HomeStreet, Inc. Form 10-Q Summary — Quarter Ended March 31, 2019
Entity note: The request identifies Mechanics Bancorp, but the supplied filing is for HomeStreet, Inc. This summary reflects the filing provided.
Business context and reporting period
HomeStreet is a Seattle-based financial services company focused on commercial banking, mortgage banking and consumer banking. The unaudited quarter ended March 31, 2019 is compared with the three months ended March 31, 2018; financial statements were recast to present the home-loan-center mortgage operations as discontinued operations. Amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Continuing-operations income was $5.1 million, up from $1.8 million. Including discontinued operations, HomeStreet reported a net loss of $1.7 million versus net income of $5.9 million; diluted EPS was a loss of $0.06 versus earnings of $0.22. Discontinued operations recorded a $6.8 million loss.
- Revenue and margins: Net interest income was $47.6 million, up from $45.4 million. Noninterest income was $8.1 million, versus $7.1 million; total net revenue was $55.6 million, up 6%. Net interest margin declined to 3.11% from 3.25%.
- Costs and credit: Noninterest expense was $47.8 million, down 3% from $49.5 million. Provision for credit losses doubled to $1.5 million from $0.75 million. Allowance for loan losses was $43.2 million, or 0.80% of loans held for investment.
- Cash flow: Operating activities used $12.2 million; investing activities provided $62.4 million; financing activities used $41.0 million. Cash, cash equivalents and restricted cash increased $9.1 million to $67.7 million.
- Balance sheet and funding: Total assets were $7.17 billion and shareholders’ equity $747.0 million at quarter-end. Loans held for investment, net, were $5.35 billion. The balance sheet reported deposits of $5.18 billion, FHLB advances of $599.6 million and long-term debt of $125.5 million. A separate deposit note reports $5.40 billion in deposits, including $219.1 million of deposits classified within discontinued operations.
- Liquidity and capital: The Bank’s primary liquidity ratio was 19.1%, compared with 19.4% at year-end 2018. Available borrowing capacity was $690.2 million from the FHLB and $280.1 million from the Federal Reserve Bank. The Bank’s total risk-based capital ratio was 15.77%; management said the Company and Bank exceeded “well-capitalized” regulatory minimums.
Material changes versus comparable periods
- Continuing-operations income improved year over year, primarily on higher net interest income, lower continuing-operations expenses and increased noninterest income. Growth in loans held for investment contributed to higher interest income, while higher deposit and borrowing costs pressured margin.
- The consolidated net result shifted to a loss, principally reflecting the exit of home-loan-center mortgage operations and related disposal and restructuring costs. The filing reports a $12.2 million pretax disposal loss and identifies $9.6 million of exit/disposal and restructuring-related expenses, net of tax, in the quarter.
- HomeStreet sold servicing rights on $14.26 billion of single-family mortgage unpaid principal balance, about 71% of the portfolio serviced for others at December 31, 2018. Total loans serviced for others fell to $7.57 billion from $21.69 billion at year-end.
- Loans held for investment, net, increased $270.6 million, or 5.3%, from year-end. Nonperforming assets rose to $16.7 million, or 0.23% of assets, from $12.1 million, or 0.17%; nonaccrual loans rose to $15.9 million from $11.6 million.
- Deposits increased $289.8 million, or 5.9%, from year-end, while FHLB advances decreased $333.0 million. The company attributed deposit growth partly to competitive pricing and the San Diego branch acquisition.
Outlook, management commentary, risks and unusual items
- The Board approved an exit or disposal plan for the stand-alone home-loan-center mortgage business, aiming to shift toward a West Coast regional commercial bank. HomeStreet expected to retain a smaller mortgage offering through bank branches, online channels and affinity relationships.
- After quarter-end, HomeStreet agreed to sell assets associated with up to 50 mortgage offices and transfer certain personnel to Homebridge. The announced transaction remained subject to licensing, employee-transfer and other closing conditions; substantial completion was expected in the second quarter of 2019. The filing warns that a delayed, reduced or failed transaction could increase closure, severance and other costs.
- Management planned to eliminate approximately 100 corporate overhead positions by year-end 2019, primarily during the second and third quarters, and pursue broader expense and process efficiencies. It temporarily suspended further de novo deposit branch openings. No formal earnings guidance is provided in the supplied filing.
- Management cited a flattening yield curve and faster repricing of funding costs than asset yields as pressures on net interest margin. Mortgage-market volatility, competition, real-estate concentration and execution risks from the business transition are also highlighted.
- The company authorized a common-stock repurchase program of up to $75 million; no shares were repurchased in the quarter. The filing says Bank capital generated in part by the MSR sales was expected to support a dividend to the parent as a primary funding source for repurchases, subject to applicable constraints.
- HomeStreet expects adoption of the expected-credit-loss standard (CECL) on January 1, 2020 and anticipates an increase in the allowance, but had not determined its magnitude. Lease accounting adoption added right-of-use assets and lease liabilities; the filing reports $104.7 million of lease right-of-use assets and $120.2 million of lease liabilities on the consolidated balance sheet at March 31.
- Management reported no material legal claims considered probable or reasonably possible of resulting in a material loss. The filing also identifies proxy-contest, employee-retention, customer attrition, cybersecurity, regulatory and regional natural-disaster risks.
Important facts for investors to verify
- Confirm progress, closing conditions, final economics and servicing-transfer timing for the Homebridge transaction and the $14.26 billion MSR sales.
- Track actual exit, restructuring and stranded costs against management’s estimates, alongside realized cost savings and the continuing bank’s efficiency ratio.
- Monitor deposit pricing and mix, funding costs, net interest margin, liquidity sources and capital after any parent-company dividend or share repurchases.
- Assess credit trends, including the rise in nonaccrual loans and nonperforming assets, construction/commercial exposures, and allowance adequacy.
- Review CECL implementation and estimated adoption impact, and assess sensitivity of remaining mortgage servicing rights to interest rates and prepayment assumptions.