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, 2012; the financial statements are unaudited.
Business context and reporting period
HomeStreet is a Seattle-based financial services company operating in the Pacific Northwest and Hawaii. Its businesses include community banking, single-family mortgage lending and servicing, income-property lending, and residential construction lending. Results are especially sensitive to mortgage production and secondary-market conditions.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $16.3 million | $12.0 million | $43.9 million | $35.5 million |
| Provision for credit losses | $5.5 million | $1.0 million | $7.5 million | $3.3 million |
| Noninterest income | $68.1 million | $37.0 million | $162.7 million | $69.9 million |
| Noninterest expense | $45.8 million | $32.3 million | $127.4 million | $92.6 million |
| Net income | $21.3 million | $15.3 million | $58.4 million | $9.1 million |
| Diluted earnings per share | $1.45 | $2.66 | $4.35 | $1.62 |
| Net interest margin | 3.08% | 2.38% | 2.82% | 2.30% |
At September 30, 2012, total assets were $2.51 billion, loans held for investment net of allowance were $1.27 billion, loans held for sale were $532.6 million, deposits were $1.98 billion, and shareholders’ equity was $239.3 million. Long-term debt was $61.9 million and FHLB advances were $131.6 million. Bank regulatory capital ratios were 10.8% Tier 1 leverage, 16.6% Tier 1 risk-based, and 17.9% total risk-based.
Cash and cash equivalents were $22.1 million, down from $263.3 million at year-end 2011. Net cash used in operating activities for the first nine months was $336.1 million, principally reflecting the scale-up in mortgage loan originations and loans held for sale. Investing activities used $39.0 million; financing activities provided $133.9 million. The Bank reported a 45.1% primary liquidity ratio and borrowing capacity of $200.9 million at the FHLB and $154.2 million at the Federal Reserve Bank of San Francisco.
Material changes versus comparable periods
- Net income increased 40% in Q3 and substantially for the first nine months. Q3 diluted EPS declined year over year despite higher earnings, reflecting the larger share count following the February 2012 IPO; share and per-share data also reflect stock splits.
- Mortgage origination and sale gains rose to $64.4 million in Q3 and $138.4 million year to date, versus $15.8 million and $29.7 million, respectively. Single-family closed-loan volume was $1.37 billion in Q3 and $3.15 billion year to date.
- Expenses rose with hiring and production: salaries and related costs increased to $31.6 million in Q3 and $81.1 million year to date. Lower OREO expense partly offset these increases.
- Credit indicators improved from December 31, 2011: nonaccrual loans declined to $38.2 million from $76.5 million; nonperforming assets fell to $55.3 million from $115.1 million; and past-due loans declined to $95.7 million from $139.9 million. However, year-to-date net charge-offs rose to $22.7 million from $14.5 million.
- OREO declined to $17.0 million from $38.6 million. The allowance for credit losses was $27.6 million, or 2.12% of loans, compared with $42.8 million, or 3.18%, at year-end.
- Deposits declined modestly overall, while certificates of deposit fell by $349.2 million and transaction and savings balances increased by $254.3 million. The company said this reflected its deposit strategy.
- The February 2012 IPO generated $86.4 million of net capital proceeds; $65.0 million was contributed to the Bank. Shareholders’ equity increased from $86.4 million at year-end to $239.3 million.
Outlook, commentary, risks and unusual items
- Management reported a sixth consecutive profitable quarter, citing mortgage growth, improved net interest margin, stronger capital, and improved asset quality. The filing provides no specific earnings or revenue guidance.
- The Bank’s 2009 cease-and-desist order was terminated in March 2012 and replaced by a memorandum of understanding requiring at least a 9.0% Tier 1 leverage ratio and continued reduction of classified assets. The Bank may not pay dividends without regulatory consent. The holding company remains subject to a Federal Reserve cease-and-desist order.
- Cash dividends to shareholders remain restricted, including because the company has deferred interest payments on its trust preferred securities since December 2008. No dividends were paid during the first nine months of 2012.
- Management reversed the remaining deferred-tax-asset valuation allowance in Q2 2012 based on improved profitability and other positive evidence. Year-to-date tax expense includes a $6.3 million discrete tax benefit; the change materially affects comparison with 2011 tax expense.
- Two nonperforming construction/land-development loans with aggregate carrying values of $26.6 million were resolved following a court-approved settlement; $11.8 million was charged off, and the properties were transferred to OREO and subsequently sold.
- Mortgage servicing income was volatile: Q3 was $0.5 million versus $18.5 million a year earlier, largely due to lower net gains from MSR hedging and fair-value changes. The $73.8 million single-family MSR valuation is sensitive to prepayment and discount-rate assumptions.
- Material risks include dependence on mortgage banking, interest-rate and refinancing changes, real-estate credit exposure, mortgage repurchase and indemnity claims, regulatory restrictions, and proposed capital rules. The filing also identifies potential operational and reputational risk from a critical technology vendor’s control deficiencies.
- The Board approved a 2-for-1 forward stock split effective November 5, 2012. The filing reports no other subsequent event requiring disclosure and states disclosure controls were effective as of September 30.
Investor facts to verify
- Confirm the issuer: this document is HomeStreet, Inc., although the request identifies Mechanics Bancorp.
- Assess whether mortgage production gains and margins can be sustained as rates, refinancing demand, and industry capacity change.
- Review credit performance, particularly the increased year-to-date net charge-offs, construction/land-development exposures, TDRs, and adequacy of the reduced allowance.
- Verify liquidity and funding resilience given the sharp decline in cash, mortgage pipeline needs, borrowing availability, and deposit mix changes.
- Track compliance with the Bank’s 9.0% leverage requirement, the holding-company order, dividend restrictions, and any final capital-rule changes.
- Evaluate earnings quality and comparability, including the tax valuation-allowance reversal, IPO-related share dilution, OREO resolutions, and volatile MSR valuation and hedging results.