Filing summary
Entity discrepancy: The request identifies Mechanics Bancorp, but the supplied 10-Q is for HomeStreet, Inc. (Nasdaq: HMST). This summary covers HomeStreet and the quarter ended June 30, 2019.
Business context and reporting period
HomeStreet is a Seattle-based bank holding company focused on commercial and consumer banking, with a smaller mortgage business. The filing reports the second quarter and first six months of 2019. Results and comparative periods reflect discontinued-operations accounting for the exit from the stand-alone home loan center (HLC) mortgage business.
In 2019, the company sold servicing rights on $14.26 billion of single-family loans and sold 47 HLC offices and related assets to Homebridge; the remaining stand-alone centers were closed. HomeStreet said it would retain a smaller, branch-focused mortgage operation. It also entered a non-binding letter of intent to sell its ownership interest in WMS Series, LLC.
Key financial metrics
| Metric | Q2 2019 or June 30, 2019 | Comparison |
|---|---|---|
| Net interest income | $49.2 million | $47.7 million in Q2 2018 |
| Noninterest income | $19.8 million | $8.4 million in Q2 2018 |
| Continuing-operations income | $8.9 million; $0.32 diluted EPS | $4.2 million; $0.15 diluted EPS in Q2 2018 |
| Discontinued-operations loss | $14.5 million | $2.9 million income in Q2 2018 |
| Net result | $5.6 million loss; $(0.22) diluted EPS | $7.1 million income; $0.26 diluted EPS in Q2 2018 |
| Net interest margin | 3.11% | 3.25% in Q2 2018 |
| Total assets | $7.20 billion | $7.04 billion at Dec. 31, 2018 |
| Loans held for investment, net | $5.29 billion | $5.08 billion at Dec. 31, 2018 |
| Deposits | $5.59 billion on the balance sheet; $5.72 billion including deposits classified in discontinued operations | $4.89 billion and $5.05 billion, respectively, at Dec. 31, 2018 |
| FHLB advances / long-term debt | $387.6 million / $125.6 million | $932.6 million / $125.5 million at Dec. 31, 2018 |
| Cash and cash equivalents | $99.6 million | $58.0 million at Dec. 31, 2018 |
| Nonperforming assets | $11.7 million, or 0.16% of assets | $12.1 million, or 0.17%, at Dec. 31, 2018 |
For the six months ended June 30, 2019, net loss was $7.3 million versus net income of $13.0 million in the prior-year period. Continuing-operations income was $14.0 million versus $5.9 million. Operating cash flow was negative $108.2 million, investing cash flow was positive $123.6 million, and financing cash flow was positive $25.6 million; cash increased $41.0 million.
The bank reported regulatory capital ratios of 9.86% Tier 1 leverage, 13.26% common equity Tier 1, and 14.15% total risk-based capital. Management said the company and bank remained above applicable “well-capitalized” minimums. The bank’s primary liquidity ratio was 19.7%; available borrowing capacity was $817.6 million from the FHLB and $332.6 million from the Federal Reserve.
Material changes versus comparable periods
- Q2 total net revenue (net interest income plus noninterest income) rose 23% to $69.0 million year over year, while noninterest expense rose 18% to $58.8 million. The filing attributes the higher continuing-operations revenue and costs in part to the bank-location mortgage business, which began reporting in continuing operations in Q2.
- Net interest income grew, supported by higher average loan balances, but net interest margin fell 14 basis points year over year. Interest expense rose as deposit and borrowing costs increased faster than yields on earning assets.
- The consolidated net loss chiefly reflects the mortgage exit: discontinued operations recorded a $10.8 million pretax disposal loss in Q2, alongside operating losses and exit-related costs. For the first half, the disposal loss was $23.0 million pretax.
- Loans serviced for others fell to $8.33 billion from $21.69 billion at year-end 2018, primarily following the sale of servicing rights. Deposits increased 13.3% from year-end; FHLB advances decreased substantially as funding mix shifted.
- The allowance for loan losses was $43.3 million, or 0.81% of loans held for investment, at June 30. The six-month provision was $1.5 million; Q2 provision was zero, and Q2 net recoveries were $92,000.
Outlook, commentary, risks and unusual items
- Management provided no numerical earnings or revenue guidance in the supplied filing text. It expects to pursue cost and efficiency improvements, with initiatives commencing in Q3 2019 and continuing through 2020 and beyond; timing, scope, and savings are uncertain.
- The company engaged a bank-efficiency consultant and identified potential reductions involving staffing, organization, technology, and other expenses. It temporarily suspended new branch openings while focusing on efficiency and profitability.
- On July 11, 2019, after quarter-end, HomeStreet completed a purchase of approximately 1.69 million shares from Blue Lion Capital and affiliates for $52.7 million, or $31.16 per share. Combined with Q2 repurchases, the company returned about $81.1 million to shareholders. The repurchase program was terminated July 25.
- Mortgage performance remains exposed to interest rates, housing-market conditions, competition, servicing-rights valuation and prepayments. The company also cites real-estate credit concentrations in western U.S. markets, funding and deposit-cost risks, execution risks in expense reductions, and operational/control risks during restructuring.
- HomeStreet expects CECL adoption on January 1, 2020 and anticipates an increase in the credit-loss allowance, but had not determined the amount. Management said the estimate depends on economic conditions and the loan portfolio at adoption.
- Management reported no material legal claims considered probable or reasonably possible of producing a material loss at June 30. Disclosure controls were deemed effective; management also said the mortgage divestitures and restructuring materially affected, or could materially affect, internal control over financial reporting and would be monitored.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is HomeStreet, Inc., not Mechanics Bancorp.
- Track completion of remaining servicing transfers, post-sale obligations and any additional costs or liabilities associated with the mortgage exit.
- Assess whether planned efficiency measures deliver durable expense savings and improve the elevated reported efficiency ratio.
- Monitor deposit pricing and mix, net interest margin, and the effects of higher funding costs on earnings.
- Review loan growth, construction and real-estate concentrations, delinquency trends, allowance adequacy, and the eventual CECL adoption impact.
- Evaluate the effect of share repurchases on capital, liquidity, and per-share value, alongside the post-quarter Blue Lion transaction.
- Check whether the proposed WMS sale proceeds and whether the smaller retained mortgage operation achieves the stated profitability objectives.