Business context and reporting period
The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a Mechanics Bancorp filing. HomeStreet is a Seattle-based financial services company operating commercial and consumer banking and mortgage banking businesses, primarily in the western United States. Unless noted, amounts below are in U.S. dollars.
Financial performance and position
- Third-quarter results: Net income was $11.8 million, down 14.5% from $13.8 million a year earlier; diluted EPS was $0.44 versus $0.51. Revenue (net interest income plus noninterest income) fell 19% to $109.8 million. Noninterest expense declined 18% to $94.6 million.
- First nine months: Net income was $24.8 million, down 27.1% from $34.0 million; diluted EPS was $0.91 versus $1.26. Revenue fell 11% to $339.4 million, while noninterest expense declined 8% to $305.9 million.
- Interest income and margins: Third-quarter net interest income was $51.6 million, up from $50.8 million; nine-month net interest income was $151.1 million, up from $143.4 million. Net interest margin decreased to 3.20% from 3.40% for the quarter and to 3.22% from 3.31% for the nine-month period. Management attributed margin pressure to funding costs rising faster than asset yields.
- Mortgage banking: Third-quarter mortgage segment net loss was $4.7 million, compared with a $0.1 million loss a year earlier; the nine-month loss was $13.9 million versus $1.3 million net income. Consolidated gain on loan origination and sale activities fell 37% for the quarter and 24% for the nine months.
- Banking segment: Commercial and Consumer Banking net income rose 19% to $16.6 million for the quarter and 18% to $38.7 million for the nine months, reflecting loan growth and lower effective taxes, partly offset by higher funding costs.
- Balance sheet and funding: At September 30, total assets were $7.03 billion, net loans held for investment were $5.03 billion, deposits were $5.16 billion, and shareholders’ equity was $714.8 million. Compared with December 31, 2017, assets rose 4%, net held-for-investment loans rose 11.5%, and deposits rose 8.3%. FHLB advances declined to $816.6 million from $979.2 million; long-term debt was $125.4 million. Brokered deposits increased to $759.7 million from $345.5 million, or 14.7% of deposits.
- Cash flow and liquidity: For the first nine months, operating activities provided $228.8 million, investing activities used $535.5 million, and financing activities provided $292.4 million. Cash and cash equivalents ended at $59.0 million, down $13.7 million from year-end. The Bank’s primary liquidity ratio was 19.5%, versus 18.1% at year-end; available borrowing capacity was $369.4 million at the FHLB and $302.2 million at the Federal Reserve.
- Credit quality and capital: Nonaccrual loans were $9.6 million, or 0.19% of loans, versus $15.0 million, or 0.33%, at year-end. Nonperforming assets were $10.4 million, or 0.15% of assets. The allowance for loan losses was $40.4 million, or 0.80% of held-for-investment loans; the nine-month provision for credit losses was $2.5 million. The Bank’s total risk-based capital ratio was 14.15%; management said the Company and Bank exceeded applicable well-capitalized minimums.
Material changes, outlook, and risks
- Management cited higher mortgage rates, reduced refinancing demand, constrained housing inventory, fewer production employees, and competitive pricing pressure as drivers of lower mortgage volumes and gain-on-sale margins. Single-family rate-lock commitments declined 31% in the quarter and 17% for the nine-month period year over year.
- HomeStreet sold servicing rights on approximately $4.90 billion of single-family unpaid principal balance in June 2018; the servicing transfer was completed in the third quarter. This reduced the servicing portfolio and contributed to lower servicing fees. Mortgage servicing rights were carried at $291.8 million, including $263.6 million of single-family MSRs, whose valuation is sensitive to interest rates and prepayment assumptions.
- The company recorded $7.1 million of restructuring costs in the first nine months of 2018, including $471,000 in the third quarter; $3.3 million of restructuring liability remained at September 30. Management intends to pursue measured commercial and consumer banking growth and continue evaluating mortgage operations. It expects future growth to be slower than in prior years. No specific earnings or revenue guidance is provided.
- Interest expense rose 61.8% in the quarter and 54.8% in the nine-month period year over year, reflecting higher rates on deposits and borrowings. Management warned that a flat or inverted yield curve and funding costs repricing faster than assets may pressure net interest income. Interest-rate simulations estimated a 6.1% decline in one-year net interest income under an immediate, sustained 200-basis-point increase, and a 4.4% increase under a 100-basis-point decline; these are model estimates, not forecasts.
- Unfunded commitments include $638.8 million of construction commitments and $610.4 million of unused home-equity and commercial banking lines. Mortgage repurchase and indemnity exposure relates to $19.89 billion of servicing-retained loan principal; the recorded repurchase liability was $2.9 million. The filing reported no material legal claims assessed as probable or reasonably possible of material loss.
- Management expects the new lease standard, effective January 1, 2019, to add an estimated $150–$175 million of right-of-use assets and corresponding lease liabilities, with potential regulatory-capital effects but no expected material income-statement impact. The expected-credit-loss standard (CECL) was still under evaluation; management said it could increase the allowance, but had not quantified the impact.
- Additional stated risks include continued mortgage-market and housing-supply weakness, interest-rate and hedging volatility, reliance on brokered and wholesale funding, real-estate concentration in western U.S. markets, regulatory and technology/cybersecurity risks, and possible added requirements as assets approach $10 billion.
Most important facts for investors to verify
- Confirm the issuer: the provided filing names HomeStreet, Inc.; it does not identify Mechanics Bancorp.
- Track mortgage production, gain-on-sale margins, restructuring savings, and whether further mortgage cost reductions are needed.
- Monitor deposit pricing and brokered-deposit dependence, liquidity sources, and the effect of higher funding costs on net interest margin.
- Review credit trends and allowance adequacy as the loan portfolio grows, including the geographic and real-estate concentrations.
- Assess sensitivity of MSR values and hedging results to interest rates and prepayment assumptions, and confirm the eventual CECL and lease-standard impacts.