HomeStreet, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for HomeStreet, Inc., not Mechanics Bancorp. It covers the quarter and nine months ended September 30, 2017; amounts below are U.S. dollars.
Business context and reporting period
HomeStreet is a diversified financial services company focused on commercial and consumer banking and mortgage banking, primarily in the western United States. Its two reporting segments are Commercial and Consumer Banking and Mortgage Banking. The financial statements are unaudited.
Financial performance and condition
- Third quarter: Net interest income was $50.8 million, up from $46.8 million a year earlier; noninterest income was $83.9 million, down from $111.7 million. Net revenue (net interest income plus noninterest income) fell 15% to $134.7 million. Net income declined 50% to $13.8 million; diluted EPS was $0.51 versus $1.11.
- Nine months: Net interest income increased 9% to $143.4 million, but noninterest income fell to $239.4 million from $285.9 million. Net revenue declined 8% to $382.7 million. Net income was $34.0 million, down 39%; diluted EPS was $1.26 versus $2.27.
- Margins and returns: Third-quarter net interest margin was 3.40% versus 3.34% in 2016; nine-month margin was 3.31% versus 3.46%. Third-quarter return on assets was 0.83% and return on equity 8.10%, compared with 1.79% and 18.83% a year earlier. The third-quarter efficiency ratio worsened to 85.13% from 72.15%.
- Balance sheet at September 30: Total assets were $6.80 billion, up 8.9% from December 31, 2016. Net loans held for investment were $4.31 billion, up 12.9%; deposits were $4.67 billion, up 5.4%; shareholders’ equity was $671.5 million, up from $629.3 million.
- Funding and debt: Federal Home Loan Bank advances rose to $1.14 billion from $868.4 million. Long-term debt was $125.3 million. Brokered deposits were $324.0 million, or 6.9% of deposits, versus $234.4 million and 5.3% at year-end.
- Cash flow and liquidity: For the nine months, operating cash flow was negative $31.4 million, investing cash flow negative $441.7 million, and financing cash flow positive $474.2 million; cash increased $1.1 million to $55.1 million. The Bank’s primary liquidity ratio was 26.4%, down from 31.2% at year-end. Available borrowing capacity was $202.5 million from the FHLB and $394.8 million from the Federal Reserve Bank.
- Credit quality and capital: Nonaccrual loans were $15.1 million, or 0.35% of loans, versus $20.5 million and 0.53% at year-end. Nonperforming assets were $18.8 million, or 0.28% of assets. The allowance for credit losses was $38.2 million, including $37.1 million for loan losses. The Company reported 9.33% Tier 1 leverage and 11.48% total risk-based capital; the Bank remained above “well-capitalized” regulatory thresholds.
Material changes versus comparable periods
- Mortgage banking weakness drove the earnings decline: third-quarter single-family rate-lock commitments fell 30% year over year, and nine-month commitments fell 21%. Management cited higher mortgage rates and limited housing inventory, which reduced refinancing and purchase activity.
- Mortgage Banking reported a third-quarter net loss of $0.1 million, versus net income of $17.6 million in the prior-year quarter; nine-month net income fell to $1.3 million from $37.1 million.
- Commercial and Consumer Banking performed better: third-quarter net income rose 38% to $14.0 million, and nine-month net income rose 74% to $32.7 million, supported by loan growth and higher net interest income.
- Loans held for investment grew across consumer and commercial portfolios. Investment securities declined 11.9% from year-end to $919.5 million; management attributed this in part to moving funds from short-term investments into longer-term investments.
- Credit-loss provision fell to $0.75 million for the first nine months from $3.75 million; the period included $2.2 million of net recoveries.
Outlook, commentary, risks and unusual items
- In September, the Company began restructuring Mortgage Banking to align costs with lower origination expectations. It recorded $3.9 million of charges, including $3.3 million of facility costs and $0.5 million of severance. Management estimated annual pretax savings of $13.3 million from restructuring, earlier staffing reductions and voluntary attrition; savings are not assured. The plan included staffing reductions, office closures and consolidations.
- Management said commercial and consumer banking produced record quarterly net income and remained focused on growth and diversification. It also cautioned that future growth rates as a percentage of assets and income may be lower than in prior periods. No specific earnings or revenue guidance was provided.
- Management estimated that proposed Basel III capital-rule changes, if adopted without material adverse changes, could reduce required regulatory capital by approximately $70–$75 million beginning in 2018. This was a proposal, not a finalized benefit.
- In October 2017, Northern California wildfires affected communities and briefly closed four home-loan centers. The filing said the full business impact was not yet known and anticipated possible adverse effects.
- Key exposures include mortgage-volume and interest-rate volatility, sensitivity of mortgage servicing rights (MSRs) to prepayment assumptions, real-estate and regional concentration, funding and brokered-deposit liquidity, and mortgage repurchase/indemnification obligations. The Company reported no material legal claims considered probable or reasonably possible of loss at quarter-end.
- The expected-credit-loss accounting standard (CECL) is scheduled for adoption in 2020. Management was still assessing its impact and said it could increase the allowance for loan losses.
Important facts for investors to verify
- Confirm the issuer: the supplied document is HomeStreet, Inc.’s 10-Q, not a Mechanics Bancorp filing.
- Track whether mortgage originations recover and whether the restructuring delivers the projected $13.3 million in annual pretax savings without impairing the ability to respond to a market rebound.
- Monitor net interest margin, deposit costs, FHLB borrowing, brokered-deposit growth, liquidity capacity and regulatory capital ratios.
- Review loan growth alongside delinquency, nonaccrual, TDR and allowance trends, particularly given the Company’s real-estate and western U.S. concentration.
- Assess MSR valuation sensitivity, hedge effectiveness, mortgage repurchase exposure and the potential effects of CECL and final Basel III rules.
- Consider the possible effects of the October 2017 wildfires and any subsequent updates; the filing did not quantify the impact.