HomeStreet, Inc. — FY2014 Form 10-K
Filing identity: The supplied filing is for HomeStreet, Inc. (Nasdaq: HMST), not Mechanics Bancorp. It reports the fiscal year ended December 31, 2014; the filing was signed March 24, 2015. The quarterly data below includes the quarter ended December 31, 2014.
Business context and reporting period
HomeStreet is a Seattle-based financial services company focused on mortgage banking and commercial and consumer banking, principally in the Pacific Northwest, California, and Hawaii. At year-end it reported 33 bank branches and total assets of $3.54 billion. Its two reportable segments are Mortgage Banking and Commercial and Consumer Banking.
Financial performance and condition
| Metric | FY2014 / Dec. 31, 2014 | Prior comparable period |
|---|---|---|
| Net interest income | $98.7 million | $74.4 million in 2013 |
| Net interest margin | 3.51% | 3.17% in 2013 |
| Noninterest income | $185.7 million | $190.7 million in 2013 |
| Noninterest expense | $252.0 million | $229.5 million in 2013 |
| Net income / diluted EPS | $22.3 million / $1.49 | $23.8 million / $1.61 in 2013 |
| Total assets | $3.54 billion | $3.07 billion at year-end 2013 |
| Deposits | $2.45 billion | $2.21 billion at year-end 2013 |
| Loans held for investment, net | $2.10 billion | $1.87 billion at year-end 2013 |
| Shareholders’ equity | $302.2 million | $265.9 million at year-end 2013 |
- Net interest margin is calculated on a tax-equivalent basis. Return on average assets was 0.69% and return on average equity was 7.69%, down from 0.88% and 9.56%, respectively, in 2013. The 2013 margin included a $1.4 million prior-period TruPS interest accrual correction; excluding it, the filing reports 3.23%.
- Credit quality improved: nonperforming assets were $25.5 million (0.72% of assets), versus $38.6 million (1.26%) a year earlier. Net charge-offs fell to $565,000 from $4.6 million; the company recorded a $1.0 million provision reversal. The loan-loss allowance was $22.0 million, or 1.04% of loans held for investment.
- Cash and cash equivalents were $30.5 million. Operating activities used $348.6 million of cash, primarily reflecting mortgage-loan funding; investing activities used $84.2 million, while financing activities provided $429.5 million. Management said operating liquidity needs could be funded through operating cash flows, available balances, and short-term debt.
- The Bank’s primary liquidity ratio was 30.0%, compared with 26.9% in 2013. Available borrowing capacity was $317.9 million from the FHLB and $316.1 million from the Federal Reserve Bank of San Francisco; these facilities are collateral-dependent and not guaranteed sources of credit.
- FHLB advances totaled $597.6 million, including $532.0 million contractually maturing in 2015; federal funds purchased were $50.0 million. Long-term debt, primarily trust preferred debentures, was $61.9 million.
- Bank regulatory capital ratios remained above year-end 2014 “well-capitalized” thresholds: Tier 1 leverage 9.38%, Tier 1 risk-based 13.10%, and total risk-based 14.03%. Basel III standards began applying in 2015.
Material changes versus 2013
- Net income declined 6.5%, despite net interest income growth of 32.5%. Higher average portfolio loan balances, improved deposit mix, and lower funding costs supported net interest income; the $22.5 million increase in noninterest expense offset much of that benefit.
- Mortgage Banking net income fell to $7.5 million from $17.8 million, chiefly because mortgage gain-on-sale margins weakened. Mortgage closed-loan volume was broadly flat, while interest-rate lock commitments rose 11.2%; noninterest income declined 2.7% overall.
- Commercial and Consumer Banking net income increased to $14.7 million from $6.0 million, supported by higher net interest income and improved credit quality. Commercial construction loans grew substantially, contributing to portfolio expansion.
- Deposits increased 10.6%, with transaction and savings deposits growing and certificates of deposit declining. Total assets rose 15.3%. The company sold servicing rights on $2.96 billion of single-family loans in June 2014; year-end mortgage servicing rights were $123.3 million, down from $162.5 million.
- Fourth-quarter 2014 net income was $5.6 million, versus a net loss of $861,000 in fourth-quarter 2013.
Outlook, risks, contingencies, and unusual items
- Management planned continued geographic and commercial-lending expansion, with emphasis on purchase-oriented mortgage production and core-deposit growth. It reported stronger refinance and purchase activity late in 2014, but cited low housing inventory and mortgage-market competition as constraints. No quantified earnings or revenue guidance is provided.
- On March 1, 2015, after the reporting year, HomeStreet acquired Simplicity Bancorp and Simplicity Bank, issuing 7,180,005 HomeStreet shares. Simplicity had approximately $863 million of assets and $656 million of deposits at December 31, 2014. Acquisition accounting was incomplete at filing, and Simplicity’s results are not included in FY2014 results.
- Significant control issue: Management and Deloitte concluded internal control over financial reporting was ineffective at year-end due to a material weakness in controls over newly implemented systems, primarily accounts payable and payroll. Management reported no material loss or financial-statement misstatement, but said a material error or loss could have occurred without specific attention. Remediation was underway and not yet deemed effective. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the 2014 financial statements.
- Key risks include interest-rate and mortgage-volume volatility, real-estate and geographic concentration, loan-loss estimation, MSR valuation and hedging, growth and acquisition integration, repurchase/indemnification obligations on sold mortgages, regulatory changes, and new capital requirements. The filing reports $11.30 billion of servicing-retained loans subject to representations and warranties and a $2.0 million recorded repurchase liability. Legal proceedings were described as ordinary-course matters; management reported no claims considered probable or reasonably possible of loss at year-end.
- The board did not declare a fourth-quarter 2014 dividend. The company had no established regular dividend policy; future dividends depend on capital, liquidity, earnings, regulatory limits, and other factors.
Important facts for investors to verify
- Confirm the requested issuer: this filing is HomeStreet, Inc., not Mechanics Bancorp.
- Track remediation and independent testing of the material weakness, and whether controls become effective in subsequent filings.
- Assess the durability of net interest margin and earnings as mortgage gain-on-sale margins, interest rates, and deposit funding costs change.
- Review loan growth and construction/real-estate concentration against future delinquency, charge-off, allowance, and collateral trends.
- Check post-acquisition Simplicity integration, final purchase accounting, share dilution, and pro forma capital and liquidity ratios.
- Monitor FHLB maturities, reliance on wholesale funding, mortgage repurchase demands, MSR valuation sensitivities, and compliance with phased-in Basel III capital buffers.