HomeStreet, Inc. Form 10-Q — quarter ended June 30, 2012
Entity note: The filing identifies the registrant as HomeStreet, Inc., not Mechanics Bancorp. Confirm that this is the intended filing.
Business context and reporting period
HomeStreet is a Seattle-based financial services company serving the Pacific Northwest and Hawaii, with community banking, single-family mortgage lending, income-property lending and residential construction lending operations. Results cover the three and six months ended June 30, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are U.S. dollars.
Financial performance and position
- Second quarter: Net income was $18.0 million ($2.43 diluted EPS), versus $1.3 million ($0.45) a year earlier. Net revenue was $70.2 million, up 130%; noninterest income rose to $55.5 million, driven largely by mortgage production and sale gains.
- First half: Net income was $37.0 million ($5.80 diluted EPS), compared with a $6.2 million loss ($2.23 per diluted share) in the first half of 2011. Net revenue was $122.2 million, up 117%.
- Net interest: Second-quarter net interest income was $14.7 million GAAP, or $15.1 million on a tax-equivalent basis; net interest margin was 2.83%, versus 2.35%. First-half net interest income was $27.6 million GAAP ($28.4 million tax-equivalent); margin was 2.68%, versus 2.26%.
- Costs and credit: Second-quarter noninterest expense increased 74% to $46.8 million, mainly reflecting expanded staffing and higher mortgage-production compensation. Provision for credit losses was $2.0 million. First-half net charge-offs were $17.7 million, up from $6.8 million.
- Balance sheet at June 30: Assets were $2.425 billion; deposits $1.905 billion; shareholders’ equity $214.0 million; cash and equivalents $75.1 million. Loans held for investment, net, were $1.235 billion, and loans held for sale were $412.9 million.
- Funding and liquidity: The company had $65.6 million of FHLB advances, $100.0 million of repurchase-agreement borrowings and $61.9 million of long-term debt. The Bank’s primary liquidity ratio was 39.2%; reported borrowing capacity was $218.4 million at the FHLB and $130.8 million at the Federal Reserve Bank of San Francisco.
- Cash flow, first half: Operating activities used $246.9 million, investing activities used $31.8 million, and financing activities provided $90.4 million. Cash fell $188.2 million to $75.1 million, largely as funds supported securities and mortgage-loan production.
Material changes versus comparable periods
- Mortgage banking gains rose to $45.5 million for the quarter and $74.0 million for the half-year, from $9.2 million and $13.9 million, respectively. Single-family loan originations and sales expanded substantially, supported by historically low mortgage rates and additional staffing.
- Deposits declined $105.0 million from year-end, primarily from managed reductions in certificates of deposit; core consumer and business deposit balances increased. Loans held for sale rose $262.5 million, while net loans held for investment fell $65.6 million.
- Asset-quality indicators improved from year-end: nonaccrual loans declined to $33.1 million from $76.5 million; nonperforming assets to $73.7 million from $115.1 million; and past-due loans to $83.9 million from $139.9 million. OREO increased modestly to $40.6 million.
- Bank capital strengthened following the February IPO, which raised $86.4 million net; $65.0 million was contributed to the Bank. Bank Tier 1 leverage capital was 10.1%, compared with 6.0% at year-end.
Outlook, risks, contingencies and unusual items
- Management reported a fifth consecutive profitable quarter and described progress in recapitalization, asset quality and mortgage-business expansion. The filing provides no specific earnings or revenue guidance; management cautions that interim results do not necessarily indicate full-year results.
- The Bank’s 2009 cease-and-desist order was terminated in March 2012 and replaced by a memorandum of understanding requiring at least a 9.0% Tier 1 leverage ratio, continued reduction of classified assets and regulatory approval for dividends. The Company remains under a Federal Reserve cease-and-desist order. Dividends remain restricted, and HomeStreet had deferred TruPS interest payments since December 2008.
- A discrete $6.3 million first-half tax benefit resulted from reversal of the beginning-of-year valuation allowance on deferred tax assets; management expects tax expense for the remainder of 2012. The filing also reports a $939,000 loss on early repayment of $25.5 million of FHLB advances.
- In April, resolution of two construction/land-development loan matters involved an $11.8 million charge-off and transfer of $18.8 million of estimated recovery value to OREO. First-half OREO loss provisions were $8.3 million.
- Key risks include reliance on mortgage origination and secondary-market programs, regional real-estate and construction-loan exposure, loan-loss and OREO valuation uncertainty, interest-rate and MSR-hedging risk, mortgage repurchase claims, regulatory constraints and proposed capital rules. The filing also flags control and cyber-risk concerns involving a critical third-party technology provider.
- Management stated that no legal matters were considered probable or reasonably possible of resulting in a loss requiring a reserve at June 30. No material subsequent events requiring disclosure were identified. Disclosure controls were concluded effective.
Investor facts to verify
- Confirm the issuer identity: the supplied filing is for HomeStreet, Inc., despite the request metadata naming Mechanics Bancorp.
- Assess how much earnings depended on unusually strong mortgage production and sale gains, and whether those margins and volumes are sustainable.
- Track credit costs and coverage alongside improving nonaccruals: first-half net charge-offs increased, and the allowance for loan losses declined to $26.9 million (2.13% of loans held for investment).
- Review restrictions under the Company order and Bank memorandum, deferred TruPS interest, and the effect of final capital rules on capital and distributions.
- Monitor liquidity and funding as cash fell sharply and mortgage-loan production expanded; verify ongoing access to warehouse, FHLB and Federal Reserve funding.
- Evaluate the assumptions behind mortgage-servicing-rights fair values, hedge effectiveness, repurchase reserves and OREO valuations.