SEC Filing Summary: HomeStreet, Inc. 2020 Q3 Form 10-Q
Entity note: The supplied filing is for HomeStreet, Inc. (Nasdaq: HMST), not Mechanics Bancorp. This summary reflects the filing provided. Reporting period ended September 30, 2020; filed November 6, 2020. HomeStreet is a regional financial services company focused on commercial banking, mortgage banking, and consumer/retail banking.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $55.7 million | $47.1 million | $152.6 million | $143.9 million |
| Provision for credit losses | None | None | $20.5 million | $1.5 million |
| Noninterest income | $36.2 million | $24.6 million | $105.4 million | $52.5 million |
| Noninterest expense | $58.1 million | $55.7 million | $170.9 million | $162.4 million |
| Continuing-operations pretax income | $33.8 million | $16.0 million | $66.6 million | $32.5 million |
| Net income | $26.3 million | $13.8 million | $52.4 million | $6.5 million |
| Diluted EPS | $1.15 | $0.55 | $2.24 | $0.22 |
Q3 net interest margin was 3.20%, compared with 2.96% a year earlier; the efficiency ratio was 59.9%, versus 75.9%. Management attributed stronger earnings mainly to higher net interest income and loan-sale gains. Lower funding costs helped margins, partly offset by lower yields on earning assets. Nine-month 2019 net income included a $21.1 million loss from discontinued operations; discontinued-operations accounting ended January 1, 2020, limiting year-over-year comparability.
Balance sheet, liquidity, and capital
- At September 30, total assets were $7.41 billion, up from $6.81 billion at December 31, 2019. Cash and cash equivalents were $79.1 million; investment securities were $1.11 billion.
- Loans held for investment, net, were $5.23 billion; loans held for sale were $421.7 million. Deposits were $5.82 billion, up $475.7 million since year-end. The loans-to-deposits ratio was 98.3%.
- Borrowings were $514.6 million and long-term debt was $125.8 million. Available borrowing capacity was $500 million from the FHLB and $368 million from the Federal Reserve Bank of San Francisco.
- Shareholders’ equity was $696.3 million, or 9.4% of assets. Bank Tier 1 leverage and total risk-based capital ratios were 9.40% and 13.95%; the Bank exceeded well-capitalized thresholds.
- For the first nine months, operating cash flow was negative $40.3 million, investing cash flow was negative $393.9 million, and financing cash flow was positive $455.4 million. Cash increased $21.2 million to $79.1 million.
Material changes and notable items
- Q3 gain on loan origination and sale activities rose to $33.1 million from $16.0 million, primarily from higher single-family loan volumes and margins. For the first nine months, the comparable total was $85.7 million versus $30.7 million, with 2019 affected by discontinued-operations presentation.
- The allowance for credit losses was $64.9 million, or 1.33% of loans, versus $41.8 million at year-end 2019. The company adopted CECL in January 2020, recording a $3.7 million reduction to opening retained earnings; CECL makes reserve comparisons with 2019 less directly comparable.
- Nonaccrual loans were $21.1 million (0.40% of loans), and nonperforming assets were $22.1 million (0.30% of assets). Nonperforming assets were $14.3 million at year-end 2019.
- Management reported $206 million outstanding on 375 qualifying loans approved for COVID-related forbearance. Separately, 1,822 PPP loans totaling $298 million had been closed or approved; PPP loans were government-guaranteed. Most commercial and CRE borrowers whose earlier forbearances had ended had resumed payments, excluding loans receiving a second forbearance.
- Loans held for sale included $195 million of multifamily loans held in anticipation of a bulk sale in Q4 2020. The company also recognized a $115 million GNMA early-buyout asset and corresponding liability, principally related to delinquent loans associated with forbearances.
- Q3 expense included $2.4 million of facility and staffing impairment charges; nine-month occupancy expense included $4.4 million of impairments tied to restructuring. The company repurchased about 2.0 million shares during the first nine months at an average $26.03 per share.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management emphasized that COVID-19 impacts remain uncertain and depend on future economic conditions. Its credit-loss estimate incorporates a two-year forecast and management overlays; management expected economic conditions and collateral values to weaken over the forecast period, with the most negative factors in the first year. Principal risks include borrower deterioration and commercial real estate exposure, interest-rate and mortgage-prepayment movements affecting margins and mortgage servicing rights, and uncertainty around relief-program borrowers. California multifamily loans represented 16.9% of the total loan portfolio. Mortgage loan-sale representations and warranties, Fannie Mae multifamily loss-sharing guarantees, and off-balance-sheet commitments are additional exposures. The company stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
The Board declared a $0.15-per-share dividend payable November 23, 2020. Management said it intended to continue quarterly dividends, subject to Board approval and regulatory restrictions. Disclosure controls were reported effective, with no material quarterly change to internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q identifies HomeStreet, Inc., rather than Mechanics Bancorp.
- Track COVID-related forbearance performance, repeat relief requests, delinquencies, and subsequent credit-loss provisions.
- Assess the allowance under CECL, particularly commercial business and construction exposures and assumptions about economic conditions and collateral values.
- Verify completion and economics of the anticipated Q4 multifamily loan bulk sale and changes in GNMA early-buyout balances.
- Monitor mortgage-sale gains, MSR valuation sensitivity to prepayments and rates, capital ratios, deposit trends, and the effect of repurchases and dividends on capital.