HomeStreet, Inc. — Q1 2020 Form 10-Q
Filing identity: The supplied filing is for HomeStreet, Inc. (NASDAQ: HMST), not Mechanics Bancorp. It covers the quarter ended March 31, 2020; financial amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
HomeStreet is a Seattle-based financial services company focused on commercial and consumer banking, real estate lending, and mortgage banking. Following its 2019 exit from its home-loan-center mortgage business, the remaining branch-based mortgage business is reported in continuing operations; discontinued-operations accounting ended January 1, 2020. This makes some year-over-year comparisons less directly comparable.
Financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $45.4 million | $47.6 million in Q1 2019 |
| Net interest margin, tax-equivalent | 2.93% | 3.11% in Q1 2019 |
| Provision for credit losses | $14.0 million | $1.5 million in Q1 2019 |
| Noninterest income | $32.6 million | $8.1 million in Q1 2019 |
| Noninterest expense | $55.2 million | $47.8 million in Q1 2019 |
| Income from continuing operations | $7.1 million; diluted EPS $0.30 | $5.1 million; diluted EPS $0.19 in Q1 2019 |
| Net income (loss) | $7.1 million | $(1.7) million in Q1 2019, including discontinued-operation losses |
| Total assets | $6.81 billion | $6.81 billion at December 31, 2019 |
| Loans held for investment, net | $5.03 billion | $5.07 billion at December 31, 2019 |
| Deposits | $5.26 billion | $5.34 billion at December 31, 2019 |
| Shareholders’ equity | $677.3 million | $679.7 million at December 31, 2019 |
Net interest income fell as average loan balances and yields declined; management cited lower origination volume after the home-loan-center sale, prepayments, and lower market rates. The margin was pressured because funding costs did not decline as quickly as asset yields. Noninterest income rose substantially, but comparisons are affected by the prior-year discontinued mortgage business and the retained business moving into continuing operations. Management attributed continuing-operation improvement partly to $11.3 million of after-tax contribution from the retained mortgage business.
The efficiency ratio was 70.69% (100.66% in Q1 2019); return on average assets was 0.42% (negative 0.10%) and return on average equity was 4.13% (negative 0.91%). These comparisons also reflect discontinued-operation presentation changes.
Q1 operating cash flow was $(14.0) million, investing cash flow was $49.0 million, and financing cash flow was $(20.4) million. Cash and cash equivalents increased $14.6 million to $72.4 million. At quarter-end, FHLB advances were $463.6 million, other borrowings $95.0 million, and long-term debt $125.7 million; there were no federal funds purchased or repurchase-agreement balances. The Bank’s primary liquidity ratio was 19.1%, with available borrowing capacity of $748.3 million at the FHLB and $245.4 million at the Federal Reserve Bank.
Bank capital ratios remained above “well-capitalized” thresholds: Tier 1 leverage 10.06%, common equity Tier 1 12.75%, and total risk-based capital 13.95%. The Company’s corresponding ratios were 10.15%, 11.24%, and 13.50%.
Material changes and unusual items
- The company adopted CECL on January 1, 2020, recording a $3.7 million reduction to opening retained earnings. The total allowance for credit losses, including unfunded commitments, was $60.6 million at March 31, up from $42.8 million before adoption and subsequent provision activity; accounting-method changes limit comparison with prior periods.
- The $14.0 million Q1 provision was attributed to forecast COVID-19 effects, rather than realized significant loan losses. Management incorporated weaker economic and collateral forecasts and an overlay related to commercial borrower forbearance requests.
- Mortgage servicing rights declined to $80.1 million from $97.6 million at year-end, principally reflecting lower fair value of single-family MSRs. Single-family MSR fair value was $49.9 million, including a $16.8 million decline from market inputs and model updates, partly offset by economic hedges.
- The company repurchased 580,278 shares at an average $27.57 per share before suspending its buyback program on March 20 to preserve capital. Q1 equity also reflected $3.6 million in declared dividends and $13.4 million of other comprehensive income.
Outlook, management commentary, and risks
Management did not provide numerical earnings guidance. It said COVID-19’s duration and effects on borrowers, collateral values, credit quality, and future results were highly uncertain; additional credit-loss provisions may be needed. The filing describes a two-year CECL forecast in which negative risk factors were expected to peak in year one and improve modestly in year two.
As of May 5, 2020, HomeStreet reported 393 granted forbearances totaling about $223.0 million and 173 requests totaling about $204.0 million still under review. It had closed or obtained SBA approval for 1,479 Paycheck Protection Program loans totaling $304.7 million. The company noted potential PPP processing, compliance, litigation, and SBA-guarantee risks. It also warned that future dividends and resumption of share repurchases were not assured, and that cost-saving targets could be delayed.
Other notable exposures include concentration in Western U.S. real estate lending (California multifamily alone represented 14.9% of the total loan portfolio), interest-rate and mortgage-market volatility, MSR valuation and hedging risk, and dependence on external funding sources. Management reported no material legal claims considered probable or reasonably possible of resulting in material loss and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is HomeStreet, Inc., rather than Mechanics Bancorp.
- Track subsequent credit quality, borrower performance, COVID-related forbearances, and any further CECL provision or allowance changes.
- Assess whether mortgage banking income, MSR valuation, and hedging results are sustainable and compare periods on a continuing-operations basis.
- Monitor deposit trends, wholesale borrowing, available liquidity, regulatory capital, and the implications of the suspended repurchase program.
- Verify the status of the declared second-quarter dividend and whether later dividends or buybacks are authorized; the filing does not assure future distributions.