HomeStreet, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. The request identifies Mechanics Bancorp, but the supplied filing is for HomeStreet, Inc., a Washington-based diversified financial services company focused on commercial and consumer banking and mortgage banking.
Key financial results
| Metric | Q1 2017 | Prior comparable period / change |
|---|---|---|
| Total assets (period-end) | $6.40 billion | Up 2.5% from Dec. 31, 2016 |
| Net interest income | $45.7 million | $40.7 million; up 12.2% |
| Noninterest income | $74.5 million | $71.7 million; up 3.8% |
| Total net revenue | $120.1 million | $112.4 million; up 6.9% |
| Noninterest expense | $106.9 million | $101.4 million; up 5.5% |
| Provision for credit losses | $0 | $1.4 million in Q1 2016 |
| Net income / diluted EPS | $9.0 million / $0.33 | $6.4 million / $0.27 |
| Net interest margin | 3.23% | 3.55%; down 32 basis points |
Balance sheet, liquidity and capital
- At March 31, 2017, deposits were $4.60 billion, net loans held for investment were $3.96 billion, shareholders’ equity was $640.9 million, and cash and cash equivalents were $61.5 million.
- Deposits increased $166.1 million from year-end; FHLB advances were $862.3 million, down $6.0 million. Long-term debt was $125.2 million.
- Q1 operating cash flow was positive $148.0 million; investing cash flow was negative $299.2 million; financing cash flow was positive $158.8 million. Cash increased $7.6 million during the quarter.
- The Bank’s primary liquidity ratio was 27.7%, versus 31.2% at year-end. Available borrowing capacity was $487.8 million at the FHLB and $368.5 million at the Federal Reserve Bank.
- The Company reported Tier 1 leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios of 9.47%, 9.92%, 11.02%, and 11.69%, respectively. Management stated the Company and Bank remained above well-capitalized regulatory minimums.
Changes and operating performance
- Commercial and Consumer Banking segment net income rose to $9.3 million from $1.5 million, benefiting from higher net interest income and the absence of prior-year acquisition costs.
- Mortgage Banking reported a $0.3 million net loss, compared with $4.9 million net income a year earlier. Management attributed the decline to lower rate-lock volume and higher costs from expanding staff and offices.
- Single-family mortgage rate-lock commitments fell 10% year over year to $1.62 billion, as higher mortgage rates reduced refinancing activity. Closed loan volume rose 3%, and loans sold rose 18%.
- Loans held for investment grew 3.6% from year-end, particularly in commercial real estate and multifamily. Investment securities grew 13.6%, partly reflecting temporary investment of equity-offering proceeds pending future loan growth.
- Net income increased 40.2% year over year, but the comparison benefited from the absence of $3.4 million of after-tax acquisition-related expenses recorded in Q1 2016. Net interest margin narrowed as funding costs rose.
Credit, outlook and risks
- Nonaccrual loans were $18.7 million, or 0.47% of total loans, down from $20.5 million, or 0.53%, at year-end. Nonperforming assets were $24.3 million, or 0.38% of assets. The allowance for loan losses was $34.7 million, 0.87% of loans held for investment.
- Management provided no specific numerical earnings or revenue guidance. It described continued efforts to diversify earnings, grow banking operations, maintain mortgage-market presence, and improve operating efficiencies. It did not expect to pay dividends in the near future, citing capital deployment for strategic growth.
- Key disclosed exposures include interest-rate and mortgage-market volatility; sensitivity of mortgage servicing rights (MSRs) to rates and prepayment assumptions; real-estate and geographic concentration; loan-credit risk; mortgage repurchase and indemnification obligations; reliance on wholesale and brokered funding; acquisition and growth execution; and regulatory, operational, and cybersecurity risks.
- Mortgage repurchase liability was $2.9 million. The Company also shared credit losses on Fannie Mae DUS loans under contractual arrangements; its reserve for that exposure was $1.8 million. Management reported no material legal claims considered probable or reasonably possible of loss and no significant subsequent events.
- Management expects the new expected-credit-loss accounting standard (CECL) to have a material impact on the Company’s financial statements; implementation was then expected beginning in 2020.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is HomeStreet, Inc., not Mechanics Bancorp.
- Assess whether continued deposit and loan growth can offset higher funding costs and the reported decline in net interest margin.
- Track Mortgage Banking profitability, rate-lock volumes, staffing and office expansion costs, and MSR valuation sensitivity.
- Review credit performance and reserve adequacy as the loan portfolio grows, including real-estate concentrations and troubled debt restructurings.
- Monitor liquidity, brokered-deposit growth, borrowing capacity, and capital ratios as the Company pursues expansion.
- Consider that Q1 2017 earnings comparisons exclude material acquisition costs incurred in Q1 2016; the filing gives no specific forward earnings guidance.