Filing summary: HomeStreet, Inc. (not Mechanics Bancorp)
Entity clarification: The supplied filing is HomeStreet, Inc.’s Form 10-Q for the quarter ended September 30, 2022. It does not appear to be a filing by Mechanics Bancorp.
Business context and reporting period
HomeStreet is a Washington-based financial services holding company operating primarily in commercial banking, mortgage banking, and consumer and retail banking in the western United States. The filing reports third-quarter and first-nine-month 2022 results, compared with the corresponding 2021 periods; balance-sheet comparisons are against December 31, 2021.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $63.0 million | $57.5 million | $177.6 million | $170.0 million |
| Noninterest income | $13.3 million | $24.3 million | $41.9 million | $91.4 million |
| Noninterest expense | $49.9 million | $51.9 million | $155.0 million | $161.4 million |
| Net income | $20.4 million | $27.2 million | $58.0 million | $86.0 million |
| Diluted earnings per share | $1.08 | $1.31 | $3.03 | $4.03 |
- Margins and returns: Third-quarter net interest margin was 3.00%, down from 3.27% in Q2 2022. The nine-month margin was 3.17%, versus 3.39% a year earlier. Third-quarter return on average assets was 0.91%; the efficiency ratio was 68.4%.
- Balance sheet: At September 30, total assets were $9.07 billion, net loans held for investment were $7.18 billion, deposits were $6.61 billion, and shareholders’ equity was $552.8 million. Assets increased about $1.87 billion from year-end, led by loan growth and investment securities.
- Funding and debt: Borrowings rose to $1.57 billion from $41 million at year-end; long-term debt was $224.3 million, including $98 million of subordinated notes issued in January 2022. Deposits increased $463.7 million. Brokered deposits rose to $512 million from $145 million, and certificates of deposit increased to $1.72 billion from $906.9 million.
- Liquidity and cash flow: Cash and equivalents were $57.3 million. For the first nine months, operating activities provided $209.5 million, investing activities used $2.38 billion, and financing activities provided $2.16 billion; cash declined $8.0 million. The Bank reported available borrowing capacity of $1.0 billion from the FHLB, $337 million from the Federal Reserve Bank, and $1.2 billion under other institutional lines.
- Credit quality and capital: The allowance for credit losses was $37.6 million, or 0.53% of loans, down from $47.1 million and 0.88% at year-end. Nonaccrual loans were $12.3 million; nonperforming assets were 0.15% of total assets. The Bank’s Tier 1 leverage ratio was 9.15% and total risk-based capital ratio was 12.57%; management said the Bank remained well capitalized.
- Shareholder equity: Accumulated other comprehensive loss was $105.9 million, compared with accumulated other comprehensive income of $21.1 million at year-end, largely reflecting unrealized losses on available-for-sale securities. Total equity declined to $552.8 million from $715.3 million.
Material changes versus comparable periods
- Nine-month net income fell $28.0 million year over year, principally as mortgage origination and loan-sale gains declined: total gains were $16.2 million versus $72.2 million. Management attributed the decline to rising interest rates, lower single-family rate-lock volume and margins, and reduced commercial loan-sale volume.
- Higher average earning assets lifted nine-month net interest income, but funding costs rose and compressed the margin. Management cited higher deposit and borrowing costs and greater reliance on borrowings to finance loan and securities growth.
- Third-quarter net income was below the prior-year quarter, despite higher net interest income and lower operating expenses. In Q3 versus Q2 2022, pretax income increased to $26.5 million from $22.4 million, helped by higher net interest income, lower expenses, and a $4.3 million branch-sale gain.
- Mortgage servicing income improved to $9.7 million for the first nine months from $4.7 million a year earlier, partly due to lower prepayments. The company also recorded significant fair-value and hedging effects related to mortgage servicing rights.
Outlook, risks, contingencies, and unusual items
- Strategy and outlook: Management said it is focused on growing the loan portfolio and using existing operating infrastructure, with the aim of increasing net interest income as a more stable revenue source. The filing provides no specific earnings or margin guidance.
- Interest-rate exposure: The company described itself as liability-sensitive. Its model estimated that an immediate, sustained 200-basis-point rate increase would reduce one-year net interest income by 9.9% and net portfolio value by 29.1%, assuming no balance-sheet changes. Actual results may differ as model assumptions and customer behavior change.
- Credit and market risks: Management expected declining collateral values and a stable economic outlook over its two-year forecast period. It reported no COVID-19 management overlay, while noting that a one-grade deterioration in projected unemployment assumptions would increase the ACL by approximately $14 million. Multifamily loans in California represented 37% of total loans.
- Branch transactions: In July, HomeStreet sold five eastern Washington branches, transferring $191 million of deposits and selling $43 million of loans; it recognized a $4.3 million gain. In October, it announced a planned purchase of three southern California branches, expected to close in Q1 2023, involving approximately $490 million of deposits, $22 million of loans, and a 6.0% deposit premium.
- Contingencies: The company is exposed to mortgage-loan repurchase and indemnification claims related to representations and warranties; its recorded mortgage repurchase liability was $2.0 million. It reported ordinary-course legal proceedings and did not expect them, taken as a whole, to have a material adverse effect.
- Other: The Board declared a $0.35-per-share dividend payable in November 2022. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is for HomeStreet, Inc. (ticker HMST), not Mechanics Bancorp.
- Assess whether loan growth can sustain net interest income as deposit and wholesale funding costs rise, and monitor the elevated borrowing and brokered-deposit levels.
- Review the sensitivity of earnings and capital to interest-rate changes, including the reported liability-sensitive position and the large modeled decline in net portfolio value under a rate shock.
- Evaluate the effect of available-for-sale securities losses on reported equity and capital, and distinguish unrealized market-value changes from credit losses.
- Monitor credit quality, the lower ACL coverage, California multifamily concentration, collateral values, and the performance of loans modified for borrowers experiencing financial difficulty.
- Verify the timing, terms, funding, and expected economics of the planned southern California branch acquisition, along with the sustainability of dividends and capital ratios.