Filing summary
Entity note: The filing supplied is HomeStreet, Inc.’s Form 10-Q, not a filing for Mechanics Bancorp. The summary below describes HomeStreet and its consolidated subsidiaries for the quarter and six months ended June 30, 2023.
Business context and reporting period
HomeStreet is a Washington-based financial services holding company focused on commercial banking, mortgage banking and consumer/retail banking, primarily in the Western United States. It reports as one segment. The filing is unaudited and compares Q2 and first-half 2023 with the corresponding 2022 periods; balance-sheet comparisons are with December 31, 2022.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $43.5 million | $60.1 million | $92.9 million | $114.6 million |
| Noninterest income | $10.3 million | $13.0 million | $20.5 million | $28.6 million |
| Noninterest expense | $90.8 million | $50.6 million | $143.3 million | $105.1 million |
| Net income (loss) | $(31.4) million | $17.7 million | $(26.4) million | $37.7 million |
| Diluted earnings (loss) per share | $(1.67) | $0.94 | $(1.41) | $1.95 |
Q2 included a $39.9 million noncash goodwill impairment charge ($34.6 million after tax). Excluding it, management-reported core net income was $3.2 million for Q2 and $8.2 million for the first half; these are non-GAAP measures.
Net interest margin was 1.93% in Q2, down from 2.23% in Q1 2023 and 3.28% for the first half of 2022. Management attributed margin pressure chiefly to higher deposit and borrowing costs, which outpaced the increase in asset yields. The Q2 efficiency ratio was 93.7% (management-defined, non-GAAP), compared with 87.2% in Q1.
Balance sheet, liquidity and capital
- At June 30, total assets were $9.50 billion, net loans held for investment were $7.40 billion, investment securities were $1.40 billion, and shareholders’ equity was $527.6 million. Tangible book value per share was $27.50, versus $28.41 at year-end.
- Deposits were $6.67 billion, down $782 million from year-end; borrowings rose to $1.97 billion from $1.02 billion. The loans-to-deposits ratio increased to 112.0% from 99.9%. Management said added borrowing helped replace higher-cost brokered deposits and increase on-balance-sheet liquidity.
- Cash and cash equivalents were $173.1 million, up $100.3 million in the first half. Six-month operating cash flow was negative $31.0 million; investing activities provided $342.5 million and financing activities used $211.3 million.
- HomeStreet reported $5.6 billion of available contingent liquidity, equal to 84% of deposits, and uninsured deposits of 7% of total deposits. Available borrowing capacity included $2.3 billion from the FHLB, $389 million from the Federal Reserve Bank and $1.2 billion under other financial-institution lines.
- The Bank’s CET1 and total risk-based capital ratios were 12.78% and 13.49%, respectively; management stated the Bank remained well capitalized and met capital conservation buffer requirements. The Company’s corresponding ratios were 9.14% and 12.16%.
Material changes and credit quality
- Interest expense rose sharply as market rates and funding costs increased. For the first half, interest expense was $104.9 million versus $12.1 million a year earlier; net interest income fell despite higher interest income.
- Mortgage origination and sale gains declined to $4.9 million for the first half from $13.6 million, reflecting lower rate-lock volume and fewer commercial loan sales. Total noninterest income fell to $20.5 million from $28.6 million.
- Nonaccrual loans increased to $39.8 million from $10.1 million at year-end; nonperforming assets rose to $41.5 million from $11.9 million. Management attributed the increase largely to one customer relationship with $27 million of loans, described as current and overcollateralized.
- The allowance for credit losses remained $41.5 million, or 0.57% of loans, at both June 30 and year-end. The first-half provision was $0.2 million versus a $9.0 million recovery in first-half 2022. Management said the portfolio performed favorably but anticipated deterioration in collateral values and economic conditions during its two-year forecast period.
- In February, the Company acquired three Southern California branches, assuming approximately $376 million in deposits and purchasing approximately $21 million in loans. The acquisition added goodwill and a core deposit intangible; all goodwill was subsequently impaired.
- Available-for-sale securities had $134.0 million of gross unrealized losses at June 30. Management considered the declines temporary and interest-rate-related, reported no expected credit losses on debt securities, and said it did not expect to be required to sell securities before recovery of amortized cost.
Outlook, risks and other items
Management expects continued migration from lower-cost transaction and savings deposits toward higher-yielding promotional deposits or wholesale funding, and warned this could sustain pressure on net interest margin. It said it is reducing new loan originations, emphasizing floating-rate products, and cutting nonessential expenses while seeking to protect core lending businesses. No specific earnings or margin guidance was provided.
Interest-rate modeling showed that an instantaneous +300 basis-point rate shock would reduce modeled one-year net interest income by 7.3% and net portfolio value by 40.7%. Management cautioned that model assumptions, deposit competition, prepayments and other factors could make actual outcomes differ. The Company described itself as liability-sensitive.
The Board declared a $0.10-per-share dividend payable August 23, 2023. Management said it intended to continue quarterly dividends, subject to Board approval and regulatory restrictions. The Company disclosed ordinary-course legal proceedings but did not expect them, taken together, to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the issuer identity: this source is HomeStreet, Inc., not Mechanics Bancorp.
- Track deposit trends, funding mix and costs, borrowing dependence, and whether reported contingent liquidity remains accessible under changing market conditions.
- Monitor net interest margin and interest-rate exposure against management’s assumptions, including deposit repricing and competitive funding costs.
- Assess the status and collateral support of the customer relationship driving the rise in nonaccrual loans, and the trend in delinquencies, charge-offs and allowance adequacy.
- Evaluate whether core earnings can improve as mortgage activity remains subdued and whether further impairment or other unusual charges arise.
- Review future capital ratios and dividend decisions, including regulatory constraints and the $64 million of senior notes maturing in 2026.