other items to or from the leased premises . The movement of furniture or other items requiring extended use of the freight elevator shall be scheduled and coordinated with Lessor’s Service Department. The freight elevator may be used on an as available basis for delivery of supplies without such scheduling or coordination, during normal business hours for the Building. Lessee shall not permit passenger elevators to be used to move furniture, supplies or other items to or from the leased premises. Lessee shall cause its suppliers and other providers to comply with the foregoing provisions.
23.13 The name of the Building may at any time be changed by Lessor, except that so long as Lessee (or an assignee authorized under Section 22.1) maintains its principal offices and headquarters within the TUS Building and occupies an area in




the TUS Building equal to at least two full floors, Lessor will not change the name of the TUS Building to that of another competing financial institution without Lessee’s approval, which shall not be unreasonably withheld or delayed.
23.14 This lease contains the entire agreement of the parties and no representations, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force and effect. Neither this lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by instrument in writing executed by Lessor and Lessee. This lease supersedes the letter of intent between the parties dated December 11, 1991.
23.15 UNICO Properties, Inc. (UNICO) is Lessor’s manager and rental agent in all matters concerning this lease and the leased premises, and the Lessee, until notified in writing to the contrary by either the Lessor or UNICO or the Assignee of Lessor’s interest under this lease, shall recognize such agency and pay all rental, furnish all statements, and give any notice which the Lessee may be under the duty of giving hereunder, or may elect to give hereunder, to UNICO at its office in the City of Seattle, King County, Washington, instead of to the Lessor. As long as such agency shall exist, the rights and options extended to Lessor shall be deemed extended to UNICO, and each and every other term and provision of this lease which is in any way beneficial to the Lessor, including especially every stipulation against liability, or limiting liability, shall inure to the benefit of UNICO and its agents and shall be applicable to UNICO and its agents in the same manner and as fully and with the same effect as to Lessor. Whenever Lessor’s consent is required, Lessee shall request such consent from UNICO. The consent of UNICO shall be deemed the consent of UNICO and Lessor.
23.16 Once the Commencement Date has occurred, Lessee agrees to look only to the equity of Lessor in the Building and the Land and not to Lessor personally with respect to any obligations or payments due or which may become due from Lessor hereunder, and no other property or assets of Lessor or any partner, joint venturer, officer, director, shareholder, agent, or employee of Lessor, disclosed or undisclosed, shall be subject for the satisfaction of Lessee’s claims under or with respect to this Lease, and no partner, officer, director, agent or employee of Lessor shall be personally liable in any manner or to any extent under or in connection with this Lease; provided, however, Lessee shall be entitled to offset against future rent obligations (i) any payments made by Lessee due to Lessor’s default hereunder and (ii) any judgment Lessee may have against Lessor. If at any time the holder of Lessor’s interests hereunder is a partnership or joint venture, a deficit in the capital account of any partner or joint venturer shall not be considered an asset of such partnership or joint venture. In the event of a sale or conveyance by Lessor of the Building, the same shall operate to release Lessor from any and all obligations and liabilities on the part of Lessor accruing from and after the effective date of the sale or conveyance.
23.17 Whenever the consent or approval of a party is required under this lease (including exhibits), it shall not be unreasonably withheld or delayed, unless expressly stated to the contrary in this lease (including exhibits).
23.18 A conference room will be provided in the TUS Building for use by Lessee and others so long as Lessor is required to provide such a conference room in the TUS Building under the lease between Lessor and Bogle & Gates. The location of such conference room may be changed from time to time. The use shall be scheduled on a first come first served basis pursuant to Lessor’s guidelines for the conference room. There will be no charge for the use of the conference room, but Lessor may charge a reasonable set up fee (currently $15.00) when required.
24. SUCCESSORS
All the covenants, agreements, terms and conditions contained in this lease shall apply to and be binding upon Lessor and Lessee and their respective heirs, executors, administrators, successors and assigns.
25. SHARED TENANT SERVICES
Lessee acknowledges that any provision of telecommunications and office automation services and equipment (“Shared Tenant Services”) by a third party provider, Shared Technologies Inc., its agents, affiliates and successors (the “Provider”) is entirely separate and distinct from this lease agreement and that Lessor has no duty of performance concerning the provision of Shared Tenant Services.
26. TENANT IMPROVEMENTS
26.1 Lessor shall provide Lessee with a tenant improvement, design and moving allowance (including stationery and mailed announcements) of $43.00 per USF of initial leased premises in addition to the Building’s standard shell and core items, which are more fully described in Exhibit B attached. If Lessee spends less than the allowance, it shall receive the balance as a rent credit to be applied to the first rents due hereunder after the amount of the credit is determined, provided, however, the credit shall not exceed five dollars ($5.00) per USF of initial leased premises.




26.2 Lessee shall have the right to select contractors and subcontractors of its choosing to bid on and construct the tenant improvements provided same shall be subject to landlord’s approval, not to be unreasonably withheld. Lessor shall not charge any fees for its involvement in the tenant improvement design or construction.
26.3 For those office floors where Lessee occupies more than half the floor, it shall have the right to incorporate its design into the elevator lobby. Lessor shall have the right to include at Lessor’s standard location in such elevator lobby, Lessor’s standard elevator signage identifying Lessee and the other tenants on the floor in question. For expansion space added
under Section 27 below, Lessor shall design (as directed by Lessee and approved by Lessor) and construct expansion space tenant improvements for standard business office space use on a turnkey basis consistent with the initial leased premises (using existing tenant improvements which are consistent with initial leased premises when reasonably possible); provided however, costs for expansion space tenant improvements and design shall not exceed $38.00/USF (as adjusted by increases in the Building Cost Index (BCI) for Seattle as published in the Engineering-News Record from January 1993 to date work commences). If the BCI is discontinued, the Consumer Price Index described in Section 3.3 shall be substituted for the BCI.
If an interconnecting stairwell is required to an expansion floor, it shall be constructed by Lessor on a turnkey basis at Lessor’s sole expense, provided Lessee has added at least one-half (1/2) of the expansion floor to the leased premises.
26.4 If Lessee elects to exercise its first extension option, then Lessor shall, at its sole cost and expense, recarpet and repaint the Premises during the eleventh year.
27. EXPANSION OPTIONS
27.1 Lessee shall have four (4) options to add between 6,000 and 8,000 RSF to its leased premises each time. Such option space shall first be the portion (if any) of floors 18-20 not included in the initial leased premises, and then at Lessor’s election on floors contiguous to the initial leased premises (i.e., floors 17 or 21) or contiguous to floors containing exercised expansion space. Option space will be on the same floor until at least two-thirds of such floor has been added to the leased premises. If part of the leased premises is on floors which are only partially leased by Lessee and the total usable area on such partially leased floors exceeds the average usable area of each such floor, then Lessee’s rent for such space on partially leased floors (based on the rentable area of such space) will be determined using the full floor load factor on the usable area of space on partially leased floors equal to the average usable area of such floors and the partial floor load factor upon the usable area of the balance of such space. For example, if Lessee is leasing 15,000 USF on floor 18, 17,000 USF on floor 17 and 8,000 USF on floor 21 for a total of 40,000 USF on such floors, and the average useable area of floors 17, 18 and 21 is 18,000 USF, then Lessee’s rent for such space shall be determined by applying the full floor load factor on 36,000 USF (18,000 USF x 2) and the partial floor load factor on 4,000 USF (40,000 USF - 36,000 USF). The first, second, third and fourth option spaces shall be added to the Premises on dates specified by Lessor between (1) July 1, 1995 and June 30, 1996, (2) July 1, 1997 and June 30, 1998, (3) July 1, 1999 and June 30, 2000, and (4) July 1, 2001 and June 30, 2002, respectively. Lessor shall use its best efforts so that not less than eighteen months nor more than thirty months pass between expansion space availability dates.
27.2 Lessor shall notify Lessee at least twelve months prior to the date an option space is available as to the commencement date, location and size of the option space. Lessee shall have the right to delay the commencement date of an expansion option by six months and/or reduce the square footage to be leased by up to 25%, provided that the unleased space is in a leasable configuration ( i.e., if Lessee elects to exercise its expansion option, Lessee must lease at
least seventy-five percent (75%) of the space stated in Lessor’s notice within six (6) months after the commencement date specified in Lessor’s notice). Lessee shall notify Lessor no later than nine months prior to the proposed commencement date, as the same may have been extended by Lessee in accordance with the terms of the preceding sentence of its intent to lease said option space, including actual size and commencement date. Except to the extent expressly provided to the contrary in this lease, the option space shall be governed by all of the terms of this lease, including rent, lease expiration date, extension options, base year, etc.
27.3 If Lessee exercises its third and fourth such options but fails to extend the Lease, Lessee shall reimburse Lessor on the lease expiration date for the unamortized cost of non shell and core improvements below the ceiling of the premises leased pursuant to such third and fourth options. Such amortization to be in equal monthly installments over five years, including interest at 9% per annum.
27.4 During the last five years of the original ten year term, Lessee shall respond promptly to requests by Lessor as to Lessee’s growth projections and renewal expectations, so as to assist Lessor in Lessor’s herein expressed obligation to use its reasonable best efforts and work with Lessee to provide Lessee with similar expansion options on similar terms during the extended years of this lease. The location, size and timing of such options will depend in part on Lessee’s requirements and in part on availability of space which is not subject to other leases. It is therefore possible that such space will not be on contiguous floors or in the same elevator bank as the initial leased premises.




28. RIGHT OF FIRST OFFER/RIGHT OF FIRST REFUSAL
28.1 Commencing January 1, 1993 and continuing throughout the term of the Lease (including extension options), Lessee shall have the following described Right of First Offer/Right of First Refusal to lease any and all available space in the low rise elevator bank, subject only to i) contrary rights (including, but not limited to, expansion options, rights of first refusal, rights of first offer, extension options and renewal options) granted to other tenants prior to December 18, 1991, and ii) expansion options granted at the outset to other tenants who, after December 18, 1991, lease more than 15,000 RSF in Lessee’s elevator bank. If Lessee elects to add space pursuant to this Section 28 which was to be used by Lessor to satisfy all or part of one or more of Lessee’s options under Section 27, (a) Lessee shall be deemed to have waived the part of the option or options in question (or all of an option or options, as the case may be) which Lessor intended to satisfy with such space, provided that, when the space is offered Lessee under this Section 28, Lessor shall have advised Lessee in writing as to the option or options (or part thereof) Lessor intended to satisfy with such space, and (b) such space shall be added to the leased premises on the terms applicable to option space under Section 27.
28.2 When Lessor first learns that office space with Lessee’s elevator bank is or will be available, Lessor shall promptly notify Lessee in writing of the fact and anticipated date of such availability. If Lessee is interested in such space and requests a proposal from Lessor, Lessor will notify Lessee in writing of the terms on which Lessor would be willing to lease such space. If Lessee does not request a proposal for such space, Lessor will not lease such space to any
third party without first notifying Lessee in writing of the terms on which Lessor would be willing to lease such space. In either of such cases, Lessee shall then have ten (10) days after receipt of such a notice in which to elect in writing to lease the space in question on the offered terms, with the exceptions that i) Lessee shall in no event be obligated to lease such space for a term that extends beyond the expiration date then applicable to the balance of Lessee’s leased premises and ii) Lessee’s two five-year extension options shall apply to the Right of First offer/Right of First Refusal space in question. If Lessee fails to so elect within such deadline (or within the five (5) day deadline of a subsequent notice with respect to such space), Lessor shall be free to lease the space to a third party on the terms specified in Lessor’s most recent notice to Lessee, provided such lease or a binding letter of intent for such a lease is executed within six months after the date of Lessor’s notice to Lessee. If Lessor wishes to offer more favorable rent, tenant improvements, parking or other material terms (from a tenant’s perspective) to a third party during such six month period, or if during such six month period Lessor wishes to reaffirm to Lessee the terms previously proposed to Lessee, Lessor shall be required to first re-offer the space to Lessee on such improved terms or reaffirmed terms, in which event Lessee will be required to respond in five (5) days. Likewise, if Lessor fails to come to terms with a third party within the six month period, Lessor will be required to re-offer the space to Lessee on whatever terms Lessor then chooses, and, in that event, Lessee shall have ten (10) days to respond.
28.3 Lessee shall have the Rights of First Offer/Rights of First Refusal shown in the following table. The initial retail space alternatives available to Lessee under Section 1.1(c) are set forth in column A. Opposite each such alternative, there is set forth the space or spaces which are subject to Lessees rights under this Section 28.3. The spaces currently leased by Federal Express and One Stop Copy are shown on Exhibit A.
 
 
 
 
A
  
B
Initial Retail Space Made Part of Leased Premises
Pursuant to Section 1.1(c)
  
Retail Space Subject to Lessee’s Section 28.3 Rights
All or part of Upper Level of Plaza Building
  
Remainder (if any) of the Upper Level of Plaza Building and Upper Level of Branch Bank
 
 
All or part of Upper Level of Plaza Building and Upper Level of Branch Bank
  
Remainder (if any) of the Upper Level of Plaza Building
 
 
Upper Level of Plaza Building and IBM Space
  
Federal Express Space
 
 
Upper Level of Plaza Building and Security Pacific Branch Space
  
One Stop Copy Space




 
 
 
A
  
B
Initial Retail Space Made Part of Leased Premises
Pursuant to Section 1.1(c)
  
Retail Space Subject to Lessee’s Section 28.3 Rights
Upper Level of Branch Bank
  
(a) IBM, Federal Express and One Stop Copy Spaces, or (b) Upper Level of Plaza Building. If any of the (a) spaces are added, the rights to the (b) space or any part of the (b) space shall terminate, and vice versa.
 
 
Upper Level of Branch Bank and IBM Space
  
Federal Express and One Stop Copy Spaces (if contiguous at time of availability)
 
 
Upper Level of Branch Bank and Security Pacific Branch Space
  
One Stop Copy and Federal Express Spaces (if contiguous at time of availability)
 
 
Upper Level of Branch Bank and IBM Space and Security Pacific Branch Space
  
None
 
 
IBM Space or  Security Pacific Branch Space
  
Federal Express and One Stop Copy (if contiguous at time of availability) and Upper Level of Branch Bank
 
 
IBM Space and  Security Pacific Branch Space
  
Upper Level of Branch Bank
After the initial retail space has been specified pursuant to Section 1.1(c), the parties will execute a memorandum specifically identifying the portion of the above table which shall apply thereafter, and deleting the other portions of the above table which do not apply thereafter.
The rights granted Lessee under this Section 28.3 shall apply only if the space in question is being added to the leased premises for uses that bring customers of Lessee to the space for the purpose of conducting business therein, or as expansion for space being used for such purpose. The procedure described in Section 28.2 shall be equally applicable to the space subject to Lessee’s rights under this Section 28.3. The rights granted under this Section 28.3 shall commence January 1, 1993 and continue through the term of the lease (including extension options), subject only to i) contrary rights (including, but not limited to, expansion options, rights of first refusal, rights of first offer, extension options and renewal options) granted to other tenants prior to December 18, 1991 and ii) expansion options granted at the outset to other tenants who, after December 18, 1991, lease any part of such space after such space has been first offered to Lessee.
The parties agree to work together in good faith, recognizing each others needs and concerns, if Lessee advises Lessor that it needs additional retail space above and beyond what is provided for under Section 28.3 to accommodate growth in the facets of Lessee’s business which are retail or plaza level oriented, and not for uses that are customarily found in office tower
space. The parties recognize the possibility that additional space may not be available as a result of such needs and concerns.
29. EXTENSION TERM AND RENT
29.1 Lessee shall have the right to extend the initial Lease term for two (2) additional five-year terms, on the same terms and conditions as stated herein except for rent, which is stated below. The extension options shall be exercised by Lessee delivering to Lessor a written notice of exercise at least nine (9) months prior to the then applicable expiration date of the Lease term. Lessee shall not be required to extend the Lease for the entire leased premises, provided the unleased space is in a leasable configuration. Between thirteen (13) and eleven (11) months prior to the then expiration date of the lease term, Lessee may request Lessor to advise Lessee of the Market Rent Lessor proposes for the next option term. Lessor will provide Lessee with written notice of such rent within thirty (30) days after its receipt of Lessee’s written request.
29.2 For Years 11-15, the annual rent shall be the lesser of (a) 95% of “Market Rent”, or (b) $23.00/RSF or USF, as the case may be (in the latter case, the initial Base indices and cap shall be retained).
29.3 For Years 16-20, the rent shall be 95% of Market Rent.
29.4 “Market Rent” shall mean the effective flat rental rate per RSF (or USF) paid by tenants to landlords of comparable Class A office buildings located in the Seattle downtown area over the term in question, if such landlord were to put space comparable to the space in question (in its then-existing condition) on the market for lease to a new tenant, assuming a new




tenant with comparable attributes to Lessee. Market Rent shall be coupled with a new Base Year for taxes and new Base Indices for operating expenses (subject to the cap described in Section 3.6). If the parties are unable to agree on the Market Rent by that date which is eight (8) months prior to the then-applicable expiration date, both parties shall submit their final estimate of the Market Rent to the other in writing by that date which is eight (8) months prior to the then-applicable expiration date, and the Market Rent shall be determined by arbitration as follows:
(a) The arbitration will be before one arbitrator mutually agreed upon by Lessor and Lessee. Absent such agreement, the arbitration will be by three arbitrators, all of whom must be (1) neutral parties and (2) either MAI appraisers or licensed real estate brokers who have been active over the five (5) years ending on the date of appointment in the brokering or appraisal of office space in the central business district of Seattle. Lessor and Lessee shall each appoint one of the arbitrators and such selection shall be accomplished on or before that date which is seven (7) months prior to the then-applicable expiration date. The third arbitrator will be selected by the two arbitrators so chosen by Lessor and Lessee. If the two arbitrators cannot agree upon the third arbitrator on or before that date which is six (6) months prior to the then-applicable expiration date, the third arbitrator will be selected by application by either party to the American Arbitration Association.
(b) On or before that date which is three (3) months prior to the then-applicable expiration date, the arbitrators shall decide on the Market Rent for the Premises for a five (5) year term (in the case of a determination of Market Rent for years 11 through 15, the existence of an additional five year extension option at ninety-five percent of Market Rent shall be taken into consideration). The decision of the majority of the arbitrators shall control. If a majority of the arbitrators do not agree within the stipulated time period, then each arbitrator shall render his or her separate determination of the Market Rent on or before that date which is two (2) months prior to the then-applicable expiration date. In such case, the three determinations shall be averaged to determine the Market Rent. However, if the lowest Market Rent and/or the highest Market Rent is more than ten percent (10%) lower or higher than the middle Market Rent, the low Market Rent and/or high Market Rent shall be disregarded. If only one Market Rent is disregarded the remaining two Market Rents will be averaged in order to establish the Market Rent.
(c) Both parties may submit any information to the arbitrators for their consideration with copies to the other party. Either party may require that the arbitration be conducted by hearing before the arbitrator(s). A copy of the arbitrators’ written decision will be given to both parties when the Market Rent has been determined. The determination of the Market Rent will be final and binding upon Lessor and Lessee. The fees and expenses of the arbitrator(s) will be paid by Lessee if the Market Rent is one hundred ten percent (110%) or more of the Market Rent specified in the notice given by Lessee to Lessor, and shall be paid by Lessor if the Market Rent is less than ninety percent (90%) of the Market Rent specified in the notice given by Lessor to Lessee, and otherwise shall be paid equally by Lessor and Lessee. Each party shall bear the fees and expenses of their respective attorneys, expert witnesses and other consultants.
30. PARKING
30.1 Throughout the term of the Lease as extended, Lessor will provide parking for thirty-three automobiles in the controlled access area of the One/Two Union Garage shown in Exhibit A attached along with up to sixty-six access cards to said area only (the number of access cards initially issued will be as mutually determined and reviewed periodically so that the number of issued cards is based on actual experience concerning usage and control of usage, and to assure that a) Lessee is achieving maximum usage and b) this right is not abused). Such access cards shall be used only to park not more than thirty-three automobiles at any time in said controlled access area, and shall not be used to park more than thirty-three cars in said controlled access area or to park elsewhere in the One/Two Union Garage. Throughout the Term of the Lease as extended, Lessor will also provide i) seventeen parking permits in the Hilton Garage; ii) six reserved short-term bank customer stalls, with unlimited validation in a manner acceptable to Lessor and Lessee, located on Level A nearest the garage entrance ramp and west garage elevators (of which four will be used initially and the remaining two added as usage indicates); and iii) 1,000 hours per month of free parking scrip (available in 1/2 hour increments and in addition to the customer stalls). Lessee shall comply with reasonable procedures and rules established by Lessor (or its garage operator) from time to time concerning the parking rights in the One/Two Union Garage and reasonably required controls with respect thereto.
30.2 The parking charge for (a) the right to park thirty-three automobiles, and (b) the right to up to six reserved short-term bank customer stalls as provided in Section 30.1, shall be at the rate of $110 per month (including sales tax) per automobile for the right to park thirty-three automobiles in the controlled access area plus $110 per month (including sales tax) per stall for the number of reserved short-term bank customer stalls being used by Lessee. Initially the monthly charge will be $4,070.00 ($110 times 33 plus $110 times 4) for 1993 and 1994. Thereafter the rate shall increase annually by the change in CPI, not to exceed 5% per year (cumulative and compounded), and in no event shall the rate exceed the generally prevailing monthly rate charged to tenants in the Building. Each January 1, commencing January 1, 1995, the adjustment will be based on the change in CPI for the twelve (12) month period ending the November 30 preceding the January 1 in question (e.g., the adjustment for January 1, 1995 will be based in the change in the November 1994 CPI over the November 1993 CPI.) Such charge shall be paid by Lessee to Lessor (or the garage operator at Lessor’s direction) in advance on the first day of each month during the term of the Lease as extended.




30.3 The parking charge per each Hilton permit shall not exceed $135.00 per month including tax during calendar year 1993, and shall increase annually thereafter by the change in CPI, not to exceed 5% per year (cumulative and compounded) and in no event to exceed the generally prevailing monthly rate charged to tenants in the Building. The adjustment for 1994 and thereafter shall be made in the same manner as provided in the last sentence of Section 30.2.
30.4 If Lessee leases additional space in excess of the greater of the area of the initial leased premises (RSF and USF, combined) or 60,000 RSF and USF (combined) pursuant to its expansion options, or right of first offer, its parking rights shall increase by one permit for each full 1,500 RSF and USF (combined) in excess of the greater of the area of the initial leased premises (RSF and USF, combined) or 60,000 RSF and USF (combined), all to be located in the Building Garage, except up to one-half may be located in the Hilton Garage at Lessor’s discretion. The monthly charges for such additional parking shall be the same as for the initial monthly parking at each location, respectively.
30.5 The provisions with respect to the 17 permits (subject to increase under Section 30.4) in the Hilton Garage are subject to obtaining the Hilton Garage owner’s written approval and agreement to provide such parking. In the event Lessor is unable to obtain such written agreement, or at Lessor’s election from time to time, then Lessor shall provide 17 permits (subject to increase under Section 30.4) in the Building Garage (or partly in the Building Garage and partly in the Hilton Garage, in such other garage or garages as are approved by Lessee in its sole discretion), at the charge stated above for permits in the Hilton Garage. Lessee may decrease or increase (up to 17) the permits used by Lessee pursuant to this Section 30.5, from time to time, upon not less than sixty (60) days’ prior written notice, provided that the change stated in any one notice shall not exceed three (3) permits.

31. STORAGE SPACE
Floors 18, 19 and 20 of the TUS Building each contain approximately 200 square feet of storage space in the core of the TUS Building for a total of approximately 600 square feet. The area of such space is not included in the USF of leased premises on such floors. Lessee is entitled to use such storage space without additional charge on each floor, in the ratio that the USF leased by Lessee on the floor bears to the total USF on the floor. Lessee shall have the right to lease up to 400 square feet at one location of dead storage space elsewhere in the TUS Building if available therein, otherwise in the OUS Building, at an annual rent of $12.00 per USF for Years 1-10. Thereafter, rent shall be market.
32. SATELLITE DISH
Lessee, at its sole cost and expense, shall be allowed to move its existing satellite dish from the Pacific Building and install the satellite dish on top of the TUS Building or the OUS Building, at Lessee’s choice. There will be no rent due in connection with the use of the rooftop during the term of the Lease or any extension thereof. Plans and specifications, location and mounting method shall be subject to Lessor’s approval. Lessee shall be solely responsible for obtaining all permits and other approvals necessary for the satellite dish, and shall provide evidence of such approvals to Lessor prior to commencement of installation of the satellite dish. Lessee shall indemnify and hold harmless Lessor from and against any damage, loss, liability or claim that Lessor may suffer or incur (including reasonable attorney fees and costs) as a result of Lessee’s installation or operation of the satellite dish, including without limitation, liability for claimed health hazards that may be associated with the satellite dish, claims of third parties and claims due to roof leaks. Notwithstanding the foregoing, however, Lessor hereby warrants that no other party has an exclusive right or other contractual right that would yield a claim to such party based simply on the existence of Lessee’s satellite dish (as opposed to, for example, a claim based on interference caused by Lessee’s satellite dish). As a result, Lessee’s foregoing indemnity will not operate with regard to such a contract claim.
33. ADDITIONAL EXPENSES
Lessor will reimburse Lessee in cash, or pay directly, at Lessee’s option, real estate consulting fees of $3.50/RSF ($3.50/USF for the retail spaces) leased for the initial leased premises. Moving expenses will be reimbursable by Lessor as part of Lessee’s $43.00/USF tenant improvement allowance. Lessor agrees that it shall make all payments promptly upon receipt of an invoice (i.e., within 30 days of receipt of approved invoice) therefor. Real estate consulting fees shall be payable one-half within 30 days after execution of the Lease and removal of all contingencies (if any) by all parties, and one-half within 30 days after occupancy of the initial leased premises by Lessee. If the exact size of the leased premises has not been determined by the date on which the first one-half real estate consulting fee payment is due, the payment will be $105,000.00 ((60,000.00 x $3.50) ÷ 2), with the balance that is actually due (after the exact leased premises have been determined) being paid within thirty days after occupancy by Lessee.

34. DEFAULT BY LESSOR
If Lessor fails to keep or perform any of its covenants or conditions under the Lease, and such failure is not cured within thirty days after written notice of the failure from Lessee to Lessor, then, in addition to all other rights and remedies available to




Lessee, under the Lease, at law or in equity, Lessee may offset the amount that Lessee paid to cure Lessor’s default against any sums payable by Lessee to Lessor under the Lease. Notwithstanding the foregoing, if Lessor commences curative efforts within the thirty-day period, such period shall be extended so long as Lessor is diligently pursuing the cure to completion in good faith.
35. REGULATORY APPROVAL
The Lease will be subject to regulatory approval as to the location of Lessee’s main office and the branch bank. Lessee will use its reasonable best efforts to obtain said approval. If, on or before that day which is thirty (30) days from the date on which this lease becomes fully executed, Lessee has not obtained all regulatory approvals that Lessee deems necessary, Lessee shall be entitled to terminate this lease by so advising Lessor, provided that such notice shall be received by Lessor on or before the end of such thirty (30) day period, otherwise such contingency shall automatically lapse and thereafter be null and void. If necessary, the thirty (30) day period will be extended an additional thirty (30) days upon written notice from Lessee to Lessor, providing Lessee is proceeding as above provided and the notice is received by Lessor prior to the expiration of the initial thirty (30) day period.
36. EXCLUSIVITY
36.1 Lessor hereby agrees that, during the entire term of this lease, including extension terms, Lessor shall not lease any space in the retail or plaza areas of the TUS Building or the OUS Building for any standard banking uses (e.g., the taking of deposits, the cashing of checks, etc.). Moreover, Lessor hereby agrees that it will draft the use and/or assignment/subletting clauses in all future leases in such a way so as to prohibit any changes in use to such standard banking uses in said areas. Notwithstanding the foregoing, however, Lessee hereby agrees that the above terms of this Section 36 shall not apply to
(a) the space currently occupied by Security Pacific Bank in the retail area of the OUS Building and any adjacent contiguous space into which a bank tenant of such space may hereafter expand, but not more expansion space than the space currently occupied by One Stop Copy and Federal Express, with the understanding that the only permissible expansion space will be the space currently occupied by One Stop Copy and Federal Express (such spaces are delineated on Exhibit A).
(b) the space currently occupied by Puget Sound Bank in the retail area of the TUS Building and any adjacent contiguous space into which a bank tenant of such space may hereafter expand. In the event of such expansion, the tenant of such space will not be permitted to have signage which can be seen from the low rise elevator lobby of the TUS Building.
(c) any other retail space, provided that the number of tenants occupying retail space for standard bank purposes does not exceed three (including Lessee’s branch bank), the proposed tenant will lease more than one full office floor in the OUS Building, Lessee has been offered the right to lease such retail and office space on the same terms and conditions as the proposed tenant, and Lessee has refused or failed to agree to lease such retail and office space upon the offered terms within ten (10) days after receipt of such offer. In no event shall such other retail space have frontage on Sixth Avenue if Lessee is leasing and occupying the space described in Section 1.1 (b) for branch bank purposes.
(d) prohibit automatic teller machines.
37. BRANCH BANK
The Lease is subject to Lessee’s determination that the space described in Section l.l(b) can be feasibly used for Lessee’s branch bank. Such feasibility determination to include without limitation whether a branch bank is a permissible use under the Master Use Permit and laws applicable to said space, whether a building permit can be obtained for the branch bank space to permit occupancy of such space by a date acceptable to Lessee, whether there are any grade changes applicable to such space which cannot be satisfactorily addressed, and whether the space can be designed to be satisfactorily used as a branch bank and comply with laws applicable to such space. Such determination shall be made by Lessee in good faith and shall not be the basis for renegotiation of any of the provisions of this lease or be made to enable Lessee to accept a lease offer from another landlord. Lessee shall proceed diligently to make such determination. If on or before that day which is thirty (30) days from the date this lease becomes fully executed, Lessee has not made such determination, Lessee shall be entitled to terminate this lease by so advising Lessor, provided that such written notice shall be received by Lessor on or before the end of such thirty (30) day period, otherwise such contingency shall automatically lapse and thereafter be null and void. If necessary, the thirty (30) day period shall be extended an additional thirty (30) days upon written notice from Lessor to Lessee, provided Lessee is proceeding as above provided and the notice is received by Lessor prior to the expiration of the initial thirty (30) day period.
38. BACKUP POWER
Lessor acknowledges that Lessee’s entire operation (including all facilities located on other properties) is dependent on the telephone and computer systems located in the space being leased by Lessee pursuant to this Lease. Consequently, Lessor hereby agrees that if there is ever a power failure, Lessor will, to the extent it is permissible to do so under all applicable laws




and ordinances, and if Lessor’s equipment will permit Lessor to do so, and to the extent Lessee so requests at the time, supply Lessee’s telephone and computer systems with whatever backup power Lessor has available to it. Lessee acknowledges that its rights hereunder will in all events be subordinate to the fire and life-safety needs of the Building. Moreover, Lessee acknowledges and agrees that all costs incurred in so supplying Lessee with backup power shall be paid by
Lessee. Lessee acknowledges that Lessor is not required to install equipment to supply backup power, in excess of the equipment presently installed in the Building.
IN WITNESS WHEREOF, this lease has been executed by Lessor and Lessee as of the day and year first above set forth.
 
 
 
 
 
 
 
 
LESSEE:
 
LESSOR:
 
 
CONTINENTAL, INC.
 
ONE UNION SQUARE VENTURE,
A Washington Joint Venture
 
 
 
By
 
/s/ Richard S. Swanson
 
By UNICO PROPERTIES, INC.
(Manager and authorized rental agent for
One Union Square Venture)
By
 
/s/ Bruce W. Williams
 
 
By
 
/s/ David C. Cortelyou
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 6th day of March, 1992, before me personally appeared David C. Cortelyou, to me known to be the President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and One Union Square Venture, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
 
 
/s/ Sharon L. Overman
Notary Public in and for the State of
Washington, residing at
 
Seattle
My commission expires:
 
9/23/1992
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 6th day of March, 1992, before me personally appeared Richard Swanson and Bruce W. Williams to me known to be the President and General Counsel of Continental, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.




IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
 
 
/s/ Sharon L. Overman
Notary Public in and for the State of
Washington, residing at
 
Seattle
My commission expires:
 
9/23/1995
EXHIBIT A
 
 
 
 
Lessor:
  
One Union Square Venture
 
 
Lessee:
  
Continental, Inc.
 
 
A-1
  
Prints with the leased premises outlined in black will be attached and made part of the lease as provided in Section 1.1 of the lease.
 
 
A-2
  
Areas will be added to this Exhibit as provided in Sections 1.1 and 1.2 of the lease.
EXHIBIT A
CORE AREA
Two Union Square
FLOOR 18
CONTINENTAL, INC.
EXHIBIT A
CORE AREA
Two Union Square
FLOOR 19




CONTINENTAL, INC.
EXHIBIT A
CORE e
FL




EXHIBIT A
Branch Bank Space
0219
2,51OPYanch




#1 - 1,762 SF
EXHIBIT A
upper Level of branch
bank locEXHIBIT A




Location of
33 Controlled
Access Parking
EXHIBIT A



































EXHIBIT B
INITIAL IMPROVEMENT OF LEASED PREMISES
( With Lessor’s Architect and Lessee’s Architect )
 
 
 
 
Lessor:
  
One Union Square Venture
 
 
Lessee:
  
Continental, Inc.
Lessor at its expense is to provide the shell and core of the TUS Building and certain improvements on the floors on which the leased premises are located, all as more fully set forth in Section 1 of this Exhibit. The core area of the TUS Building is shown on Exhibit A (Prints for Floors 18, 19 and 20). Lessor is to also provide an allowance as provided in Section 3 of this Exhibit for improvements to the leased premises which are in addition to those provided by Lessor pursuant to Section 1 of this Exhibit, all as more fully set forth in this Exhibit. The allowance amount for Section 3 and the dates for submission of plans and documents to Lessor pursuant to Section 4.2 are as follows:
The Section 3 allowance amount is Forty Three Dollars ($43.00) per usable square foot of initial leased premises. The total allowance will be specified in Exhibit A when it is completed and added to the lease as provided in Section 1 of the lease.
The Section 4.2 delivery dates are:
 
 
 
 
 
 
 
 
 
  
 
  
Office Space
  
Retail Space
 
 
 
 
(A)
  
Schematic Plans -
  
April 10, 1992
  
March 27, 1992
 
 
 
 
(B)
  
Final Preliminary Plans -
  
May 15, 1992
  
April 24, 1992
 
 
 
 
(C)
  
Final Contract Documents -
  
June 19, 1992
  
May 22, 1992
1. Basic Building Improvements (Shell and Core) .
1.1 Office Space . Lessor will at its expense furnish and install the following improvements in the office space portion of the TUS Building in accordance with plans and specifications for the TUS Building on the floors upon which the office space portion of the leased premises are located:
 
Exhibit B
(a) Finished elevator lobby to match building standard specifications including carpeting. The typical elevator lobby has painted walls, carpeted floors, painted elevator doors and jambs, and wall sconce lighting fixtures.
(b) All items which are standard for the TUS Building and located within the core area of the Building finished to the specifications for the TUS Building, including but not limited to core walls, electrical distribution equipment and conduits, heating and air conditioning equipment and ducting, a women’s lavatory, a men’s lavatory, drinking fountain, and fire and life safety equipment.
(c) Exterior walls and exterior windows for the TUS Building. The interior of such exterior walls, the exterior of the core walls and all structural elements within the leased premises (except cross-bracing on Floors 35, 36 and 37) shall be ready to receive Lessee specified finishes.
(d) The rigid ducting and standard size variable air volume air terminal units for interior and exterior zone heating and air cooling in accordance with the TUS Building standard layout for the floor upon which the leased premises are located. The standard number of such air terminal units is twelve (12) units for the entire Fourth Floor and twenty (20) units for each




other entire floor. Such improvements by the Lessor include the individually controlled central fan unit located in each floor’s mechanical room allowing for separate floor-by-floor air conditioning control and operation but do not include the round low pressure run out ducting, flexible ducting and diffusers.
(e) Electric service to the electrical room located within the core of the building and sufficient capacity to meet Lessee’s requirements, not to exceed 4.5 watts per usable square foot (including lighting) and any limits imposed by applicable codes, laws and regulations. Two electrical power loops are provided on each floor of the TUS Building. One loop is for building standard 277/480 volt lighting and the other loop is available for tenant 110 volt power or special power requirements.
(f) Telephone service to the telephone closet located within the core area of the Building.
(g) Concrete floor ready to receive carpet. The floors typically will have a partition load capacity of 20 pounds per square foot. The live load capacity is 80 pounds per square foot for a zone extending approximately 24 feet out from the core and 50 pounds per square foot on the remainder of the floor, all as more fully specified by Lessor’s Architect.
(h) Basic sprinkler distribution grid in accordance with TUS Building standard layout for the floor.
 
Exhibit B
(i) A vertical condenser water loop to provide water for supplementary air cooling equipment (if any) installed in the Leased Premises. The hook-up to said loop and reasonable charge for said water shall be at Lessee’s expense.
If Lessee, with Lessor’s consent, changes surface finishes from those specified for the TUS Building, requires changes to the heating and cooling and electrical systems which are standard for the TUS Building, or makes any other departure from the specifications or standards for the TUS Building with respect to any of the foregoing items, the additional cost of such change of other departure shall be at the Lessee’s expense as a charge to Tenant Work pursuant to Section 2 of this Exhibit. Throughout the Exhibit, items which are not TUS Building Standard items are sometimes referred to as special items or special improvements.
1.2 Retail Space . Lessor will at its expense furnish and install the following improvements in the retail space portion of the Building in accordance with plans and specifications for the Building on the floor and in the area where the retail space portion of the leased premises are located:
(a) Storefronts . A basic interior storefront is provided with one (1) entry door. The exterior storefront does not include entry door(s), required framing members, vestibules, platforms, or stairs that may be required for grade transitions. A vestibule and internal platform may be required at the street entry due to the slope of the sidewalk.
(b) Awnings and Signage . Awnings are provided along Sixth Avenue. Signage, including electrical connections for illuminated signs, shall be supplied by the tenants.
(c) Floors . Structural concrete slabs are provided without penetrations for utilities.
(d) Utilities . A supply line is provided for cold water (if required), waste line, electrical power and condenser water or chilled water to the perimeter of the leased premises at reasonable location(s) designated by Lessor.
(e) Fire Sprinkler System . The main fire sprinkler system is provided but does not include relocation of sprinkler heads to their final configuration.
(f) Other . With the exception of the storefront and HVAC equipment, the intent is to provide basic Building Shell improvements similar to those described in Section 1.1.
(g) Previously Built Space . Any retail space that has previously been improved will be provided to Lessee oh an “AS-IS, WHERE-IS” basis free of charge as to existing improvements. Thus, there shall be no charge against the Tenant Work allowance described in Section 3 below for the value of any above-shell and core improvements in such space.
 
Exhibit B
1.3 Credit for Shell and Core Items Not Used . If Lessee with Lessor’s consent does not use a building standard finish or item to be provided by Lessor at Lessor’s expense under Section 1, and Lessor has not already installed such finish or item, then Lessee will be given a credit, in the amount of the cost saving to Lessor for not being required to install such finish or item. The credit shall be applied against the cost of Tenant Work.
2. Additional Improvements (Tenant Work) .




To the extent any of the terms of this Section 2 are inconsistent with any of the terms of Section 1 of this Exhibit, the terms of Section 1 shall govern. Improvements to the leased premises which are in addition to those provided for in Section 1 of this Exhibit are herein sometimes described as Tenant Work. Tenant Work shall be at Lessee’s expense but shall be paid for by Lessor to the extent of the allowance provided for in Section 3 of this Exhibit. The same procedure shall pertain to any matters referred to in this Exhibit as being at Lessee’s expense or a charge to Tenant Work. If the costs for Tenant Work and expenses or charges to Tenant Work exceed said allowance, the excess shall be paid by Lessee. Tenant Work and costs charged to Tenant Work shall include without limitation:
(a) All partitioning (solid, glazed or otherwise), including one-half of walls separating the leased premises from the space to be occupied by other tenants in the building, all partitioning within the leased premises, and the walls separating the leased premises from the public corridor.
(b) Column enclosures, furring, blocking, painting, paneling or other wall coverings approved by Lessor. Painted walls shall receive at least one prime coat and one semi-gloss or eggshell finish coat. Lessee shall use a brand of paint specified by Lessor as standard for the Building or an equivalent brand approved in advance by Lessor.
(c) Doors and door hardware.
(d) Finish ceiling, including suspension system and hangers.
(e) Cabinetry, millwork or other built-ins.
(f) Carpeting or other floor covering.
(g) Blinds for exterior windows as designated by Lessor.
(h) Lighting fixtures, including Building standard fixtures and all other fixtures, and all switching, all in accordance with applicable Seattle codes.
(i) Electrical receptacles, wiring from junction boxes located above suspended ceiling to light fixtures and any other electrical items which are in addition to those furnished by Lessor pursuant to Section 1 of this Exhibit.
 
Exhibit B
(j) Telephone and data outlets and any other communication equipment not furnished by Lessor pursuant to Section 1.
(k) Air terminal units in excess of the standard number for the leased premises. The standard number for an entire floor is 12 on the Fourth Floor and 20 on all other floors. All HVAC equipment for the leased premises including packaged heat pump units, ducting, round low pressure run out ducting, flexible ducting, return ducting diffusers, exhaust air handling equipment, blowers, controls and any other items for heating or air cooling which are not furnished by the Lessor pursuant to Section 1 of this Exhibit.
(1) Modifications and adjustments to sprinkler systems identified in Section 1 and installation of sprinkler heads, emergency speakers, fire extinguishers and cabinets within the leased premises, including any specialized fire suppression system such as halon.
(m) Interfloor stairs within the leased premises.
(n) Vertical lifts for books, files, mail distribution, etc.
(o) Plumbing and fixtures including private toilets, showers, lavatories, sinks and lunchroom or kitchen equipment, hot water heaters or booster heaters and hot water lines.
(p) Emergency power equipment for Lessee’s equipment.
(q) All demolition and removal of debris for any item of work installed pursuant to Section 1 or Section 2 of this Exhibit which Lessee with Lessor’s consent, subsequently requests Lessor to remove, and the demolition and removal of the ceiling suspension system which has been installed by Lessor, to the extent Lessee does not use such system.
(r) Signage.
(s) All other utility lines and appurtenances, and connecting to utility lines provided by Lessor.
(t) Any structural modification to the Building.




(u) The fees for architects, engineers, interior designers, consultants, contractors and others, including Lessor’s Architect (to the limited extent expressly provided for in Section 4.4 below) and Lessor’s contractor, for services with respect to the leased premises.
(v) All applicable Washington State sales tax.
(w) Fees and expenses for all permits, including building, special energy and structural modification permits and other governmental fees applicable to the leased premises.
 
Exhibit B
(x) Any other costs referred to in this Exhibit as being at Lessee’s expense or a charge to Tenant Work.
3. Tenant Improvement Allowance .
Lessor shall provide an allowance for Tenant Work in the initial leased premises equal to the amount specified at page 1 of this Exhibit. The allowance shall be used to pay costs for Tenant Work, by crediting or paying the amount of the allowance against amounts due for the Tenant Work, all in accordance with Section 5.2 of this Exhibit.
4. Design of Tenant Improvements .
4.1 Lessor’s Architect . Lessor has engaged the services of an architect, mechanical engineer and electrical engineer (herein collectively “Lessor’s Architect”) to provide certain professional services required for the improvement of the initial leased premises and other portions of the Building. Lessor’s Architect shall provide all mechanical and electrical engineering services required to prepare the engineering plans described in Section 4.2.C. of this Exhibit and the services described in 4.5 of this Exhibit. All structural engineering services required with respect to the leased premises shall be provided by Lessor’s structural engineer as provided in subsection (10) of Section 4.2.C. All other architectural services shall be provided by Lessee’s Architect.
Lessee’s Architect . At Lessee’s expense as a charge to Tenant Work, Lessee may retain the services of a qualified architect/office planner (Lessee’s Architect), licensed to practice architecture in the State of Washington, and approved by Lessor, to provide all architectural services related to the tenant improvements, except for those services which by the express provisions of this Exhibit are to be provided by Lessor’s Architect or Lessor’s structural engineer. Lessee’s Architect shall timely prepare all plans and specifications described in Section 4.2 of this Exhibit (except the engineering drawings described in Sections 4.2.C.(3), (4) and (10)). Lessee’s Architect shall timely provide Lessor’s Architect or Lessor’s structural engineer, as the case may be, with all information, plans or specifications which are necessary to prepare the engineering drawings described in Sections 4.2.C.(3), (4) and (10) of this Exhibit.
4.2 Plans for Tenant Work . The Schematic Plans, Final Preliminary Plans and Final Contract Documents shall be subject to Lessor’s and Lessee’s approval. (Lessor shall disapprove such Plans only if they indicate interference with either the structural integrity of the Building or mechanical or utility systems in the Building or for other reasonable reasons not related to aesthetics. Lessor shall have no right of approval with regard to the aesthetic aspects of the Plans. Lessor shall not withhold its approval because of the substantial cost involved to demolish or remove Lessee’s proposed improvement at the expiration of the lease term, but Lessor may condition its approval upon Lessee’s agreement to pay the cost to demolish or remove such work which is in excess of the cost to demolish or remove standard improvements.) Such plans shall be compatible with the basic plans and specifications for the Building and when submitted to Lessor for its approval shall clearly show any proposed modifications to the plans and
 
Exhibit B
specifications for the Building. Lessee shall (a) provide timely and adequate information, direction and approval of plans and specifications to Lessee’s Architect and (b) obtain from Lessor’s tenant construction coordinator and/or Lessor’s Architect any required information concerning the basic Building for the design of tenant improvements.
Lessee, through its Architect, shall submit one (1) reproducible copy and five (5) black line prints of the following plans and documents to Lessor for Lessor’s approval on or before the respective dates specified at page 1 of this Exhibit:
A. Schematic Plans .
The Schematic Plan(s) due on this date shall generally describe all areas within the leased premises. Rooms or areas shall be identified by name or function with special furniture or equipment shown or described. Special features, including without limitation, relites, lunch rooms, coffee bars, computer rooms, shall also be noted on the Schematic Plans. These plans are to be the basis for the Final Preliminary Plans. Changes in such plans after delivery to and approval by Lessor are not prohibited. They are however subject to provisions concerning changes set forth elsewhere in this exhibit.




B. Final Preliminary Plans .
The Final Preliminary Plans submitted for interim approval shall show all partition layout indicating partition type and identifying each room and its function. The floor plan must also clearly identify and locate equipment and fixtures requiring plumbing or other special mechanical systems, area(s) subject to above normal floor loads, special openings in the floor, special electrical requirements and any other major or special features, including an outline specification of special finishes. These plans are to be the basis for the Final Contract Documents. Changes in such plans after delivery to and approval by Lessor are not prohibited. They are however subject to provisions concerning changes set forth elsewhere in this exhibit.
C. Final Contract Documents .
The Final Contract Documents shall be prepared in accordance with the standards adopted by Lessor including scale, common symbols, legends and abbreviations together with information required to obtain permits. The drawings shall be prepared using the “pin bar” system or using a CADD system that can produce a DXF file, for compatibility with other building drawings. The Final Contract Documents shall be approved and signed by Lessee and Lessor’s Architect prior to submittal to Lessor and approved and signed by Lessor prior to submittal to Lessor’s contractor for pricing, and shall include:
(1) Architectural Floor Plan(s) : A plan, fully dimensioned, showing partition layout and type, identifying each room with a number and each door with a number, and the location, nature and extent of floor finishes, casework, relites, etc. Plumbing locations and requirements shall be shown on this plan.
 
Exhibit B
(2) Reflected Ceiling Plan(s) : A plan showing all building standard and/or special ceiling conditions and materials. This plan shall also include the location and type of all building standard and special light fixtures including switching together with a legend indicating fixture type, quantity of fixtures, connected wattage of each fixture as necessary for compliance with the lighting power budget of Seattle’s codes and any other applicable laws and regulations.
(3) Electrical and Telephone Outlet Plan(s) : A plan locating all power and telephone requirements dimensioned to give exact location of outlet and height above concrete slabs if locations are critical. This plan shall identify all dedicated circuits and identify all power outlets greater than 120 volts. For equipment used in outlets which require dedicated circuits and/or which require greater than 120 volts, identify the type of equipment, the manufacturer’s name and manufacturer’s model number and provide power requirements and other technical specifications. The plan shall also show modifications to basic system, circuit identification, conduit size, the number and size of wires, all in compliance with applicable Seattle codes or other applicable laws and regulations.
(4) Mechanical Plant(s), HVAC, and Plumbing : A plan which clearly shows the basic HVAC system, modifications to the basic system if required, any special cooling or stand-alone systems, all supply air diffusers, thermostats and return air grills. All plumbing information shall be complete for final installation, including the fixture schedule and specifications.
(5) Furniture Layout : Basic layout showing furniture locations.
(6) Millwork Details : Complete elevations and details of all special millwork including but not limited to cabinets, paneling, trim, bookcases and special doors and jambs.
(7) Hardware and Keying Schedules : Complete specifications for all special hardware shall be provided. (Note: Key ways in special locks (with the exception of Lessee’s vault(s) and secured data areas) must be compatible with building master key system.) The keying schedule must indicate which doors are locked and which keys open each lock, together with a symbol indicating which side of the door is to be locked to prohibit entry.
(8) Room Finish and Color Schedule : Provide on the drawings complete information showing location and specification for all finishes including wall, floor covering, base, ceiling and special conditions.
(9) Construction Notes and Specifications : Provide all required special notes and complete specifications, including instruction for bidders, special conditions incorporating the AIA standard form of general conditions or such modifications thereof as are designated or approved by Lessor and technical specifications for all special improvements.
(10) Structural Modifications : If Lessee’s tenant improvements include interfloor stairways, increased floor loading or any other items which require structural
 
Exhibit B




modifications, Lessor’s structural engineer for the Building shall be engaged to perform all required structural engineering services. The cost of such services shall be a charge to Tenant Work. A drawing shall be prepared showing the extent of structural modification necessary and a separate building permit shall be obtained for this phase of work.
4.3 Contract Administration . Lessor’s Architect shall provide construction administration during the execution of Tenant Work on the initial leased premises and will observe progress of such work, attend necessary contractor coordination meetings, advise Lessee and Lessor on status and progress payments, and together with Lessee’s Architect prepare a punchlist for any construction deficiencies at completion and certify the leased premises ready for occupancy. Lessee’s Architect may also provide construction administration services for Lessee and shall coordinate its activities with Lessor’s Architect.
4.4 Services by Lessor’s Architect . Certain services with respect to Tenant Work shall be provided by Lessor’s Architect. Lessor’s Architect shall:
(a)
Provide Lessee’s Architect with information about the Building and background drawings for execution of the Tenant Work as reasonably requested by Lessee’s Architect.
(b)
Provide mechanical engineering and required engineering drawings for (1) sizing of feeder ducts and placement of diffusers and thermostats, (2) computer rooms or areas which are supplied HVAC service only off the basic HVAC system for the Building, and (3) specifications for sinks and related plumbing such as service to coffee machines, sinks, dishwashers and hot water tanks.
(c)
Provide electrical engineering and required engineering drawings for building standard items and typical desk top office equipment and copiers.
(d)
Review all plans and specifications required under Section 4.2 and assist Lessee’s Architect regarding compliance with the requirements of Building systems and codes related to Tenant Work. Notwithstanding such review and assistance, Lessee’s Architect is responsible for compliance with such requirements and codes.
(e)
Provide coordination with the Lessor, Lessee and/or Lessee’s Architect and Lessor’s contractor, as applicable, throughout the design, pricing and construction of the Tenant Work, transmit shop drawings and submittals pertaining to special items to Lessee’s Architect as requested, and provide contract administration as provided in Section 4.3, such administration to be coordinated with Lessee’s Architect.
Exhibit B
(f)
Obtain the blanket building permit for tenant improvement construction in the office portions of the Building and transmit the Final Contract Documents to the Department of Construction and Land Use (“DCLU”) for review and approval. Lessee’s Architect shall be responsible for all changes required as a result of such review by DCLU, with the exception of changes to the work provided pursuant to Sections 4.4(b) and (c) which shall be Lessor’s Architect’s responsibility and which shall be done within the $0.25 per usable square foot charge described below. All other permits, including without limitation electrical, mechanical, plumbing, energy code and structural permits shall be obtained by subcontractors or Lessee’s Architect (with assistance from Lessor’s Architect as reasonably requested).
Lessor shall not charge any fee for its services under Sections 4.4(a)(d), (e) and (f) above. The charges for the foregoing engineering services (Sections 4.4(b) and (c)) by Lessor’s Architect are a charge to Tenant Work and shall be $0.25 per usable square foot of leased premises for such engineering services, with a $500 minimum.
Additional mechanical and electrical engineering services, if required, shall be provided by Lessor’s Architect and the reasonable charges for same shall be in addition to the foregoing charge and at Lessee’s expense as a charge to Tenant Work. Examples of such additional services include without limitation mechanical engineering services for food service kitchens, private toilet facilities, exercise rooms, computer rooms or areas that are cooled utilizing the vertical chilled water loop for the Building, stand alone cooling systems, special exhaust systems and special fire suppression systems, and electrical engineering services for integrated lighting controls, computer wiring or networking, computer room design, lighting design beyond building standard, control circuitry, and sound and/or paging systems. The charges for any such additional work provided by Lessor’s Architect shall be reviewed and approved by Lessee and Lessee’s Architect prior to being incurred.
5. Construction of Tenant Improvements .
5.1 Method of Contracting .
(a) The Tenant Work will be competitively bid by selected general contractors as mutually agreed by Lessee and Lessor, or at Lessee’s election a contract may be negotiated with a general contractor approved by Lessor, except work on the sprinkler system and the fire alarm system will not be bid but will instead at a reasonable charge be performed by the original shell and core subcontractors for such work. The selected general contractor and subcontractors shall only employ and use union labor in and about the Building and Land, unless Lessor in its sole discretion and Lessee agree otherwise as to one or more subcontractors. Lessor will sign the contract with the selected general contractor.
 




Exhibit B
(b) Lessor will provide Instructions to Bidders and General Conditions applicable to the Tenant Work to Lessee for review and coordination with Final Contract Documents. Lessee’s Architect shall prepare Contract Documents suitable for competitive bidding and provide information and specifications for all Tenant Work other than building standard. Specifications and detail for building standard items may be referenced to the Tenant Improvement Manual Volume I, through revision 17. The scope of the work shall be shown on the Contract Documents, and shall include installation and/or finish of prepurchased materials provided by Lessor. Lessor will transmit the final Contract Documents, Instructions to Bidders and General Conditions to the selected general contractors, and after receipt of bids add the cost of materials and HVAC balancing and other services provided by Lessor and approved by Lessee and Lessor. The construction contract will be awarded to the lowest bidder whose bid is acceptable in form and amount to Lessor and Lessee. If the price of the Tenant Work exceeds the allowance amount, Lessee shall either approve such price and authorize Tenant Work to proceed, or proceed diligently to delete items or otherwise modify the work so as to reduce the price for Tenant Work, and authorize Tenant Work to proceed at such reduced price. Lessee will use its reasonable best efforts to give such approval and authorization within two (2) weeks of receipt of bids. In the absence of Lessee’s approval of the price for Tenant Work and written authorization to proceed, Lessor will not be obligated to commence Tenant Work.
(c) During the construction phase, representative of Lessee shall attend construction coordination meetings to respond to questions and/or clarifications of the Construction Documents. Any and all instructions to the general contractor shall be issued through the Lessor’s tenant construction coordinator. Lessee shall participate in the approval of progress and final payments (and no such payments will be made without such approval) and in the preparation of punchlists for any construction deficiencies, and final acceptance but formal direction to the general contractor shall be the responsibility of the Lessor’s tenant construction coordinator.
5.2 Payments . Lessor’s contractor shall complete the improvements to the lease premises (Tenant Work) in accordance with the approved Final Contract Documents. Lessor shall pay for the cost of Tenant Work up to the amount of the allowance described in Section 3. Lessor shall submit monthly progress billings to Lessee for costs which exceed or are not included in said allowance, which shall be payable within ten (10) days after receipt. Final billing shall be rendered and payable within ten (10) days after acceptance of the leased premises by Lessee in accordance with the terms of the Lease, Notwithstanding the foregoing, the retainage and progress payment system outlined in the construction contract shall be subject to Lessee’s prior approval.
5.3 Final Plans and Modifications . If Lessee shall request any change from the approved Final Contract Documents, Lessee shall request such change in writing to Lessor and such request shall be accompanied by all plans and specifications necessary to show and explain changes from the approved Final Contract Documents. After receiving this information, Lessor shall give Lessee a written price for the cost of engineering and design services to incorporate the changes in Lessee’s Final Contract Documents. There shall be no charge from Lessor or
 
Exhibit B
Lessor’s Architect for engineering and design services required as a result of lessee’s change orders except to the extent that the work described in Section 4.4(b) or (c) requires revision or the additional service described in the last paragraph of Section 4.4 requires revision. If Lessee approves such price in writing, Lessor shall have such Final Contract Documents changes made and the cost thereof shall be a charge to Tenant Work. Within a reasonable time after completion of such changes in the Final Contract Documents, Lessor shall obtain and notify Lessee in writing of the construction cost, if any, which shall be chargeable or credited to Lessee as a result of such change. Lessee shall use its reasonable best efforts to days notify Lessor in writing within five (5) days whether to proceed with such change. In the absence of such notice, Lessor shall proceed in accordance with the previously approved Final Contract Documents before such change was requested. Tenant shall be responsible for any demolition work required as a result of the change.
5.4 Lessee’s Entry to Leased Premises . Lessee’s entry to the leased premises for any purpose prior to commencement of the lease term shall be scheduled in advance with Lessor and shall be subject to all the terms and conditions of the Lease, except the payment of rent. Lessee’s entry shall mean entry by Lessee its officers, contractors, office planner, licensees, agents, servants, employees, guests, invitees or visitors.
5.5 Lessee’s Telephone . Lessee is responsible for Lessee’s telephone system. Lessee shall select Lessee’s telephone system. Information concerning telephone equipment size, manufacturer, technical specifications, special requirements and other information requested by Lessor’s Architect shall be provided by Lessee to Lessor’s Architect during the planning phase. Lessee shall coordinate installation of the telephone system with Lessor’s tenant construction coordinator during the construction phase.




5.6 Commencement of Lease Term . The lease term shall commence as provided in Section 1.3 of the lease. If substantial completion of Tenant Work is delayed as a result of:
(i) Lessee’s failure to timely deliver the plans and specifications identified in Section 4.2 of this Exhibit or any inadequacy in such plans and specifications; or
(ii) Lessee’s failure to approve plans and specifications and price by the dates or within the time periods required by the lease (including this Exhibit); or
(iii) Lessee’s change(s) in Final Preliminary Plans or Final Contract Documents after they have been approved by Lessor where Lessee has been advised by Lessor that such change will cause delay, and notwithstanding such advice Lessor elects to require such changes; or
(iv) Lessee’s requests for materials, finishes or installations other than the building standard items and improvements specified by Lessor for the Building, where Lessee has been advised by Lessor that use of such non building standard item(s) will cause delay, and notwithstanding such advice, Lessee elects to use such non building standard item(s); or
 
Exhibit B
(v) Lessee’s failure to timely perform any of its other obligations under the lease (including this Exhibit) (this provision (v) will operate only if Lessor has provided Lessee with notice of one of the enumerated failures on Lessee’s part and Lessee has failed to remedy such failure within two (2) business days after receipt of such notice);
then the costs of such delays shall be a charge to Tenant Work and Lessor shall be deemed to have delivered possession of the leased premises to Lessee and the lease term and rent shall commence five (5) days after the date such work would have Substantially Completed if it was not so delayed. This Section 5.6 pertains only to delay which causes occupancy of the leased premises to be delayed until after January 1, 1993.
6. General Provisions .
The following provisions shall be applicable to all Tenant Work.
(a) Lessee shall be responsible for the design and function of all special improvements made to the leased premises.
(b) Lessee shall not install sunscreens or other materials between the blinds on exterior windows or visible from the exterior window of the leased premises.
(c) If a portion of the Tenant Work or any other installation (including furniture, fixtures and equipment) within the leased premises (hereinafter collectively referred to as such work) is to be performed at any time by someone other than the Lessor’s contractor or subcontractor, then the following terms and conditions shall apply:
1. Subject to the terms of the lease, all such work shall be subject to the prior approval of the Lessor. Lessee shall be responsible to coordinate and schedule such work with the Lessor’s Tenant Construction Coordinator.
2. All costs and expenses of such work shall be paid by Lessee unless otherwise mutually agreed.
3. If any of such work is performed by other than union labor licensed to perform such work within the City of Seattle, Lessee shall be responsible for delay caused by such use, including work stoppages, where such delay causes occupancy of the leased premises to be after January 1, 1993.
4. All such work shall conform to written standards or rules and regulations of the Lessor.
5. Lessee shall at no time permit anything to be done whereby the Building or the land upon which it is located may be subjected to any mechanic’s or other liens or encumbrances arising out of the Tenant Work.
 
Exhibit B
6. If the performance of work requires additional services or facilities (including, but not limited to, utilities, cleanup or other cleaning services, trash removal from the leased premises and site of the Building, field supervision or ordering materials) be provided, Lessee shall pay Lessor (or Lessor’s contractor, if directed to do so by Lessor) a reasonable charge therefor if the services are performed by Lessor’s contractor. If performed by Lessor, the charge shall not exceed the direct costs to provide such services. Lessee and its contractors and suppliers shall use the freight elevator for personnel and delivery. Extended use shall be scheduled in advance with the Lessor for use between 5:30 AM and 7:00 AM or after 5:30 PM. A reasonable charge, on a per item basis shall be charged to Lessee by Lessor for oversize or overweight items requiring the assistance of an elevator technician.




7. Lessor shall have no responsibility for such work. Lessee shall remedy at Lessee’s expense and be responsible for any and all defects in such work. Lessee shall reimburse Lessor for any extra expense incurred by Lessor by reason of faulty work done by Lessee or Lessee’s contractor(s), by reason of delays caused by such work, or by reason of inadequate clean up.
8. Lessee shall at its sole expense comply with all applicable laws and all regulations and requirements of municipal or other governmental bodies exercising authority over such work and this compliance shall include the filing of plans and other documents as required and the procuring of all required licenses or permits.
9. If any shutdown of plumbing, electrical, fire and life safety equipment or air conditioning equipment becomes necessary, Lessee shall notify Lessor and Lessor will determine when such shutdown may be made. Any such shutdown shall be done only if an agent or employee of Lessor is present. The expense of such employee or agent shall be charged to Tenant Work if it was incurred primarily because of the Tenant Work being performed by Lessee’s contractor. In the case of a shutdown of fire and life safety equipment, it shall be Lessee’s responsibility to obtain all necessary fire department and other governmental approvals.
10. Any reasonable complaints by other tenants or Lessor regarding noise, fumes or odors are to be remedied immediately or alteration operations are to cease until such noise, fumes or odor are abated.
11. Lessee or Lessee’s contractor shall not install plumbing, mechanical, electrical wiring or fixtures, acoustical or integrated ceilings, unless prior written approval is obtained from Lessor. In addition to the foregoing, all wiring and. electrical panels for data processing and other special electrical equipment shall be installed only under the coordination supervision of Lessor or Lessor’s electrical contractor (i.e., in the presence of and in a mariner approved by Lessor or Lessor’s electrical contractor). Lessor and Lessor’s electrical contractor shall not incur any obligations or liability to Lessee or Lessee’s contractors or others as a result of such coordination supervision. Such coordination supervision by Lessor or Lessor’s electrical contractor shall be at Lessee’s expense.
 
Exhibit B
12. Lessee agrees to be entirely responsible for the balancing of any heating, ventilating or air conditioning system installed by Lessee. Such balancing shall be performed only by a contractor or contractors approved in writing in advance by Lessor.
13. Lessee shall be responsible for any delay in occupancy of the leased premises after January 1, 1993 as a result of such work.
(d) If Lessee requests to install any fixtures, furniture or equipment in the leased premises or perform any alterations, additions or improvements to the leased premises which are in addition to or subsequent to the Tenant Work, and Lessor consents to such requests, the terms and conditions of this Exhibit (excluding Section 3) shall pertain to all such work.
 
Exhibit B
EXHIBIT C
JANITORIAL SPECIFICATIONS
LESSEE’S PREMISES
DAILY SERVICES :
 
A.
Turn off all lights except those required to be left on.
 
B.
Vacuum carpeted areas and entrance mats. (Traffic patterns and around desks as needed.)
 
C.
Dust mop all resilient floors with treated dust mops.
 
D.
Dust desks, chairs, window ledges, credenzas, cabinets, handrails, countertops, banisters and horizontal surfaces with treated dust rags.
 
E.
Papers and folders on desks are not to be moved.
 
F.
Empty waste baskets, insert liners as required, remove and deposit trash in containers.
 
G.
Return chairs and waste baskets to proper positions.




 
H.
Police all interior stairwells. (if carpet vacuum)
 
I.
Police all interior public corridor planters.
 
J.
Dust and remove debris from all entrances and all metal door thresholds.
 
K.
Wipe clean all smudged brightwork.
 
L.
Spot clean all carpets, resilient and composition floors as reasonably required.
 
M.
Vacuum and clean all walk-off mats as required.
 
N.
Close all drapes and venetian blinds at exterior windows. If requested.
 
O.
Check for burned out lights and report to supervisor — supervisor to leave a list with the Building Management Office.
 
P.
Activate all alarm systems as instructed by tenant.
 
Exhibit C
 
Q.
Provide janitorial services which are required with respect to any recycle program(s) made available by Lessor to tenants of the Building.
WEEKLY SERVICES :
 
A.
Perform all “low dusting” not done daily; coatracks and shelves, desks, credenzas, counters, cabinets, all ledges and flat surfaces within reach, furniture ledges; window sills, door louvers, wood paneling and moulding.
 
B.
Dust inside of all door jambs.
 
C.
Clean and polish chrome and bright metal, entrance doors, kick and push plates, and all metal thresholds.
 
D.
Dust all vinyl base.
 
E.
Completely vacuum and edge all carpeted areas.
 
F.
Vacuum under and around all desks and office furniture. (Does not include moving plastic or similar carpet protectors.)
 
G.
Remove fingerprints, smudges, etc. from all doors, frames, glass partitions, windows, light switches, walls, elevator door jambs and elevator interiors.
 
H.
Clean, sanitize and polish all drinking fountains.
 
I.
Clean all phones.
MONTHLY SERVICES :
 
A.
Dust all high reach areas including tops of door frames, furniture ledges, air conditioning diffusers, tops of partitions, picture frames, etc.
 
B.
Scrub and re-wax all hard surface floors as required.
 
C.
Inspect leased premises to determine that janitorial services are being provided as required.




QUARTERLY SERVICES :
 
A.
Dust exterior venetian blinds.
 
B.
Dust light fixtures using damp cloth.
 
C.
Strip all hardsurfaced floors, refinish and machine polish to uniform appearance.
 
Exhibit C
SEMI-ANNUAL SERVICES :
 
A.
Wash and dry all trash receptacles as required.
 
B.
Wash and dry all air diffusers and grills.
COMMON AREAS
RESTROOM SERVICE SPECIFICATIONS
DAILY SERVICES :
 
A.
Refill all paper and soap dispensers; clean out all plugged soap dispensers.
 
B.
Clean mirrors, bright metal and all other restroom fixtures.
 
C.
Wash and sanitize all toilets, both sides of toilet seats, urinals, sinks, and partitions.
 
D.
Remove stains, descale toilets, urinals, and sinks.
 
E.
Wet mop floors with disinfecting cleaner.
 
F.
Empty all waste receptacles.
 
G.
Remove all restroom trash from Building.
 
H.
Spot clean fingerprints, marks from walls, partitions, glass, aluminum and light switches.
 
I.
Report all fixtures not working properly to Building Management Office.
WEEKLY SERVICES :
 
A.
Dust all low reach and high reach areas, including mirror tops, partition tops and edges, and air conditioning vents.
MONTHLY SERVICES :
 
A.
Wipe down all tile walls; scrub vinyl walls.
 
B.
Clean all ventilation grills.
 
C.
Dust all doors and door jambs.
 
Exhibit C
 
D.
Scrub and wax tile floors.




SEMI-ANNUAL SERVICES :
 
A.
Machine scrub floors and re-seal as needed.
MAIN FLOOR AND ELEVATOR LOBBIES AND
PUBLIC CORRIDOR AND STAIRWAY SPECIFICATIONS
DAILY SERVICES :
 
A.
Spot clean all swinging and revolving glass doors exclusive of tenant doors.
 
B.
Spot clean all glass including low partitions, mirrors and the corridor side of all windows.
 
C.
Spot clean all bright work, including but not limited to door hardware, kick plates, hand rails, fountains, trash receptacles, planters, elevator call buttons, hose cabinets and outlet cover plates.
 
D.
Spot clean all masonry wall surfaces.
 
E.
Spot clean and dust directory board glass and ledge.
 
F.
Empty and clean all waste baskets.
 
G.
Vacuum and edge all carpets and entry mats and minor spot cleaning as needed.
 
H.
Treat and polish elevator doors and call buttons as needed.
 
I.
Police Building stairs.
 
J.
Clean all cigarette urns.
WEEKLY SERVICES :
 
A.
Spot clean, sweep, mop and buff all hardsurface floorings, if any.
 
B.
Sweep stairwells from parking levels and all service stairwells.
 
C.
Clean all swinging and revolving glass doors exclusive of tenant doors.
MONTHLY SERVICES :
 
A.
Clean all chrome and architectural aluminum.
 
Exhibit C
 
B.
Steam clean carpets in main entrance lobby.
 
C.
Wash all lobby glass.
SEMI-ANNUAL SERVICES :
 
A.
Steam clean carpets in all public areas.




PASSENGER ELEVATOR SPECIFICATIONS
DAILY SERVICES :
 
A.
Clean and polish inside elevator doors, control panels, and floor indicator panels.
 
B.
Spot clean outside door surfaces and lobby call buttons.
 
C.
Spot clean carpet as needed.
 
D.
Vacuum and edge all cab floors thoroughly.
 
E.
Vacuum all elevator thresholds. Clean and polish.
 
F.
Polish all cab wall panels.
 
G.
Clean cab telephone cabinets.
WEEKLY SERVICES :
 
A.
Thoroughly clean entire interior surface.
 
B.
Vacuum and edge carpeted rear walls of all cabs, if any.
 
C.
Dust ceiling.
 
D.
Clean and polish all elevator thresholds.
JANITORIAL, ELECTRICAL, TELEPHONE CLOSET SPECIFICATIONS
DAILY SERVICES :
 
A.
Remove trash from all of the above areas.
 
B.
Maintain an orderly arrangement of janitorial supplies and paper products in the storage rooms and service sink closets.
 
Exhibit C
 
C.
Maintain an orderly arrangement of all equipment stored in these areas such as mops, buckets, brooms, vacuum cleaners, scrubbers, etc.
 
D.
Sweep storeroom floors.
 
E.
Receive and store all janitor supplies in an orderly manner.
WEEKLY SERVICES :
 
A.
Damp mop all composition floors in store rooms. Deodorize and disinfect as required.




EXTERIOR STRUCTURE AND GROUNDS SERVICE SPECIFICATIONS
DAILY SERVICES :
 
A.
Police entire perimeter of building including Plaza, fountain, landscaped areas, storm drain grills, and ventilation grills to the property lines on all sides.
 
B.
Spot sweep accumulation soft dirt, papers and leaves in all corners where wind tends to cause a collection of this debris.
 
C.
Spot clean around entrance to the building.
 
D.
Spot clean all exterior glass at building entrances.
 
E.
Clean all hand rails around building exterior.
 
F.
Vacuum all entry walk-off mats.
 
G.
Empty all waste receptacles and remove trash to designated trash areas.
 
H.
Sweep sidewalk, steps and landscaped areas, walks and benches, and hose down building entrances as required.
 
I.
Machine scrub, pressure wash, or steam clean exterior sidewalk and plaza areas, as required (approximately four times per year).
LOADING DOCK, TRASH AREA AND SERVICE ENTRANCE SPECIFICATIONS
DAILY SERVICES :
 
A.
Place all miscellaneous trash and debris, except construction material in the trash receptacles, compactors or balers.
 
Exhibit C
 
B.
Neatly stack all trash in designated areas.
 
C.
Sweep entire area.
 
D.
Hose down or mop entire trash area and disinfect and deodorize as required.
 
E.
Hose down loading dock and service entrance area as required.
BELOW GRADE PARKING LEVEL CORE AREA SPECIFICATIONS
DAILY SERVICES :
 
A.
Clean all cigarette urns.
 
B.
Vacuum and spot clean all carpets.
 
C.
Spot clean walls and door jams as required.
 
Exhibit C




EXHIBIT D-1 (Two Union Square)
The Permanent Lender Nondisturbance and Attornment Agreement shall contain the following provisions:
1. Lessee hereby agrees, for itself and any successor or assign under the Lease, that all its right, title, and interest as lessee under the Lease is and shall be subject and subordinate to the terms and provisions of the Deed of Trust with the same force and effect as if the Lease had been executed and delivered after the execution, delivery and recording of the Deed of Trust and that, so long as such Deed of Trust shall be in effect, it shall look only to Lessor to observe and perform the covenants and obligations of Lessor under the Lease and at no time shall the Lender have any responsibility or liability whatsoever therefor, except for such period of time as the Lender is the owner of the Property.
2. The Lender and Lessee agree that so long as Lessee is not in default under the Lease upon the exercise of the power of sale contained in the Deed of Trust or conclusion of a judicial foreclosure or sale in lieu of foreclosure with respect to the Property as a result of an Event of Default (as defined in the Deed of Trust), the Lender will not terminate the Lease and that the Lender will not join Lessee in any foreclosure proceedings, and Lessee shall attorn to and recognize the Lender as Lessee’s lessor under the Lease. Thereupon the Lease shall continue in full force and effect as a direct lease between Lessee and the Lender, upon all the terms and conditions of the Lease. Any such attornment shall be effective and self-operative as of the date of such exercise of power of sale, or upon such foreclosure or sale in lieu of foreclosure without the execution of any further instrument; provided, however, that upon the request of the Lender, Lessee shall execute and deliver any such instruments in recordable form as shall be satisfactory to the Lender to evidence such attornment. The Lender shall have no liability to Lessee for any act or omission of Lessor or any claims arising prior to such attornment nor shall the Lender be liable for the performance of any obligation under the Lease prior to such attornment, except that (a) any obligation of the Lessor under the Lease to provide tenant improvements or allowances for tenant improvements, and (b) any provisions in the Lease which relate to cost reimbursements, set-off rights, free rent (and the like) which represent liquidated amounts otherwise owing by Lessor to Lessee under the Lease prior to an attornment, will be honored by Lender in the event Lessor is either foreclosed by Lender or Lessor deeds the Property to Lender in lieu of foreclosure. Lessee shall not modify, surrender or terminate, either orally or in writing, the Lease without the Lender’s written consent, except where such rights are expressly provided for in the Lease.
3. Lessee covenants and agrees that it will not pay or remit payment for any rents or other charges pursuant to the Lease more than one (1) month in advance of the date such payment is due. Lessee further covenants and agrees that, upon written notice by the Lender or its agent to Lessee, it will pay all rents and other charges due with respect to the Lease to the Lender.
4. No actions, whether voluntary or otherwise, are pending against the Lessee under the bankruptcy laws of the United States or any state thereof.
5. To the best of Lender’s knowledge, One Union Square Venture is the fee owner of the Property on the date of this Agreement.
 
Exhibit D-1
 
 
 
 
 
D/T (8-81)
 
 
  
Exhibit D-2
 
 
 
  
ONE UNION SQUARE
RECORDING REQUESTED BY AND
WHEN RECORDED RETURN TO:
 
 
  
 
SUBORDINATION,
NON-DISTURBANCE AND ATTORNMENT AGREEMENT
 
NOTICE:
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.
THIS AGREEMENT is entered into by and among Tenant, Landlord, and Beneficiary and affects the Property described in Exhibit A attached hereto. The terms “Tenant”, “Landlord”, “Beneficiary”, “Premises”, “Lease”, “Property”, “Loan”, “Note”, and “Mortgage” are defined in the Schedule of Definitions attached hereto as Exhibit B. This Agreement is entered into with reference to the following facts:
A. Landlord and Tenant have entered into the Lease covering the Premises in the Property.




B. Beneficiary has agreed to make the Loan to Landlord to be evidenced by the Note, which Note is to be secured by the Mortgage covering the Property, provided that the Lease is subordinated to the lien of the Mortgage.
C. For the purposes of completing the Loan, the parties hereto desire expressly to subordinate the Lease to the lien of the Mortgage, it being a condition precedent to Beneficiary’s obligation to consummate the Loan that the lien of the Mortgage be unconditionally and at all times prior and superior to the leasehold interests and estates created by the Lease.
D. Tenant has requested that Beneficiary agree not to disturb Tenant’s possessory rights in the Premises and recognize the terms of the Lease in the event Beneficiary should foreclose the Mortgage; provided that Tenant is not then in default under the Lease and provided further that Tenant attorns to Beneficiary or the purchaser at any foreclosure or trustee’s sale of the Property.
NOW THEREFORE, in consideration of the mutual covenants contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Subordination. Notwithstanding anything to the contrary set forth in the Lease, the Lease and the leasehold estate created thereby and all of Tenant’s rights thereunder shall be and shall at all times remain subject, subordinate and inferior to the Mortgage and the lien thereof, and all rights of Beneficiary thereunder and to any and all renewals, modifications, consolidations, replacements and extensions thereof.
2. Acknowledgment and Agreement by Tenant. Tenant acknowledges and agrees that:
(a) Beneficiary would not make the Loan without this Agreement;
Exhibit D-2
(b) It consents to and approves the Mortgage and the agreements evidencing and securing the Loan; and
(c) Beneficiary, in making any disbursements to Landlord, is under no obligation or duty to oversee or direct the application of the proceeds of such disbursements, and such proceeds may be used by Landlord for purposes other than improvement of the Property.
(d) From and after the date hereof, in the event of any act or omission by Landlord which would give Tenant the right, either immediately or after the lapse of time, to terminate the Lease or to claim a partial or total eviction, Tenant will not exercise any such right:
(i) until it has given written notice of such act or omission to Beneficiary; and
(ii) until the same period of time as is given to Landlord under the Lease to cure such act or omission shall have elapsed following such giving of notice to Beneficiary and following the time when Beneficiary shall have become entitled under the Mortgage to remedy the same.
(e) It has notice that the Lease and the rent and all other sums due thereunder have been assigned or are to be assigned to Beneficiary as security for the Loan secured by the Mortgage. In the event that Beneficiary notifies Tenant of a default under the Mortgage and demands that Tenant pay its rent and all other sums due under the Lease to Beneficiary, Tenant shall honor such demand and pay its rent and all other sums due under the Lease directly to Beneficiary or as otherwise required pursuant to such notice.
(g) It has no right or option of any nature whatsoever, whether pursuant to the Lease or otherwise, to purchase the Premises or the Property, or any portion thereof or any interest therein, and to the extent that Tenant has had, or hereafter acquires, any such right or option, the same is hereby acknowledged to be subject and subordinate to the Mortgage and is hereby waived and released as against Beneficiary.
(h) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a non-disturbance agreement.
3. Foreclosure and Sale. In the event of foreclosure of the Mortgage, or upon a sale of the Property pursuant to the trustee’s power of sale contained therein, or upon a transfer of the Property by conveyance in lieu of foreclosure, then:
(a) Non-Disturbance . So long as Tenant complies with this Agreement and is not in default under any of the terms, covenants, or conditions of the Lease, the Lease shall continue in full force and effect as a direct lease between the succeeding owner of the Property and Tenant, upon and subject to all of the terms, covenants and conditions of the Lease, except as set forth in Exhibits C and D attached hereto, for the balance of the term of the Lease (including extension options) Tenant hereby agrees to adhere to and accept any such successor owner as landlord under the Lease, and to be bound by and perform all of the obligations imposed by the Lease, and Beneficiary, or any such successor owner of the Property, will not disturb the possession of Tenant, and will be bound by all of the obligations imposed on the Landlord by the Lease, except as set forth in Exhibits C and D attached hereto; provided, however, that Beneficiary, or any purchaser at a trustee’s or sheriff’s sale or any successor owner of the Property shall not be:




(i) liable for any act or omission of a prior landlord (including Landlord); or
 
Exhibit D-2
(ii) subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord); or
(iii) bound by any rent or additional rent which Tenant might have paid in advance to any prior landlord (including Landlord) for a period in excess of one month or by any security deposit, cleaning deposit or other prepaid charge which Tenant might have paid in advance to any prior landlord (including Landlord); or
(iv) bound by any agreement or modification of the Lease made without the written consent of Beneficiary, which consent shall not be unreasonably delayed or withheld.
(b) New Lease . Upon the written request of either Beneficiary or Tenant to the other given at the time of any foreclosure, trustee’s sale or conveyance in lieu thereof, the parties agree to execute a lease of the Premises upon the same terms and conditions as the Lease between Landlord and Tenant, with the changes set forth in Exhibits C and D attached hereto, which lease shall cover any unexpired term of the Lease (including extension options) existing prior to such foreclosure, trustee’s sale or conveyance in lieu of foreclosure.
(c) The provisions of the Lease set forth in Exhibit C shall be of no force or effect and shall not be binding upon Beneficiary or any purchaser or transferee acquiring the Property as a result of such foreclosure, trustee’s sale or conveyance in lieu thereof, and in the event of such foreclosure, trustee’s sale, or conveyance in lieu thereof, the provisions set forth in Exhibit D shall be added to the Lease and shall be effective and binding upon Tenant.
4. Acknowledgment and Agreement by Landlord. Landlord, as landlord under the Lease and mortgagor or trustor under the Mortgage, acknowledges and agrees for itself and its heirs, successors and assigns, that:
(a) This Agreement does not:
(i) constitute a waiver by Beneficiary of any of its rights under the Mortgage; and/or
(ii) in any way release Landlord from its obligations to comply with the terms, provisions, conditions, covenants, agreements and clauses of the Mortgage;
(b) The provisions of the Mortgage remain in full force and effect and must be complied with by Landlord; and
(c) In the event of a default under the Mortgage, Tenant may pay all rent and all other sums due under the Lease to Beneficiary as provided in this Agreement.
 
Exhibit D-2
5. No Obligation of Beneficiary. Beneficiary shall have no obligation or incur any liability with respect to the erection or completion of the improvements in which the Premises are located or for completion of the Premises or any improvements for Tenant’s use and occupancy, either at the commencement of the term of the Lease or upon any renewal or extension thereof or upon the addition of additional space, pursuant to any expansion rights contained in the Lease.
6. Notice. All notices hereunder to Beneficiary shall be deemed to have been duly given if mailed by United States registered or certified mail, with return receipt requested, postage prepaid to Beneficiary at its address set forth in Exhibit B attached hereto (or at such other address as shall be given in writing by Beneficiary to Tenant) and shall be deemed complete upon any such mailing.
7. Miscellaneous.
(a) This Agreement supersedes any inconsistent provision of the Lease.
(b) Nothing contained in this Agreement shall be construed to derogate from or in any way impair or affect the lien and charge or provisions of the Mortgage.
(c) Beneficiary shall have no obligations nor incur any liability with respect to any warranties of any nature whatsoever, whether pursuant to the Lease or otherwise, including, without limitation, any warranties respecting use, compliance with zoning. Landlord’s title, Landlord’s authority, habitability, fitness for purpose or possession.
(d) In the event that Beneficiary shall acquire title to the Premises or the Property, Beneficiary shall have no obligation, nor incur any liability, beyond Beneficiary’s then interest, if any, in the Premises, and Tenant shall look exclusively to such interest of Beneficiary, if any, in the Premises for the payment and discharge of any obligations imposed upon Beneficiary hereunder or under the Lease, and Beneficiary is hereby released and relieved of any other obligations hereunder and under the Lease.




(e) This Agreement shall inure to the benefit of the parties hereto, their respective successors and permitted assigns; provided however, that in the event of the assignment or transfer of the interest of Beneficiary, all obligations and liabilities of Beneficiary under this Agreement shall terminate, and thereupon all such obligations and liabilities shall be the responsibility of the party to whom Beneficiary’s interest is assigned or transferred; and provided further that the interest of Tenant under this Agreement may not be assigned or transferred without the prior written consent of Beneficiary, which consent shall not be unreasonably delayed or withheld.
(f) This Agreement shall be governed by and construed in accordance with the laws of the State in which the Property is located.
 
Exhibit D-2
IN WITNESS WHEREOF, the parties have executed this Subordination, Non-Disturbance, and Attornment Agreement as of                      , 19          .
 
NOTICE:
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT CONTAINS PROVISIONS WHICH ALLOW THE PERSON OBLIGATED ON THE LEASE TO OBTAIN A LOAN, A PORTION OF WHICH MAY BE EXPENDED FOR OTHER PURPOSES THAN IMPROVEMENT OF THE PROPERTY.
IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT, THE PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT THERETO.
 
 
 
 
 
 
 
 
 
 
BENEFICIARY:
 
 
 
METROPOLITAN LIFE INSURANCE
 
 
 
 
 
 
COMPANY, a New York corporation
 
 
 
 
 
 
 
 
 
 
By
 
 
 
 
 
 
TENANT:
 
 
 
 
 
,
 
 
 
 
a
 
 
 
 
 
 
 
 
 
 
By
 
 
 
 
 
 
 
 
 
 
By
 
 
 
 
 
 
LANDLORD:
 
 
 
 
 
,
 
 
 
 
a
 
 
 
 
 
 
 
 
 
 
By
 
 
 
 
 
 
 
 
 
 
By
 
 
 
Exhibit D-2
Legal Description
EXHIBIT A
 
 
Schedule of Definitions




“Beneficiary” shall mean Metropolitan Life Insurance Company, a New York corporation. All notices hereunder to Beneficiary shall be mailed to:
 
 
 
 
 
 
 
 
Metropolitan Life Insurance Company
One Madison Avenue
New York, New York 10010
  
with a copy to;
 
Metropolitan Life Insurance Company
2855 Campus Drive
Attn:
 
Senior Vice President
  
San Mateo, California 94403
 
 
Real Estate Investments
  
Attn:
  
Vice President
Real Estate Investments
 
 
“Mortgage” shall mean a first lien Mortgage or Deed of Trust and Security Agreement with Assignment of Rents dated as of                      , 19          , encumbering the Property, executed by Landlord, as Mortgagor or Trustor, to                                                       , a                                                                                                                                                 , as Trustee, in favor of Beneficiary, securing repayment of the Loan evidenced by the Note, to be recorded in the records of the County in which the Property is located.
 
 
 
 
 
 
 
 
 
 
“Landlord” shall mean
 
 
 
,
 
 
 
 
 
 
 
 
 
a
 
 
 
,
 
 
 
 
 
 
 
 
 
having an office at
 
 
 
,
 
 
 
 
 
 
 
 
 
 
 
.
 
 
“Lease” shall mean a certain lease entered into by and among Landlord and Tenant dated as of                      , 19          , covering the Premises.
 
“Loan” shall mean a first mortgage loan in an amount up to $                                                        from Beneficiary to Landlord.
 
 
 
 
 
 
“Note” shall mean that certain Installment Note executed by Landlord in favor of
 
 
 
 
 
 
 
 
 
 
 
,
 
 
 
 
 
a
  
 
 
,
 
 
 
 
 
 
 
 
 
 
 
 
 
dated as of
 
 
 
,
 
19           ,
 
in the amount of $
 
 
 
.
 




 
“Premises” shall mean certain space in the improvements located in and upon the Property.
 
“Property” shall mean the real property described in Exhibit A attached hereto together with the improvements thereon.
 
 
 
 
 
 
“Tenant” shall mean
 
 
 
,
 
 
 
 
 
a
 
 
 
,
 
 
 
 
 
having an office at
 
 
 
,
 
 
.
EXHIBIT B
Exhibit D-2
In the event of foreclosure of the Mortgage, or upon a sale of the Property pursuant to the trustee’s power of sale contained therein, or upon a transfer of the Property by conveyance in lieu of foreclosure, the provisions of the Lease set forth below shall be of no force or effect:
None
EXHIBIT C
In the event of foreclosure of the Mortgage, or upon a sale of the Property pursuant to the trustee’s power of sale contained therein, or upon a transfer of the Property by conveyance in lieu of foreclosure, the provisions set forth below shall be added to the Lease and shall be effective and binding:
None
EXHIBIT D
(Add Notarial Acknowledgments for
Beneficiary, Tenant and Landlord)
Exhibit D-2
[***]
[***] Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.
SUPPLEMENTAL LEASE AGREEMENT
Lessor:      One Union Square Venture
Lessee:      Continental, Inc.
Agreement made this 25th day of August, 1992 between One Union Square Venture (Lessor) and Continental Inc. (Lessee).
Lessor and Lessee are parties to lease dated March 5, 1992 (the Lease) for leased premises in the Two Union Square Building in Seattle, Washington. The parties desire to supplement the Lease and agree as follows:
1. Clauses (a), (b) and (c) of Section 1.1 (Leased Premises) of the Lease describing the initial leased premises are amended in their entirety to read as follows:
(a)
All of the office space on floors 18, 19 and 20 in the TUS Building, for a total of 59,898 RSF on these three floors.




(b)
2,692 USF (no load factor to be applied) on level 2 of the retail area of the Building as outlined in black on attached Exhibit F for Lessee’s branch bank.
(c)
2,401 USF (no load factor to be applied) on level 3 of the retail area of the Building as outlined in black on attached Exhibit G.
2. Base monthly rent shall be calculated as provided in Section 1.4 (Rent) of the Lease, except the rent rate for base monthly rent for the twenty-nine months immediately following the first month of full occupancy shall be $7.00/RSF/year for 2,600 square feet of office space and $17.98/RSF/year (USF/year for retail space) for the remainder of the leased premises. By way of example, if the first month of full occupancy commences on January 1, 1993, the base monthly rent for the initial leased premises (59,898 RSF of office space and 5,093 USF of retail space) for the term January 1, 1993 through December 31, 2002 will be:
 
 
 
Period
Base Monthly Rent
January 1 through January 31, 1993
$
25,508.97

February 1, 1993 through June 30, 1995
$
94,999.16

July 1, 1995 through December 31, 2002
$
97,378.18

3. Section 1.9 (Exhibits and Other Attachments which are part of the Lease) is amended to add thereto:
 
 
 
Exhibit F:
  
Print with Branch Bank space outlined in black, replacing the corresponding page in Exhibit A.
 
 
Exhibit G:
  
Print with upper level of Branch Bank Location outlined in black, replacing the corresponding page in Exhibit A.
4. The first option to add space under Section 27.1 shall be reduced to between 4,000 and 6,000 RSF. The first sentence of Section 27.1 is therefore modified to read “Lessee shall have one (1) option to add between 4,000 and 6,000 RSF to its leased premises and three (3) subsequent options to add between 6,000 and 8,000 RSF to its leased premises each time.”
5. The table in Section 28.3 is deleted from the Lease. The Retail Space subject to Lessee’s Section 28.3 rights shall be:
(a)
The IBM, Federal Express and One Stop Copy spaces, or
(b)
the upper level of Plaza Building, corner of Sixth Avenue and Union Street.
If any of the space described in clause (a) is added to the leased premises, then the rights to add any of the space described in clause (b) shall terminate. If any of the space described in clause (b) is added to the leased premises, then the rights to add any of the space described in clause (a) shall terminate.
IN WITNESS WHEREOF, this supplemental lease agreement has been executed by Lessor and Lessee as of the day and year first above set forth.
 
 
 
 
 
 
 
 
 
 
LESSEE:
 
 
 
LESSOR:
 
 
 
 
 
CONTINENTAL, INC.
 
 
 
ONE UNION SQUARE VENTURE,
A Washington Joint Venture
 
 
 
 
By
 
/s/ Richard S. Swanson
 
 
 
By UNICO PROPERTIES, INC.
 
 
 
 
 
 
(Manager and authorized rental agent for
One Union Square Venture)
 
 
 
 
By
 
/s/ Bruce W. Williams
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By
 
/s/ Stephen W. Camp
 
 
 
 
 
 
 
 
Stephen W. Camp, Vice President




LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 29 th day of December, 1992, before me personally appeared Stephen W. Camp , to me known to be the Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and One Union Square Venture, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Elaine [Illegible Signature]
Notary Public in and for the State of
Washington, residing at Seattle                                                .
My commission expires:   1-15-95                                              .
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 25 day of August, 1992, before me personally appeared Richard S. Swanson and Bruce W. Williams to me known to be the President and Vice President of continental, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Laura [Illegible Signature]
Notary Public in and for the State of
Washington, residing at Seattle                                                .
My commission expires:   2/17/93                                              .
SECURITY PACIFIC BANK 1.7626F
ONE STEP COPY
FEDERAL EXPRESS
TDM - 20682F.
BRANCH BANK 2642 S.F.
INITIALS
CONTINENTAL, INC.
Branch Bank
EXHIBIT F




2,692 SF
INITIALS
CONTINENTAL, INC.
Upper Level of




Branch Bank Location
EXHIBIT G 2,401 SF




SECOND AMENDMENT TO LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED PARTNERSHIP
 
 
Lessee:
  
CONTINENTAL, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: May 6, 1998
Lessor and Lessee are parties to Lease dated March 5, 1992, as amended August 25, 1992, (the Lease) and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1, Leased Premises  is hereby amended from all of the office space on floors 18, 19 and 20 to all of the office space on floors 18, 19, 20 and Rooms 2101-2112 and 2134 - 2137.
2
Section 1.2, Floor Areas  is hereby amended from 54,816 usable square feet; 59,897 rentable square feet to 61,708 usable square feet; 67,685 rentable square feet.
3.
Section 1.2, Floor Areas  is hereby amended from 5.68208 percent of the rentable area of the Building to 6.42088 percent.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing July 1, 1995 and thereafter on the first day of each calendar month until October 31, 1998, Lessee shall continue to pay Monthly Minimum Rent of $89,747.17.
Commencing November 1, 1998 and thereafter on the first day of each calendar month until December 31, 2002, Lessee shall pay Monthly Minimum Rent of $101,416.38.
5.
Lessor shall provide Lessee with tenant improvements on a turnkey basis up to $44.41 per usable square foot on the additional 6,892 usable square feet for improvements to the additional Leased Premises, including A & E fees. As provided in the Lease the CPI was used in place of the BCI to calculate the increase in the tenant improvement allowance.
6.
Exhibit “A” of the Lease, changed to reflect the revised floor plan, is attached hereto and made a part hereof.
7.
Lessee shall be granted five (5) additional parking permits (one for each 1,500 rentable square feet of expansion space), effective November 1, 1998.
8.
All other terms and conditions are to remain the same.




 
 
 
 
 
 
 
 
 
Lessee:
 
 
 
Lessor:
 
 
 
CONTINENTAL, INC.
 
 
 
UNION SQUARE LIMITED
 
 
 
 
PARTNERSHIP, a Washington Limited
Partnership
 
 
 
 
By
 
/s/ HOWARD H. BELL
 
 
 
 
 
 
HOWARD H. BELL
 
 
 
By UNICO PROPERTIES, INC.
Its
 
EXEC V.P.
 
 
 
(Manager and authorized rental agent for
 
 
 
 
 
 
Union Square Limited Partnership)
Date:
 
May 7, 1998
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
By
 
/s/ John Schoettler
 
 
 
 
 
 
 
 
John Schoettler, Vice President
 
 
 
 
 
 
 
Date: May 6, 1998
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 7 th day of May , 1998, before me personally appeared Howard B. Bell , to me known to be the Exec. Vice President of CONTINENTAL, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Elfie E. Holmes
(Print name)
Elfie E. Holmes
Notary Public in and for the State of Washington,
residing at
Benton
My commission expires:   9-30-00                                
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 




On this 6th day of May, 1998, before me personally appeared John Schoettler, to me known to be the Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Shielah C. Sabalza
Shielah C. Sabalza
Notary Public in and for the State of
Washington, residing at Seattle.
My commission expires:  4-02-2002.
THIRD AMENDMENT TO LEASE
 
 
 
 
Lessor:
  
Union Square Limited Partnership
 
 
Lessee:
  
Continental, Inc.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this
Amendment:        June 17, 1998
Lessor and Lessee are parties to Lease dated March 5, 1992, as amended August 25, 1992 and May 6, 1998, (the Lease) and desire to further amend the Lease as follows:
1.
Section 1.1 ,  The office space portion of the Leased Premises are hereby amended from all of the office space on Floors 18, 19, 20, Rooms 2101-12, 2134-2137 to all of the office space on floors l8, 19, 20, Rooms 2101-2112, 2134-2137, and 701-30,735-37, and Part of 731 and 734.
2.
Section 1.2 ,  The office space portion of the Leased Premises is hereby amended from 54,816 usable square feet; 59,897 rentable square feet, to 63,660 usable square feet; 69,983 rentable square feet effective October 1, 1997,70,795 usable square feet; 78,332 rentable square feet effective August 1, 1998, and 77,687 usable square feet; 86,120 rentable square feet effective November 1, 1998.
3.
Section 1.2 ,  Floor Areas is hereby amended to 6.42088 percent of the rentable area of the Building for the premises located on floors 18-21, and .89540 percent for rooms 714-30 and Part 731, and .74119 percent for Rooms 701-13, 735-37 and Part of 734.
4.
Section 1.4 ,  Rent is hereby amended as follows:
Commencing July 1, 1998 and thereafter on the first day of each calendar month until July 31, 1998, Lessee shall pay base monthly rent on the office portion of $107,398.17.
Commencing August 1, 1998 and thereafter on the first day of each calendar month until October 31, 1998, Lessee shall pay base monthly rent on the office portion of $123,400.42
Commencing November 1, 1998 and thereafter on the first day of each calendar month until September 30, 2000, Lessee shall pay base monthly rent on the office portion of $135,069.63.
Commencing October 1, 2000 and thereafter on the first day of each calendar month until January 31, 2002, Lessee shall pay base monthly rent on the office portion of $135,909.63.
Commencing February 1, 2002 and thereafter on the first day of each calendar month until December 31, 20.02, Lessee shall pay base monthly rent on the office portion of $139,388.38.




5.
Section 1.5,  Base Indices is revised as follows; For rooms 714-30 and Part of 3l containing 10,086 RSF, Lessee shall have a base year of 1997. For rooms 701-13, 735-37 and Part 731, 724, Lessee shall have a base year of 1998.
6.
Section 4.4  Real Property Taxes shall have a base year as outlined in Section 5 above.
7.
Section 30  Parking is hereby amended as follows:
Lessor shall make available five (5) monthly parking permits associated with rooms 701-13, 735-37 and Part of 734, effective August 1, 1998, and six (6) monthly parking permits associated with Rooms 714-30 and Part of 731; effective October 1, 1997.
8.
Exhibit “A” of the Lease changed to reflect the revised floor plan is attached hereto and part hereof.
9.
Upon the full execution of this Third Amendment the lease between Lessor and Lessee dated July 30, 1997 for Rooms 714-30, Part of 731 shall be terminated and superceded by this Amendment and the Master Lease.
 
 
 
 
 
 
 
 
 
 
Lessee:
 
 
 
Lessor:
 
 
 
CONTINENTAL, INC.
 
 
 
UNION SQUARE LIMITED
/s/ Howard H. Bell
 
 
 
PARTNERSHIP, a Washington Limited
Partnership
 
 
 
 
By
 
Howard H. Bell
 
 
 
By UNICO PROPERTIES, INC.
 
 
 
 
 
 
(Manager and authorized rental agent for
Its
 
Executive Vice President
 
 
 
Union Square Limited Partnership)
 
 
 
 
 
Date
 
June 23, 1998
 
 
 
By
 
/s/ John Schoettler
 
 
 
 
 
 
 
 
John Schoettler, Vice President
 
 
 
 
 
 
 
 
Date
 
6/25/1998
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 23 rd day of June , 1998, before me personally appeared Howard H. Bell , to me known to be the Exec. Vice President of Continental, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Elfie E. Holmes
(Print name) Elfie E. Holmes                                        
Notary Public in and for the State of Washington,
residing at Benton                                                                 
My commission expires:   9-30-00                                         




LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 25TH day of JUNE , 1998, before me personally appeared John Schoettler, to me known to be the Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
/s/ Shielah C. Sabalza
Shielah C. Sabalza
Notary Public in and for the State of
Washington, residing at Seattle.
My commission expires:  4-02-2002.
FOURTH AMENDMENT TO LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED PARTNERSHIP
 
 
Lessee:
  
CONTINENTAL, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building (the “Building”) as more particularly described in the Lease.
Date of this Amendment: February 15, 2000
Lessor and Lessee are parties to Lease dated March 5, 1992, as amended August 25, 1992, May 6, 1998 and June 17, 1998, (the Lease) and desire to further amend the Lease to add to the Leased Premises that portion of the 21 st floor not previously leased by Lessee (the “Expansion Space”). The parties mutually agree that effective on the date Lessor delivers the Expansion Space to Lessee with tenant improvements substantially complete for occupancy (the “Effective Delivery Date”), which date is anticipated to be September 1, 2000:
1.
Section 1.1 is hereby amended to include all of the office space on floors 18, 19, 20, and 21, together with all of rooms 701-30, 735-37, and part of rooms 731 and 734 on floor 7 as the office space portion of the Leased Premises.
2.
Section 1.2 is hereby amended to provide that the areas of the office space portion of the Leased Premises are increased from 77,687 usable square feet and 86,120 rentable square feet, to 89,067 usable square feet and 98,555 rentable square feet.
3.
Section 1.2 is hereby further amended to reflect that the percentage of the rentable area of the Building that is leased by Lessee for all of floors 18-21 and rooms 701-30, 735-37 and parts of rooms 731 and 734 is 9.2371 percent. (The percentage applicable to all of rooms 701-30, 735-37, and part of rooms 731 and 734 remains at 1.63659 percent.)
4.
Section 1.4 is hereby amended as follows:
Commencing upon the Effective Delivery Date and through September 30, 2000, Lessee shall pay base monthly rent of $153,701.41 (prorated if the Effective Delivery Date is not on the first day of the month).




Provided the Effective Delivery Date has occurred by October 1, 2000, then commencing October 1, 2000 (or prorated if the Effective Delivery Date is not on October 1, 2000) and thereafter on the first day of each calendar month until January 31, 2002, Lessee shall pay base monthly rent of $154,541.41.
Commencing February 1, 2002 and thereafter on the first day of each calendar month until December 31, 2002, Lessee shall pay base monthly rent of $158,020.15.
5.
Lessor shall provide Lessee with tenant improvements for the additional 11,380 usable square feet on floor 21 in keeping with the terms outlined in Section 26 of the Lease.
6.
Lessor shall, on a turnkey basis and in keeping with Section 26 of the Lease, construct an interconnecting stairwell between floor 20 and floor 21 at Lessor’s sole expense.
7.
Lessor and Lessee acknowledge that the addition to the Leased Premises of the remaining 12,435 rentable square feet on the 21 st  floor fully satisfies Lessee’s third and fourth expansion options under Section 27.1 through Section 27.3 of the Lease.
8.
Section 30 Parking is revised as follows:
Lessor shall make available eight (8) additional parking permits associated with the remainder of the 21 st floor, effective September 1, 2000.
9.
Exhibit “A” of the Lease, changed to reflect the revised floor plan, is attached hereto and made a part hereof.
10.
Continental will have plans for improvements on the 21 st  floor prepared by NBBJ for review by Landlord. Construction Drawings are to be completed not later than May 31, 2000. The Effective Delivery Date shall be deemed to be one day earlier than the actual delivery date for every day after May 31, 2000 until they are completed.
All other terms and conditions are to remain the same.
 
 
 
 
 
 
 
 
 
 
Lessee:
 
 
 
Lessor:
 
 
 
CONTINENTAL, INC,
a Washington corporation
 
 
 
UNION SQUARE LIMITED
PARTNERSHIP,
a Washington Limited Partnership
 
 
 
 
 
 
 
By UNICO PROPERTIES, INC.
(Manager and authorized rental agent for
Union Square Limited Partnership)
 
 
 
 
 
By
 
/s/ Brian P. Dempsey
 
 
 
By
 
/s/ Donald M. Wise
 
 
 
 
 
 
 
 
Donald M. Wise
 
 
 
 
 
Its
 
Vice Chairman
 
 
 
Its
 
Senior Vice President
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date:
 
2/15/2000
 
 
 
Date:
 
2/15/2000
LESSOR’S ACKNOWLEDGEMENT
 




 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 15 th day of FEBRUARY , 2000 , before me personally appeared Donald M. Wise, to me known to be the Senior Vice President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Shielah C.Sabalza                                                         
Shielah C.Sabalza
Notary Public in and for the State of
Washington, residing at Seattle.
My commission expires April 2, 2002.
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 15 th day of FEBRUARY , 2000, before me personally appeared BRIAN DEMPSEY , to me known to be the VICE CHAIRMAN of CONTINENTAL, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ SHIELAH C. SABALZA                                             
(Print name) SHIELAH C. SABALZA                        
Notary Public in and for the State of Washington,
residing at SEATTLE                                                      .
My commission expires: APRIL 2, 2002                       .
 
Page 4




FIFTH AMENDMENT TO LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED PARTNERSHIP
 
 
Lessee:
  
HOMESTREET, INC.
 
  
(formerly known as Continental, Inc.)
 
 
Leased Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building (the “Building”) as more particularly described in the Lease.
 
 
Date of this Amendment:
  
July 30, 2001
Lessor and Lessee are parties to a Lease dated March 5, 1992, as amended August 25, 1992, May 6, 1998, June 17, 1998 and February 15, 2000, (the Lease) and desire to further amend the Lease to clarify the calculation and sharing of certain profits related to Lessee’s subleasing of a portion of the Leased Premises to Quadra Financial Group, L.P. Lessor and Lessee also desire to amend the Lease to address the terms and conditions under which Lessee will install and operate the automated teller machine in the portion of the leased premises where the retail branch bank is located, facing onto Sixth Avenue (the “Sixth Avenue ATM”).
1.
Lessee, as Sublandlord, entered into a Sublease Agreement dated May 18, 2000 (“Quadra Sublease”) with Quadra Financial Group, L.P. as Subtenant (“Quadra”) for 18,435 rentable square feet on the 7th floor of the Leased Premises. Lessor consented to the Quadra Sublease on May 30, 2000. For the purpose of calculating the 50% share of net profit from the Quadra Sublease owing to Lessor pursuant to Section 22.3, the following shall govern:
(a)
Lessee has provided Lessor with a calculation through July 2001 of net profit derived from the Quadra Sublease, a copy of which calculation is attached hereto as SCHEDULE 1.
(b)
The parties agree that Lessor is entitled to share equally in the net profits from the Quadra Sublease, to the extent Lessee realizes a net profit at the end of the Term of such Sublease. The mechanism for sharing such profits shall be as follows:
(a)
Commencing in August 2001 and continuing on a monthly basis thereafter so long as Lessee receives net profit on the Quadra Sublease, Lessee shall calculate and remit to Lessor its 50% share of such net profit on a cash flow basis. The payment to Lessor shall be made within five (5) business days following receipt of payment from Quadra. The August payment shall include Lessor’s share of net profits through July 2001, as shown on Schedule 1.
(b)
In the event Lessee does not realize a net profit at the end of the Term of the Quadra Sublease, or in the event such net profit is less than that shared with
HomeStreet/Union Square Fifth Amendment
Page 1
 
Lessor through payments previously made to Lessor on a cash flow basis, then Lessor agrees that it shall reimburse Lessee for any excess payments made to Lessor, up to the amount of net profits previously paid to Lessor hereunder. Such reimbursement shall be made within thirty (30) days following written notice by Lessee to Lessor.
2.
Lessor hereby consents to Lessee’s installation, maintenance and operation of the Sixth Avenue ATM; provided, however, that the design and installation of the signage surround for the Sixth Avenue ATM shall be subject to Lessor’s prior approval, which approval shall not be unreasonably withheld. No additional rent shall be charged for Sixth Avenue ATM. Lessee agrees that it shall, at its sole cost and expense, comply with and perform the following:
(a)
Lessee shall comply with applicable regulatory requirements regarding the operation and maintenance of the Sixth Avenue ATM.
(b)
Upon expiration or earlier termination of the Lease term with respect to Lessee’s bank branch, Lessee shall remove the Sixth Avenue ATM and return the affected portion of the leased premises, including the building facade on Sixth Avenue, to its original condition, reasonable wear and tear excepted. This provision shall also apply in the event Lessee removes the Sixth Avenue ATM prior to termination or expiration of the Lease term.
3.
All other terms and conditions are to remain the same.
 




 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED
PARTNERSHIP,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By UNICO PROPERTIES, INC.
(Manager and authorized rental agent for
Union Square Limited Partnership)
 
 
By   /s/ Kyle Samuels                                                                    
  
 
 
 
Its   Senior V.P.                                                                           
  
 
 
 
Date:   August 2, 2001                                                                
  
 
 
 
 
  
By   /s/ Donald M. Wise                                                                             
 
 
 
  
Its   Sr. V.P.                                                                                                     
 
 
 
  
Date:   8-8-01                                                                                                  
 
 
HomeStreet/Union Square Fifth Amendment
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
 
 
 
 
 
 
 
 
 
STATE OF WASHINGTON
 
 
}
  
 
 
 
 
 
 
 
 
 
ss.
 
 
 
 
COUNTY OF KING
 
 
 
 
 
 
 
On this 8 th day of August , 2001, before me personally appeared Donald M. Wise , to me known to be the Senior Vise President of UNICO PROPERTIES, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ SUZANNE SWANSON                                                         
Printed Name   SUZANNE SWANSON                                  
N OTARY P UBLIC in and for the State of Washington,
residing at   SEATTLE                                                       
My Commission Expires   3-21-04                                  
 
 
HomeStreet/Union Square Fifth Amendment
Page 3
LESSEE’S ACKNOWLEDGMENT
 




 
 
 
 
 
 
 
 
 
 
 
STATE OF WASHINGTON
 
 
}
  
 
 
 
 
 
 
 
 
 
ss.
 
 
 
 
COUNTY OF KING
 
 
 
 
 
 
 
On this 2 nd day of August , 2001, before me personally appeared Kyle Samuels , to me known to be the Senior Vice President of HOMESTREET, INC., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that he (she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Amber English                                                                       
Printed Name   Amber English                                                   
N OTARY P UBLIC in and for the State of Washington,
residing at   Shoreline, WA.                                               
My Commission Expires 8-16-04                                      
 
 
HomeStreet/Union Square Fifth Amendment
Page 4
SCHEDULE 1
INITIAL CALCULATION OF NET PROFIT
FOR
QUADRA SUBLEASE
 
 
 
 
 
 
 
HomeStreet/Union Square Fifth Amendment
  
 
Schedule 1
  
SIXTH AMENDMENT TO LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED PARTNERSHIP
 
 
Lessee:
  
HOMESTREET, INC.
(formerly known as Continental, Inc.)
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: 5th day of March, 2002
Lessor and Lessee are parties to Lease dated March 5, 1992, as amended August 25, 1992, may 6, 1998, June 17, 1998, February 15, 2000, and July 30, 2001 (the Lease) and desire to further amend the Lease as a result of Lessee exercising its Option to Extend the term of the Lease pursuant to Section 28. The parties mutually agree:
1.
Section 1.2, Floor Areas  is hereby amended from 89,067 usable square feet; 98,555 rentable square feet; to 94,160 usable square feet; 106,014 rentable square feet (office and retail) in accordance with the BOMA Standard (American National Standard ANSIZ 65.1-1996).
2.
Section 1.2, Floor Areas  is hereby amended from 9.2371 percent of the rentable area of the Building to 9.411520 percent.




3.
The term is hereby extended to December 31, 2007 in accordance with Lessee’s exercise of its first five-year option to extend the Lease in accordance with Section 29.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing January 1, 2003 and thereafter on the first day of each calendar month until December 31, 2007, Lessee shall pay base monthly rent of $198,422.87. Such amount is derived from the agreed amount of $23/rsf discounted to $22.46/rsf to compensate for the adjustment in the rentable area per paragraph 1 herein.
5.
Section 1.5 Base Indices  as outlined in Section 29.2 remains the same (1992) for floors 18-21, however the Base Indices for the 7 th  floor shall be 1997 and 1998 in keeping with the Third Amendment to Lease.
6.
In keeping with Section 26.4, Lessor shall, at its sole cost and expense, re-carpet and paint the premises during the 11 th  year.
7.
Section 1.8 Lessor’s Address for Notices and Payment of Rent  is revised to read; Union Square Limited Partnership, c/o Lowe Enterprises Northwest, Inc., 600 University Street, Suite 2820 Seattle, Washington 98101.
8.
Section 1.10 is hereby deleted and replaced in its entirety with the following language:
Rent sharing of sublease with Quadra (now Quellos)
Costs to July 31st for 7th floor space subleased to Quadra:
 
 
 
Lease commission - Trammell Crow
85,416.00

Lease commission - Behar Company
68,794.00

Legal fees - sublease negotiations
4,036.00

Rent paid to Unico:
 
 
 
Base
 
CAM
 
TAXES
 
METRO
IMPROVEMENT
 
TOTAL
Oct-00
 
28,907.42

 
260.21

 
1,610.67

 
109.00

 
30,887.30

Nov-00
 
28,907.42

 
260.21

 
1,610.67

 
109.00

 
30,887.30

Dec-00
 
28,907.42

 
260.21

 
1,610.67

 
109.00

 
30,887.30

Jan-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

Feb-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

Mar-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

Apr-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

May-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

Jun-01
 
28,907.42

 
813.63

 
1,385.83

 
110.67

 
31,217.55

Jul-01
 
28,907.42

 
813.63

 
1,385.83

 
 
 
31,106.88

 
 
289,074.20

 
6,476.04

 
14,532.82

 
991.02

 
311,074.08

Total sublease costs to July 31st
 
 
 
469,320.08

 
 
Lease payments from Quadra to July 30th:
 




Oct-00
 
52,232.50

 
 
Nov-00
 
52,232.50

 
 
Dec-00
 
52,232.50

 
 
Jan-01
 
52,232.50

 
 
Feb-01
 
52,232.50

 
 
Mar-01
 
52,232.50

 
 
Apr-01
 
52,232.50

 
 
May-01
 
52,232.50

 
 
Jun-01
 
52,232.50

 
 
Jul-01
 
52,232.50

 
 
 
 
522,325.00

 
522,325.00

 
 
Net profit at July 3st
 
53,004.92

50% payable to Unico
 
26,502.46

Projected for August
 
 
 
 
Rent from Quadra
 
52,232.50

Rent to Unico for 7th floor
 
(31,106.88
)
 
 
Net monthly profit
 
21,125.62

50% to Unico
 
10,562.81

Lessor is a Washington limited partner known as Union Square Limited Partnership. Lessor is the sole owner of the Building and the Land. Lowe Enterprises Northwest, Inc. is the manager and authorized rental agent of One and Two Union Square, and it has the authority to execute documents on behalf of Lessor and bind Lessor as provided in this lease.
9.
All other terms and conditions are to remain the same.
 
 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC (FORMERLY
KNOWN AS CONTINENTAL, INC.)
  
UNION SQUARE LIMITED
PARTNERSHIP,
a Washington corporation
  
a Washington Limited Partnership
 
 
 
  
By Lowe Enterprises Northwest, Inc.
(Manager and authorized rental agent for
Union Square Limited Partnership)
 
 
By   /s/ Kyle Samuels                                                                                    
  
By   /s/ Craig A. Wrench                                                                         
Kyle Samuels
  
Craig A. Wrench
 
 
Its   Senior V.P.                                                                                         
  
Its   President                                                                                               
 
 
Date:   3/5/02                                                                                             
  
Date:   3/5/02                                                                                               
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 




On this 6 th day of March , 2002 , before me personally appeared Craig A. Wrench, to me known to be the President of Lowe Enterprises Northwest, Inc. the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED PARTNERSHIP, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Loren Blumenstine                                                             
Loren Blumenstine
Notary Public in and for the State of Washington
Washington, residing at Seattle, WA
My commission expires July 18, 2005
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 5 th day of   March , 2002, before me personally appeared   Kyle Samuels , to me known to be the Senior VP of   HomeStreet, Inc. , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Amber English                                                            
(Print name)   Amber English                                          
Notary Public in and for the State of Washington,
residing at   Shoreline, WA.                                          .
My commission expires:   8-16-04                                .
 
Page 4
SEVENTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
Successor in interest by merger to Union Square Limited Partnership
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: 19th day of May, 2004




Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, and March 5, 2002 (as so amended, the “Lease”) and desire to further amend the Lease as a result of Lessor and Lessee agreeing to extend the term of the Lease. The parties mutually agree:
1.
Section 1.3 Term is hereby amended from fifteen years commencing January 1, 1993 and ending December 31, 2007, to twenty-five (25) years commencing January 1, 1993 and ending December 31,2017.
2.
Section 1.4 Rent  is hereby amended as follows and shall be recalculated in the event the Leased Premises are reduced in keeping with Section 39, or expanded in keeping with Section 28:
Commencing on January 1, 2008 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay base monthly rent of $229,697.00. Such amount is derived from the agreed amount of $26 per rentable square feet (“RSF”) multiplied by the number of rentable square feet (106,014) divided by 12 months.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay base monthly rent of $238,531.00. Such amount is derived from the agreed amount of $27 per RSF multiplied by the number of rentable square feet (106,014) divided by 12 months.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay base monthly rent of $247,366.00. Such amount is derived from the agreed amount of $28 per RSF multiplied by the number of rentable square feet (106,014) divided by 12 months.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay base monthly rent of $256,200.00. Such
 
amount is derived from the agreed amount of $29 per RSF multiplied by the number of rentable square feet (106,014) divided by 12 months.
3.
Section 1.5 Base Indices is revised by adding the following language: “Effective January 1, 2008 the base year for Sections 3 &4 shall be revised to read 2007, with the first adjustment as of January 1, 2009. To the extent Lessee elects to extend the term of the lease for additional terms as provided herein, commencing in 2018 and 2023, new base years of 2017 and 2022, respectively, shall be established for such additional terms.”
4.
The following language is substituted in Section 26 Tenant Improvements, in lieu of the existing section 26.1:
“On January 1, 2008, Lessor shall pay Lessee an amount equal to $15 per RSF (the “refurbishment allowance”) on the lesser of 106,014 RSF (“Current Leased Premises”), or, to the extent Lessee has elected to reduce its Leased Premises as provided for herein, on the RSF then leased by Lessee. Lessee shall utilize the refurbishment allowance for any costs (tenant improvements, telephone and computer cabling, architectural and engineering fees, moving costs, etc.) associated with refurbishing the Leased Premises.
In addition to such refurbishment allowance, Lessor shall provide Lessee with a tenant improvement allowance of $35 per RSF on all space acquired by Lessee (the “expansion space”) in the TUS Building at any time during the term of this Lease and any extension terms (not including the Current Leased Premises), including without limitation on all such expansion space acquired pursuant to the Right of First Offer/Right of First Refusal as set forth in Section 28 of the Lease, as amended herein. Lessor shall pay Lessee such tenant improvement allowance on the effective date of Lessee’s lease of the expansion space (the “effective date”), and such tenant improvement allowance shall be utilized by Lessee for any costs (tenant improvements, telephone and computer cabling, architectural and engineering, fees, moving costs, etc.) associated with the improvement of the expansion space. Notwithstanding the foregoing, for all such expansion space acquired after January 1, 2011, Lessee shall receive a pro rated tenant improvement allowance based upon $35 per RSF divided by 120 months and multiplied by the number of months then (as of the effective date) remaining on the Term (not to exceed $35 per RSF).”
With respect to Section 26.4 of the Lease, Lessor and Lessee acknowledge that they have by mutual agreement deferred the recarpeting and repainting of the Current Leased Premises pursuant to section 26.4 beyond the 11 th year of the Lease term, but the parties acknowledge that Lessor remains obligated to pay the cost and expense of such repainting and recarpeting of the Current Leased Premises, which is in addition to the refurbishment allowance referenced above, at such time as the parties mutually agree, which may be completed in different stages for each floor of the Current Leased Premises.
5.
Section 28 Right of First Offer/Right of First Refusal shall remain as written with the exception that for all expansion space acquired by Lessee, Lessee shall pay the per RSF rate then in effect on the Leased Premises pursuant to section 1.4 as amended herein at
 
Page 2




 
the time such expansion space is acquired. Any tenant improvement allowance shall be in keeping with Section 26, as amended herein. In the event Lessee requires additional space and Lessor is unable to provide such additional space in the low-rise elevator bank of the TUS Building (floors 4-22), Lessor shall make reasonable efforts to accommodate such requirement elsewhere within the TUS Building, and to the extent Lessee elects to lease such additional space outside the low-rise elevator bank, Lessee shall do so at Market Rent, as described in section 29.4.
6.
Section 29.2 & 29.3 Extension Term and Rent shall be revised to read as follows;
“For the two additional five year terms commencing January 1, 2018 and January 1, 2023, the base monthly rent shall be 95% of Market Rent as described in Section 29.4”.
7.
A new Section 39 Option to Reduce the Premises is added as follows:
“To the extent Lessee is not in default under any of the terms and conditions of the Lease (beyond any applicable cure periods), Lessee shall have the right to reduce the Leased Premises in keeping with the following table provided Lessee provides at least twelve months prior written notice to Lessor.
 
 
 
 
 
 
 
 
Premises
  
Square Feet
  
Notice Date
  
Effective Date
Level 3 Retail
  
2,470 RSF
  
12 months
prior notice
  
April 1, 2005
or thereafter
 
 
 
 
Remaining Premises
  
25,000 RSF
  
12 months
prior notice
  
January 1, 2008
or January 1, 2010 or
January 1, 2015
To the extent Lessee elects to reduce the Leased Premises as provided for herein, the cumulative total reduction, not including the 2,470 RSF on Level 3 Retail, shall not exceed 25,000 RSF. The minimum reduction on any single effective date in 2008, 2010, or 2015 shall be 10,000 RSF, unless an entire floor is reduced at one time, in which case any subsequent reduction may be less than 10,000 RSF. The RSF that is eliminated from the Lease hereunder (the “reduced space”) shall be located either on non-contiguous floors or on the lowest or highest contiguous floors then occupied by Lessee. Notwithstanding anything to the contrary contained herein, Lessee shall have the right to terminate the Lease as it pertains to the Level 3 Retail at any time on or after April 1, 2005, without being required to terminate the Lease as it pertains to other space in the Building. Lessee shall as of the effective date of any reduction hereunder, pay to Lessor a sum equal to the unamortized transaction costs attributable to and prorated based upon the RSF of the reduced space, if any, including interest at 9% compounded. For purposes of this provision, “unamortized transaction costs” shall mean any tenant improvement allowance and any refurbishment allowance paid under Section 26.1
 
Page 3
as amended herein and any broker commission paid to Washington Partners that is specifically attributable to the reduced space. Lessor and Lessee hereby acknowledge that there is no broker commission being paid to Washington Partners with respect to the Level 3 Retail or the 7 th floor Premises unless and until Lessee makes a commitment to lease such space beyond January 1, 2008, In addition to such unamortized transaction costs, Lessee shall pay to Lessor an additional termination fee in an amount equal to six months rent on the reduced space as of the effective date of the reduction, or such lesser amount of rent due for the remaining term or extension term then in effect; provided, however, that Lessee shall not be required to pay this additional termination fee for any of the 7 th floor Premises.
In the event Lessee requires additional space following any reduction of the Leased Premises, and Lessor has not previously entered into a lease with a third party on the reduced space, Lessee shall be entitled to reoccupy such reduced space, and in such event, Lessor shall not be obligated to fund any tenant improvement allowance, but shall refund the $15 per RSF refurbishment allowance as provided above.
8.
Lessor agrees that the 33 parking stalls provided in the controlled access area of the One/Two Union Square Garage pursuant to Section 30.1 of the Lease shall be marked with the “HomeStreet Bank” name for the exclusive use of Lessee.
9.
All other terms and conditions are to remain the same.
 




 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   /s/ Mark Barbieri                                                                                  
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                               
  
Its   Senior Vice President
Its   President /COO                                                         
  
Date:   5/26/04                                                                                                
Date:   May 19, 2004                                                       
  
 
 
Page 4
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 24 th day of May , 2004 , before me personally appeared Mark Barbieri, to me known to be the Senior Vice .President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Zina D. Wilson                                                         
Notary Public in and for the State of
Washington, residing at Covington, WA
My commission expires 04/01/06.
 
Page 5
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 19 th day of May , 2004, before me personally appeared Joan Enticknap to me known to be the President COO of HomeStreet, Inc., the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.




/s/ Stephanie M. Madden                                                              
(Print name) Stephanie M. Madden                                             
Notary Public in and for the State of Washington,
residing at Mill Creek                                                .
My commission expires: March 20, 2005             .
 
Page 6
EIGHTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: 31 st day of August, 2004
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, March 5, 2002, and May 19, 2004 (as so amended, the “Lease”) and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1, Leased Premises  is hereby amended to delete that portion of the Leased Premises located at the Third Level Plaza of Two Union Square effective upon the date Lessee vacates the Third Level Plaza (target date is September 17, 2004 (the “Effective Date”).
2.
Section 1.2, Floor Areas  is hereby amended from 93,376 usable square feet; 106,014 rentable square feet to 90,975 usable square feet; 103,544 rentable square feet as of the Effective Date.
3.
Section 1.2, Floor Areas  is hereby amended from 9.411520 percent of the rentable area of the Building to 9.19224 percent as of the Effective Date.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing on the Effective Date (target date of September 17, 2004) and thereafter on the first day of each calendar month until December 31, 2007, Lessee shall pay base monthly rent of $193,799.85.
Commencing on January 1, 2008 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay base monthly rent of $224,345.33. Such amount is derived from the agreed amount of $26 per rentable square foot, multiplied by the number of rentable square feet (103,544) divided by 12 months.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay base monthly rent of $232,974.00. Such amount is derived from the agreed amount of $27 per rentable square foot, multiplied by the number of rentable square feet (103,544) divided by 12 months.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay base monthly rent of $241,602.67. Such amount is derived from the agreed amount of $28 per rentable square foot, multiplied by the number of rentable square feet (103,544) divided by 12 months.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay base monthly rent of $250,231.33. Such amount is derived from the agreed amount of $29 per rentable square foot, multiplied by the number of rentable square feet (103,544) divided by 12 months.




5.
For purposes of this reduction in the Leased Premises, Lessor and Lessee acknowledge that in keeping with Paragraph 7, Section 39 of the Seventh Amendment to Lease Option to Reduce the Premises,  Lessee has effectively exercised its right with regards to Level 3 Retail prior to the date specified in the Seventh Amendment, and Lessor accepts such early termination of said Premises.
6.
All other terms and conditions are to remain the same.
 
 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   /s/ Mark Barbieri                                                                                                    
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                                     
  
Its   Senior Vice President
Its   President & COO                                                           
  
Date:   9/7/04                                                                                                                   
Date:   September 3, 2005                                                   
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 7 th day of September , 2004 , before me personally appeared Mark Barbieri, to me known to be the Senior Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Zina D. Wilson                                                         
Notary Public in and for the State of
Washington, residing at Covington, WA
My commission expires 04/01/06
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 




On this 3 rd day of September , 2004, before me personally appeared Joan Enticknap , to me known to be the President and COO of HomeStreet Bank , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Stephanie M Madden                                             
(Print name) Stephanie M Madden                         
Notary Public in and for the State of Washington,
residing at Mill Creek                                                  .
My commission expires:   March 20, 2005                 .
 
Page 4
NINTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: 19 th day of April, 2006
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, March 5, 2002, May 19, 2004, and August 31, 2004 (as so amended, the “Lease”) and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1, Leased Premises  is hereby amended to add room 1723 to the Leased Premises as of the Effective Date.
2.
Section 1.2, Floor Areas  is hereby amended from 90,975 usable square feet; 103,544 rentable square feet to 91,837 usable square feet; 104,573 rentable square feet as of the Effective Date.
3.
Section 1.2, Floor Areas  is hereby amended from 9.19224 percent of the rentable area of the Building to 9.28359 percent as of the Effective Date.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing on the Effective Date (February 1, 2007) and thereafter on the first day of each calendar month until December 31, 2007, Lessee shall pay base monthly rent of $195,725.80.
Commencing on January 1, 2008 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay base monthly rent of $226,574.83. Such amount is derived from the agreed amount of $26 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay base monthly rent of $235,289.25. Such amount is derived from the agreed amount of $27 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay base monthly rent of $244,003.67 Such amount is derived from the agreed amount of $28 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.




Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay base monthly rent of $252,718.08. Such amount is derived from the agreed amount of $29 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
5.
In keeping with Section 26 of the Seventh Amendment to Lease, Lessor shall provide Lessee with a tenant improvement allowance of thirty-five ($35.00) dollars per rentable square foot multiplied by 1,029 rentable square feet for improvements to room 1723.
6.
All other terms and conditions are to remain the same.
 
 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   /s/ Mark Barbieri                                                                                 
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                                       
  
Its   Senior Vice President
Its   President & COO                                                                      
  
Date:   4/27/06                                                                                                
Date:   April 20, 2006                                                                      
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 27 th day of April , 2006 , before me personally appeared Mark Barbieri, to me known to be the Senior Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Sherri L. Voeltner                                                         
Notary Public in and for the State of
Washington, residing at Renton
My commission expires 01/19/10
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 




 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 20 th day of April , 2006, before me personally appeared Joan Enticknap , to me known to be the President & COO of, HomeStreet Bank , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Stephanie M. Madden                                                             
(Print name) Stephanie M. Madden                                             
Notary Public in and for the State of Washington,
residing at Mill Creek, WA                                        .
My commission expires: March 30, 2009                 .
 
Page 4
TENTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: July 20, 2006
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, March 5, 2002, May 19, 2004, August 31, 2004, and April 19, 2006 (as so amended, the “Lease”) and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1, Leased Premises  is hereby amended to add room 1723 to the Leased Premises as of the Effective Date, herein defined as “September 1, 2006”.
2.
Section 1.2, Floor Areas  is hereby amended from 90,975 usable square feet; 103,544 rentable square feet to 91,837 usable square feet; 104,573 rentable square feet as of the Effective Date.
3.
Section 1.2, Floor Areas  is hereby amended from 9.19224 percent of the rentable area of the Building to 9.28359 percent as of the Effective Date.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing on the Effective Date (September 1, 2006) and thereafter on the first day of each calendar month until December 31, 2007, Lessee shall pay base monthly rent of $195,725.80.
Commencing on January 1, 2008 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay base monthly rent of $226,574.83. Such amount is derived from the agreed amount of $26 per rentable square foot, multiplied by the number of rentable, square feet (104,573) divided by 12 months.




Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay base monthly rent of $235,289.25. Such amount is derived from the agreed amount of $27 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay base monthly rent of $244,003.67 Such amount is derived from the agreed amount of $28 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay base monthly rent of $252,718.08. Such amount is derived from the agreed amount of $29 per rentable square foot, multiplied by the number of rentable square feet (104,573) divided by 12 months.
5.
In keeping with Section 26 of the Seventh Amendment to Lease, Lessor shall provide Lessee with a tenant improvement allowance of thirty-five ($35.00) dollars per rentable square foot multiplied by 1,029 rentable square feet for improvements to room 1723.
6.
All other terms and conditions are to remain the same.
 
 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   Mark Barbieri                                                                                        
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                                               
  
Its   Executive Vice President
Its   President                                                                                    
  
Date:   08/16/06                                                                                             
Date:   08/09/06                                                                               
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 16 th day of August , 2006 , before me personally appeared Mark Barbieri, to me known to be the Executive Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
 
 
 
 
 
 
 
 
/s/ Sherri L. Voeltner
 
 
 
 
Notary Public in and for the State of
Washington, residing at Renton
My commission expires 01/19/10
 
 




 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 9 th day of August , 2006, before me personally appeared Joan Enticknap , to me known to be the President of HomeStreet, Inc. , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Stephanie M. Madden
(Print name) Stephanie M. Madden
Notary Public in and for the State of Washington,
residing at Mill Creek .
My commission expires: 3/20/09                     .
 
Page 4
4 5 6 7 8 9 10 11 12 13 14 15 16
16 17 18 19 20 21 22 23
23 24 25 26 27 28 29 30 31 32 33




33 34 35 36 37
1 2 3 4
Two Union Square
Floor 17




ELEVENTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: December 27, 2006
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, March 5, 2002, May 19, 2004, August 31, 2004, April 19, 2006, and July 20, 2006 (as so amended, the “Lease”) and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1 Leased Premises is hereby amended to delete Rooms 701-30, 735-37, and part of Rooms 731 & 734 as of the Effective Date, herein defined as “December 31, 2007”.
2.
Section 1.2 Floor Areas is hereby amended from 91,837 usable square feet; 104,573 rentable square feet, to 75,858 usable square feet; 86,138 rentable square feet as of the Effective Date.
3.
Section 1.2 Floor Areas is hereby amended from 9.28359 percent, to 7.64700 percent of the Building as of the Effective Date.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing on January 1, 2008 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay to Lessor base monthly rent of $186,632.00.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay to Lessor base monthly rent of $193,810.00.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay to Lessor base monthly rent of $200,989.00.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay to Lessor base monthly rent of $208,167.00.
5.
For purposes of this reduction in the Leased Premises, Lessor and Lessee acknowledge that in keeping with Paragraph 7, Section 39 of the Seventh Amendment to Lease Option to Reduce the Premises, Lessee has effectively exercised its right with regards to the 7 th  floor Premises, and Lessor accepts such termination of said Premises.
6.
In keeping with Paragraph 4 Section 26 of the Seventh Amendment to Lease, Tenant Improvement Allowance is revised to replace “106,014 RSF”, with “85,J09RSF”.
7.
Section 30 Parking is revised to read a total of “53” monthly stalls as of the Effective Date.
8.
All other terms and conditions are to remain the same.
 




 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By /s/ Mark Barbieri                                                                                  
 
  
Mark Barbieri
By   /s/ Bruce W. Williams                                                                                
  
Its   Executive Vice President
Its   Chairman                                                                                              
  
Date:   1/18/07                                                                                                
Date:   1/8/07                                                                                              
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 18 th day of January , 2007 , before me personally appeared Mark Barbieri, to me known to be the Executive Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Sherri L. Voeltner                    
Sherri L. Voeltner
Notary Public in and for the State of
Washington, residing at Renton
My commission expires 01/19/10
 
Page 3




LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 8 th day of January , 2007, before me personally appeared Bruce W. Williams , to me known to be the Chairman of HomeStreet, Inc , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Stephanie M. Madden                                                 
(Print name) Stephanie M. Madden                                
Notary Public in and for the State of Washington,
residing at Mill Creek, WA                                                .
My commission expires: March 20, 2009                 .
 
Page 4
TWELFTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment. October 1, 2007
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended by the First - Eleventh Amendments to Lease (as so amended, the “Lease”), and desire to further amend the Lease. The parties mutually agree:
1.
Section 1.1 Leased Premises is hereby amended to incorporate Rooms 1701-02, and 1724-37 into the Leased Premises as of the Effective Date, and as shaded in red on the attached Exhibit A.
2.
Section 1.2 Floor Areas is hereby amended from 75,858 usable square feet; 86,138 rentable square feet, to 82,909 usable square feet; 94,558 rentable square feet as of the Effective Date.
3.
Section 1.2 Floor Areas is hereby amended from 7.64700 percent to 8.39450 percent ofthe Building as of the Effective Date.
4.
Section 1.4 Rent  is hereby amended as follows:
Commencing on October 1, 2008 herein defined as the “Effective Date”, and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay to Lessor base monthly rent of $204,876.00.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay to Lessor base monthly rent of $212,755.00




Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31, 2014, Lessee shall pay to Lessor base monthly rent of $220,635.00.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay to Lessor base monthly rent of $228,515.00.
5.
Section 1.5 Base Indices shall remain 2007 for the entire Leased Premises,
6.
Section 26 Tenant Improvement Allowance; In keeping with the terms of the Lease, Lessor shall provide Lessee with a tenant improvement allowance of thirty-five ($35.00) dollars per rentable square foot on the additional 8,420 rsf, for an additional. Tenant Improvement allowance of $294,700.00.
7.
Section 30 Parking is revised to read a total of “59” monthly stalls as of the Effective Date.
8.
Lessor shall pay a real estate fee to Washington Partners, Inc upon the full execution of this amendment.
9.
Exhibit “A” of the Lease, changed to reflect the revised floor plan, is attached hereto and made a part hereof.
10.
All other terms and conditions are to remain the same.
 
 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   /s/ Mark Barbieri                                                                                 
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                                                      
  
Its   Executive Vice President
Its   President & COO                                                                                        
  
Date:   11/7/07                                                                                                
Date:   11/5/07                                                                                                     
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 7 th day of November , 2007 before me personally appeared Mark Barbieri, to me known to be the Executive Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.




IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Sherri L Voeltner                                    
Notary Public in and for the State of
Washington, residing at Renton
My commission expires 01/19/10
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 5 th day of November , 2007, before me personally appeared Joan Enticknap , to me known to be the President & COO of HomeStreet, Inc. , the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Barbara L DeVere                                        
(Print name) Barbara L DeVere
Notary Public in and for the State of Washington,
residing at LYNNWOOD WA .
My commission expires: 10/29/10 .
 
Page 4
4 5 6 7 8 9 10 11 12 13 14 15 16
16 17 18 19 20 21 22 23
23 24 25 26 27 28 29 30 31 32 33




33 34 35 36 371 2 3 4
Two Union Square
Floor 17




THIRTEENTH AMENDMENT TO
LEASE
 
 
 
 
Lessor:
  
UNION SQUARE LIMITED LIABILITY COMPANY
 
 
Lessee:
  
HOMESTREET, INC.
 
 
Premises:
  
Commonly referred to as Suite 2000 in the Two Union Square Building as more particularly described in the Lease.
Date of this Amendment: January 26, 2010
Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992 as amended August 25, 1992, May 6, 1998, June 17, 1998, February 15, 2000, July 30, 2001, March 5, 2002, May 19, 2004, August 31, 2004, April 19, 2006, July 20, 2006, December 27, 2006, and October 1, 2007, (as so amended, the “Lease”), and desire to further amend the Lease. The parties mutually agree:
1.
Pursuant to Section 4 of the Seventh Amendment Lease, Section 2 of the Eighth Amendment to Lease, Section 5 of the Ninth Amendment to lease, Section 5 of the Tenth Amendment to Lease, Section 6 of the Eleventh Amendment to Lease, and Section 6 of the Twelfth Amendment to Lease, Lessee was entitled to a Tenant Improvement Allowance in the total amount of $1,607,350.00. As of the Effective Date hereof, and as set forth in the attached Exhibit A, Lessee has previously received $310,335.22 of the Tenant Improvement Allowance, so that $1,297,014.78 thereof remains unapplied (the “ Unapplied   Allowance ”). The parties have agreed that, notwithstanding anything to the contrary in the Lease, a portion of the Unapplied Allowance in the amount of $625,348.89, as set forth in the attached Exhibit B, shall be applied towards Base Monthly Rent and Additional Rent due under the Lease for the period January 1, 2010, through and including March 31, 2010. The difference between the Unapplied Allowance of $1,297,014.78 and the $625,348.89 portion of the Unapplied Allowance which shall be applied towards Base Monthly Rent and Additional Rent as described herein totaling $671,665.89, (the “Remaining Unapplied Allowance”)  shall remain available for Lessee’s use for leasehold improvements to the Leased Premises as originally permitted by the terms and conditions of the Lease and Amendments governing the use of the Tenant Improvement Allowance. Lessee waives any right to receive any portion of the Unapplied Allowance or any tenant Improvements whatsoever except for the $671,665.89 Remaining Unapplied Allowance.
EXHIBIT A
Homestreet Bank
Tenant Improvement Summary
 
Lease Activity Description
 
Date
Commence
 
TI
Allowance
 
USF
 
RSF
 
Allowance
 
Comments
7th Amend - Renew from 12/31/07 - 12/31/17
 
1/1/2008
 
15.00

 
94,160

 
106,014

 
1,590,210.00

 
TI allow on RSF, or to the extent Lessee has elected to reduce its Leased Premises
8th Amend - reduce Third Level Plaza
 
9/30/2004
 
15.00

 
(3,185
)
 
(2,470
)
 
(37,050.00
)
 
Downsize only, no TI allowance. ADJUST $15/rsf
9th/10th Amend - Expand on 17th Flr
 
9/1/2006
 
35.00

 
862

 
1,029

 
36,015.00

 
Expand on 17, this sq ft does not affect $15 TI
12th Amend - Expand on 17th Flr
 
10/1/2008
 
35.00

 
7,051

 
8,420

 
294,700.00

 
Expand on 17, this sq ft does not affect $15 TI
11th Amend - downsize 7th Flr
 
1/1/2008
 
15.00

 
(15,979
)
 
(18,435
)
 
(276,525.00
)
 
Downsize only, no TI allowance. ADJUST $15/rsf
Total Tenant Improvement Allowance
 
 
 
 
 
82,909

 
94,558

 
1,607,350.00

 
 




Tenant Improvement Costs
 
 
 
07/2007 - Reimbursement to Homestreet
181,757.77

Purchase Furniture from the 30th floor
17,000.00

Qtr 1 2009 - Branch Remodel
89,728.50

Qtr 4 2009 - 17th Floor
9,875.92

Qtr 1 2010 - Branch Signage
10,973.03

Qtr 1 2010 - ATM Lighting (estimated)
1,000.00

 
 
 
310,335.22

 
 
Remaining Funds available as of 1/24/2010
1,297,014.78

 
 
EXHIBIT B
HOMESTREET BANK
T.I. ALLOWANCE APPLIED TO MONTHLY RENT
 
 
 
Summary of Rents
 
 
 
Retail CAM
$
494.66

 
 
Retail AUX
658.13

 
 
Office/Retail Base Rent
204,876.00

 
 
Office ESC
1,979.23

 
 
Office Janitorial
441.61

 
 
Total January 2010
$
208,449.63

2.
Section 1.4 Rent  is hereby amended as follows:
Commencing on January 1, 2010 and thereafter on the first day of each calendar month until March 31, 2010, Lessee shall pay to Lessor base monthly rent of $0.00.
Commencing on April 1, 2010 and thereafter on the first day of each calendar month until December 31, 2010, Lessee shall pay to Lessor base monthly rent of $204,876.00.
Commencing on January 1, 2011 and thereafter on the first day of each calendar month until December 31, 2012, Lessee shall pay to Lessor base monthly rent of $212,755.00.
Commencing on January 1, 2013 and thereafter on the first day of each calendar month until December 31,2014, Lessee shall pay to Lessor base monthly rent of $220,635.00.
Commencing on January 1, 2015 and thereafter on the first day of each calendar month until December 31, 2017, Lessee shall pay to Lessor base monthly rent of $228,515.00.
3.
Except as modified herein, the Lease remains unmodified and in full force and effect.
 




 
 
 
Lessee:
  
Lessor:
 
 
HOMESTREET, INC
  
UNION SQUARE LIMITED LIABILITY
COMPANY,
a Washington corporation
  
a Washington Limited Liability Company
 
 
 
  
By Washington Real Estate Holdings, LLC
its manager.
 
 
 
  
By   /s/ Mark Barbieri                                                                                 
 
  
Mark Barbieri
By   /s/ Joan Enticknap                                                                                              
  
Its   Executive Vice President
Its   President & Coo                                                                                                  
  
Date:   2/22/10                                                                                                
Date:   2/19/2010                                                                                                           
  
 
 
Page 2
LESSOR’S ACKNOWLEDGEMENT
 
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 22 nd , day of February , 2010, before me personally appeared Mark Barbieri, to me known to be the Executive Vice President of Washington Real Estate Holdings, LLC the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation and UNION SQUARE LIMITED LIABILITY COMPANY, for the uses and purposes therein mentioned, and on oath stated that he (she) was authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ Zina D. Wilson                                                     
Notary Public in and for the State of
Washington, residing at Bothell, WA
My commission expires 01/21/13
 
Page 3
LESSEE’S CORPORATE ACKNOWLEDGEMENT
 
 
STATE OF WASHINGTON
 
 
ss.
COUNTY OF KING
 
On this 19 th day of February, 2010, before me personally appeared Joan Enticknap to me known to be the President of HomeStreet Bank, the corporation that executed the within and foregoing instrument, and acknowledged the said instrument to be the free and voluntary act and deed of said corporation for the uses and purposes therein mentioned, and on oath stated that they (he or she) were authorized to execute the said instrument and that the seal affixed (if any) is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written.
/s/ BARBARA DEVERE                                                                  




(Print name) BARBARA DEVERE                                               
Notary Public in and for the State of Washington,
residing at   LYNNWOOD                                                          .
My commission expires:   10/29/10                                                .
 
Page 4




HomeStreet / USLLC
Fourteen Amendment to Lease
-7-
FOURTEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET, INC.

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 94,558 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      January 19, 2012

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; and Thirteenth Amendment thereto dated January 26, 2010 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises, tenant improvement allowance, and certain other amendments more specifically set forth below. Capitalized terms used in this Fourteenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area; Square Footage and Percentage of Building . The parties confirm that the usable square footage of the Leased Premises is 82,909 and the rentable square footage of the Leased Premises is 94,558, which constitutes 8.39450 percent of the total rentable square footage of the Building.

1.1      The parties further agree that, commencing on the later of June 1, 2012 or substantial completion of the Tenant Work pursuant to Section 4 herein, i.e. completed except for minor punch-list items that do not materially interfere with Lessee’s use and enjoyment of the Expansion Premises (the “ Effective Date ”), Lessee will acquire an additional 6,147 RSF comprised of Rooms 2216-2223, as depicted in Exhibit A attached hereto (the “ Expansion Premises ”).

1.2      Effective as of the Effective Date, the usable square footage of the Leased Premises shall be amended to 88,223 and the rentable square footage of the Leased Premises shall be amended to 100,705, which shall constitute 8.94021 percent of the total rentable square footage of the Building.

3.      Rent . On and after the Effective Date, Section 1.4 of the Lease is hereby amended as follows:

Period
RSF of Leased Premises
Annual Base Rental Rate per RSF of Leased Premises
Monthly Base Rent for Leased Premises
RSF of Expansion Premises
Annual Base Rent per RSF of Expansion Premises
Monthly Base Rent of Expansion Premises
Total Monthly Base Rent
06/01/2012 - 12/31/2012
94,558
$27.00
$212,755.00
6,147
$27.00
$13,830.75
$226,585.75
01/01/2013 - 12/31/2014
94,558
$28.00
$220,635.00
6,147
$28.00
$14,343.00
$234,978.00
01/01/2015 - 12/31/2017
94,558
$29.00
$228,515.00
6,147
$29.00
$14,855.25
$243,370.25


4.      Tenant Improvement Allowance .  Lessor will provide to Lessee a Tenant Improvement Allowance of up to
$19.54 ($35.00 / 120 months x 67 months) per rentable square foot of the Expansion Premises ($120,112) to be spent on permanent improvements to the Expansion Premises based upon mutually approved plans and specifications. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant




Improvement Work in a timely fashion. Final Contract Documents based upon the mutually approved plans and specifications must be delivered to Lessor by Lessee no later than March 1, 2012. If Final Contract Documents are not delivered to Lessor by March 1, 2012, The Effective Date shall be June 1, 2012.

4.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior consent.

4.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, general contractor’s general conditions, overhead and profit, and taxes, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

5.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements made by or on behalf of Lessee with any brokers, finders or other persons except Lessor shall pay a fee equal to $5.58/RSF of the 6,147 RSF Expansion Premises to Washington Partners, Inc. upon the full execution of this Amendment.

6.      Temporary Space . Effective January 20, 2012 (the "Temporary Space Commencement Date"), Lessor
shall allow Lessee to occupy a portion of Suite 4500 comprised of approximately 5,000 RSF on the 45 th Floor of
Two Union Square (the "Temporary Space") as depicted in Exhibit C attached hereto. Lessee shall pay Lessor a
Monthly Base Rent of $4,583.00 effective on and after the Temporary Space Commencement Date and terminating on the Effective Date for the Expansion Premises. In no event shall Lessee occupy the Temporary Premises beyond
May 31, 2012. Lessee understands that Lessor may be performing tenant improvement work for an adjacent tenant in a portion of the Temporary Premises as depicted in Exhibit C attached hereto and permits such work to occur.
Lessor shall use reasonable efforts to avoid disruption of Lessee's business operations during normal business hours while performing such construction.

7.      Parking . Section 30 “Parking” shall remain as written except Lessor shall provide Lessee with four (4) additional parking permits for a total of sixty-three (63) parking permits.

8.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

9.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.



[Signatures on Following Page]
    

    

DATED as of the Date of this Amendment first above set forth.






Lessee:

HOMESTREET, iNC.
a Washington corporation






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET, INC., a Washington corporation, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.


(Affix seal or stamp below)
(Signature of Notary)






(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     


























FIFTEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET, INC.

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 100,705 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      May 24, 2012

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises, tenant improvement allowance, and certain other amendments more specifically set forth below. Capitalized terms used in this Fifteenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area; Square Footage and Percentage of Building . The parties confirm that the usable square footage of the Leased Premises is 88,223 and the rentable square footage of the Leased Premises is 100,705, which constitutes 8.94021 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following spaces will be added to the Leased Premises:

a.      Expansion Premises #1 - Commencing on June 1, 2012 (the “ Commencement Date #1 ”), Lessee will acquire an additional 2,993 RSF comprised of Rooms 1706-1712, as depicted in Exhibit A attached hereto shaded in blue (the “ Expansion Premises #1 ”). Effective as of Commencement Date #1, the usable square footage of the Leased Premises shall be amended to 90,728 and the rentable square footage of the Leased Premises shall be amended to 103,698, which shall constitute 9.20591 percent of the total rentable square footage of the Building.

b.      Expansion Premises #2 - Commencing on the later of March 1, 2013 or substantial completion of the Tenant Work pursuant to Section 3 herein, i.e. completed except for minor punch-list items that do not materially interfere with Lessee’s use and enjoyment of the Expansion Premises #2 (the “ Commencement Date #2 ”), Lessee will acquire an additional 1,891 RSF comprised of Rooms 1703-1705, as depicted in Exhibit A attached hereto shaded in red (the “ Expansion Premises #2 ”). Effective as of Commencement Date #2, the usable square footage of the Leased Premises shall be amended to 92,311 and the rentable square footage of the Leased Premises shall be amended to 105,589, which shall constitute 9.37379 percent of the total rentable square footage of the Building.

2.      Rent . On and after the above commencement dates, Section 1.4 of the Lease is hereby amended as follows:

Period
Base Monthly Rent for Leased Premises
RSF of Expansion Premises #1
Annual Base Rent per RSF of Expansion Premises #1
Base Monthly Rent of Expansion Premises #1
RSF of Expansion Premises #2
Annual Base Rent per RSF of Expansion Premises #2
Base Monthly Rent of Expansion Premises #2
Total Base Monthly Rent
Commencement Date #1
06/01/2012 - 12/31/2012
$226,585.75
2,993
$27.00
$6,734.25
N/A
$27.00
$0.00
$233,320.00
01/01/2013 - 02/28/2013
$234,978.00
2,993
$28.00
$6,983.67
N/A
$28.00
$0.00
$241,961.67
Commencement Date #2
03/01/2013 - 12/31/2014
$234,978.00
2,993
$28.00
$6,983.67
1,891
$28.00
$4,412.33
$246,374.00
01/01/2015 - 12/31/2017
$243,370.25
2,993
$29.00
$7,233.08
1,891
$29.00
$4,569.92
$255,173.25






3.      Tenant Improvement Allowance . Lessor will provide to Lessee a Tenant Improvement Allowance as follows:

a.      Expansion Premises #1 . Up to $19.54 ($35.00 / 120 months x 67 months) per rentable square foot of the Expansion Premises #1 ($58,483.22) to be spent on permanent improvements to the Expansion Premises #1and 2 based upon mutually approved plans and specifications. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either party in connection with approving the plans and specifications and performing the Tenant Work in a timely fashion.

b.      Expansion Premises #2 . Up to $16.92 ($35.00 / 120 months x 58 months) per rentable square foot of the Expansion Premises #2 ($31,995.72) to be spent on permanent improvements to the Expansion Premises #1 and 2 based upon mutually approved plans and specifications. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either party in connection with approving the plans and specifications and performing the Tenant Work in a timely fashion. Final Contact Documents based upon mutually approved plans and specifications must be delivered to Lessor by Lessee no later than December 1, 2012. If Final Contract Documents are not delivered to Lessor by December 1, 2012, the Commencement Date #2 shall be March 1, 2013.

4.      Parking . Section 30 “Parking”, as amended by the Fourteenth Amendment, shall remain as written except Lessor shall provide Lessee with two (2) additional parking permits effective on the Commencement Date #1; and one (1) additional parking permit effective on the Commencement Date #2 for a grand total of sixty-six (66) parking permits.

5.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

6.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.


    

DATED as of the Date of this Amendment first above set forth.

[Signatures on the following page]
Lessee:

HOMSTREET, INC.
a Washington corporation






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.






(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET, INC., a Washington corporation, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     









SIXTEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET BANK

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 105,589 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      September 12, 2012

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012; Fifteenth Amendment thereto dated May 24, 2012 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises, tenant improvement allowance, and certain other amendments more specifically set forth below. Capitalized terms used in this Sixteenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area and Square Footage . The parties confirm that, not including the 14 th Floor Expansion Premises (as defined in this Amendment), the usable square footage of the Leased Premises is 92,311 and the rentable square footage of the Leased Premises is 105,589. The Lessor represents that this constitutes 9.37379 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following space will be added to the Leased Premises:

The premises located on the 14 th Floor of Two Union Square consisting of an additional 9,761 RSF comprised of Rooms 1401- 1416 & 1437, as depicted in Exhibit A attached hereto (the “ 14 th Floor Expansion Premises ”). Lessor shall deliver the 14 th Floor Expansion Premises to Lessee for commencement of the Tenant Work on October 1, 2012 (the Delivery Date). The Effective Date for the 14 th Floor Expansion Premises shall be thirty-one (31) days after the Delivery Date. A portion of the 14 th floor Expansion Premises may be delivered to Lessee prior to October 1, 2012, and in the event any portion of the 14 th floor Expansion Premises are delivered prior to October 1, 2012, the Effective Date shall not be altered, however, Lessee agrees to comply with all terms and conditions of the Lease for the period of occupancy prior to the Effective Date with the exception of the payment of rent.

1.2      Effective as of the Delivery Date, the usable square footage of the Leased Premises shall be amended to 100,711 and the rentable square footage of the Leased Premises shall be amended to 115,350. Lessor represents that the amended Leased Premises shall constitute 10.24033 percent of the total rentable square footage of the Building.


2.      Rent . On and after the Effective Date, Section 1.4 of the Lease is hereby amended as follows:





Period
Base Monthly Rent for Leased Premises
Annual Base Rent per RSF of Expansion Premises
RSF of Expansion Premises
Base Monthly Rent of Expansion Premises
Total Base Monthly Rent
10/01/2012 - 10/31/2012
$233,320.00
Gratis
9,761
Gratis
$233,320.00
11/01/2012 - 12/31/2012
$233,320.00
$27.00
9,761
$21,962.25
$255,282.25
01/01/2013 - 02/28/2013
$241,961.67
$28.00
9,761
$22,775.67
$264,737.34
03/01/2013 - 12/31/2014
$246,374.00
$28.00
9,761
$22,775.67
$269,149.67
01/01/2015 - 12/31/2017
$255,173.25
$29.00
9,761
$23,589.08
$278,762.33
 

3.      Tenant Improvement Allowance .  Lessor agrees to provide a Tenant Improvement Allowance of up to $18.08 ($35.00 x 62/120) per rentable square foot of the 14 th Floor Expansion Premises ($176,479) to be spent on permanent improvements to the Leased Premises based upon mutually approved plans and specifications or be added to the Remaining Unapplied Allowance.. Notwithstanding the foregoing, a portion of the Tenant Improvement Allowance for the 14 th Floor Expansion Premises equaling $14,526.00 will be deducted from the Tenant Improvement Allowance as consideration for Lessee’s acquisition of the furniture currently located in the 14 th Floor Expansion Premises further described in Section 4 below, resulting in a total remaining Tenant Improvement Allowance $161,953.00 for the Tenant Work. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant Improvement Work in a timely fashion. Lessor and Lessee agree that the Remaining Unapplied Allowance of $432,002.82, plus the remaining Tenant Improvement Allowance net of furniture acquisition costs, is $593,955.82.

3.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior written consent.

3.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, all amounts payable to general contractor under Lessor’s contract with general contractor,, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

3.3      Any and all Tenant Improvement Costs in excess of the Tenant Improvement Allowance shall be Lessee’s responsibility and, if performed by Lessor, shall be paid upon demand to Lessor, or upon Lessee’s election, may be paid for out of the current Remaining Unapplied Allowance. Lessor and Lessee agree that the Remaining Unapplied Allowance as of August 2012 is $614,166.07 and that Lessee currently has a tenant improvement project on the 22 nd floor which has not been closed out with an estimated cost of $182,163.25 which would bring the Remaining Unapplied Allowance, not including the Tenant Improvement Allowance added pursuant to this Amendment, to an estimated $432,002.82 as depicted in Exhibit B attached hereto.


4.      Furniture . Lessor and Lessee acknowledge the 14 th Floor Expansion Premises are currently demised into two separate spaces identified as Suite 1400 and Suite 1416. The furniture to be aquired by Lessee as described in Section 3.1 above shall consist of all furniture in Suite 1400 and only the file cabinets and appliances in Suite 1416. All other furniture in Suite 1416 including the soda machine shall be removed from Suite 1416 on or before the Delivery Date at Lessor’s sole cost and expense.

5.      Parking . Section 30 “Parking”, as amended by the Fifteenth Amendment, shall remain as written except that, as of the Delivery Date, Lessor shall provide Lessee with seven (7) additional parking permits for a total of seventy-three (73) parking permits.

6.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements made by or on behalf of Lessee with any brokers, finders or other persons except Lessor shall pay a fee equal to $36,603.75 to Jones Lang LaSalle upon the full execution of this Amendment.

7.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.





8.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.



DATED as of the Date of this Amendment first above set forth.


Lessee:

HOMESTREET BANK, a Washington state-chartered savings bank







By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET BANK, a Washington state-




chartered savings bank, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2012.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     







































































SEVENTEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET BANK

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 115,350 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      November 8, 2012

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012; Fifteenth Amendment thereto dated May 24, 2012; Sixteenth Amendment thereto dated September 12, 2012 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises to the 11 th Floor and a slight reduction of the Leased Premises on the 2 nd Floor, and certain other amendments more specifically set forth below. Capitalized terms used in this Seventeenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area and Square Footage . The parties confirm that, not including the 11 th Floor Expansion Premises or reduction of space on the 2 nd Floor Premises (as defined in this Amendment), the usable square footage of the Leased Premises is 100,700 and the rentable square footage of the Leased Premises is 115,350. The Lessor represents that this constitutes 10.24033 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following space will be added to the Leased Premises:

The premises located on the 11 th Floor of Two Union Square consisting of an additional 9,550 RSF comprised of Rooms 1116 - 1131 and a portion of 1115 as depicted in Exhibit A attached hereto (the “ 11 th Floor Expansion Premises ”). Lessor shall deliver the 11 th Floor Expansion Premises to Lessee for commencement of the Tenant Work on December 1, 2012 (the Delivery Date). The Effective Date for the 11 th Floor Expansion Premises shall be March 1, 2013 (the “ Effective Date #1 ”).

1.2      Effective as of the Delivery Date, the usable square footage of the Leased Premises shall be amended to 108,878 and the rentable square footage of the Leased Premises shall be amended to 124,900. Lessor represents that, as of the Delivery Date, the amended Leased Premises shall constitute 11.08815 percent of the total rentable square footage of the Building.

1.3      The parties further agree that the following space on the second floor of the Building will be removed from the Leased Premises:


Effective January 1, 2013 (the “Effective Date #2”) the Leased Premises shall be reduced by five rentable square feet in order to accommodate a pay station Lessor is installing at Lessor’s sole expense as depicted in Exhibit B attached hereto.

1.4      Effective as of the Effective Date #2, the usable square footage of the Leased Premises shall be amended to 108,873 and the rentable square footage of the Leased Premises shall be amended to 124,895. Lessor represents that the amended Leased Premises shall constitute 11.08770 percent of the total rentable square footage of the Building.

2.      Rent . On and after the Effective Dates, Section 1.4 of the Lease is hereby amended as follows:





Period
Base Monthly Rent for Leased Premises
Reduced RSF of 2 nd  FL Premises
Annual Base Rent per RSF
Reduced Base Monthly Rent
RSF of 11 th  FL Exp. Premises
Annual Base Rent per RSF of 11 th  FL Exp.
Premises
Base Monthly Rent of 11 th  FL Exp. Premises
Total Base Monthly Rent
12/01/2012 - 12/31/2012
$255,282.25
N/A
N/A
N/A
9,550
Gratis
Gratis
$255,282.25
01/01/2013 - 02/28/2013
$264,737.34
-5
$28.00
($11.67)
9,550
Gratis
Gratis
$264,725.67
03/01/2013 - 12/31/2014
$269,149.67
-5
$28.00
($11.67)
9,550
$28.00
$22,283.33
$291,421.33
01/01/2015 - 12/31/2017
$278,762.33
-5
$29.00
($12.08)
9,550
$29.00
$23,079.17
$301,829.42

 
3.      Tenant Improvement Allowance .  Lessor agrees to provide a Tenant Improvement Allowance of up to $16.92 ($35.00 x 58/120) per rentable square foot of the 11 th Floor Expansion Premises ($161,586) to be spent on permanent improvements to the Leased Premises based upon mutually approved plans and specifications or to be added to the Remaining Unapplied Allowance. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant Improvement Work in a timely fashion and in accordance with the terms of the Lease.

3.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior written consent.

3.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, amounts payable to general contractor under Lessor’s contract with general contractor, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

3.3      Any and all Tenant Improvement Costs in excess of the Tenant Improvement Allowance shall be Lessee’s responsibility and, if performed by Lessor, shall be paid upon demand to Lessor, or upon Lessee’s election, may be paid for out of the current Remaining Unapplied Allowance.

4.      Parking . Section 30 “Parking”, as amended by the Sixteenth Amendment, shall remain as written except that, as of the Delivery Date, Lessor shall provide Lessee with six (6) additional parking permits for a total of seventy-nine (79) parking permits.

5.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements between Lessee and any other broker, finder or other person relating to the negotiation of this Amendment. Lessor shall pay a fee equal to $46,158.33 to Jones Lang LaSalle upon the full execution of this Amendment.

6.      Contingency . Lessor and Lessee acknowledge and agree that the Delivery Date and Effective Date #1 for the 11 th Floor Expansion Premises are contingent upon Kibble and Prentice relinquishing said premises on or before November 30, 2012, and every day of delay of the Delivery Date beyond December 1, 2012 shall result in a commensurate delay in Effective Date #1and no rent shall be due on the 11 th Floor Expansion Premises during the duration of said delay.

7.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

8.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.



DATED as of the Date of this Amendment first above set forth.






Lessee:

HOMESTREET BANK, a Washington state-chartered savings bank






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 201__.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET BANK, a Washington state-chartered savings bank, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 201__.


(Affix seal or stamp below)
(Signature of Notary)






(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     






















































































EIGHTEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET BANK

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 124,895 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      May 3, 2013

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012; Fifteenth Amendment thereto dated May 24, 2012; Sixteenth Amendment thereto dated September 12, 2012; Seventeenth Amendment thereto dated November 8, 2012 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises on the 8 th Floor, and certain other amendments more specifically set forth below. Capitalized terms used in this Eighteenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area and Square Footage . The parties confirm that, not including the 8 th Floor Expansion Premises (as defined in this Amendment), the usable square footage of the Leased Premises is 108,873 and the rentable square footage of the Leased Premises is 124,895. The Lessor represents that this constitutes 11.08770 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following space will be added to the Leased Premises:

Commencing on the earlier of October 1, 2013 or substantial completion of the Tenant Work pursuant to Section 3 herein, i.e. completed except for minor punch-list items that do not materially interfere with Lessee’s use and enjoyment of the 8 th Floor Expansion Premises (the “8 th Floor Expansion Premises Commencement Date ”), Lessee will acquire an additional 5,138 RSF comprised of Rooms 817 - 823 and a portion of 814, 815 & 816, as depicted in Exhibit A attached hereto shaded in red (the “8 th Floor Expansion Premises ”). After the Commencement Date has occurred, Lessee agrees to execute a certificate confirming the date on which possession of the 8 th Floor Expansion Premises was delivered to Lessee with the Tenant Improvement Work described hereinbelow substantially completed, in the form of the certificate attached hereto as Exhibit C , which certificate shall also be executed by Lessor.

1.2      Effective as of the 8 th Floor Expansion Premises Commencement Date, the usable square footage of the Leased Premises shall be amended to 113,105 and the rentable square footage of the Leased Premises shall be amended to 130,033. Lessor represents that the amended Leased Premises shall constitute 11.54384 percent of the total rentable square footage of the Building.


2.      Rent . On and after the 8 th Floor Expansion Premises Commencement Date, Section 1.4 of the Lease is hereby amended as follows:





Period
Base Monthly Rent for Leased Premises
Annual Base Rent per RSF of Expansion Premises
RSF of Expansion Premises
Base Monthly Rent of Expansion Premises
Total Base Monthly Rent
8 th  Floor Premises Commencement Date - 12/31/2014
$291,421.33
$28.00
5,138
$11,988.67
$303,410.00
01/01/2015 - 12/31/2017
$301,829.42
$29.00
5,138
$12,416.83
$314,246.25

3.      Tenant Improvement Allowance .  Lessor agrees to provide a Tenant Improvement Allowance based upon the ratio of $35.00 per rentable square foot of the 8 th Floor Expansion Premises divided by 120 months times the number of months in the remaining term from the 8 th Floor Expansion Premises Commencement Date. For example: if the commencement date is October 1, 2013, then the Tenant Improvement Allowance shall be $35.00 x 51 /120 or $14.88/rsf ($76,453.44). The aforementioned Tenant Improvement Allowance shall be spent on permanent improvements to the Leased Premises based upon mutually approved plans and specifications or be added to the Remaining Unapplied Allowance. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant Improvement Work in a timely fashion.

3.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior written consent.

3.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, all amounts payable to general contractor under Lessor’s contract with general contractor, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

3.3      Any and all Tenant Improvement Costs in excess of the Tenant Improvement Allowance shall be Lessee’s responsibility and, if performed by Lessor, shall be paid upon demand to Lessor, or upon Lessee’s election, may be paid for out of the current Remaining Unapplied Allowance. Lessor and Lessee agree that the Remaining Unapplied Allowance as of April 2013 is estimated to be $309,953.40 not including the Tenant Improvement Allowance added pursuant to this Amendment and that Lessee currently has tenant improvement projects underway which have not been closed out and which contain estimated costs as depicted in Exhibit B attached hereto.

4.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements between Lessee and any other broker, finder or other person relating to the negotiation of this Amendment. Upon documentation of the 8 th Floor Expansion Premises Commencement Date, Lessor shall pay a fee equal to $1 per rsf /year of term from the 8 th Floor Expansion Premises Commencement Date to December 31, 2017 to Jones Lang LaSalle.

5.      Parking . Section 30 “Parking”, as amended by the Seventeenth Amendment, shall remain as written except that, as of the 8th Floor Expansion Premises Commencement Date, Lessor shall provide Lessee with three (3) additional parking permits for a total of eighty-two (82) parking permits.

6.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

7.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.


    

DATED as of the Date of this Amendment first above set forth.






Lessee:

HOMESTREET BANK, a Washington state-chartered savings bank






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET BANK, a Washington state-chartered savings bank, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)






(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     





EXHIBIT A
FLOOR PLANS DEPICTING THE LEASED PREMISES
(insert here)











































































EXHIBIT C
HomeStreet / USLLC
Eighteenth Amendment to Lease
-17-

Memorandum of Commencement Date


NAME OF BUILDING:
_______ Union Square
NAME OF LESSEE:
-___________________
LEASED PREMISES:
__________________
Seattle, WA 98101

ACKNOWLEDGEMENT
As stipulated in the Lease executed by Lessor and Lessee herein for the above-referenced Leased Premises, Lessor and Lessee do hereby acknowledge the following:
1.      Confirmation of Dates . The parties confirm that:

a.      Lessor substantially completed the Tenant Work to the Leased Premises and delivered possession thereof, and Lessee has accepted delivery of same, on ________, 20___;

b.      The Commencement Date is _______, 20____;

c.      The initial term of the Lease expires on _________________; and

d.      The last day on which Lessee may exercise its Extended Term option is __________________.

2.      Confirmation of Base Rent . The schedule of Base Rent payable by Lessee under the Lease is hereby confirmed as follows:

Period
Base Monthly Rent
 
 
 
 

3.      Acceptance of Delivery; Estoppel . Lessee acknowledges and agrees that it has accepted delivery of possession of the Leased Premises and is occupying same; that Lessor has performed all obligations required of Lessor under the Lease relating to construction and delivery of the Leased Premises (including as to any Tenant Work described in the Lease); that there are no offsets, counterclaims or defenses of Lessee under the Lease existing against Lessor; that Lessee has not assigned, sublet, or otherwise encumbered any interest in the Lease or any portion of the Leased Premises; that there are no remaining conditions or contingencies to the commencement of payment of rent under the Lease; and that the Lease is in full force and effect.






LESSEE:


_________________________________,
a _______________________





By

Its

Date:
LESSOR:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By Washington Real Estate Holdings, LLC,
      its manager


By
      Mark Barbieri
Its Executive Vice President                          

Date:









NINETEENTH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET BANK

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 124,895 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      May 28, 2013

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012; Fifteenth Amendment thereto dated May 24, 2012; Sixteenth Amendment thereto dated September 12, 2012; Seventeenth Amendment thereto dated November 8, 2012; Eighteenth Amendment thereto dated May 3, 2013 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises on the 8 th Floor, and certain other amendments more specifically set forth below. Capitalized terms used in this Nineteenth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area and Square Footage . The parties confirm that, not including the Suite 810 Expansion Premises (as defined in this Amendment), the usable square footage of the Leased Premises is 113,105 and the rentable square footage of the Leased Premises is 130,033. The Lessor represents that this constitutes 11.54384 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following space will be added to the Leased Premises:

Commencing on the earlier of September 1, 2014 or substantial completion of the Tenant Work pursuant to Section 3 herein, i.e. completed except for minor punch-list items that do not materially interfere with Lessee’s use and enjoyment of the Suite 810 Expansion Premises (the “ Suite 810 Expansion Premises Commencement Date ”), Lessee will acquire an additional 9,326 RSF comprised of Rooms 801 - 803, 824 - 837 and a portion of 804, as depicted in Exhibit A attached hereto shaded in red (the “Suite 810 Expansion Premises ”). After the Commencement Date has occurred, Lessee agrees to execute a certificate confirming the date on which possession of the Suite 810 Expansion Premises was delivered to Lessee with the Tenant Improvement Work described hereinbelow substantially completed, in the form of the certificate attached hereto as Exhibit B , which certificate shall also be executed by Lessor.

1.2      Effective as of the Suite 810 Expansion Premises Commencement Date, the usable square footage of the Leased Premises shall be amended to 120,786 and the rentable square footage of the Leased Premises shall be amended to 139,359. Lessor represents that the amended Leased Premises shall constitute 12.37176 percent of the total rentable square footage of the Building.


2.      Rent . On and after the Suite 810 Expansion Premises Commencement Date, Section 1.4 of the Lease is hereby amended as follows:





Period
Base Monthly Rent for Leased Premises
Annual Base Rent per RSF of Expansion Premises
RSF of Expansion Premises
Base Monthly Rent of Expansion Premises
Total Base Monthly Rent
Suite 810 Expansion Commencement Date - 12/31/2014
$303,410.00
$28.00
9,326
$21,760.67
$325,170.67
01/01/2015 - 12/31/2017
$314,246.25
$29.00
9,326
$22,537.83
$336,784.08

3.      Tenant Improvement Allowance .  Lessor agrees to provide a Tenant Improvement Allowance based upon the ratio of $35.00 per rentable square foot of the Suite 810 Expansion Premises divided by 120 months times the number of months in the remaining term from the Suite 810 Expansion Premises Commencement Date. For example: if the commencement date is September 1, 2014, then the Tenant Improvement Allowance shall be $35.00 x 40 /120 or $11.67/rsf ($108,834.42). The aforementioned Tenant Improvement Allowance shall be spent on permanent improvements to the Leased Premises based upon mutually approved plans and specifications or be added to the Remaining Unapplied Allowance. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant Improvement Work in a timely fashion.

3.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior written consent.

3.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, all amounts payable to general contractor under Lessor’s contract with general contractor, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

3.3      Any and all Tenant Improvement Costs in excess of the Tenant Improvement Allowance shall be Lessee’s responsibility and, if performed by Lessor, shall be paid upon demand to Lessor, or upon Lessee’s election, may be paid for out of the current Remaining Unapplied Allowance. Lessor and Lessee agree that the Remaining Unapplied Allowance as of April 2013 is estimated to be $309,953.40 not including the Tenant Improvement Allowance added pursuant to this Amendment and the 18 th Amendment and that Lessee currently has tenant improvement projects underway which have not been closed out and which contain estimated costs as depicted in Exhibit B of the 18 th Amendment thereto.

4.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements between Lessee and any other broker, finder or other person relating to the negotiation of this Amendment. Lessor shall pay a fee equal to $31,086.67 to Jones Lang LaSalle upon execution of this Amendment.

5.      Parking . Section 30 “Parking”, as amended by the Seventeenth Amendment, shall remain as written except that, as of the Suite 810 Expansion Premises Commencement Date, Lessor shall provide Lessee with six (6) additional parking permits for a total of eighty-eight (88) parking permits.

6.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

7.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.


    

DATED as of the Date of this Amendment first above set forth.






Lessee:

HOMESTREET BANK, a Washington state-chartered savings bank






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET BANK, a Washington state-chartered savings bank, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)






(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     





EXHIBIT A
FLOOR PLANS DEPICTING THE LEASED AND EXPANSION PREMISES
(insert here)



































































EXHIBIT B
HomeStreet / USLLC
Nineteenth Amendment to Lease
Page 17

Memorandum of Commencement Date


NAME OF BUILDING:
_______ Union Square
NAME OF LESSEE:
-___________________
LEASED PREMISES:
__________________
Seattle, WA 98101


ACKNOWLEDGEMENT
As stipulated in the Lease executed by Lessor and Lessee herein for the above-referenced Leased Premises, Lessor and Lessee do hereby acknowledge the following:
1.      Confirmation of Dates . The parties confirm that:

a.      Lessor substantially completed the Tenant Work to the Leased Premises and delivered possession thereof, and Lessee has accepted delivery of same, on ________, 20___;

b.      The Commencement Date is _______, 20____;

c.      The initial term of the Lease expires on _________________; and

d.      The last day on which Lessee may exercise its Extended Term option is __________________.

2.      Confirmation of Base Rent . The schedule of Base Rent payable by Lessee under the Lease is hereby confirmed as follows:

Period
Base Monthly Rent
 
 
 
 

3.      Acceptance of Delivery; Estoppel . Lessee acknowledges and agrees that it has accepted delivery of possession of the Leased Premises and is occupying same; that Lessor has performed all obligations required of Lessor under the Lease relating to construction and delivery of the Leased Premises (including as to any Tenant Work described in the Lease); that there are no offsets, counterclaims or defenses of Lessee under the Lease existing against Lessor; that Lessee has not assigned, sublet, or otherwise encumbered any interest in the Lease or any portion of the Leased Premises; that there are no remaining conditions or contingencies to the commencement of payment of rent under the Lease; and that the Lease is in full force and effect.






LESSEE:


_________________________________,
a _______________________





By

Its

Date:
LESSOR:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By Washington Real Estate Holdings, LLC,
      its manager


By
      Mark Barbieri
Its Executive Vice President                          

Date:









TWENTIETH AMENDMENT TO
LEASE

Lessor:          UNION SQUARE LIMITED LIABILITY COMPANY
    
Lessee:          HOMESTREET BANK

Leased Premises:      Commonly referred to as Suite 2000, consisting of an agreed 139,359 rentable square feet (“R SF ”) of space in the Two Union Square Building (the “ Building ”), as more particularly described in the Lease.

Date of this Amendment:      June 19, 2013

Lessor and Lessee are parties to that certain Office Lease dated March 5, 1992, as amended by a First Amendment thereto dated August 25, 1992; Second Amendment thereto dated May 6, 1998; Third Amendment thereto dated June 17, 1998; Fourth Amendment thereto dated February 15, 2000; Fifth Amendment thereto dated July 30, 2001; Sixth Amendment thereto dated March 5, 2002; Seventh Amendment thereto dated May 19, 2004; Eighth Amendment thereto dated August 31, 2004, Ninth Amendment thereto dated April 19, 2006; Tenth Amendment thereto dated July 20, 2006; Eleventh Amendment thereto dated December 27, 2006; Twelfth Amendment thereto dated October 1, 2007; Thirteenth Amendment thereto dated January 26, 2010; Fourteenth Amendment thereto dated January 19, 2012; Fifteenth Amendment thereto dated May 24, 2012; Sixteenth Amendment thereto dated September 12, 2012; Seventeenth Amendment thereto dated November 8, 2012; Eighteenth Amendment thereto dated May 3, 2013; Nineteenth Amendment thereto dated May 28, 2013 (collectively, the “ Lease ”), and desire to further amend the Lease to document an expansion of the Leased Premises on the 8 th Floor, and certain other amendments more specifically set forth below. Capitalized terms used in this Twentieth Amendment (this “ Amendment ”) shall have their meanings set forth in the Lease, unless otherwise set forth herein.

The parties hereby agree as follows:

1.      Confirmation of Leased Premises Area and Square Footage . The parties confirm that, not including the Suite 1420 Expansion Premises (as defined in this Amendment), the usable square footage of the Leased Premises is 120,786 and the rentable square footage of the Leased Premises is 139,359. The Lessor represents that this constitutes 12.37176 percent of the total rentable square footage of the Building.

1.1      The parties further agree that the following space will be added to the Leased Premises:

Commencing on July 1, 2013 (the “ Suite 1420 Expansion Premises Commencement Date ”), Lessee will acquire an additional 5,908 RSF comprised of Rooms 1417 - 1427, as depicted in Exhibit A attached hereto shaded in red (the “ Suite 1420 Expansion Premises ”).

1.2      Effective as of the Suite 1420 Expansion Premises Commencement Date, the usable square footage of the Leased Premises shall be amended to 125,870 and the rentable square footage of the Leased Premises shall be amended to 145,267. Lessor represents that the amended Leased Premises shall constitute 12.89625 percent of the total rentable square footage of the Building.


2.      Rent . On and after the Suite 1420 Expansion Premises Commencement Date, Section 1.4 of the Lease is hereby amended as follows:

Period
Base Monthly Rent for Leased Premises
Annual Base Rent per RSF of Expansion Premises
RSF of Expansion Premises
Base Monthly Rent of Expansion Premises
Total Base Monthly Rent
08/01/2013 - 12/31/2014
$325,170.67
$28.00
5,908
$13,785.33
$338,956.00
01/01/2015 - 12/31/2017
$336,784.08
$29.00
5,908
$14,277.67
$351,061.75
*Rent for the month of July to be paid by Prolumina pursuant to Prolumina termination agreement

3.      Tenant Improvement Allowance .  Effective as of the Suite 1420 Expansion Premises Commencement Date, Lessor agrees to provide a Tenant Improvement Allowance based upon the ratio of $35.00 per rentable square foot of the Suite 1420 Expansion Premises divided by 120 months times the number of months in the remaining term from the Suite 1420 TI Date. Therefore, the




Tenant Improvement Allowance shall be $35.00 x 24 /120 or $7.00/rsf ($41,356.00). The aforementioned Tenant Improvement Allowance shall be spent on permanent improvements to the Leased Premises based upon mutually approved plans and specifications or be added to the Remaining Unapplied Allowance. Lessee and Lessor shall cooperate in the design, permitting and construction of the Tenant Work by responding to requests for information and taking such other action as may be required of either of them in connection with approving the plans and specifications and performing the Tenant Improvement Work in a timely fashion. The parties agree that the effective date for calculating the Tenant Improvement Allowance in Section 3 herein shall be January 1, 2016, following the natural maturation of the current lease for the Suite 1420 Expansion Premises between Lessor and Prolumina LLC (the “ Suite 1420 TI Date ”).


3.1      The “Tenant Work,” as used herein, shall mean all construction work performed pursuant to and in accordance with the plans and specifications which have been approved by Lessor.  Lessee may request to perform additional work different from or in addition to the Tenant Work, except Lessee may not make any modifications to the Tenant Work without Lessor’s prior written consent.

3.2      The “Tenant Improvement Costs,” as used herein, shall consist of all direct and indirect costs associated with the Tenant Work, including: (a) design, including, without limitation, the cost of preparing the plans and specifications, permitting, demolition and preparation work, (b) “hard” and “soft” construction costs, including, without limitation, all amounts payable to general contractor under Lessor’s contract with general contractor, (c) the cost of any changes to the plans and specifications required by any applicable governmental authority, and, (d) inspection and approval fees.

3.3      Any and all Tenant Improvement Costs in excess of the Tenant Improvement Allowance shall be Lessee’s responsibility and, if performed by Lessor, shall be paid upon demand to Lessor, or upon Lessee’s election, may be paid for out of the current Remaining Unapplied Allowance. Lessor and Lessee agree that the Remaining Unapplied Allowance as of April 2013 is estimated to be $309,953.40 not including the Tenant Improvement Allowance added pursuant to this Amendment and the 18 th and 19 th Amendments and that Lessee currently has tenant improvement projects underway which have not been closed out and which contain estimated costs as depicted in Exhibit B of the 18 th Amendment thereto.

4.      Transfer of Furniture . Lessor acknowledges that Lessee intends to acquire certain items of furniture, fixtures, equipment, and other personal property from Prolumina LLC which are currently located in the Suite 1420 Expansion Premises (the “ Prolumina FF&E ”), and Lessee shall accept delivery of the Premises on the Suite 1420 Expansion Premises Commencement Date with the Prolumina FF&E in-place. Any such transfer and conveyance shall be at Lessee’s sole risk and expense, and Lessee shall indemnify, defend, and hold Lessor harmless from and against any losses, costs, demands, or claims relating to or arising in any way from the Prolumina FF&E, including without limitation any claims by Prolumina LLC. or any leasing company or other party as to title to or the condition thereof. Upon expiration or earlier termination of the Lease, the Prolumina FF&E shall be removed by Lessee from the Leased Premises at Lessee’s sole cost except as may otherwise be agreed to by the parties.

5.      Broker Fee. Lessee shall defend, indemnify, and hold Lessor harmless from all claims and liabilities or expenses arising from agreements or other arrangements between Lessee and any other broker, finder or other person relating to the negotiation of this Amendment. Lessor shall pay a fee equal to $11,816.00 to Jones Lang LaSalle upon execution of this Amendment.

6.      Lease Contingency . Lessee acknowledges that this Amendment is contingent upon the successful termination of the Prolumina LLC lease for the Suite 1420 Expansion Premises.

7.      Parking . Section 30 “Parking”, as amended by the Nineteenth Amendment, shall remain as written except that, as of the Suite 1420 Expansion Premises Commencement Date, Lessor shall provide Lessee with four (4) additional parking permits for a total of ninety-two (92) parking permits.

8.      Full Force and Effect . Except as modified herein, the Lease remains unmodified and in full force and effect.

9.      Counterparts . This Amendment may be executed in counterparts, each of which, when combined, shall constitute one single, binding agreement.


    

DATED as of the Date of this Amendment first above set forth.






Lessee:

HOMESTREET BANK, a Washington state-chartered savings bank






By
     
Title:

Date:
Lessor:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By: Washington Real Estate Holdings, LLC, a Washington limited liability company, its Manager


By
     Mark Barbieri- Executive Vice
     President

Date:

STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that Mark Barbieri is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the Executive Vice President of Washington Real Estate Holdings, LLC, a Washington limited liability company, the Manager of UNION SQUARE LIMITED LIABILITY COMPANY, a Washington limited liability company, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)


(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     




STATE OF WASHINGTON

COUNTY OF KING
ss.

I certify that I know or have satisfactory evidence that ___________________________ is the person who appeared before me, and said person acknowledged that said person signed this instrument, on oath stated that said person was authorized to execute the instrument and acknowledged it as the ___________________of HOMESTREET BANK, a Washington state-chartered savings bank, to be the free and voluntary act of such limited liability company for the uses and purposes mentioned in the instrument.

Dated this ____ day of ____________________ 2013.


(Affix seal or stamp below)
(Signature of Notary)






(Legibly Print or Stamp Name of Notary)
Notary public in and for the State of Washington,
residing at     
My appointment expires     





EXHIBIT A
FLOOR PLANS DEPICTING THE LEASED AND EXPANSION PREMISES
(insert here)



































































EXHIBIT B
HomeStreet / USLLC
Nineteenth Amendment to Lease
Page 17

Memorandum of Commencement Date


NAME OF BUILDING:
_______ Union Square
NAME OF LESSEE:
-___________________
LEASED PREMISES:
__________________
Seattle, WA 98101


ACKNOWLEDGEMENT
As stipulated in the Lease executed by Lessor and Lessee herein for the above-referenced Leased Premises, Lessor and Lessee do hereby acknowledge the following:
1.      Confirmation of Dates . The parties confirm that:

a.      Lessor substantially completed the Tenant Work to the Leased Premises and delivered possession thereof, and Lessee has accepted delivery of same, on ________, 20___;

b.      The Commencement Date is _______, 20____;

c.      The initial term of the Lease expires on _________________; and

d.      The last day on which Lessee may exercise its Extended Term option is __________________.

2.      Confirmation of Base Rent . The schedule of Base Rent payable by Lessee under the Lease is hereby confirmed as follows:

Period
Base Monthly Rent
 
 
 
 

3.      Acceptance of Delivery; Estoppel . Lessee acknowledges and agrees that it has accepted delivery of possession of the Leased Premises and is occupying same; that Lessor has performed all obligations required of Lessor under the Lease relating to construction and delivery of the Leased Premises (including as to any Tenant Work described in the Lease); that there are no offsets, counterclaims or defenses of Lessee under the Lease existing against Lessor; that Lessee has not assigned, sublet, or otherwise encumbered any interest in the Lease or any portion of the Leased Premises; that there are no remaining conditions or contingencies to the commencement of payment of rent under the Lease; and that the Lease is in full force and effect.






LESSEE:


_________________________________,
a _______________________





By

Its

Date:
LESSOR:

UNION SQUARE LIMITED LIABILITY COMPANY , a Washington limited liability company

By Washington Real Estate Holdings, LLC,
      its manager


By
      Mark Barbieri
Its Executive Vice President                          

Date:








     1501 Fourth Ave., Ste. 1800, Seattle, WA 98101-1693 206.340.2300 tel 206.340.2485 fax www.fhlbsea.com


EXHIBIT 10.13
Advances, Security and Deposit Agreement


This Advances, Security and Deposit Agreement (“Agreement”), dated as of February 1 st , 2013 is entered between HomeStreet Bank, having its principal place of business at 601 Union Street, Ste. 2000, Seattle, WA 98101 (“Customer”) and the Federal Home Loan Bank of Seattle, 1501 Fourth Avenue, Suite 1800, Seattle, WA 98101 (“Seattle Bank”).
RECITALS
Whereas, Customer is a Member of Seattle Bank and desires from time to time to apply for extensions of credit, deposit accounts and other services from Seattle Bank in accordance with the terms and conditions of this Agreement; and
Whereas, Seattle Bank requires that all existing and future indebtedness of Customer to Seattle Bank be secured pursuant to this Agreement.
AGREEMENT
NOW THEREFORE, Customer and Seattle Bank agree as follows:
Article I. Definitions
Section 1.1 Definitions As used in this Agreement, the following terms will have the following meanings:
1.1.1
“Account” or “Accounts” means Customer’s deposit account(s) with Seattle Bank, including demand and time deposit accounts.
1.1.2
“Act” means the Federal Home Loan Bank Act, as amended from time to time.
1.1.3
“Advance” or “Advances” means any loans heretofore, now or hereafter made to Customer by Seattle Bank.
1.1.4
“Advance Master Application” means a writing executed by Customer and accepted by Seattle Bank, in form and content satisfactory to Seattle Bank, under which Customer may make Requests from time to time to receive Advances, subject to the terms of this Agreement, the Seattle Bank’s Credit Policy, the Act and the Regulations.
1.1.5
“Advances Note” means any promissory note executed by Customer and accepted by Seattle Bank, in form and content satisfactory to Seattle Bank, relating to Advances or Other Credit Accommodations.
1.1.6
“Advance Confirmation Advice” means a writing or an electronic transmission issued at any time by Seattle Bank, in form and content satisfactory to Seattle Bank, confirming particular terms of an Advance made at the Request of Customer.
1.1.7
“Borrowing Capacity” means the maximum amount of Advances, Commitments and Other Credit Accommodations which Borrower may have outstanding at any time. Borrowing Capacity is limited by the Act and Regulations, the Stock Ownership Requirement and Collateral Maintenance Requirement of the Credit Policy, and by Customer’s creditworthiness and the quality of Customer’s Eligible Collateral, as determined by Seattle Bank from time to time.
1.1.8
“Capital Plan” means the Capital Plan of the Federal Home Loan Bank of Seattle, adopted March 5, 2002, as amended November 22, 2002 and as hereafter amended.
1.1.9
“Capital Stock” means all of Customer’s capital stock in Seattle Bank, as currently owned or hereafter acquired.
1.1.10
“Collateral” means all property, including the proceeds thereof, heretofore, now or hereafter assigned, transferred or pledged to Seattle Bank by Customer as security for Indebtedness. The term “Collateral” may, in appropriate circumstances, include property that is pledged under agreements separate from this


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Agreement, including without limitation real property of Customer, whether used in Customer’s business or obtained through foreclosure or deeds in lieu of foreclosure of Mortgage Collateral.
1.1.11
“Collateral Coverage Factor” means the percentage of value, as determined by Seattle Bank from time to time, of various types of Eligible Collateral which will support the aggregate amount of all outstanding Advances, Commitments or Other Credit Accommodations made to Customer against such Eligible Collateral.
1.1.12
“Collateral Manual” means the Collateral Manual of the Seattle Bank, as published and revised by the Seattle Bank from time to time.
1.1.13
“Collateral Maintenance Requirement” means the minimum level of aggregate Eligible Collateral, discounted by applicable Collateral Coverage Factors, which Customer must pledge to Seattle Bank, and maintain at or above such minimum level, to secure Customer’s outstanding Advances, Commitments or Other Credit Accommodations, as determined by Seattle Bank from time to time.
1.1.14
“Commitment” means any written agreement under which Seattle Bank is contractually obligated to make Advances to Customer, or payments on behalf of or for the account of Customer, at a future date, irrespective of whether Seattle Bank’s obligation under such agreement is contingent upon the occurrence or non-occurrence of a condition subsequent. Commitments include, without limitation, Letters of Credit, firm commitments, guarantees or other financial arrangements made by Seattle Bank in writing to facilitate transactions between Customer and third parties. This Agreement is neither a Commitment nor an undertaking or obligation to provide any Commitment.
1.1.15
“Credit Policy” means the credit and collateral policies of Seattle Bank, including without limitation the credit and collateral policies set forth in the Users Guide and the Collateral Manual, as published and revised by the Seattle Bank from time to time. In addition to the Users Guide and Collateral Manual, the Credit Policy includes other policies adopted from time to time by Seattle Bank. The Credit Policy is subject to the Act and Regulations, and in the event of any inconsistency between the Credit Policy and the Act or Regulations, the more restrictive statute, regulation or policy shall be controlling.
1.1.16
“De-Pledge” means the partial release, re-assignment and/or re-delivery by Seattle Bank or its approved custodian of any part of the Collateral pledged to Seattle Bank for Indebtedness.
1.1.17
“Eligible Collateral” means Collateral other than Capital Stock which: (i) qualifies as security for Advances or Other Credit Accommodations under the Act and Regulations; (ii) qualifies as security for Advances or Other Credit Accommodations under the Credit Policy, as amended by Seattle Bank from time to time, which may be more restrictive than the Act or Regulations; (iii) is owned by Customer free and clear of any liens, encumbrances or other interests, other than the pledge of such Collateral to Seattle Bank under this Agreement; and (iv) is not a home mortgage on which any director, officer, employee, attorney or agent of Customer or any Federal Home Loan Bank is personally liable, unless acceptance of such mortgage is specifically approved by formal resolution of the Seattle Bank’s board of directors, and the Finance Agency has endorsed such resolution.
1.1.18
“Eligible CFI Collateral” means, if Customer is a community financial institution as defined in the Regulations, certain small agri-business loans, small farm loans or small business loans which meet the requirements of Eligible Collateral described in Subsection 1.1.17 above.
1.1.19
“Eligible Mortgage Collateral” means Mortgage Collateral which meets the requirements of Eligible Collateral described in Subsection 1.1.17 above.
1.1.20
“Eligible Securities Collateral” means “securities” (whether certificated or uncertificated) or other “investment property” (as each such term is defined in the UCC) now owned or hereafter acquired by Customer, which meet the requirements of Eligible Collateral described in Subsection 1.1.17 above.
1.1.21
“Finance Agency” means the Federal Housing Finance Agency, or any successor agency thereto.
1.1.22
“Funds” means money maintained in Customer’s Account(s) with Seattle Bank.
1.1.23
“Indebtedness” means all obligations of Customer to Seattle Bank, defined in the broadest and most comprehensive sense, to mean all primary, secondary, direct, indirect, fixed or contingent, debts, duties, agreements, undertakings, obligations, covenants and conditions now or at any time in the future to be paid or performed by Customer in connection with or relating to Advances, Other Credit Accommodations, Commitments, Accounts or Other Obligations, including, without limitation, all of Customer’s obligations to pay principal, interest, fees (including, without limitation, loan fees and prepayment fees), charges (including,


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without limitation, overdraft charges), costs, reimbursements (including, without limitation, attorneys fees) and losses (including, without limitation, damages for Customer’s breach of any contractual obligations to Seattle Bank), which at any time may be owing under or in connection therewith.
1.1.24
“Letter of Credit” means any standby letter of credit issued by Seattle Bank for the account of Customer.
1.1.25
“Listed Collateral” is defined in Section 3.4 below.
1.1.26
“Louisiana Collateral” means all portions of the Collateral and the proceeds thereof that are from time to time located in the State of Louisiana or are otherwise subject to the application of Louisiana law.1.1.27    “Master Backup Support Agreement” means any agreement now or hereafter made by Seattle Bank and one or more other Federal Home Loan Bank(s) under which such other Federal Home Loan Bank(s) may make Advances or Other Credit Accommodations to Customer in the event of a loss of power, communications or computer failure, property damage or other forms of business interruption adversely affecting Seattle Bank’s normal operations.
1.1.28
“Member” means an owner of Capital Stock in Seattle Bank.
1.1.29
“Member Advance Stock Purchase Requirement” is described in Section 6.10 of this Agreement and in the Capital Plan.
1.1.30
“MERS” means Mortgage Electronic Registration Systems, Inc., a corporation organized and existing under the laws of the State of Delaware, or any successor thereto.
1.1.31
“MERS Mortgages” means mortgages registered with MERS, in which the Mortgage Documents name MERS as mortgagee, solely as nominee, for the originators of the debt secured by such mortgages and their successors and assigns.
1.1.32
“Mortgage Collateral” means Mortgage Documents (excluding participation or other fractional interests therein) and all ancillary security agreements, policies and certificates of insurance, guarantees, indemnities, evidences of recordation, applications, underwriting materials, surveys, appraisals, notices, opinions of counsel and loan servicing data and all other electronically stored and written records or materials relating to the loans evidenced or secured by the Mortgage Documents.
1.1.33
“Mortgage Documents” means mortgages and deeds of trust (in this Agreement, “mortgages”) and all notes, bonds or other instruments evidencing loans secured thereby (in this Agreement, “mortgage notes”) and any endorsements and assignments thereof to Customer.
1.1.34
“Mortgage Purchase Program” means any program offered by Seattle Bank for the purchase from a Member of mortgage notes and related mortgages.
1.1.35
“Other Credit Accommodations” means credit products, other than Advances, authorized under the terms and conditions of the Act and the Regulations and offered from time to time by Seattle Bank under its Credit Policy, including, without limitation, Swap Transactions, Letters of Credit and other Commitments.
1.1.36
“Other Eligible Collateral” means property, other than Eligible Mortgage Collateral or Eligible Securities Collateral, which meets the requirements of Eligible Collateral described in Subsection 1.1.17 above, including, if Customer is a community financial institution as defined in the Regulations, any Eligible CFI Collateral.
1.1.37
“Other Obligations” means obligations of Customer to Seattle Bank other than those relating to Advances or Other Credit Accommodations, including, without limitation, any repurchase obligations of Customer under a Mortgage Purchase Program, if applicable; overdraft charges, wire charges, Account fees and charges for other miscellaneous services provided to Customer by Seattle Bank; and all other amounts, of any nature whatsoever, now or hereafter owed to the Seattle Bank by Customer.
1.1.38
”Parent” means JPMorgan Chase Bank, N.A., the entity of which Customer is a direct, wholly-owned, subsidiary.
1.1.39
“Parent Guaranty” means an unconditional, limited guaranty of Parent in favor of the Seattle Bank, guarantying certain of the obligations of Customer under this Agreement, including without limitation the principal and interest on certain Advances, accompanied by an opinion of outside counsel to the Parent in form and substance satisfactory to the Seattle Bank and its counsel.
1.1.40
“Physical Possession or Control Collateral” is defined in Section 3.5 below.
1.1.41
“Regulations” means the regulations of the Finance Agency, as amended from time to time.


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1.1.42
“Request” or “Requests” means any request(s) made by Customer via telephone, or other means made available by Seattle Bank from time to time, for Advances.
1.1.43
“Stock Ownership Requirement” means the obligation of Customer to own minimum amounts of Capital Stock in accordance with the Capital Plan.
1.1.44
“Swap Transaction” means an interest rate swap, cap or collar, currency exchange transaction, or any other similar transaction (including any option to enter into any of the foregoing) or any combination of the foregoing, entered into between the Seattle Bank and Customer pursuant to the terms of the Credit Policy, this Agreement or other related documentation, including without limitation any form of master agreement published by the International Swaps and Derivatives Association, Inc.
1.1.45
“UCC” means the Uniform Commercial Code, as amended from time to time, of the State of Washington or the jurisdiction of formation of Customer, as applicable under Section 6.13 of this Agreement. References in this Agreement to sections of the UCC shall be to the uniform version thereof and shall be deemed to be the corresponding section of the UCC in the appropriate jurisdiction notwithstanding that it may be numbered differently.

1.1.46
“Users Guide” means the Financial Products and Services Users Guide of Seattle Bank, as published and revised by Seattle Bank from time to time.
Article II. Advances and Other Credit Accommodations
Section 2.1 Procedures for Advances The terms and conditions of this Agreement shall govern each Advance heretofore, now or hereafter made by Seattle Bank to Customer. The Credit Policy of the Seattle Bank is an integral part of the terms and conditions of all such Advances and is incorporated in this Agreement by this reference as if fully set forth herein. Additional terms and conditions of Advances may be set forth in an Advance Master Application and/or Advances Note, which Seattle Bank may require Customer to sign and deliver to Seattle Bank from time to time. Any additional, particular terms and conditions of an Advance orally quoted by Seattle Bank and accepted by Customer at the time of Customer’s Request for an Advance, including, without limitation, the principal amount, applicable interest rate or due date of the Advance, will be confirmed by Seattle Bank in an Advance Confirmation Advice or, if no Advance Confirmation Advice is issued, will be evidenced by the books and records of Seattle Bank. In cases in which a Request for an Advance is made orally by Customer of Seattle Bank in an electronically recorded telephone conversation, and a question arises concerning any particulars of such Advance, Customer agrees that such recording or a transcript thereof will be an integral part of Seattle Bank’s books and records and may be used as evidence of such particulars. In cases in which an Advance requested orally by Customer is made by another Federal Home Loan Bank, on behalf of Seattle Bank, under a Master Backup Support Agreement, the books and records of such other Federal Home Loan Bank will establish any additional, particular terms of such Advance. If such Advance is requested by Customer of such other Federal Home Loan Bank in an electronically recorded telephone conversation, and a question arises concerning any particulars of such Advance, Customer agrees that such recording or a transcript thereof will be an integral part of the such other Federal Home Loan Bank’s books and records and may be used as evidence of such particulars. Unless otherwise agreed by Seattle Bank, each Advance will be made by crediting Customer’s demand deposit Account(s) with Seattle Bank. In all cases, funding of any Request for an Advance will be subject to compliance by Customer with the terms and provisions of the Act, the Regulations, the Credit Policy and this Agreement, including, without limitation, the Stock Ownership Requirement and Collateral Maintenance Requirement. In the event that Customer’s access to Advances is subsequently restricted pursuant to the Act, the Regulations or any other provision of applicable law, Seattle Bank will not be required to fund any outstanding Commitment for Advances not funded prior to the effective date of such restriction.
Section 2.2 Repayment of Advances Customer agrees to repay each Advance in accordance with its terms and conditions. Customer will maintain in Customer’s demand deposit Account(s) with Seattle Bank an amount at least equal to the amounts then currently due and payable to Seattle Bank with respect to Advances, and Customer hereby authorizes Seattle Bank to debit Customer’s Account(s) with Seattle Bank for all amounts due and payable with respect to any Advance and for all other amounts due and payable under this Agreement. Customer agrees that, in the event any such debit results in Customer’s demand deposit Account being overdrawn, Customer will pay overdraft charges thereon at the rate that Seattle Bank normally assesses for overdrafts on general demand deposit accounts. In the event that the balance in such demand deposit Account(s) is, at any time, insufficient to pay such due and payable amounts, Seattle Bank may in its discretion and without notice to Customer: (i) make a “flexible balance” or other similar Advance, as provided in the Credit Policy, in the amount of and for the purpose of paying such due and payable amounts; or (ii) apply any other deposits, credits, Funds or other monies of Customer then in the possession of Seattle Bank to the payment of such due and payable amounts. All payments with respect to Advances will be applied to any fees, costs or charges applicable thereto, to interest due thereon and to any principal amount thereof that is then due and payable, in such order and priority as Seattle Bank may determine.


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Section 2.3 Estoppel For any Advance evidenced by an Advance Confirmation Advice, failure of Customer, within ten (10) business days of Customer’s receipt of the Advance Confirmation Advice, to deliver written notice to Seattle Bank specifying any disputed particulars thereof, including without limitation the principal amount, applicable interest rate or due date of the Advance, will constitute the final agreement and acknowledgment by Customer that the particulars of the Advance Confirmation Advice are accurate and are those that Customer requested and by which Customer agreed to be bound, and Customer will thereafter be estopped from asserting any claim or defense with respect thereto. For any Advance which has such particular terms established by the books and records of Seattle Bank or another Federal Home Loan Bank rather than by an Advance Confirmation Advice, such books and records shall be conclusive in the absence of manifest error. Seattle Bank reserves the right to correct its scrivener’s errors, if any, in any Advance Confirmation Advice or such books and records, and no such errors shall affect Customer’s obligations in respect to the affected Advance.
Section 2.4 Interest Customer agrees to pay interest on each Advance at a rate per annum determined on the basis described in the Credit Policy, Advance Master Application, Advances Note, Advance Confirmation Advice or the books and records of Seattle Bank or other Federal Home Loan Bank, as the case may be, pertaining to such Advance.
Section 2.5 Commitment and Cancellation Fees Customer agrees to pay when due any commitment fees and any cancellation fees applicable to any Commitments issued by Seattle Bank for Advances, determined on the basis described in the Credit Policy, the Commitment documentation or the books and records of Seattle Bank or other Federal Home Loan Bank, as the case may be, pertaining to such Commitment.
Section 2.6 Other Credit Accommodations
2.6.1
Customer may apply to Seattle Bank for the issuance of other credit products, including without limitation Letters of Credit, firm commitments for Advances and Swap Transactions, provided such other credit products, and Customer’s intended use thereof, are authorized under the Act, the Regulations and the Credit Policy. The terms and conditions of such Other Credit Accommodations shall be governed by the Act, the Regulations, the Credit Policy, this Agreement and such other documentation as Seattle Bank may require from time to time.
2.6.2
The Borrowing Capacity of Customer shall be reduced by Seattle Bank’s outstanding obligations under any Letter of Credit, Swap Transaction, Commitment or Other Credit Accommodation, as determined by Seattle Bank from time to time, in the same manner as outstanding Advances.
2.6.3
In the event any Commitment, including without limitation a Letter of Credit, is outstanding at the time of an Event of Default under Section 4.1 of this Agreement, Seattle Bank may at its option make an Advance by crediting a special Account with Seattle Bank in an amount equal to the outstanding Commitment. Amounts credited to such special Account will be utilized by Seattle Bank for the purpose of satisfying Seattle Bank’s obligations under the outstanding Commitment. When all such obligations have expired or have been satisfied, Seattle Bank will disburse the balance, if any, in such special Account first to the satisfaction of any Indebtedness then owing by Customer to Seattle Bank and then to Customer or its successors in interest. Advances made pursuant to this Subsection 2.7.3 will be payable on demand and will bear interest at the rate in effect and being charged by Seattle Bank from time to time on overdrafts on demand deposit accounts of its Customers.
Section 2.7 Prepayment Fees Customer agrees to pay a prepayment fee upon the prepayment of all or any portion of any Advance or Other Credit Accommodation, made before the due date thereof, whether such prepayment is made voluntarily or involuntarily, including, without limitation, any prepayment resulting from acceleration under Section 4.1 hereof upon an Event of Default. The amount of the prepayment fee shall not be less than zero and shall be determined by the Seattle Bank on the basis described in the Regulations, the Credit Policy and any applicable Advance Master Application, Advances Note, Advance Confirmation Advice or Swap Transaction, as the case may be, pertaining to prepayment of such Advance or Other Credit Accommodation. Any applicable illustrations and examples of prepayment fees in the Users Guide, as published and revised by the Seattle Bank from time to time, are an integral part of the terms and conditions of this Agreement and are incorporated herein by this reference as if fully set forth at length.
Section 2.8 Compliance with the Credit Policy, Act and Regulations Customer hereby agrees to comply with the terms and provisions of the Credit Policy, the Act and the Regulations, including, without limitation, any reporting requirements, application procedures or eligibility requirements imposed by the Credit Policy, the Act or the Regulations with respect to particular types of Advances, Commitments or Other Credit Accommodations. In the event of any inconsistency between the Credit Policy and the Act or the Regulations, Customer hereby agrees to comply with the more restrictive statute, regulation or policy. In the event any provision of the Credit Policy, the Act or the Regulations is amended, Customer agrees to comply with the terms and provisions of the Credit Policy, the Act and the Regulations as so amended from time to time, provided that, to the extent permitted by the Act and the


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Regulations, any particular terms of outstanding Advances or Commitments existing at the time of any such amendment, including, without limitation, interest rates or prepayment fees, will continue to be governed by the terms and provisions of the Advance Master Application, Advances Note, Advance Confirmation Advice or Commitment documentation which applied to such outstanding Advances or Commitments at the time such Advances or Commitments were made. Notwithstanding the foregoing, Seattle Bank shall retain the right to amend from time to time the Borrowing Capacity, Collateral Coverage Factors and Collateral Maintenance Requirements applicable to Customer and its Eligible Collateral, and Customer agrees to comply with such changes upon Seattle Bank’s notice thereof to Customer.
Section 2.9 Additional Covenants by Customer Customer will maintain a copy of this Agreement in its official records at all times. Customer will give Seattle Bank notice of any material event that would cause Customer, pursuant to the provisions of the Act, the Regulations, the Credit Policy or this Agreement, to be ineligible to become a Customer of Seattle Bank or ineligible to obtain Advances, Commitments or Other Credit Accommodations. Customer will give Seattle Bank notice of any material adverse change in or affecting Customer’s financial condition. Failure to provide any notice required pursuant to this section shall constitute an Event of Default under this Agreement. Any obligation of Seattle Bank to fund any Advance or Other Credit Accommodation, including any Commitment, shall be conditioned upon the satisfaction of each of the following conditions precedent as of the date hereof and at the time of funding of each Advance or Other Credit Accommodation: (a) all representations and warranties of Customer contained this Agreement, or otherwise made by Customer to Seattle Bank, are and continue to be correct; (b) no Event of Default under this Agreement, or other documentation relating to the Advance or Other Credit Accommodation, has occurred or would result from such Advance; (c) the Seattle Bank has received such approvals, opinions or documents that the Seattle Bank may request in connection with the Advance or Other Credit Accommodation; (d) Customer satisfies all membership and borrowing eligibility criteria under the Act, the Regulations, this Agreement and the Credit Policy; (e) Customer, in the judgment of Seattle Bank, is not engaging or has not engaged in unsafe or unsound banking practices, has adequate capital, is not sustaining operating losses, does not have financial or managerial deficiencies that bear on the Customer’s creditworthiness, and has no other deficiencies as determined by Seattle Bank; (f) there has been in Seattle Bank’s judgment no material adverse change in Customer, the Collateral or any financial or other information submitted by Customer to Seattle Bank in connection with an Advance, Other Credit Accommodations or any Other Obligations; and (g) there has been in Seattle Bank’s judgment no change in governmental laws or regulations that materially affects the Seattle Bank’s power, right, authority, or ability to fund the Advance or Other Credit Accommodation.
Article III. Security Agreement
Section 3.1 Creation of Security Interest As security for the timely payment of all Indebtedness and outstanding Commitments, Customer hereby assigns, transfers, and pledges to Seattle Bank, and grants to Seattle Bank a security interest in all of the following Collateral now owned or hereafter acquired by Customer, and all proceeds thereof:
3.1.1    
(a)
All Capital Stock now owned or hereafter acquired by Customer in Seattle Bank, including all payments which have been or hereafter are made on account of subscriptions to and all unpaid dividends on such stock;
(b)
All Funds of Customer now or hereafter on deposit with Seattle Bank;
(c)
All Eligible Mortgage Collateral and related Mortgage Documents now owned or hereafter acquired by Customer and specifically pledged to the Seattle Bank;
(d)
All Eligible Securities Collateral now owned or hereafter acquired by Customer and specifically pledged to the Seattle Bank; and
(e)
All Other Eligible Collateral now owned or hereafter acquired by Customer and specifically pledged to the Seattle Bank.
3.1.2
All of the Collateral shall secure the Indebtedness, irrespective of whether only part of the Collateral constitutes Eligible Collateral for purposes of satisfying the Collateral Maintenance Requirements of Section 3.3 below.
Section 3.2 Customer’s Representations and Warranties Regarding Collateral Customer represents and warrants to Seattle Bank, as of the date of this Agreement and the date of each Advance, Commitment or Other Credit Accommodation made under this Agreement, as follows:


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3.2.1
Customer owns and has marketable title to all Collateral and has the right and authority to grant a security interest in the Collateral and to subject all of the Collateral to this Agreement, and Customer covenants that it will defend the Collateral against the claims and demands of all persons;
3.2.2
With respect to any Eligible Mortgage Collateral originated by any party (whether affiliated or unaffiliated) other than Customer, the Mortgage Documents contain either a complete chain of endorsements (either on the mortgage note or a related allonge) from the originating party to Customer, a complete chain of endorsements in blank from each successive holder of the Mortgage Collateral or are MERS Mortgages for which Customer’s ownership in the whole obligation secured by the MERS Mortgage has been registered with MERS.
3.2.3
The information contained in any financial report, call report, certification, audit, confirmation, report, schedule, or other documents required under this Agreement and any other information given from time to time by Customer as to each item of Eligible Collateral, and any information provided by Customer to its supervising state or federal agency in call reports or other reports, from which Seattle Bank obtains information related to Collateral, is true, accurate and complete in all material respects;
3.2.4
All Eligible Collateral meets the standards and requirements from time to time established by the Credit Policy, the Act and the Regulations and, in any case of variances among the Act, the Regulations and the Credit Policy, the most restrictive of such standards and requirements;
3.2.5
To Customer’s knowledge, no part of any real property encumbered by Mortgage Collateral pledged hereunder contains or is subject to the effects of any hazardous materials or other hazardous substances, except as may have been disclosed to and reasonably approved by Customer in its underwriting of Mortgage Collateral, and Customer will indemnify and hold Seattle Bank harmless, and, at the option of Seattle Bank, defend Seattle Bank (with counsel satisfactory to Seattle Bank) from all liabilities, costs, damages, claims or expenses (including attorneys’ fees and environmental consultants’ fees) suffered, paid or incurred by Seattle Bank resulting from or arising out of any requirement under any applicable federal, state or local law, regulation, ordinance, order, judgment or decree relating to the release or cleanup of any such hazardous material or hazardous substance;
3.2.6
Except as permitted under Section 3.3 of this Agreement, Customer will not (i) sell, offer to sell or otherwise transfer Eligible Collateral pledged hereunder, nor pledge, mortgage or create or suffer to exist a lien, claim of lien, encumbrance, right of set-off or other security interest or collateral assignment of any kind whatsoever in Eligible Collateral pledged hereunder or the proceeds thereof in favor of any person other than Seattle Bank, or (ii) transfer physical possession of the Mortgage Documents evidencing Eligible Mortgage Collateral pledged hereunder to any third party or affiliate without the prior written consent of Seattle Bank;
3.2.7
All taxes, assessments and governmental charges levied or assessed or imposed upon or with respect to Eligible Collateral pledged hereunder, including any real property subject to Eligible Mortgage Collateral, will be paid and if Customer fails to promptly pay such taxes, assessments or governmental charges, Seattle Bank may (but will not be required to) pay the same and any such expense will be an obligation under this Agreement; and
3.2.8
Customer will notify Seattle Bank promptly in writing of any change in the location of the Eligible Collateral pledged hereunder and of any change in location of its principal place of business or jurisdiction of incorporation, organization or formation, including without limitation, if Customer is organized under the laws of the United States, the location determined by Section 9-307(f) of the UCC.
3.2.9
Customer hereby grants to Seattle Bank a security interest in and grants a right of access to all books and records relating to the Collateral and any electronic records system that contains any records of any of the Collateral. To the extent necessary for Seattle Bank to access such records, Customer shall, upon request by the Seattle Bank and at its own expense, provide Seattle Bank with such licenses and other authorizations as may be appropriate to allow Seattle Bank to obtain such access to the same extent Customer may do so, including the right to make and retain copies thereof.
3.2.10
In the event that any Mortgage Documents or Mortgage Collateral becomes the subject of any form of enforcement, including without limitation judicial or non-judicial foreclosure or the acceptance of a deed in lieu of judicial or non-judicial foreclosure, upon notice to Customer to that effect by Seattle Bank the following procedures shall apply:
(a)
Customer shall provide Seattle Bank with (i) true and complete copies of all notices of foreclosure and trustee’s sale and all complaints for judicial foreclosure that relate to any of the Mortgage Collateral at the time the same are given to the mortgagor, (ii) written notice of any proposed deed in lieu of any judicial or nonjudicial foreclosure of any Mortgage Collateral no later than 30 days prior to the date


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such deed is proposed to be accepted, and (iii) true and complete copies of any related settlement agreements between Customer and such mortgagors at the time such agreements are executed;
(b)
Customer acknowledges and agrees that the Mortgage Collateral includes the cash proceeds payable to Customer that are derived from any of the other Mortgage Collateral and has granted a security interest in the same to Seattle Bank. In the event that Customer receives cash consideration upon such foreclosure, judicial or non-judicial, or in connection with a deed in lieu of any such foreclosure, either from the obligor on the Mortgage Document or any third party, Customer shall immediately deposit such cash consideration, in the form received, in its Account at Seattle Bank; and.
(c)
In the event that Customer obtains title to any of the real estate secured by the Mortgage Documents, Customer shall forthwith, at the same time it records any deed or title in its favor or in favor of its nominee, record a mortgage or deed of trust, in form and substance satisfactory to Seattle Bank, in favor of Seattle Bank, securing a portion of the Indebtedness. Any recording or other tax applicable to such mortgage or deed of trust shall be the responsibility of Customer. The amount of such mortgage or deed of trust shall, unless Seattle Bank agrees in writing to a different amount, be equal to the principal of the note or debt originally secured by the Mortgage Document and any subsequent increases in the principal so secured. Customer shall provide Seattle Bank, at Customer’s sole cost and expense, with an owner’s policy of title insurance that insures Seattle Bank as the sole holder of fee title to the foreclosed Mortgage Collateral and includes no exceptions related to Customer’s enforcement of the Mortgage Document or any liens that were subordinate thereto and with property insurance with a carrier or carriers and with coverages, terms and insured amount satisfactory to Seattle Bank, in Seattle Bank’s favor.
Section 3.3 Collateral Maintenance Requirement
3.3.1
Customer will at all times maintain an amount of Eligible Collateral, pledged to Seattle Bank under this Agreement, which, after discounting by the Collateral Coverage Factor(s) applicable to such Eligible Collateral, has a value, as determined by Seattle Bank, of not less than the aggregate amount of all Advances, Commitments and Other Credit Accommodations then outstanding. This Collateral Maintenance Requirement may be increased or decreased by Seattle Bank at any time, based upon Customer’s creditworthiness or the quality of Customer’s Eligible Collateral, as determined by Seattle Bank from time to time. Customer will not, without prior written consent of Seattle Bank, assign, pledge, transfer, create any security interest in, sell, or otherwise dispose of any Eligible Collateral if: (i) such Eligible Collateral is Physical Possession or Control Collateral under Section 3.5 of this Agreement; (ii) immediately after such action, Customer’s remaining Eligible Collateral would be insufficient to comply with the Collateral Maintenance Requirement; or (iii) at the time of such action, there is an outstanding Event of Default under Section 4.1 of this Agreement.
3.3.2
All Eligible Collateral pledged hereunder (other than Physical Possession or Control Collateral held by Seattle Bank or its custodian) will be held by Customer in trust for the benefit of, and subject to the direction and control of Seattle Bank, and will be physically safeguarded by Customer with at least the same degree of care as Customer would ordinarily use in prudently safeguarding its property. Without limiting the foregoing, Customer will take all action necessary or desirable to protect and preserve Eligible Collateral pledged hereunder and held by Customer, including without limitation the maintaining of insurance on property securing mortgages constituting Eligible Collateral (such policies and certificates of insurance relating to such mortgages are in this Agreement called “insurance”), the collection of payments under all such mortgages and under all such insurance, and otherwise assuring that loans comprising Eligible Mortgage Collateral pledged hereunder are serviced in accordance with the standards of a reasonable and prudent mortgagee. Customer, as Seattle Bank’s agent, will collect all payments when due on all Eligible Collateral held by Customer in trust for the benefit of Seattle Bank. If Seattle Bank requests, all such collections shall be held separate from Customer’s other monies in one or more designated Accounts maintained at Seattle Bank. At Seattle Bank’s sole discretion, Seattle Bank may then apply such collections to the payment of Indebtedness as it becomes due; otherwise, and provided there is no outstanding Event of Default under Section 4.1 of this Agreement, Customer may use and dispose of such collections in the ordinary course of its business.
3.3.3
Subject to the Collateral Maintenance Requirement of Subsection 3.3.1 above, and provided there is no outstanding Event of Default under Section 4.1 of this Agreement, Customer may use or dispose of all or part of the Collateral and proceeds thereof in the ordinary course of its business. Notwithstanding the foregoing, Customer may not use or dispose or all or part of Physical Possession or Control Collateral or the proceeds thereof, except upon the De-Pledging of such Physical Possession or Control Collateral in accordance with Section 3.6 below.


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3.3.4
Customer will, upon request of Seattle Bank, immediately take such actions and execute such documentation as Seattle Bank may deem necessary or appropriate to create and perfect Seattle Bank’s security interest in the Collateral or otherwise to obtain, preserve, protect, enforce or collect the Collateral; including, without limitation, executing any agreements, instructions or other documents that Seattle Bank deems necessary to establish control under the provisions of the UCC of Collateral by Seattle Bank or by its custodian on Seattle Bank’s behalf.
3.3.5
Any Collateral that is not satisfactory to Seattle Bank may be rejected at any time as Eligible Collateral by Seattle Bank, or in Seattle Bank’s discretion may at any time be discounted by a Collateral Coverage Factor that is less than the Collateral Coverage Factor normally ascribed thereto under the Credit Policy. Seattle Bank may require, before or during the period when any Advance is made to Customer, that Customer make any or all Eligible Securities Collateral pledged hereunder, all Mortgage Documents for Eligible Mortgage Collateral pledged hereunder and any other documents pertaining to Eligible Collateral pledged hereunder, including without limitation any agreements between Customer and its servicing agents, available to Seattle Bank for its inspection and approval.
3.3.6
In the case of any Eligible Collateral pledged hereunder which is physically possessed by Customer, Customer will grant, upon Seattle Bank’s written request, an irrevocable license to Seattle Bank, in form and content satisfactory to Seattle Bank (and if requested by Seattle Bank, joined in by any real property owner or landlord of the premises where such Eligible Collateral is located), that will allow representatives of Seattle Bank to enter the premises of Customer in order to inspect from time to time and/or remove and take possession of such Eligible Collateral.
3.3.7
In the case of Eligible Collateral pledged hereunder which is physically possessed by any affiliate or servicing agent of Customer, Customer will, upon Seattle Bank’s written request, cause Customer’s affiliate or servicing agent to (i) grant an irrevocable license to Seattle Bank, in form and content satisfactory to Seattle Bank (and if requested by Seattle Bank, joined in by any real property owner or landlord of the premises where such Eligible Collateral is located), that will allow representatives of Seattle Bank to enter the premises of Customer’s affiliate or servicing agent in order to inspect from time to time and/or remove and take possession of such Eligible Collateral; and/or (ii) establish custodial or control agreements, in form and content satisfactory to Seattle Bank, under which the affiliate’s or servicing agent’s physical possession will be held for the benefit of Seattle Bank as secured party. Seattle Bank may require such arrangements irrespective of whether such Eligible Collateral has been designated as Listed Collateral or Physical Possession or Control Collateral under Sections 3.4 or 3.5 below.
3.3.8
Seattle Bank’s acceptance as Eligible Collateral of any Mortgage Collateral relating to multifamily or commercial properties may, in the discretion of Seattle Bank, be conditioned upon Customer’s execution and delivery of Rider(s) to this Agreement containing warranties and representations required of Customer by Seattle Bank for any Mortgage Collateral relating to multifamily or commercial properties.
Section 3.4 Listed Collateral
3.4.1
At any time that Customer’s Eligible Mortgage Collateral or Eligible CFI Collateral becomes subject to mandatory listing requirements under the Credit Policy, or at any other time, at the sole discretion of Seattle Bank, Customer will deliver to Seattle Bank, upon Seattle Bank’s written request, a status report and accompanying schedules, all in form and content acceptable to Seattle Bank, specifying and describing any mortgage loan pledged to Seattle Bank as Eligible Mortgage Collateral and any item of Eligible CFI Collateral pledged to Seattle Bank (collectively, “Listed Collateral”). At such other times as Seattle Bank may request, Customer will deliver to Seattle Bank periodic status reports and accompanying schedules, in form and content acceptable to Seattle Bank, describing the status of the Listed Collateral.
3.4.2
Upon Seattle Bank’s written request, Customer will physically segregate the mortgages, loan packages and other property comprising Listed Collateral from all other property of Customer in a manner satisfactory to Seattle Bank. Until particular items of Listed Collateral are De-Pledged in accordance with the Credit Policy, the physical segregation of such items shall be maintained.
3.4.3
Upon Seattle Bank’s written request, Customer will hold each loan package included in Listed Collateral in a separate file folder, with each file folder clearly labeled with the loan identification number and the name of the mortgagor. Upon written request of Seattle Bank, the file folder for each package of loan documents included within Listed Collateral will be clearly marked or stamped with the statement: “The Instrument(s) and Security Relating to this Loan Have Been Pledged to the Federal Home Loan Bank of Seattle.”
Section 3.5 Physical Possession or Control Collateral
3.5.1
At any time that Customer becomes subject to mandatory physical possession or control requirements under the Credit Policy, or at any other time, at the sole discretion of Seattle Bank, Customer will deliver to


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Seattle Bank, or to a custodian approved by Seattle Bank in its discretion, upon Seattle Bank’s written request, the mortgage loans pledged to Seattle Bank as Eligible Mortgage Collateral, securities or other investment property pledged to Seattle Bank as Eligible Securities Collateral, loans pledged to Seattle Bank as Eligible CFI Collateral and each item of Other Eligible Collateral pledged to Seattle Bank (collectively, “Physical Possession or Control Collateral”).
3.5.2
Eligible Mortgage Collateral delivered to Seattle Bank or its approved custodian as Physical Possession or Control Collateral will be endorsed or assigned by Customer in blank or, if requested by Seattle Bank, to Seattle Bank. For MERS Mortgages pledged hereunder, Customer will execute a notification to MERS of its assignment of the MERS Mortgage in blank or, if requested by Seattle Bank, to Seattle Bank. Regardless of whether any endorsement is stated to be “without recourse,” Customer shall be liable for any deficiency remaining after any exercise by the Bank of its remedies in respect of Collateral, as provided in Section 4.2 below.
3.5.3
With respect to certificated Eligible Securities Collateral pledged to Seattle Bank as Physical Possession or Control Collateral, the delivery requirements contained in this Section 3.5 will be satisfied, at the election of Seattle Bank, by one of more of: (i) transfer of physical possession of such certificated securities to Seattle Bank; (ii) re-registration of such securities in Seattle Bank’s name; or (iii) possession of such certificated securities, on Seattle Bank’s behalf, by a custodian appointed by Seattle Bank. Any such possession of certificated securities by an approved custodian, on Seattle Bank’s behalf, will be effected and evidenced by documentation acceptable to Seattle Bank in form and content, establishing Seattle Bank’s control of such certificated securities under the provisions of the UCC.
3.5.4
With respect to Eligible Securities Collateral pledged to Seattle Bank as Physical Possession or Control Collateral, whether in uncertificated form or as a security entitlement, satisfaction of the delivery requirements contained in this Section 3.5 will be effected and evidenced by agreements, instructions or other documentation acceptable to Seattle Bank in form and content, establishing Seattle Bank’s control of such uncertificated securities under the provisions of the UCC. The control requirements will be satisfied, at the election of Seattle Bank, by one or more of: (i) re-registration of any uncertificated securities in Seattle Bank’s name; (ii) entering into an agreement that, under the provisions of the UCC, provides the Seattle Bank with control of any uncertificated securities with the issuer or transfer agent thereof; (iii) entering into agreements that, under the provisions of the UCC, provide the Seattle Bank with control of any security entitlements with the securities intermediary establishing such security entitlement; or (iv) in the case of security entitlements, making the Seattle Bank the entitlement holder, within the meaning of the UCC, of such security entitlements.
3.5.5
Concurrently with the initial delivery of Physical Possession or Control Collateral, and at such other times as Seattle Bank may request, Customer will deliver to Seattle Bank a status report and accompanying schedules, in form and content acceptable to Seattle Bank, describing the status of the Physical Possession or Control Collateral held by Seattle Bank or its custodian. At such other times as Seattle Bank may request, Customer will deliver to Seattle Bank periodic status reports and accompanying schedules, in form and content acceptable to Seattle Bank, describing the status of the Physical Possession or Control Collateral. Until Physical Possession or Control Collateral is De-Pledged in accordance with Section 3.6 below, such physical possession or control by Seattle Bank or its approved custodian shall be maintained with respect to such Physical Possession or Control Collateral. At Seattle Bank’s sole discretion, all proceeds the Physical Possession or Control Collateral, including without limitation all payments made under the loans or investment property constituting Physical Possession or Control Collateral, shall be held separate from Customer’s other monies in one or more designated Accounts maintained at Seattle Bank. Seattle Bank may apply such monies to the payment of Indebtedness as it becomes due, or hold such monies as part of its Physical Possession or Control Collateral, subject to De-Pledging under the terms and conditions of Section 3.6 below.
3.5.6
Customer agrees to pay to Seattle Bank such reasonable fees and charges as may be assessed by Seattle Bank to cover Seattle Bank’s overhead and other costs relating to the receipt, holding, De-Pledge, redelivery and reassignment of Physical Possession or Control Collateral and to reimburse Seattle Bank upon request for all filing or recording fees and other reasonable expenses, disbursements and advances incurred or made by Seattle Bank in connection therewith, including without limitation reasonable attorneys fees and costs of legal counsel of Seattle Bank. Customer shall pay the fees and expenses, including, without limitation, reasonable attorneys fees and costs, of any custodian approved or appointed by Seattle Bank with respect to Collateral. Any such sums owed to Seattle Bank or to such custodian may be collected by Seattle Bank, at its option, by debiting Customer’s Account(s) with Seattle Bank.
Section 3.6 De-Pledging of Collateral Upon receipt by Seattle Bank of a written request from Customer, in form and content acceptable to Seattle Bank, for the De-Pledge of any part of the Collateral or proceeds thereof in which Seattle Bank has perfected its security interest, setting forth (i) a sufficient description of the Collateral to be


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withdrawn or reassigned; and (ii) a certificate of an authorized officer of Customer certifying that the immediately after such De-Pledge, Customer’s remaining Eligible Collateral will be sufficient to comply with the Collateral Maintenance Requirement, Seattle Bank will, subject to the succeeding sentence of this Section 3.6, promptly return, reassign or partially release to Customer, at Customer’s expense, the Collateral specified in said request. Notwithstanding anything to the contrary contained in this Agreement, Customer may not obtain any such withdrawal or reassignment (a) while an Event of Default under this Agreement has occurred and is continuing; (b) at any time that Seattle Bank’s records indicate that immediately after such De-Pledge, Customer’s remaining Eligible Collateral would be insufficient to comply with the Collateral Maintenance Requirement as determined by Seattle Bank; or (c) at any time that Seattle Bank reasonably and in good faith deems itself insecure. Customer will pay upon request for all filing or recording fees and other reasonable expenses incurred by Seattle Bank or any approved custodian in connection with De-Pledging of any Collateral, including without limitation reasonable attorneys fees and costs of legal counsel of Seattle Bank or such custodian. Any such sums owed to Seattle Bank or to such custodian may be collected by Seattle Bank, at its option, by debiting Customer’s demand or time deposit Account(s) with Seattle Bank. Upon a De-Pledge, ordinarily the Seattle Bank will not agree to amend its financing statements covering Collateral to reflect the De-Pledge but will, where appropriate and at Customer’s expense, evidence that it has released the Collateral that was subject to the De-Pledge from its security interest.
Section 3.7 Reports, Collateral Audits; Access
3.7.1
If requested by Seattle Bank at any time, Customer will furnish to Seattle Bank an audit report prepared in accordance with generally accepted auditing standards by an external auditor acceptable to Seattle Bank, certifying the book value of the Collateral owned by Customer and pledged to the Seattle Bank hereunder. If requested by Seattle Bank at any time, Customer will furnish to Seattle Bank a written report covering such matters regarding Collateral as Seattle Bank may require, including without limitation a listing of mortgages comprising Eligible Mortgage Collateral or loans comprising Eligible CFI Collateral, the unpaid principal balances thereof, the status of payments thereon and of taxes and insurance on the property encumbered thereby; securities and the publicly listed market value thereof, and any other information requested by Seattle Bank regarding the Collateral. Customer will give Seattle Bank access at all reasonable times to Collateral pledged hereunder in Customer’s possession and to Customer’s books and records of account relating to such Collateral, for the purpose of Seattle Bank’s examining, verifying or reconciling such Collateral and Customer’s report to Seattle Bank thereon.
3.7.2
All Collateral and the satisfaction by Customer of the Collateral Maintenance Requirement will be subject to audit and verification by or on behalf of Seattle Bank. Such audits and verifications may occur without notice during Customer’s normal business hours or upon reasonable notice at such other times as Seattle Bank may reasonably request. Customer will provide access to, and will, at its own expense, make adequate working facilities available to, the representatives or agents of Seattle Bank for purposes of such audits and verifications. Customer agrees to pay to Seattle Bank such reasonable fees and charges as may be assessed by Seattle Bank to cover overhead and other costs relating to such audit and verification.
Section 3.8 Additional Documentation Customer will make, execute, record and deliver to Seattle Bank such notices, instructions, assignments, listings, powers, and other documents with respect to the Collateral and Seattle Bank’s security interest therein in such form as Seattle Bank may require. Customer authorizes Seattle Bank to file such financing statements as Seattle Bank deems necessary with respect to the Collateral, and Customer hereby ratifies any financing statements previously filed by Seattle Bank with respect to the Collateral.
Section 3.9 Seattle Bank’s Responsibilities as to Collateral In the event that Seattle Bank takes possession of any Collateral pursuant to the terms of this Agreement, Seattle Bank’s duty as to the Collateral will be solely to use reasonable care in the custody and preservation of the Collateral in its possession, which will not include any steps necessary to preserve Customer’s rights against any third parties nor the duty to send notices, perform services, or take any action in connection with management of the Collateral. Seattle Bank will not have any responsibility or liability for the form, sufficiency, correctness, genuineness or legal effect of any instrument or document constituting a part of the Collateral, or any signature thereon or the description or misdescription, or value of property represented or secured, or purported to be represented or secured, by any such document or instrument. Customer agrees that any and all Collateral may be removed by Seattle Bank from the state or location where situated, and may there be dealt with by Seattle Bank as provided in this Agreement.
Section 3.10 Seattle Bank’s Rights as to Collateral At any time or times, at the sole expense of Customer, Seattle Bank will have the right, before or after the occurrence of an Event of Default as set forth in Section 4.1 of this Agreement, but shall not have the obligation, to do any or all things and take any and all actions that are deemed necessary or convenient by Seattle Bank to the protection of its rights and interests under this Agreement and are lawful under the Act, the Regulations and the laws of the State of Washington, including, but not limited to, the following:
3.10.1
Terminate any consent given under this Agreement;


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3.10.2
Notify obligors on any Collateral to make payments thereon directly to Seattle Bank;
3.10.3
Endorse any Collateral that is in Customer’s name or that has been endorsed by others to Customer’s name;
3.10.4
Enter into any extension, compromise, settlement, or other agreement relating to or affecting any Collateral;
3.10.5
Take any action Customer is required to take or which is otherwise necessary to: (i) file a financing statement or otherwise perfect a security interest in any or all of the Collateral; or (ii) to obtain, preserve, protect, enforce or collect the Collateral;
3.10.6
Take control of any funds or other proceeds generated by the Collateral and use the same to reduce Indebtedness as it becomes due; and
3.10.7
Cause the Collateral to be transferred to Seattle Bank’s name or the name of its nominee.
Section 3.11    Power of Attorney Customer hereby appoints Seattle Bank as its true and lawful attorney, for and on behalf of Customer and in its name, place and stead, to prepare, execute and record endorsements and assignments to Seattle Bank of all or any item of Collateral, giving or granting to Seattle Bank, as such attorney, full power and authority to do or perform every lawful act necessary or proper in connection therewith as fully as Customer might or could do. Customer hereby ratifies and confirms all that Seattle Bank will lawfully do or cause to be done by virtue of this special power of attorney. This special power of attorney is granted for a period commencing on the date of this Agreement and continuing until the indefeasible discharge of all Indebtedness and Commitments and all obligations of Customer under this Agreement regardless of any Event of Default by Customer, is coupled with an interest and is irrevocable for the period granted. As Customer’s true and lawful attorney-in-fact, Seattle Bank has no responsibility to take any steps necessary to preserve rights against prior parties nor the duty to send notices, perform services, or take any action in connection with the management of the Collateral.
Article IV. Default; Remedies
Section 4.1 Events of Default; Acceleration Upon the occurrence of and during the continuation any of the following events or conditions of default (“Event of Default’), Seattle Bank may at its option, by a notice to Customer, declare all Indebtedness and accrued interest thereon, including any prepayment fees or charges which are payable in connection with the payment prior to the originally scheduled maturity of any Advance or Other Credit Accommodation, to be immediately due and payable without presentment, demand, protest or any further notice and/or terminate any obligation on the part of Seattle Bank in respect of any Commitment to make or continue making any Advances:
4.1.1
Failure of Customer to pay when due any interest on or principal of any Advance or Other Credit Accommodation; or
4.1.2
Failure of Customer to perform any promise or obligation or to satisfy any condition or liability contained in this Agreement, the Credit Policy or any Advances Note, Advance Master Application or Advance Confirmation Advice, or in any other agreement to which Customer and Seattle Bank are parties, whether pertaining to any Advance, Other Credit Accommodation or Other Obligations; or
4.1.3
Evidence coming to the attention of Seattle Bank that any representations, statements, or warranties made or furnished in any manner to Seattle Bank by or on behalf of Customer in connection with any Advance or Other Credit Accommodation, any specification of Eligible Collateral or any certification of Fair Market Value were false, misleading or incomplete in any material respect when made or, with the passage of time, have become untrue in any material respect; or
4.1.4
Failure of Customer to maintain adequate Eligible Collateral free of any encumbrances or claims as required in this Agreement, or any material damage to or loss of Eligible Collateral, or any sale or encumbrance of any Eligible Collateral except as permitted by this Agreement
4.1.5
The issuance of any tax, levy, seizure, attachment, garnishment, levy of execution, or other process with respect to any of the Collateral; or
4.1.6
Any suspension of payment by Customer to any creditor of sums due or the occurrence of any event which results in another creditor having the right to accelerate the maturity of any indebtedness of Customer under any security agreement, indenture, loan agreement, or comparable undertaking; or
4.1.7
Any taking over of the Customer or any of its assets or affiliates by a supervising agency, or an application for or appointment of a conservator or receiver for Customer or any affiliate of Customer or Customer’s property, entry of a judgment or decree adjudicating Customer or any affiliate of Customer insolvent or bankrupt, an assignment by Customer or any affiliate of Customer for benefit of creditors, or the entry of any


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supervisory or consent order pertaining to Customer or any affiliate of Customer by any regulatory body or by any court at the request of such regulator; or
4.1.8
Sale by Customer of all or a material part of Customer’s assets or the taking of any other action by Customer to liquidate or dissolve; or
4.1.9
Termination of Customer’s membership in Seattle Bank, or Customer’s ceasing to be a type of financial institution that is eligible under the Act or the Regulations to become a Member of Seattle Bank; or
4.1.10
Merger, consolidation or other combination of Customer with an entity which is not a Member of Seattle Bank if the non-Member entity is the surviving entity; or
4.1.11
Seattle Bank determines in good faith that a material adverse change has occurred in the financial condition of Customer from that disclosed at the time of the making of any Advance or from the condition of Customer as theretofore most recently disclosed to Seattle Bank; or
4.1.12
Seattle Bank in good faith deems itself insecure even though Customer is not otherwise in default; or
4.1.13
Customer has borrowed, or committed to borrow, from any source an amount that is greater than the amount Customer is permitted to borrow under applicable law.
4.1.14
The Parent Guaranty shall cease to be in full force and effect for any reason or Parent or any person acting by or on behalf of Parent shall deny or disaffirm in writing Parent’s obligations under the Parent Guaranty.
4.1.15
Any of the events referred to in Subsections 4.1.7, 4.1.8 or 4.1.11 occur with respect to the Parent (substituting the word “Parent” for the word “Customer” or the word “Member” in each of such subsections).
4.1.16
Parent (not including any successor to Parent by operation of law, purchase and assumption or otherwise) shall cease to own 100% of the outstanding capital stock of Customer.
Section 4.2 Remedies Upon the occurrence of any Event of Default, Seattle Bank will have all of the rights and remedies provided by applicable law, including but not be limited to all of the remedies of a secured party under the UCC and the rights and remedies contained in any mortgage or deed of trust in favor of Seattle Bank or its nominee. In addition, Seattle Bank may take immediate possession of any of the Collateral or any part thereof wherever the same may be found. Seattle Bank may sell, assign and deliver the Collateral or any part thereof at public or private sale for such price as Seattle Bank deems appropriate without any liability for any loss due to decrease in the market value of the Collateral during the period held. Seattle Bank will have the right to purchase all or part of the Collateral at such sale. If the Collateral includes insurance or securities which will be redeemed by the issuer upon surrender, or any accounts or deposits in the possession of Seattle Bank, Seattle Bank may realize upon such Collateral without notice to Customer. If any notification of intended disposition of any of the Collateral is required by applicable law, then, if no greater period of notification is required by applicable law, such notification will be deemed reasonable and properly given if mailed, postage prepaid, at least 10 days before any such disposition to the address of Customer appearing on the records of Seattle Bank. The proceeds of any sale will be applied in the order that Seattle Bank, in its sole discretion, may choose. Customer agrees to pay all the costs and expenses of Seattle Bank in the collection of the Indebtedness and enforcement of Seattle Bank’s rights and remedies in case of default, including, without limitation, reasonable attorneys’ fees, including in any proceedings in bankruptcy or receivership and on appeal. Seattle Bank will, to the extent required by law, apply any surplus after payment of the Indebtedness, provision for repayment to Seattle Bank of any amounts to be paid or advanced under outstanding Commitments, and all costs of collection and enforcement to third parties claiming a secondary security interest in the Collateral, with any remaining surplus paid to Customer. Customer will be liable to Seattle Bank for any deficiency remaining. To the fullest extent permitted by law, Customer waives, for itself and any successors or assigns, include successors or assigns by operation of law, the defense of marshaling.
Upon the occurrence of any Event of Default, Seattle Bank shall have the following rights and remedies with respect to any Louisiana Collateral pledged under this Agreement, which rights and remedies are in addition to and are not in lieu or limitation of any other rights and remedies that may be provided in this Agreement, under Chapter 9 of the Louisiana Commercial Laws (La. R.S. §§10:9-101, et seq.), under the Uniform Commercial Code of any state other than Louisiana, under any other agreement, or at law or equity generally:
A.     Seattle Bank may cause such Louisiana Collateral, or any part or parts thereof, to be immediately seized wherever found, and sold, whether in term of court or in vacation, under ordinary or executory process, in accordance with applicable Louisiana law, to the highest bidder for cash, with or without appraisement, without the necessity of making additional demand, or of notifying Customer, Parent or any other guarantor, or placing Customer, Parent or any other guarantor in default.


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B.     For purposes of foreclosure under Louisiana executory process procedures, Customer confesses judgment and acknowledges that Customer is indebted unto and in favor of Seattle Bank up to the full amount of the Indebtedness, in principal, interest, costs, expenses, attorneys' fees and other fees and charges. To the extent permitted under applicable Louisiana law, Customer additionally waives: (a) the benefit of appraisal as provided in Articles 2332, 2336, 2723 and 2724 of the Louisiana Code of Civil Procedure and all other laws with regard to appraisal upon judicial sale; (b) the demand and three (3) days' delay as provided under Article 2721 of the Louisiana Code of Civil Procedure; (c) the Notice of Seizure as provided under Articles 2293 and 2721 of the Louisiana Code of Civil Procedure; (d) the three (3) days' delay provided under Articles 2331 and 2722 of the Louisiana Code of Civil Procedure; and (e) all other benefits provided under Articles 2331, 2722 and 2723 of the Louisiana Code of Civil Procedure and all other Articles not specifically mentioned above.
Section 4.3 Payment of Prepayment Charges Any prepayment fees or charges for which provision is made, whether under the Regulations, the Credit Policy, or any applicable Advance Master Application, Advances Note, Advance Confirmation Advice or Swap Transaction, as the case may be, with respect to any Advances or Other Credit Accommodations, will be payable at the time of any voluntary or involuntary payment of the principal of such Advances or Other Credit Accommodations prior to the originally scheduled maturity thereof, including, without limitation, payments that are made as a part of a liquidation of Customer or that become due as a result of an acceleration pursuant to Section 4.1 of this Agreement, whether such payment is made by Customer, by a conservator, receiver, liquidator or trustee of or for Customer, or by any successor to or any assignee of Customer.
Article V. Accounts
Section 5.1 Deposit Accounts The Customer may open Accounts with the Seattle Bank subject to the Act, the Regulations, the Credit Policy and any other policies adopted by the Seattle Bank from time to time in respect to Accounts and related services, including without limitation the wire transfer of funds. Any Customer’s funds deposited in Accounts shall be subject to withdrawal or charge at any time and from time to time upon wire transfers or any other orders for the payment of money when made and drawn on behalf of the Customer by a person or persons authorized by Resolution of the Customer under Section 6.7 below. The Seattle Bank is authorized to pay any such wire transfers or other orders, provided they are in the form prescribed by it, and to charge the Customer’s Accounts therefor, without inquiry as to the circumstances of issue or the disposition of the proceeds, even if drawn to the individual order of any authorized person or payable to others for his account.
Section 5.2 Bank’s Reliance The Seattle Bank, if it acts in good faith and with ordinary care (and without liability if it does so act), can charge the Accounts with orders received by the Seattle Bank by telephone, or otherwise orally, from any person acting for or purporting to act for the Customer as its officer or employee, for the transfer of funds to others, including the person giving such instructions or payable to others for his account, or between Accounts of the Customer. All scheduled charges and fees adopted by the Seattle Bank from time to time in respect to Accounts and related services will be charged monthly to such Accounts.
Section 5.3 Positive Balance Requirement The Customer shall maintain a net positive collected balance in all of its Accounts. The Seattle Bank shall have the option of closing or restricting the use of Accounts in which positive balances are not maintained. For each day the aggregate collected balance of an Account is negative, the Customer shall pay such overdraft charges as are consistent with the scheduled charges and fees adopted by the Seattle Bank from time to time in respect to Accounts and related services. These overdraft charges are in addition to any other rights and remedies of Seattle Bank under this Agreement and any other agreements governing Accounts.
Article VI. Miscellaneous
Section 6.1 General Representations and Warranties by Customer. Customer hereby represents and warrants that, as of the date of this Agreement and the date of each Advance or Other Credit Accommodation, including any Commitment, made pursuant to this Agreement:
6.1.1
Customer is not, and neither the execution of nor the performance of any of the transactions or obligations of Customer under this agreement will, with the passage of time, the giving of notice or otherwise, cause Customer to be: (i) in violation of its charter or articles of incorporation, by-laws, the Act, or the Regulations, any other law or administrative regulation, or any court or administrative decree; or (ii) in default under or in breach of any indenture, contract, or other instrument or agreement to which Customer is a party or by which it or any of its property is bound.
6.1.2
Customer has full corporate power and authority and has received all corporate and governmental authorizations and approvals (including without limitation those required under the Act and the Regulations) as may be required to enter into and perform its obligations under this Agreement, to borrow each Advance and to obtain each Other Credit Accommodation.


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6.1.3
The information given by Customer in any document provided, or in any oral statement made, in connection with any application or request for an Advance or Other Credit Accommodation, is true, accurate and complete in all material respects.
Section 6.2 Assignment Seattle Bank may assign or negotiate to any other Federal Home Loan Bank or to any other person or entity, with or without recourse, any Indebtedness of Customer or participations therein, and Seattle Bank may assign or transfer all or any part of Seattle Bank’s right, title, and interest in and to this Agreement and may assign and deliver the whole or any part of the Collateral to the transferee, which will succeed to all the powers and rights of Seattle Bank in respect thereof, and Seattle Bank will thereafter be forever relieved and fully discharged from any liability or responsibility with respect to the transferred Collateral. Customer hereby acknowledges and agrees that any such disposition will give rise to a direct obligation of Customer to the participant. Customer hereby authorizes Seattle Bank and each participant, in case of default by Customer under this Agreement, to proceed directly, by right of setoff or otherwise, against any assets of Customer which may at the time of such default be in the respective hands of Seattle Bank or any such participant. Customer further agrees that Seattle Bank may furnish any information pertaining to Customer which is in the possession of Seattle Bank to any prospective participant to assist it in evaluating such participation provided that any non-pubic information reasonably designated in writing to Seattle Bank by Customer as constituting non-public information will be furnished to such prospective participant on a confidential basis. Customer may not assign or transfer any of its rights or obligations under this Agreement without the express prior consent of Seattle Bank, which may be granted or withheld in Seattle Bank’s sole discretion..
Section 6.3 Discretion of Seattle Bank to Grant or Deny Advances Nothing contained in this Agreement or in any documents describing or setting forth the Credit Policy or any other policy of Seattle Bank will be construed as an agreement or commitment on the part of Seattle Bank to grant Advances or extend Commitments or Other Credit Accommodations under this Agreement, the right and power of Seattle Bank in its discretion to either grant or deny any of the foregoing being herein expressly reserved.
Section 6.4 Amendment; Waivers No modification, amendment or waiver of any provision of this Agreement or consent to any departure therefrom will be effective unless executed by the party against whom such change is asserted and will be effective only in the specific instance and for the purpose for which given. No notice to or demand on Customer in any case will entitle Customer to any other or further notice or demand in the same, or similar or other circumstances. Any forbearance, failure or delay by Seattle Bank in exercising any right, power or remedy under this Agreement will not be deemed to be a waiver thereof, and any single or partial exercise by Seattle Bank of any right, power or remedy under this Agreement will not preclude the further exercise thereof. Every right, power and remedy of Seattle Bank will continue in full force and effect until specifically waived by Seattle Bank in writing.
Section 6.5 Exceptions to Credit Policy Customer acknowledges and agrees that no exception to the Credit Policy requested of Seattle Bank by Customer shall be binding upon the Seattle Bank unless (i) approved in writing by the Seattle Bank’s authorized representative and (ii) authorized by the Act and Regulations.
Section 6.6 Jurisdiction; Legal Fees In any action or proceeding brought by Seattle Bank or Customer in order to enforce any right or remedy under this Agreement, the parties hereby consent to, and agree that they will submit to, the jurisdiction of the United States District Court for the Western District of Washington, or, if such action or proceeding may not be brought in federal court, the jurisdiction of the courts of King County, Washington. Customer agrees that, if any action or proceeding is brought by Customer seeking to obtain any legal or equitable relief against Seattle Bank under or arising out of this Agreement or any transaction contemplated hereby, and such relief is not granted by the final decision, after any and all appeals, of a court of competent jurisdiction, Customer will pay all attorneys’ fees and other costs incurred by Seattle Bank in connection therewith. Customer agrees to reimburse Seattle Bank for all costs and expenses (including reasonable fees and out-of-pocket expenses of counsel for Seattle Bank) incurred by Seattle Bank in connection with (i) the administration, enforcement, interpretation or preservation of Seattle Bank’s rights under this Agreement including, but not limited to, its rights in respect of any Collateral or the audit or possession thereof, whether or not an Event of Default has occurred or any suit has been brought, and in any receivership or bankruptcy proceeding and on appeal; (ii) Seattle Bank’s rights in any litigation, arbitration or supervisory, receivership, bankruptcy or other insolvency or regulatory proceedings affecting Customer, any Collateral or any Advances, Other Credit Accommodations or Other Obligations, and any appeal of any of the foregoing; or (iii) Seattle Bank’s preparation of additional documentation for Advances, Other Credit Accommodations or Other Obligations or any Collateral, or any amendments, approvals, consents, waivers or releases requested, required, proposed or done from time to time.
Section 6.7 Notices Except as provided in Subsection 6.8.3 below, any notice, advice, request, consent or direction given, made or withdrawn pursuant to this Agreement must be in writing or by machine-readable electronic transmission, and will be deemed to have been given to and received by a party to this Agreement when received by such party at its address given above by first class mail, or if given by hand or by electronic transmission, when actually received by such party at its principal office.


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Section 6.8 Signatures of Customer; Resolution; Oral Requests
6.8.1
The Secretary or one or more of the Assistant Secretaries of Customer will from time to time certify to Seattle Bank on forms provided by Seattle Bank the names and specimen signatures of the persons authorized to apply on behalf of Customer to Seattle Bank for Advances and otherwise act for and on behalf of Customer in accordance with this Agreement. Such certifications are incorporated in this Agreement and made a part of this Agreement and will continue in effect until expressly revoked by Customer notwithstanding that subsequent certifications may authorize additional persons to act for and on behalf of Customer.
6.8.2
Prior to or at the time of the execution and delivery of this Agreement, the Secretary or the Assistant Secretaries of Customer shall provide the Seattle Bank with a certified copy of a resolution adopted by the Customer’s Board of Directors or other governing body (“Resolution”) approving this Agreement and authorizing designated officers or employees of the Customer to obtain Advances and Other Credit Accommodations, open and use Accounts, and incur Other Obligations. The Seattle Bank may rely upon, and the Customer is estopped from denying, the authority of the persons designated in the Resolution or of the persons to whom such authority has been delegated pursuant to the terms of the Resolution.
6.8.3
Notwithstanding the preceding or any other provision of this Agreement, the Seattle Bank may, but is not obligated to, honor, and Customer shall be bound by, any form of request, including an oral request, for Advances, Other Credit Accommodations or other services from Seattle Bank, whenever such requests are made by persons purporting to act as officers or employees of Customer, if Seattle Bank acts in good faith and with ordinary care (and without liability if it does so act).
Section 6.9 Recording Conversations. Customer for itself and its employees hereby authorizes and consents to Seattle Bank’s electronic recording of, transcription of and use of all telephone conversations made by Customer’s employees to the Seattle Bank for the purpose of requesting Advances or Other Credit Accommodations. The period of time for which such recordings are stored or whether transcriptions are made shall be determined by Seattle Bank.
Section 6.10 Stock Ownership Requirement The Seattle Bank and the Customer acknowledge and agree that the Customer is subject to the Member Advance Stock Purchase Requirement and other terms and conditions set forth in the Capital Plan of the Seattle Bank. The Member Advance Stock Purchase Requirement provides that the Customer hold a specified amount capital stock in the Seattle Bank in connection with Advance transactions. Currently, each Customer is required to hold Class B stock with a par value equal to four and one-half percent (4.5%) of the unpaid principal balances of Advances As set forth in the Capital Plan, the Board of Directors of the Seattle Bank may change the above percentage within a range of not less than two and one-half percent (2.5%) or not greater than six percent (6.0%). The Customer agrees to be bound by any such change in the Member Advance Stock Purchase Requirement percentage. Any such change in the Member Advance Stock Purchase Requirement will be applied as of the implementation date of the change to all new Advances made by the Seattle Bank to the Customer. In addition, the Customer agrees and acknowledges that it will be subject to all amendments to the Capital Plan, that may be made from time to time.
Section 6.11 Force Majeure Any obligations of the Seattle Bank in connection with this Agreement, any Commitment, or otherwise arising in connection with any Advance, Other Credit Accommodation, Account, Mortgage Purchase Program or other service, shall be excused to the extent delayed or prevented by reason of computer, communications system or power failure, labor disturbances, governmental laws, orders or regulations, riots, insurrection, acts of terror, war or any other causes beyond the reasonable control of the Seattle Bank. In addition, the Seattle Bank shall not be liable for the failure of any wire transfer, fedwire or other such system.
Section 6.12 Limitation of Damages If Seattle Bank, in connection with this Agreement, any Commitment, or any Advance, Other Credit Accommodation, Account, Mortgage Purchase Program or other service, breaches any obligation of Seattle Bank to Customer not otherwise excused by this Agreement or applicable law, Seattle Bank will be obligated to Customer only for Customer’s actual, direct damages, if any. Under no circumstances shall Seattle Bank be liable for, and Customer hereby forever waives, any special, indirect or consequential damages or any punitive or exemplary damages.
Section 6.13 Applicable Law; Severability In addition to the terms and conditions specifically set forth in this Agreement and any other related documentation, this Agreement, and all Advances granted and Commitments extended under this Agreement, will be governed by the statutory and common law of the United States and, to the extent Federal law incorporates or defers to state law, the laws (exclusive of the choice of law provisions) of the State of Washington. Notwithstanding the foregoing, the UCC of the State of Washington, as amended from time to time, will be deemed applicable to this Agreement and to any Advance or Other Credit Accommodation made or Collateral pledged under this Agreement, except as otherwise required by the provisions of RCW 62A.9A-301 through 307. In the event that any portion of this Agreement conflicts with applicable law, such conflict will not affect other provisions


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of this Agreement that can be given effect without the conflicting provision, and to this end the provisions of this Agreement are declared to be severable.
Section 6.14 Successors and Assigns This Agreement will be binding upon and inure to the benefit of the successors and permitted assigns of Customer and Seattle Bank.
Section 6.15 Amendment and Restatement of Any Prior Agreement This Agreement amends and restates the terms of, and is not a novation of, any previous agreements between the parties or their predecessors entitled “Advances, Security and Deposit Agreement,” “Deposit Account Resolution” or “Advances Agreement, Pledge Agreement and Security Agreement.” This Agreement shall not release or impair the priority position of any existing Collateral for any existing Collateral securing any existing Indebtedness.
NOTICE: ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, Customer and Seattle Bank have caused this Agreement to be signed in their names by their duly authorized officers as of the date first above mentioned.


_HomeStreet Bank __________ _ _         
(Full Corporate Name of Customer)

By:          ____________________________________
(Signature of Authorized Officer)

____________________________________
Darrell van Amen

____________________________________
EVP/Chief Investment Officer /Treasurer

and

By:         ____________________________________
(Signature of Authorized Officer)

____________________________________
Erik Ashe

____________________________________
VP/Portfolio & Asset Liability Manager


FEDERAL HOME LOAN BANK OF SEATTLE

By:         _____________________________________
(Signature of Authorized Officer)

_____________________________________
(Name of Authorized Officer)

_____________________________________
(Title of Authorized Officer)








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CORPORATE ACKNOWLEDGMENT

STATE OF     ___________________         )
(State Where Signed)
) ss.

COUNTY OF                          )
(County Where Signed)
        
I certify that I know or have satisfactory evidence that __________________________ _____ is the
(Name of Authorized Officer of Customer)
person who appeared before me, and said person acknowledged that [he/she] signed this instrument, on oath stated

that [he/she] was authorized to execute the instrument and acknowledge it as the ________ ________ of
(Title of Authorized Officer)
______ _________ to be the free and voluntary act of such party for the uses and purposes
(Full Corporate Name of Customer)
mentioned in the instrument.

_________________________________________
(Signature of Notary)

(Date of Notary Acknowledgement)
(Please print notary’s name legibly)




_________________________________________
NOTARY PUBLIC in and for the State of __________, residing at _______            ___________.
                    (City Where Notary Resides)
My commission expires: _________________.
(Include notary seal in space above this line.)


CORPORATE ACKNOWLEDGMENT
STATE OF                        )
(State Where Signed)
) ss.
COUNTY OF                      )
(County Where Signed)

I certify that I know or have satisfactory evidence that __________________ _ ___ _____ is the                                 (Name of Authorized Officer of Customer)
person who appeared before me, and said person acknowledged that [he/she] signed this instrument, on oath stated

that [he/she] was authorized to execute the instrument and acknowledge it as the ________ ________ of
(Title of Authorized Officer)
________          ______ to be the free and voluntary act of such party for the uses and purposes
(Full Corporate Name of Customer)
mentioned in the instrument.


_________________________________________
(Signature of Notary)

(Date of Notary Acknowledgement)
(Please print notary’s name legibly)




__________________________________________
NOTARY PUBLIC in and for the State of __________, residing at _______             ___________.
                    (City Where Notary Resides)
My commission expires: _________________.
(Include notary Seal in space above this line.)




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LETTER OF AGREEMENT
m
HomeStreet Bank


EXHIBIT 10.14


January 15, 2013

Federal Reserve Bank of San Francisco
Depository Institution Customer Support
Attn: Account Management Services, Mail Stop 556
P. 0. Box 7702
San Francisco, CA 94120-7702

RE:    HomeStreet Bank
ABA Number: 3250-8442-6

Ladies and Gentlemen:

In consideration of being able to request Advances from and incur Indebtedness to you and in consideration of your making Advances to us we agree to the provisions of your Operating Circular No. 10, effective October 15, 2006, as amended and supplemented from time to time thereafter ("Circular;" capitalized terms used but not defined herein shall have the meaning specified in the Circular).

[Enclosed are (I) certified copies of the Certificate, (2) certified copies of the resolutions that you requested and (3) documents(s) containing the name, title, and signature of those persons authorized to request Advances from and to pledge our assets to you.]

Any notices required under the Lending Agreement may be directed to the following department(s): Treasury Department
Attn: Darrell van Amen
HomeStreet Bank
601 Union Street, Suite 2000
Seattle, WA 98101
         

HomeStreet Bank
Full Legal Name of Borrower

By: /s/ Darrell S. van Amen___
Authorized signature(s)
       

Darrell S. van Amen      _ Name(s)


EVP/Chief Investment Officer & Treasurer      Title(s)



Each Borrower should contact the Bank for instructions as to whether this paragraph and the referenced documents, forms of which are provided as part of this Appendix 3, must be submitted.
2      The signatory or signatories should be authorized to sign documents on behalf of the Borrower as provided
in the Authorizing Resolutions for Borrowers required by OC-10.







SCHEDULE A To Letter of Agreement

FORM OF CERTIFICATE


The undersigned, the_Chief Executive Officer_ and_Board Secretary     of
(Title)    (Title)

_HomeStreet Bank--(the "Borrower") hereby certifies, with reference to Operating Circular
(Name of Borrower)

No. I 0, effective as of October 15, 2006, as amended or supplemented from time to time thereafter ("OC-
10"; terms used but not defined herein have the meaning specified therein), as agreed to by the Borrower by
Letter of Agreement dated _January _15, _2013_ to the Bank as follows:
(Date of Letter of Agreement)

(a)
attached hereto are true, correct and complete, as of the date of this Certificate, copies of the official document that specifies the official name or names of the Borrower in its jurisdiction of organization ("Organizational Document").
(h)
The information listed below is true and correct as of the date of this certificate: I.     Borrower's current mailing address is:

2.     601 Union Street, Ste.2000, Seattle, WA 98101


3.    Borrower's jurisdiction of organization is 2 : Washington


4.     Borrower's Organizational number is (indicate n/a if not applicable): N/A


5.      Borrower's ABA number is : 325084426


IN WITNESS WHEREOF, the undersigned has signed this Certificate on January 16, 2013.


/s/ Mark K. Mason___
Name: Mark K. Mason
Title: Chief Executive Officer


/s/ Godfrey B. Evans____
Name: Godfrey B. Evans
Title: Board Secretary
4



________________________________
Borrowers that have previously provided the documents and information requested in this Certificate need only certify that the previously provided documents and information have not changed.
2      Borrowers operating under a Federal charter (e.g., national banks or Federal savings banks or associations)
(see 12 U.S.C. §§ 22 and 1464(a), and 12 C.F.R. § 552.3), please specify the State of the Borrower's main
office or home office.
One signatory should be someone authorized to sign documents on behalf of the Borrower as provided in the
Authorizing Resolutions for Borrowers required by OC-10.
4      The other signatory should be in-house or outside counsel to the Borrower.



FORM OF AUTHORIZING RESOLUTIONS FOR BORROWERS.
As evidenced by my signature below, I certify that the following are correct and complete copies of the resolutions duly adopted on January 31", 2013 at a meeting' of Board of Directors of the HomeStreet Bank ("Borrower"), a savings bank duly established and operating under the laws of Washington, with its head office located at 601 Union Street, Ste. 2000, Seattle, WA 98101 in accordance with applicable law and the Borrower's chartering documents. I also certifY that the resolutions have not been modified, remain in effect, are not in conflict with any provisions of the Borrower's certificate of incorporation, bylaws, or chartering and/or licensing statutes or requirements, and are reflected in the minutes of the meeting at which these resolutions were approved:     ·

I.
RESOLVED, that the Borrower is authorized to request advance(s) from, incur indebtedness, including overdrafts, to and pledge and grant a security interest in the Borrower's property, whether now owned or hereafter acquired, to a Federal Reserve Bank.

2.     RESOLVED, that the persons with the following titles: Chief Executive Officer; President; Chief Investment Office;
or Treasurer, and each of their successors in office, any one of whom is authorized to (I) take each of the actions listed in paragraphs (a)-(e) immediately below and (2) send the names, titles, and signatures of individuals authorized to take such actions in the name and on behalf of the Borrower:'

(a)     to borrow money from a Federal Reserve Bank on the terms and security that such Federal Reserve Bank
requires;

(b)
to discount, rediscount, or sell (with or without the Borrower's agreement to repurchase) and, for any of those purposes, to endorse and assign notes, drafts, bills of exchange, acceptances, other bills receivable, evidences of indebtedness, and securities, now or hereafter acquired by the Borrower;

(c)
to make, execute, and deliver any application, note, agreement, certificate, power of attorney, and any other document that any Fede al Reserve Bank requires in connection with any transaction authorized by this resolution;

(d)
to grant, assign, pledge, and transfer to any Federal Reserve Bank security interests in any or all property of the Borrower, whether now owned or hereafter acquired, and to endorse, assign, deliver, deposit, and/or pledge any of such property to any Federal Reserve Bank as collateral to secure payment or performance of any obligation of the Borrower to a Federal Reserve Bank; and

(e)
to do any and all other acts and things that may be necessary or incidental to any transaction authorized by the relevant resolution, or that may be designed or intended to carry out the purpose of such resolution.

3.
RESOLVED, that a Federal Reserve Bank making an extension of credit to the Borrower is appointed as the Borrower's attorney-in-fact for it and in its place and stead, to endorse, assign, transfer and sell, set over and deliver collateral pledged to such Federal Reserve Bank, and to take any other action deemed necessary or advisable by the
Federal Reserve Bank to exercise its rights with respect to any advance or indebtedness owed by the Borrower, in its capacity as secured party, including but not limited to accepting and endorsing payments on loans, preparing and/or filing of any documents necessary to perfect, protect, preserve, or release the interest of the Federal Reserve Bank or the Borrower in such collateral, or compromising disputes or handling insurance issues related to such collateral. The power of attorney is coupled with an interest and as such is irrevocable, and full power of substitution is granted to the assignee or holder. The Borrower ratifies any and all action authorized herein and taken by any such Federal Reserve Bank as the Borrower's attorney-in-fact. The rights, powers, and authority of the attorney-in-fact to perform any and all act(s) whatsoever necessary remains in full force and effect and binds the Borrower, its legal representatives, successors, and assigns until all indebtedness of the Borrower to any such Federal Reserve Bank has been fully satisfied and discharged.

The language of this certification should be modified if the resolutions were adopted by written consent or otherwise.
_____________________

2
If certain persons are authorized to undertake only some of these activities, e.g., to borrow, but not to pledge on behalf of the Borrower, this resolution should be split so specifically identity who is authorized to undertake which activit(y)(ies).









4.
RESOLVED, that we approve and consent to be bound by the provisions of the Federal Reserve Bank of San Francisco's Operating Circular No 10, effective October 15, 2006, as amended and supplemented from time to time thereafter ("OC-10").

5.
RESOLVED, that the Borrower is authorized and approved to use any record (as such term is used in OC-10) to endorse or pledge to a Reserve Bank the notes and other obligations offered as collateral to secure payment or performance of any obligations of the Borrower to a Reserve Bank. The record will have the full force and effect of a manual endorsement.

6.
RESOLVED, that these resolutions and the powers and authorizations granted or confirmed by them continue in effect until written notice of revocation is received by each Reserve Bank that has relied or is relying on such resolutions and the Borrower shall continue to be bound with respect to any outstanding obligations and pledges to any Reserve Bank at the time the notice of revocation is received by such Reserve Bank.

7.
RESOLVED, that a duly certified copy of these resolutions be furnished to each Reserve Bank to which the Borrower applies for an advance or has an account.

IN WITNESS WHEREOF, I have hereunto subscribed my name.


/s/ Godfrey B. Evans___
Signature of certifying official



Godfrey B. Evans, Secretary of the Board,      Name and Title/
     2/7/13     
Date     




The certifying official must be the secretary of the Borrower or another person authorized to certify the statements in this document and, in any case, may not be a person authorized in Paragraph 2.



EXHIBIT10.21

                        
HomeStreet Bank
Management/Support Performance-Based
Annual Incentive Compensation Plan
Effective as of January 2013


HomeStreet (the “Company”) provides annual cash incentive opportunities for eligible employees through the use of a performance-based incentive compensation plan (the “Plan”). The annual incentive awards will provide a payment based upon attainment of specified goals that align the interests of employees with the interests of the Company.

PARTICIPATION & ELIGIBILITY

The Plan is limited to selected employees of the Company. Each Plan participant shall be notified of eligibility for participation in the Plan. Additional eligibility requirements are the following:

•
New employees must be employed by September 30 in a given Plan Year to be eligible for an award related to performance in that Plan Year.
•
Employees hired after September 30 must wait until the next fiscal year to be eligible for an award.
•
Employees who become a Plan participant during the year and work a partial year, will receive pro-rated awards based on actual earned base salary during the partial Plan Year.
•
A Plan participant must be an active employee as of the award payout date to earn and receive an award, except for partial awards available in limited circumstances as outlined in this Plan.
•
Plan participants must not be on a Performance Improvement Plan at the time the award is to be paid in order to earn an award; otherwise the award is neither earned, nor will be paid.
•
Participants will not earn incentive pay if the Participant’s conduct during the Plan Year or before the award is paid is considered by the Company to be a violation of applicable laws or regulations or in violation of the Company’s professional or ethical standards.

PLAN YEAR & PERFORMANCE PERIOD

The Plan operates on a calendar year basis (January 1 to December 31), which is the same as the Performance Period. Plan payouts covering the Performance Period will generally be made after Company financials have been audited and award amounts have been reviewed by the Compensation Committee of the Board of Directors.

PLAN DESIGN

The Plan design incorporates a tiered approach with annual incentive awards that are linked to the achievement of pre-defined corporate, department and individual performance goals. The pre-defined corporate goals are reviewed and approved by the Compensation Committee of the Board of Directors. The incentive ranges for each job (as a percent of salary) are designed to provide market competitive payouts for the achievement of target and maximum performance goals.

PERFORMANCE OBJECTIVES

The Plan will provide annual incentive awards to Plan participants based on overall Company, department and/or individual performance goals.

•
Company Performance Goals – The Company’s goals are determined by using performance history, peer data, market data and management’s judgment of what reasonable levels can be reached, based on previous experience and projected market conditions. Once the target performance is established, the threshold, target and maximum performance and payout levels will also be determined. The specific Company performance criteria for Plan participants will be recommended by management subject to approval by the Compensation Committee.

Page 1 of 1


•
Department and/or Individual Performance – Certain Plan participants may have a portion of their annual incentive award based on a combination of department and/or individual performance criteria. The number of performance criteria included, the specific type of performance criteria to use, and the weighting of each criterion for the overall incentive award will vary based on the position and role of each Plan participant.

AWARD OPPORTUNITIES & CALCULATION

Award opportunity levels, expressed as a percent of salary, will be set for each job that each eligible employee is assigned to for each Plan Year. The actual payouts will be calculated as a proportion of minimum, target and maximum performance levels.

•
Threshold Performance – The minimum level of performance needed to begin to be eligible to earn and receive an incentive award.
•
Target Performance – The expected level of performance based upon both historical performance and management’s best judgment of expected performance during the performance period.
•
Maximum Performance – The level of performance, which based upon historical performance and management’s judgment, would be exceptional or significantly beyond the expected.

The Company’s performance will be based on the Company’s success as measured by criteria determined by the Compensation Committee of the Board of Directors, with input from the CEO. The department and/or individual performance will be based on the department and/or Plan participant’s individual success as measured against the predetermined goals. The percentage of payout for overall Company performance and for department and/or individual performance will be allocated based on the specific weighting of the goals, the participant’s annual incentive award tier, and the actual performance compared to the pre-determined Threshold, Target and Maximum performance levels.

ALLOWANCE FOR DISCRETION 

The Plan allows for final payouts to be discretionarily adjusted based on factors not specifically measured (e.g., the quality of the job being performed, performance sacrifices in other areas).

PLAN TRIGGER

In order for there to be any payout to employees under the Plan, the Company must achieve sufficient net income as established by the Compensation Committee to fund the Plan. A specified pre-tax income threshold must be met for the corporate component of the Plan to pay awards. Participants may be eligible to receive a portion of the department and/or individual award at the discretion of the Compensation Committee, with input from the CEO if the Company pre-tax income threshold is not met.

PROVISION FOR AWARD ADJUSTMENT

This clause applies to those officers classified as Senior Vice President and above. The Compensation Committee reserves the right to make an adjustment to a participant’s award under the following circumstances:

•
Materially inaccurate financial information was used in determining or setting such incentive award. The claw-back period will be a rolling three year look back.

•
A participant’s activities posed imprudent risk to the organization. The claw-back period will be a rolling three year look back. In other words, if the participant’s activities at any time in the preceding three years posed imprudent risk to the Bank, the Bank may claw-back or recover the amount paid to him/her as a result of the imprudent risk.

The Compensation Committee shall determine the amount of any such award paid as a result of the inaccurate information (the “overpayment amount”) or the amount of loss resulting from the imprudent risk presented by the participant’s activities and shall send the participant a notice of recovery, which will specify the overpayment amount or loss and the terms for repayment.

Page 2 of 2


TERMINATION OF EMPLOYMENT/PARTIAL YEAR PAYMENTS

A participant must be an active employee on the date the incentive is paid to earn and receive an award. However, there are exceptions for terminations as a result of the circumstances identified below:
•
Eligible employees whose performance otherwise qualifies them for an annual incentive award and whose employment is terminated due to disability can receive a pro-rata award for the Plan Year, even if they are not employed as of the award payout date.
•
An eligible employee whose performance otherwise qualifies them for an annual incentive award, attains age 65 (or greater) and voluntarily retires will receive payment for a pro-rata portion of the award based on their retirement date.
•
In the event of death, the Company will pay to the participant’s beneficiary the pro-rata portion of the award that had been earned by the participant in the Plan year. The beneficiary will be the person or entity named on the employee’s life insurance beneficiary form, unless otherwise designated in writing by the employee.
•
In the event Plan participant’s employment is terminated as part of a reduction in force or other elimination of his/her position.
•
For any Plan participant with a written employment agreement that specifically provides benefits upon termination by HomeStreet without Cause or terminated by the Plan participant for Good Reason, then upon any termination without Cause or by the Plan participant with Good Reason, as those terms are defined in the employment agreement.

Calculation of Partial Year Payment . In the event that a Plan participant qualifies for a partial year payment, the Plan Administrator, in consultation with the Plan participant’s manager(s) and the Compensation Committee of the Board of Directors shall have the discretion to determine the amount of the payout. As a guideline for such determination, the following principles will be taken into consideration: (a) the participant’s Target Incentive shall be multiplied by the fraction of the Plan Year that the participant worked, and the Plan participant’s award shall be no more than the product of that calculation; and (b) any portion of the participant’s Target Incentive Award attributable to individual performance shall be set based on evaluation of the individual participant’s performance using input from the participant’s managers. Final calculations of the Partial Year Payment shall be completed after the end of the Plan Year.

Timing of Payment . The partial year payout shall be made at the same time that other Plan participants receive their payments after the end of the Plan Year.

Notwithstanding any other documents or communications to the contrary, employment with the Company is terminable at will, meaning that either the employee or the Company may terminate employment at any time, for any reason, with or without cause and with or without prior notice.

DISPUTES

In the event that there is any dispute about the application of the Plan, the employee should discuss such dispute with the Chief Executive Officer and the Director of Human Resources in order to resolve the matter. If the employee and Company have entered into an Arbitration Agreement, the dispute or claim may be resolved in accordance with such Arbitration Agreement.

MISCELLANEOUS

The Company shall withhold any taxes that are required to be withheld from the awards provided under the Plan.

Employee’s benefits under this Plan cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

Plan payouts will be made in a manner such that they are exempt from the Internal Revenue Code Section 409A.
 
The Plan is designed to comply with Internal Revenue Code Section 162(m), but if any amount payable as part of this Plan would not be deductible by the Company because of the limitations of that section, the payment shall be made in the next year in which the deduction is allowed.

Page 3 of 3


The Plan and all rights hereunder shall be governed by the laws of the State of Washington, except to the extent preempted by federal law.

If any provision of this Plan is determined to be void or otherwise unenforceable, such determination shall not affect the validity of the remainder of this Plan. Waiver by either party of any breach of this Plan shall not operate or be construed as a waiver of any subsequent breach, or of the condition itself.

This Plan constitutes the entire Plan between the Company and the Plan participant as to the subject matter hereof. No rights are granted to the Plan participant by virtue of this Plan other than those specifically set forth herein.
 
This Plan replaces and supersedes any prior agreements between you and HomeStreet, except for any written employment agreements between the Employee and the Company. In the event of any conflict between this Plan and the written employment agreement, the provisions of the written employment agreement shall govern. The Plan may be amended, terminated or suspended at any time and for any reason or for no reason upon notice in the sole discretion of the Company. This Plan will remain in effect until revised. Notwithstanding any other documents or communications to the contrary, employment with the Company is terminable at will, meaning that either the employee or the Company may terminate employment at any time, for any reason, with or without cause and with or without prior notice.





ACKNOWLEDGMENT

I have read, understand and accept all of the terms of this Plan.



Printed Name                    Signature                    Date
   


Page 4 of 4


EXHIBIT 21

Subsidiaries of HomeStreet, Inc.
 
 
 
Subsidiary
Jurisdiction of Incorporation or Organization
HomeStreet Bank
WA
HomeStreet Statutory Trust I
DE
HomeStreet Statutory Trust II
DE
HomeStreet Statutory Trust III
DE
HomeStreet Statutory Trust IV
DE
YNB Statutory Trust I
CT
HomeStreet Capital Corporation
WA
 
 
 
Subsidiaries of HomeStreet Bank
 
 
 
 
Subsidiary
Jurisdiction of Incorporation or Organization
HomeStreet Reinsurance, Ltd.
Turks & Caicos Islands
Continental Escrow Company
WA
HomeStreet/WMS, Inc.
WA
Union Street Holdings, LLC
WA
HS Cascadia Holdings, LLC
WA







EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm
The Board of Directors
HomeStreet, Inc.:
We consent to the incorporation by reference in Registration Statement No. 333-182171 on Form S-8 of our reports dated March 17, 2014, relating to the consolidated financial statements of HomeStreet, Inc. and subsidiaries (the Company) and the effectiveness of the Company’s internal control over financial reporting, appearing in the Annual Report on Form 10-K of the Company for the year ended December 31, 2013.

/s/ Deloitte & Touche LLP
Seattle, Washington
March 17, 2014


EXHIBIT 23.2


Consent of Independent Registered Public Accounting Firm
The Board of Directors
HomeStreet, Inc.:
We consent to the incorporation by reference in the registration statement No. 333-182171 on Form S-8 of HomeStreet Inc. and subsidiaries (the Company) of our report dated March 15, 2013, except as to Note 20, with respect to the consolidated statements of financial condition of the Company as of December 31, 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012, which report appears in the December 31, 2013 annual report on Form 10-K of the Company.
(signed) KPMG LLP
Seattle, Washington
March 14, 2014






CERTIFICATIONS
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark K. Mason, certify that:
1. I have reviewed this annual report on Form 10-K of HomeStreet, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Dated: March 17, 2014
 
By:
/s/ Mark K. Mason  
 
 
 
Mark K. Mason
 
 
 
President and Chief Executive Officer







EXHIBIT 31.2
CERTIFICATION OF CHIEF ACCOUNTING OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cory D. Stewart, certify that:
1. I have reviewed this annual report on Form 10-K of HomeStreet, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Dated: March 17, 2014
 
By:
/s/ Cory D. Stewart  
 
 
 
Cory D. Stewart
Executive Vice President and
 
 
 
Chief Accounting Officer





EXHIBIT 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Mark K. Mason, the Chief Executive Officer of HomeStreet, Inc. (the " Company "), hereby certify, that, to my knowledge:
1.
The Annual Report on Form 10-K for the year ended December 31, 2013 (the " Report ") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

Dated:
March 17, 2014
By:
/S/ Mark K. Mason
 
 
 
Mark K. Mason
 
 
 
President, Chief Executive Officer
 
 
 



CERTIFICATION OF PRINCIPAL ACCOUNTING OFFICER PURSUANT TO
18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Cory D. Stewart, the Chief Accounting Officer of HomeStreet, Inc. (the " Company "), hereby certify, that, to my knowledge:
1.
The Annual Report on Form 10-K for the year ended December 31, 2013 (the " Report ") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.  

Dated:
March 17, 2014
By:
/S/ Cory D. Stewart
 
 
 
Cory D. Stewart
 
 
 
Executive Vice President,
Chief Accounting Officer