Business context and reporting period
The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2021—not a filing identifying “Mechanics Bancorp.” HomeStreet is a Washington-based financial services holding company focused on commercial banking, mortgage banking, and consumer and retail banking, primarily in the Western United States.
Financial performance and condition
Unless noted otherwise, amounts are in millions of dollars. Third-quarter results are compared with Q3 2020; nine-month results are compared with the first nine months of 2020.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $57.5 | $55.7 | $170.0 | $152.6 |
| Noninterest income | $24.3 | $36.2 | $91.4 | $105.4 |
| Provision for credit losses | $(5.0) recovery | $0.0 | $(9.0) recovery | $20.5 expense |
| Noninterest expense | $51.9 | $58.1 | $161.4 | $170.9 |
| Net income | $27.2 | $26.3 | $86.0 | $52.4 |
| Diluted EPS | $1.31 | $1.15 | $4.03 | $2.24 |
Q3 net interest margin was 3.42%, versus 3.09% for the first nine months of 2020; nine-month margin was 3.39%, up from 3.09%. Q3 annualized return on average assets was 1.48%, and the efficiency ratio was 62.8%. Nine-month return on average assets was 1.57%, and the efficiency ratio was 61.8%.
At September 30, 2021, total assets were $7.37 billion, net loans held for investment were $5.30 billion, and deposits were $6.36 billion. Deposits increased $538 million from year-end 2020, while short-term borrowings fell from $322.8 million to zero; long-term debt was $126.0 million. Cash and cash equivalents were $218.7 million, up $160.6 million from year-end. For the first nine months, operating cash flow was $182.5 million, investing cash use was $155.4 million, and financing cash flow was $133.5 million.
Shareholders’ equity was $710.4 million; total equity was 9.6% of assets. The Bank’s Tier 1 leverage ratio was 10.17% and total risk-based capital ratio was 13.71%; management reported the Bank remained well capitalized. The loan-to-deposit ratio was 90.4%. Nonaccrual loans were 0.33% of total loans, and nonperforming assets were 0.26% of total assets. The allowance for credit losses was $54.5 million, or 1.06% of loans.
Material changes versus comparable periods
- Nine-month net income rose to $86.0 million from $52.4 million, reflecting higher net interest income, a $29.5 million swing from credit-loss provision expense to recovery, and lower noninterest expense; lower noninterest income partly offset the gains.
- Nine-month noninterest income declined to $91.4 million from $105.4 million, mainly because lower single-family mortgage origination and sale gains outweighed improved commercial loan-sale gains. Single-family rate locks fell 22% year over year.
- Q3 net income increased modestly year over year, while loan-sale gains fell to $17.5 million from $33.1 million. Sequentially, Q3 net income was $27.2 million versus $29.2 million in Q2 2021, with lower net interest and noninterest income partly offset by a larger credit-loss recovery and lower expenses.
- Loans held for investment increased $120 million from December 2020. Multifamily loans grew to $2.09 billion from $1.43 billion; California multifamily loans represented 29% of total loans, compared with 19% at year-end 2020.
- Available-for-sale securities had $13.3 million of after-tax unrealized losses in the first nine months, versus $28.5 million of unrealized gains in the prior-year period.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management cited favorable loan performance, low nonperforming assets, and an improved COVID-19 outlook as reasons for the 2021 credit-loss allowance recoveries. Its forecast nevertheless anticipated modest deterioration in the economic outlook and commercial real estate collateral values over the two-year forecast period, with negative factors peaking in year one.
COVID-19 forbearances remained on 100 loans totaling $43 million under a separate program disclosure; the broader forbearance discussion reported two commercial/CRE loans totaling $17.9 million still outstanding, and noted no new forbearances in Q3. PPP loans were government-guaranteed; $77 million remained outstanding at quarter-end. Management highlighted possible employee attrition and labor challenges related to anticipated federal contractor vaccination requirements or, alternatively, OSHA vaccination-or-testing rules.
Key exposures include interest-rate and prepayment changes affecting net interest income and mortgage servicing rights; the loan portfolio’s regional real-estate concentration; and mortgage representations, warranties, and repurchase obligations. HomeStreet reported $7.69 billion of loans serviced for others and a $1.4 million mortgage repurchase liability. It also had $1.26 billion of off-balance-sheet lending commitments, including $564 million of undistributed construction advances. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly changes in internal control over financial reporting.
On October 28, 2021, the Board declared a $0.25-per-share dividend and authorized an expansion of the share repurchase program for up to $20 million. The Company had repurchased about 1.50 million shares during the first nine months of 2021.
Most important facts for investors to verify
- Confirm issuer identity: the filing is for HomeStreet, Inc., notwithstanding the request metadata naming Mechanics Bancorp.
- Assess whether mortgage banking income can withstand lower single-family rate-lock and loan-sale volumes, and review the sensitivity of MSR values to rates and prepayments.
- Monitor multifamily and commercial real-estate growth and concentration, California exposure, collateral trends, and any renewed deterioration in credit quality or allowance needs.
- Review deposit stability, available borrowing capacity, capital ratios, and the implications of dividends and the expanded repurchase authorization.
- Track the remaining COVID-related forbearances, construction commitments, mortgage repurchase exposure, and the employee-related risks described in the filing.