Filing identity and reporting period
The supplied filing is HomeStreet, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2022. This does not match the request metadata identifying “Mechanics Bancorp”; verify the intended company before relying on this summary.
HomeStreet is a Washington-based financial services holding company focused on commercial banking, mortgage banking, and consumer and retail banking, principally in the western United States.
Financial performance and condition
Unless otherwise noted, amounts are in U.S. dollars. Income-statement and cash-flow amounts below are in millions; balance-sheet amounts are as of June 30, 2022 and compared with December 31, 2021.
| Metric | Reported result |
|---|---|
| Q2 revenue (net interest income plus noninterest income) | $73.1 million, versus $86.2 million in Q2 2021 |
| Q2 net interest income | $60.1 million, versus $58.0 million |
| Q2 net income / diluted EPS | $17.7 million / $0.94, versus $29.2 million / $1.37 |
| Six-month net income / diluted EPS | $37.7 million / $1.95, versus $58.8 million / $2.72 |
| Net interest margin | 3.27% in Q2; 3.28% for the first half, versus 3.37% for first-half 2021 |
| Assets / loans held for investment, net | $8.58 billion / $6.72 billion, versus $7.20 billion / $5.50 billion at year-end 2021 |
| Deposits / borrowings / long-term debt | $6.18 billion / $1.46 billion / $224.2 million, versus $6.15 billion / $41.0 million / $126.0 million at year-end |
| Shareholders’ equity | $580.8 million, versus $715.3 million at year-end; accumulated other comprehensive loss was $63.3 million, versus income of $21.1 million |
| Credit quality | Allowance for credit losses (ACL) $37.4 million, or 0.56% of loans; nonaccrual loans $9.1 million; nonperforming assets 0.13% of assets |
| Six-month cash flows | Operating +$145.1 million; investing −$1.575 billion; financing +$1.440 billion; cash increased $10.1 million to $75.3 million |
Material changes versus comparable periods
- Q2 net income declined to $17.7 million from $29.2 million a year earlier; first-half net income fell to $37.7 million from $58.8 million. Management attributed the first-half pretax decline primarily to lower noninterest income.
- First-half noninterest income fell to $28.6 million from $67.1 million, chiefly because gain on loan origination and sale activities fell to $13.6 million from $54.7 million as rising rates reduced mortgage rate-lock volume and margins and commercial loan sales declined. Loan servicing income improved to $7.0 million from $2.7 million.
- First-half net interest income increased to $114.6 million from $112.5 million as average earning assets grew, but net interest margin narrowed to 3.28% from 3.37%. Higher market rates increased funding costs, especially borrowing costs.
- Loans held for investment grew by approximately $1.23 billion in the first half, while deposits increased only $36.8 million. Borrowings rose substantially to fund loan and securities growth. The loans-to-deposits ratio increased to 110.1% from 93.0% at year-end.
- First-half noninterest expense decreased to $105.1 million from $109.4 million, mainly due to lower mortgage-related compensation costs, partly offset by higher information-services and general, administrative and other expenses.
- First-half operating cash flow improved to $145.1 million from $55.2 million, while investing cash use increased sharply with loan growth and securities purchases.
Outlook, commentary, risks and unusual items
- Management’s strategy is to grow the loan portfolio and rely more on net interest income as a stable revenue source; it reported no multifamily portfolio loan sales in the first half. The filing provides no numerical earnings or revenue guidance.
- Management reported favorable loan performance and an improved COVID-19 outlook, supporting a $9 million ACL recovery in the first half; no provision was recorded in Q2. It also expects declining collateral values in its markets over the two-year forecast period. A one-grade deterioration in forecast unemployment assumptions would increase the ACL by an estimated $12 million, according to a hypothetical sensitivity.
- Interest-rate exposure is material: the company characterized itself as liability-sensitive. Its modeled one-year net interest income sensitivity was −4.6% for an immediate, sustained 200-basis-point rate increase and −2.1% for a 100-basis-point increase. These are model estimates, not forecasts, and exclude potential management actions.
- Available-for-sale securities had $84.5 million of gross unrealized losses at June 30, primarily attributed by management to market interest-rate changes rather than issuer-specific credit events. The company said it did not expect credit losses and did not expect to be required to sell securities before recovery of amortized cost.
- Multifamily loans were $3.48 billion, including California multifamily loans equal to 36% of total loans. Liquidity sources included reported borrowing capacity of $809 million from FHLB, $323 million from the Federal Reserve Bank, and $1.0 billion from other financial-institution lines.
- In January 2022, HomeStreet issued $98 million of subordinated notes; the notes carry a 3.5% rate until January 2027 and then a floating rate. The company repurchased $75.0 million of common stock and paid $13.8 million in dividends in the first half.
- After quarter-end, the board declared a $0.35-per-share dividend. HomeStreet also closed the sale of five eastern Washington retail branches on July 29, 2022, including lending businesses and employees; it estimated a $4 million gain and reported that $185 million of deposits and $42 million of loans were sold.
- The filing identifies mortgage repurchase and indemnification obligations, loan commitments, and Fannie Mae multifamily loss-sharing exposure. Management did not expect ordinary-course legal proceedings, taken as a whole, to have a material adverse effect. The filing highlights evolving cybersecurity and third-party technology risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Confirm the intended issuer: the source filing is for HomeStreet, Inc., not Mechanics Bancorp.
- Track whether loan growth can be funded sustainably, given deposit growth, higher borrowings, and the 110.1% loans-to-deposits ratio.
- Assess the effect of further rate changes on funding costs, net interest margin, securities values, and mortgage banking and servicing results.
- Monitor credit performance and ACL adequacy, particularly multifamily and construction exposures, collateral values, and California concentration.
- Review the impact of the branch sale and the company’s stated loan-growth strategy on future earnings, liquidity, and capital.