Filing summary
Entity note: The supplied filing is HomeStreet, Inc.’s Form 10-K, not a filing identified as Mechanics Bancorp. It reports the fiscal year ended December 31, 2012; quarterly figures are unaudited.
Business context and reporting period
HomeStreet is a Seattle-based financial services company operating primarily in the Pacific Northwest and Hawaii. Its businesses include community banking, single-family mortgage lending, income-property lending and residential construction lending. Mortgage banking is a major source of revenue.
Financial highlights
| Metric | 2012 | 2011 |
|---|---|---|
| Net income | $82.1 million | $16.1 million |
| Diluted earnings per share | $5.98 | $2.80 |
| Net interest income | $60.7 million | $48.5 million |
| Net interest margin | 2.89% | 2.36% |
| Noninterest income | $237.5 million | $97.2 million |
| Noninterest expense | $183.1 million | $126.5 million |
| Provision for credit losses | $11.5 million | $3.3 million |
| Total assets at year-end | $2.63 billion | $2.26 billion |
| Deposits at year-end | $1.98 billion | $2.01 billion |
| Shareholders’ equity at year-end | $263.8 million | $86.4 million |
| Cash and cash equivalents at year-end | $25.3 million | $263.3 million |
- Mortgage loan origination and sale gains rose to $210.2 million from $48.5 million. Single-family closed loan production designated for sale increased 174% to $4.67 billion.
- Cash flow from operating activities was negative $391.9 million, principally reflecting higher mortgage production and loans held for sale. Investing activities used $102.9 million; financing activities provided $256.7 million. Cash fell by $238.0 million during the year.
- Year-end FHLB advances were $259.1 million, up from $57.9 million; $243.5 million matured in 2013. The company reported $55.7 million of remaining FHLB borrowing capacity and $124.3 million of Federal Reserve borrowing capacity, subject to availability and collateral.
- The Bank’s regulatory capital ratios were 11.78% Tier 1 leverage, 18.05% Tier 1 risk-based and 19.31% total risk-based; it was classified as well-capitalized. The Bank’s primary liquidity ratio was 43.9%.
Material changes and quarterly results
- Compared with 2011, annual net income rose substantially, principally on mortgage production and strong secondary-market margins. Net interest margin improved as funding costs fell and the deposit mix shifted toward transaction and savings accounts.
- Asset quality improved: nonaccrual loans declined to $29.9 million from $76.5 million; nonperforming assets fell to $53.8 million from $115.1 million; and past-due loans declined to 6.58% of loans from 10.38%. Net charge-offs nevertheless increased to $26.5 million from $25.1 million.
- During 2012, the company completed an IPO that generated $86.4 million of net capital, contributing $65.0 million to the Bank. It expanded mortgage operations, hiring 389 mortgage lending and support employees and opening 15 lending offices.
- Fourth-quarter 2012 net income was $21.5 million, versus $7.0 million in fourth-quarter 2011. Fourth-quarter provision for credit losses was $4.0 million, compared with none in the year-earlier quarter.
Outlook, risks and unusual items
- Management planned to grow community banking, mortgage production and multifamily lending, and resumed residential construction lending under tighter underwriting standards. The filing gives no quantified earnings or revenue guidance.
- The Bank’s cease-and-desist order and subsequent MOU were terminated in 2012, but the parent company remained subject to a Federal Reserve cease-and-desist order restricting debt actions and cash distributions without regulatory approval. Common dividends had not been paid since 2008.
- After year-end, the Federal Reserve permitted payment of deferred and current trust-preferred-security interest. HomeStreet paid $13.5 million on March 15, 2013. This removed the indenture-based dividend restriction, but the regulatory restriction remained; a proposed Bank dividend to replenish parent liquidity was subject to regulatory non-objection, with no assurance it would be obtained.
- Mortgage gains were unusually strong and concentrated: results depend on mortgage volumes, secondary-market margins, interest rates, refinancing activity and government-sponsored mortgage programs. The filing also cites credit, real-estate concentration, servicing-rights valuation, loan repurchase, regulatory, cybersecurity and vendor risks.
- Mortgage servicing income fell to $16.1 million from $38.1 million, reflecting lower MSR hedging gains and valuation effects. The $95.5 million MSR asset is sensitive to prepayment and discount-rate assumptions.
- A fourth-quarter fair-value measurement error understated loans held for sale and delayed some mortgage gains. The company corrected the error, reporting a $1.3 million cumulative prior-period adjustment deemed immaterial.
- A settlement involving two construction/land-development loans resulted in an $11.8 million charge-off. The company reported no legal claims considered probable or reasonably possible of loss at year-end; ordinary-course proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer identity: the filing names HomeStreet, Inc., not Mechanics Bancorp.
- Assess how sustainable earnings are if mortgage volume or unusually strong secondary-market margins decline, and how much earnings depend on mortgage banking.
- Review cash levels, operating cash outflows, near-term FHLB maturities and the availability of alternative funding.
- Track whether the parent-company regulatory order is lifted and whether regulators permit Bank dividends to support parent liquidity; common dividends remain restricted absent consent.
- Monitor credit quality, charge-offs, allowance adequacy, construction and real-estate exposure, and the sensitivity of MSR valuations and mortgage repurchase reserves.
- Review the proposed capital-rule changes and their eventual effect on capital, distributions and lending. The 2012 financial statements received an unqualified audit opinion from KPMG.