HomeStreet, Inc. — Form 10-Q Summary
Registrant note: The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2015, not a Mechanics Bancorp filing. Financial amounts are in U.S. dollars; unless noted, amounts are in millions.
Business context and reporting period
HomeStreet is a Seattle-based financial services company focused on mortgage banking and commercial and consumer banking in the Pacific Northwest, California and Hawaii. The report covers the second quarter and six months ended June 30, 2015. Results include Simplicity Bancorp from its March 1, 2015 acquisition, making comparisons with 2014 less directly comparable.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $38.2 | $23.1 | $69.0 | $45.9 |
| Net income | $12.4 | $9.4 | $22.7 | $11.7 |
| Diluted earnings per share | $0.56 | $0.63 | $1.14 | $0.78 |
| Net interest margin | 3.63% | 3.48% | 3.62% | 3.49% |
| Efficiency ratio | 83.02% | 82.00% | 83.66% | 88.71% |
- Revenue and earnings: Q2 total net revenue was $111.2 million, up 45% year over year; net income rose 32%. For the first half, net revenue was $217.3 million, up 62%, and net income rose 94%. Mortgage loan origination and sale gains were $70.0 million in Q2 and $131.9 million in the first half.
- Margins and expenses: Q2 net interest margin improved 15 basis points year over year, primarily reflecting higher average interest-earning assets. Q2 noninterest expense increased 47% to $92.3 million, reflecting growth, higher mortgage production costs and acquisition-related expense.
- Balance sheet and funding: At June 30, total assets were $4.87 billion, net loans held for investment $2.90 billion, deposits $3.32 billion and shareholders’ equity $447.7 million. Deposits increased 35.9% and FHLB advances increased to $922.8 million from $597.6 million at year-end 2014. Long-term debt was $61.9 million; there were no federal funds purchased or repurchase-agreement borrowings at quarter-end.
- Credit quality: The allowance for loan losses was $25.8 million, or 0.88% of loans held for investment; including unfunded commitments, the allowance for credit losses was $26.4 million. Nonaccrual loans were $21.3 million, or 0.73% of loans, and nonperforming assets were $32.7 million, or 0.67% of assets. Q2 recorded a $0.5 million provision; first-half provision was $3.5 million.
- Cash flow and liquidity: For the first half, operating activities used $357.4 million, investing activities used $61.2 million and financing activities provided $434.3 million; cash increased $15.7 million to $46.2 million. Operating cash use primarily reflected mortgage loan originations exceeding sale proceeds. The bank’s primary liquidity ratio was 30.4%; available borrowing capacity was $342.6 million at the FHLB and $349.8 million at the Federal Reserve Bank.
- Capital: Under Basel III, the Bank’s Tier 1 leverage and total risk-based capital ratios were 9.46% and 13.97%; HomeStreet, Inc.’s were 9.87% and 12.75%. Management stated the Bank remained well capitalized.
Material changes versus comparable periods
- Q2 net income increased, but diluted EPS fell from $0.63 to $0.56 as the share count rose substantially following issuance of 7.18 million shares for the Simplicity acquisition.
- Mortgage banking production expanded: Q2 single-family closed-loan volume rose 84% and interest-rate lock commitments rose 57% year over year. Mortgage servicing income declined to $1.8 million from $10.2 million, largely reflecting weaker hedging results and the absence of the prior-year MSR-sale gain.
- The Simplicity acquisition expanded the balance sheet and California banking footprint. It added $850.2 million of assets, $664.1 million of loans and $651.2 million of deposits. The company recorded a $6.5 million bargain-purchase gain and $15.4 million of merger-related expenses in the first half.
- Nonperforming assets were lower as a percentage of assets than a year earlier (0.67% versus 1.00%), although nonaccrual loans increased from $16.0 million at December 31, 2014 to $21.3 million at June 30, 2015.
Outlook, commentary, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management described continued plans to diversify earnings, expand banking and mortgage operations, grow deposits and strengthen processing, compliance and risk management.
- Management cited low mortgage rates and expanded production capacity as drivers of mortgage growth. Results remain sensitive to mortgage rates, refinancing activity, housing conditions, deposit costs and loan demand.
- Key stated risks include rapid growth and acquisition integration, real-estate and geographic loan concentration, credit losses, interest-rate and MSR valuation volatility, mortgage repurchase claims, regulatory and capital requirements, and cybersecurity and third-party service-provider risks.
- Unusual item: A $2.4 million out-of-period adjustment increased Q2 mortgage origination and sale gains, adding $1.5 million to net income, or $0.07 per share. Management said it corrected an error in mortgage pipeline valuation.
- The Simplicity acquisition’s fair-value estimates were preliminary and could be adjusted during the measurement period. The filing reports no significant subsequent events and no legal claims considered probable or reasonably possible of loss at June 30.
- Disclosure controls were assessed as effective at June 30, 2015, with no material changes in internal control over financial reporting during the quarter. The filing also describes a material weakness identified at year-end 2014 involving new back-office systems and remedial measures underway.
Important facts for investors to verify
- Confirm the issuer and filing: this is HomeStreet, Inc., not Mechanics Bancorp.
- Assess the sustainability of mortgage banking gains and the effects of rates, production volumes, hedging and servicing-rights assumptions.
- Separate recurring performance from the $6.5 million bargain-purchase gain, $15.4 million of first-half merger costs and the $2.4 million pipeline-valuation correction.
- Review Simplicity integration progress, preliminary acquisition valuations and the effect of share issuance on per-share results.
- Track credit quality, allowance adequacy, construction and commercial real-estate exposures, and mortgage repurchase and DUS loss-sharing obligations.
- Monitor funding mix, FHLB borrowing, liquidity capacity, Basel III capital headroom and the remediation of the previously identified control weakness.