HomeStreet, Inc. — Form 10-Q Summary
Entity mismatch: The request identifies Mechanics Bancorp, but the supplied filing is for HomeStreet, Inc. (Nasdaq: HMST). This summary reflects the filing provided, for the quarter and nine months ended September 30, 2019.
Business context and reporting period
HomeStreet is a West Coast-focused financial services company engaged in commercial banking, consumer banking and mortgage banking. In 2019 it exited its stand-alone home-loan-center mortgage business, sold related assets and transferred servicing rights; those activities are presented as discontinued operations. The company shifted its strategy toward commercial and consumer banking and smaller-scale, branch-focused mortgage activity. Following the segment changes, management evaluates performance on a consolidated basis.
Financial performance and position
Unless otherwise stated, dollar amounts below are in millions.
- Third-quarter earnings: Net interest income was $47.1, versus $47.9 a year earlier. Continuing-operations income was $13.7, up from $8.1; net income including discontinued operations was $13.8, versus $11.8. Diluted EPS was $0.55, versus $0.44.
- Nine-month earnings: Continuing-operations income was $27.6, versus $14.0. Net income was $6.5, down from $24.8, reflecting a $21.8 pretax disposal loss and restructuring costs in discontinued operations. Diluted EPS was $0.22, versus $0.91.
- Revenue and costs: Third-quarter net revenue (net interest income plus noninterest income) rose 23% to $71.7. Noninterest income was $24.6, versus $10.7, with higher commercial and retained mortgage banking activity. Noninterest expense increased 16% to $55.7, partly reflecting $9.3 of expenses from the retained mortgage business. The efficiency ratio was 78.08%, versus 86.19%.
- Margins and funding costs: Net interest margin declined to 2.96% from 3.20% in the third quarter and to 3.06% from 3.22% for the first nine months. Management attributed pressure chiefly to higher-cost certificates of deposit; deposit interest expense also rose substantially.
- Balance sheet: Total assets were $6.84 billion at September 30, versus $7.04 billion at December 31, 2018. Net loans held for investment were $5.14 billion, up $63.7 million; investment securities were $866.7 million. Cash and cash equivalents were $74.8 million.
- Deposits and borrowings: The balance sheet reports deposits of $5.80 billion and FHLB advances of $5.6 million, compared with $4.89 billion and $932.6 million, respectively, at year-end. The deposit note’s comparative table gives $5.05 billion at year-end after discontinued-operation deposits are excluded; compare presentations carefully. Brokered deposits were $739.0 million. Long-term debt was $125.6 million.
- Credit and capital: Allowance for loan losses was $43.4 million, or 0.84% of loans held for investment. Nonaccrual loans were $12.4 million (0.24% of loans); nonperforming assets were $14.2 million (0.21% of assets). The Bank’s total risk-based capital ratio was 14.37%; management said the Company and Bank remained above regulatory minimums and “well-capitalized.”
- Cash flow: For the nine months, operating activities provided $182.3 million, investing activities provided $147.6 million, and financing activities used $313.7 million. Cash, cash equivalents and restricted cash increased $16.2 million. Financing outflows included $927.0 million net repayment of FHLB advances and $81.1 million of share repurchases.
Material changes versus comparable periods
- Third-quarter net income improved year over year, while nine-month net income fell sharply due primarily to the mortgage-business exit and related disposal and restructuring charges.
- The company sold rights to service $14.26 billion of single-family mortgages—71% of the year-end 2018 portfolio—and reported $8.59 billion of loans serviced for others at September 30, versus $21.69 billion at December 31, 2018.
- Deposits grew, while FHLB advances fell substantially. Deposit growth included higher certificates of deposit and money-market balances; the average cost of interest-bearing deposits rose.
- Shareholders’ equity declined to $691.1 million from $739.5 million, primarily due to $81.1 million of repurchases, partly offset by $25.5 million of other comprehensive income and $6.5 million of net income. Shares outstanding fell to 24.4 million from 27.0 million.
- Asset quality remained relatively sound, but nonperforming assets and commercial delinquencies increased from year-end levels.
Outlook, risks and unusual items
- Cost and strategy: Management began an enterprise-wide efficiency project in the third quarter, including organizational and staffing changes, contract renegotiations, and technology and process reviews. Reductions and improvements were expected to continue through 2020 and beyond; the filing cautions that savings, timing and execution are uncertain. New deposit-branch openings were temporarily suspended.
- Mortgage activity: The company said it expected to complete the sale of its interest in WMS Series LLC in the fourth quarter of 2019; if completed, single-family mortgage volume was expected to decline further. No formal earnings or financial guidance is provided in the supplied filing text.
- CECL: Adoption was planned for January 1, 2020. Based on September 2019 conditions and portfolio composition, management estimated a 0%–10% increase in the allowance for credit losses; the estimate remained subject to model completion, portfolio changes and management judgment.
- Interest-rate and valuation risks: Management cited margin pressure from the flatter/inverted yield curve and deposit pricing. Single-family mortgage servicing rights are sensitive to interest rates and prepayment assumptions; the filing provides hypothetical sensitivities, not forecasts.
- Restructuring and contingencies: Discontinued operations recorded a $21.8 million pretax disposal loss for the first nine months. The filing reports no material legal claims considered probable or reasonably possible of a material loss at September 30. It also discloses a November 2019 FDIC civil penalty of $1.35 million over alleged RESPA violations involving terminated marketing programs; the matter was described as resolved without additional sanctions.
- Other risks: The filing highlights execution risks in cost reductions, regional and real-estate concentration, credit quality, liquidity and funding costs, mortgage and MSR volatility, regulatory compliance, cybersecurity and third-party service providers. A third-party vendor reported a cybersecurity incident in the quarter; HomeStreet said it found no apparent impact to its systems.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q is HomeStreet, Inc., not Mechanics Bancorp.
- Review the discontinued-operations accounting and the $21.8 million nine-month pretax disposal loss, including remaining assets, liabilities and exit costs.
- Reconcile deposit balances across the financial statements and notes, particularly the treatment of discontinued-operation servicing deposits.
- Track deposit pricing, brokered-deposit levels, net interest margin and the company’s ability to sustain profitability as FHLB funding falls.
- Assess progress and costs of the efficiency plan, WMS disposition status and any further changes to mortgage operations.
- Monitor CECL implementation and its final effect on reserves and retained earnings, along with nonperforming loans and commercial credit trends.
- Evaluate capital and liquidity after the repurchases and verify any subsequent repurchase activity under the $25 million authorization.
- Consider the FDIC penalty, continuing compliance obligations, and the company’s control and vendor-cybersecurity risks.