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HomeStreet frees itself from regulators' sanction

Christina Rexrode, AP Business Writer

NEW YORK (AP) -- HomeStreet Bank is free from regulatory sanctions, the latest step in the bank's turnaround plan.

The Seattle-based bank said Friday that its regulators, the Federal Deposit Insurance Corporation and the Washington Department of Financial Institutions, have lifted a so-called memorandum of understanding against it.

A memorandum of understanding is an informal regulatory action that instructs a bank to make changes to bring it in line with regulators' standards, such as bringing in new leaders or tightening risk standards.

The memorandum filed against HomeStreet required it to reduce its bad or "adversely classified" assets and to keep a bigger capital cushion. It also restricted the dividends that the bank could pay to its parent company, HomeStreet Inc., which went public in February.

The memorandum, which was lifted Thursday, was filed in March and replaced a more-serious sanction called a "cease and desist order," which had been in place for nearly three years.

Because memorandums are informal, regulators generally don't disclose them or comment on them. An FDIC spokesman declined to comment on HomeStreet's announcement Friday.

Cease and desist orders, however, are public. The order filed against HomeStreet in 2009 accused it of "unsatisfactory lending and collection practices" and of "operating with a large volume of poor quality loans."

The 2009 order directed the bank to stop lending to borrowers who had already defaulted on other loans. It also ordered the bank to tighten its lending policies and to limit its concentration of loans in commercial real estate and development and construction.

The HomeStreet story has been a familiar one throughout the financial crisis and its aftermath. Many community banks were overly dependent on a single sector of loans, or overextended themselves in the pre-bubble housing market, and either failed, closed or merged to survive. That has thinned the number of players in the banking industry: The FDIC says there are now less than 6,200 FDIC-insured commercial banks in the U.S., down from nearly 7,300 in 2007.

CEO Mark Mason said Thursday that the bank was "deeply gratified by this acknowledgement on the part of our regulators of the bank's significant accomplishments." He cited "strong earnings and greatly improved credit quality."

The Seattle-based bank, which does business in Washington, Oregon, Idaho and Hawaii, earned about $21 million in the third quarter of this year, compared with about $15 million in the same period the year before. Its nonperforming assets, or troubled loans, made up about 2 percent of total assets, down from about 5 percent at the end of 2011 and about 11 percent at the end of 2010. That was largely because the bank sold off foreclosed assets, particularly construction and land development property.

Mason became CEO in 2010. In a regulatory filing, the bank said he was experienced in "distressed institution turnaround."

HomeStreet Inc. shares rose 25 cents to $24.59 in morning trading.