Business context and reporting period
The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2016—not a Mechanics Bancorp filing. HomeStreet is a Seattle-based financial services company focused on mortgage banking and commercial and consumer banking.
Financial performance and condition
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total net revenue | $147.0 | $111.2 | $259.4 | $217.3 |
| Net interest income | $44.5 | $38.2 | $85.2 | $69.0 |
| Provision for credit losses | $1.1 | $0.5 | $2.5 | $3.5 |
| Net income | $21.7 | $12.4 | $28.2 | $22.7 |
| Diluted earnings per share | $0.87 | $0.56 | $1.15 | $1.14 |
| Net interest margin | 3.48% | 3.63% | 3.52% | 3.62% |
| Efficiency ratio | 75.55% | 83.02% | 81.89% | 83.66% |
At June 30, total assets were $5.94 billion, loans held for investment net of allowance were $3.70 billion, deposits $4.24 billion, and shareholders’ equity $559.6 million. Cash and cash equivalents were $45.2 million. The Bank’s primary liquidity ratio was 30.0%, up from 25.4% at year-end 2015; available borrowing capacity was $360.2 million at the FHLB and $361.4 million at the Federal Reserve Bank.
FHLB advances were $879.0 million, down from $1.02 billion at December 31, 2015. Long-term debt was $125.1 million, compared with $61.9 million at year-end, following issuance of $65 million of 6.50% senior notes due 2026. The Bank reported Tier 1 leverage and total risk-based capital ratios of 10.28% and 14.33%, respectively, and management said the Company and Bank remained above applicable well-capitalized thresholds.
For the first half, operating activities used $108.9 million of cash and investing activities used $676.9 million, while financing activities provided $798.3 million. Cash increased $12.5 million to $45.2 million. Financing inflows included $880.7 million of deposit growth and $63.3 million net proceeds from the senior note issuance.
Material changes versus comparable periods
- Q2 net income rose 76% year over year; first-half net income increased 24%. Q2 revenue grew 32%, led by mortgage banking income and higher net interest income.
- Net interest margin narrowed year over year to 3.48% for Q2 and 3.52% for the first half. Management attributed pressure principally to higher funding costs, including deposits and the new senior notes.
- Mortgage loan production and sales increased: Q2 single-family closed volume was $2.26 billion, up 12%, and interest-rate lock commitments were $2.36 billion, up 25%. Mortgage servicing income rose to $13.2 million in Q2 from $1.8 million, with results affected by changes in MSR valuation and hedges.
- Noninterest expense rose 20% in Q2 and 17% in the first half, reflecting business expansion, higher loan-volume-related compensation, branch and office growth, and regulatory costs. First-half merger-related expense was $6.2 million before tax.
- Loans held for investment grew 15.9% from year-end; deposits grew 31.2%. These changes included the February 2016 Orange County Business Bank acquisition, which added $188.5 million of assets and $126.5 million of deposits.
- Nonaccrual loans declined to $15.7 million, or 0.42% of loans, from $17.2 million, or 0.53%, at year-end. Nonperforming assets were $26.4 million, 0.45% of assets, versus $24.7 million, 0.50%, at year-end.
Outlook, risks, contingencies and unusual items
No numerical earnings or revenue guidance is provided. Management described ongoing growth in lending and branch networks and stated that proceeds from the senior notes would support growth, initially through investment in securities pending loan growth. Agreements to acquire two branches in Oregon and two in Southern California were expected to close in the second half of 2016, subject to regulatory approval and other conditions.
Key exposures include sensitivity of mortgage origination and servicing income to interest rates and refinancing activity; valuation uncertainty in mortgage servicing rights; credit and real-estate concentration risk; reliance on wholesale and brokered funding; and execution, integration, staffing, systems and control challenges from rapid growth and acquisitions. Brokered deposits were $310.4 million, compared with $120.3 million at year-end. The filing also describes mortgage-loan repurchase and indemnification exposure: the recorded liability was $3.4 million against $17.14 billion of servicing-retained loans subject to representations and warranties.
Management reported no material legal claims considered probable or reasonably possible of loss at June 30 and no material subsequent events. The filing identifies an ongoing SEC Division of Enforcement inquiry primarily concerning prior fair-value hedge-accounting analysis. The Company said it was cooperating and did not expect a material adverse impact, but could not assure that no enforcement action would follow. The Company also said newly issued expected-credit-loss guidance (CECL) was under evaluation and expected to have a material financial-statement impact.
Most important facts for investors to verify
- Confirm the issuer identity: the provided filing is for HomeStreet, Inc., despite the request metadata naming Mechanics Bancorp.
- Review the drivers and sustainability of mortgage income, including the significant Q2 contribution from MSR valuation and derivative hedging, and test sensitivity to prepayment assumptions and interest rates.
- Assess whether deposit growth, including brokered deposits and large certificates of deposit, can fund continued asset growth without further margin compression or increased funding risk.
- Track credit quality, especially loan growth and concentrations in Western U.S. real estate, delinquency trends, TDR performance, and adequacy of the allowance.
- Monitor acquisition closings and integration costs, the SEC inquiry, and the eventual quantified impact and implementation plan for CECL.