Business context and reporting period
Filing identity: The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013, filed November 7, 2013. It is not identified as a Mechanics Bancorp filing.
HomeStreet is a Seattle-based financial services company focused on mortgage banking and commercial and consumer banking, primarily in the Pacific Northwest, California and Hawaii. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and condition
| Metric | Q3 2013 | Q3 2012 | Change / context |
|---|---|---|---|
| Net interest income | $20.4 | $16.5 | Up 23.6% |
| Net interest margin | 3.41% | 3.12% | Improved, mainly as funding costs declined |
| Noninterest income | $38.2 | $69.1 | Down 44.7%, chiefly from lower mortgage origination and sale revenue |
| Noninterest expense | $58.1 | $45.9 | Up 26.5%, reflecting business expansion and higher staffing costs |
| Net income | $1.7 | $22.0 | Down 92.4%; diluted EPS was $0.11 versus $1.50 |
| Return on average assets / equity | 0.24% / 2.45% | 3.60% / 38.02% | Both materially lower |
For the nine months ended September 30, net income was $24.7 million, down 59.3% from $60.6 million; diluted EPS was $1.67 versus $4.52. Net interest income rose to $53.1 million from $44.2 million, while noninterest income fell to $154.7 million from $166.1 million and expenses rose to $170.6 million from $127.6 million. Nine-month net interest margin was 3.12%, or 3.21% excluding a $1.4 million prior-period interest expense correction.
At September 30, total assets were $2.85 billion, up from $2.63 billion at year-end 2012. Loans held for investment, net, were $1.51 billion; loans held for sale were $385.1 million; and available-for-sale securities were $573.6 million. Shareholders’ equity was $268.2 million. A $18.3 million nine-month other comprehensive loss, primarily unrealized securities losses following higher interest rates, reduced equity growth.
Deposits were $2.10 billion, including $338.7 million of FHLB advances and $61.9 million of long-term debt. Deposits increased $121.2 million from year-end, with transaction and savings balances growing while certificates of deposit declined. Brokered deposits were $158.0 million, versus none at year-end. The Bank’s primary liquidity ratio was 36.8%, down from 43.9%; reported available borrowing capacity was $91.4 million from the FHLB and $382.8 million from the Federal Reserve Bank of San Francisco. Bank capital ratios remained above “well-capitalized” thresholds: Tier 1 leverage 10.85%, Tier 1 risk-based 17.19%, and total risk-based 18.44%.
For the first nine months, operating activities provided $258.2 million of cash, investing activities used $447.7 million, and financing activities provided $202.1 million. Cash and cash equivalents increased $12.6 million to $37.9 million. The company said operating cash, available balances and short-term borrowing capacity were sufficient for operating liquidity needs.
Material changes versus comparable periods
- Mortgage conditions weakened as higher interest rates sharply reduced refinancing activity. Q3 single-family rate-lock commitments fell 40.1% year over year to $786.1 million, and closed loan volume fell 13.2% to $1.19 billion. Mortgage Banking recorded a $2.2 million quarterly net loss, compared with $24.3 million of income a year earlier.
- Mortgage Banking’s Q3 composite margin fell to 375 basis points from 501 basis points amid lower lock volumes, price competition and a shift toward purchase lending. Closed loans materially exceeded new lock commitments, while many costs were recognized when loans funded.
- Commercial and Consumer Banking earned $3.9 million in Q3 versus a $2.3 million loss a year earlier, supported by higher net interest income and a $1.5 million reversal of credit-loss provision. Consolidated net charge-offs were $1.5 million for the quarter versus $5.0 million in Q3 2012.
- Credit indicators improved overall: nonperforming assets were $39.0 million, or 1.37% of assets, versus $53.8 million, or 2.05%, at year-end 2012. Nonaccrual loans fell to $26.8 million from $29.9 million, and other real estate owned declined to $12.3 million from $23.9 million.
- Loans held for investment grew 15.4% from year-end, while loans held for sale fell 38.0%. Securities grew 37.8%, including a new $70.0 million corporate debt securities position.
- The allowance for loan losses declined to $24.7 million, or 1.61% of loans held for investment, from $27.6 million, or 2.06%, at year-end. Troubled debt restructurings totaled $109.4 million across 194 relationships, compared with $110.8 million across 162 relationships at year-end.
Outlook, commentary, risks and unusual items
- Management described a market transition from refinancing toward purchase mortgages and said it intended to pursue purchase-market share through relationships with builders and real estate professionals and targeted hiring. The filing provides no quantified earnings or revenue guidance.
- Management linked margin improvement to lower deposit funding costs and said the strategy of attracting transaction and savings deposits improved deposit mix. However, the mortgage slowdown and expansion-related expense growth pressured profitability.
- On November 1, 2013, after quarter-end, HomeStreet completed acquisitions of Fortune Bank and YNB Financial Services, parent of Yakima National Bank. The combined organization was approximately $3.10 billion in pro forma assets as of September 30. Acquisition accounting was not finalized, and the acquired entities’ results are not included in Q3. The company also described a pending acquisition of two AmericanWest Bank branches.
- The board approved a $0.11-per-share dividend payable November 25, 2013; the company also reported paying a $0.11-per-share dividend during Q3.
- The company reported that its and the Bank’s prior regulatory orders had been terminated and the Bank was well-capitalized. It expected to elect the option to exclude certain AOCI components under new Basel III rules and stated it believed current capital levels met the forthcoming standards, which generally begin in 2015.
- Key risks include interest-rate and mortgage-market volatility, sensitivity of mortgage servicing rights (MSRs) to prepayment assumptions, hedging effectiveness, credit and real-estate concentration risk, mortgage repurchase and government-loan indemnification exposure, regulatory changes, and acquisition integration. Single-family MSRs were valued at $136.9 million; the filing illustrates sensitivity to adverse assumption changes, including a $6.9 million decline for a 10% adverse prepayment-rate change.
- Mortgage repurchase liability was $1.6 million against $11.34 billion of sold loans subject to representations and warranties. The company reported no legal claims considered probable or reasonably possible of loss at September 30 and no amounts reserved for legal claims.
- Unusual item: nine-month results include a $1.4 million correction of previously under-accrued interest on deferred Trust Preferred Securities interest. Q3 results also include a $1.5 million reversal of credit-loss provision.
Important facts for investors to verify
- Confirm the filing issuer: the document is HomeStreet, Inc., not Mechanics Bancorp.
- Assess whether mortgage origination volumes, gain-on-sale margins and funding mix recovered or deteriorated after Q3, and whether growth in purchase lending offset refinancing weakness.
- Review the assumptions and valuation sensitivity for MSRs and the effectiveness and earnings impact of mortgage and MSR hedging.
- Track credit quality, allowance adequacy, TDR performance, concentrations in Washington real estate, and any changes in nonperforming assets or charge-offs.
- Verify the completed bank acquisitions’ final purchase accounting, integration costs, asset quality, funding effects and contribution to earnings; separately confirm the status of the AmericanWest branch transaction.
- Monitor liquidity and reliance on wholesale and brokered funding, capital levels under Basel III, and the effect of unrealized securities losses on equity.