Filing and business context
The supplied filing is HomeStreet, Inc.’s Form 10-K for the fiscal year ended December 31, 2019—not a filing for Mechanics Bancorp. Figures below summarize the filing as provided. HomeStreet is a Seattle-based bank holding company focused on commercial and consumer banking, real estate lending, and a smaller, retained mortgage business, primarily in the western United States and Hawaii.
In 2019, HomeStreet exited its stand-alone home-loan-center mortgage origination business, sold most related mortgage servicing rights, and sold its interest in WMS Series, LLC. The former business is reported as discontinued operations, and prior periods were recast; this affects comparability.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total net revenue | $263.8 million | $226.5 million |
| Net interest income | $189.4 million | $190.0 million |
| Net interest margin, tax-equivalent | 3.01% | 3.23% |
| Income from continuing operations | $40.7 million | $26.2 million |
| Discontinued operations | Loss of $23.2 million | Income of $13.8 million |
| Net income | $17.5 million | $40.0 million |
| Diluted earnings per share | $0.65 | $1.47 |
| Efficiency ratio | 94.02% | 88.88% |
Fourth-quarter 2019 net income was $11.0 million, including $13.1 million from continuing operations and a $2.1 million loss from discontinued operations. Quarterly net interest income was $45.5 million.
At year-end, assets were $6.81 billion; net loans held for investment, $5.07 billion; deposits, $5.34 billion; and shareholders’ equity, $679.7 million. Cash and cash equivalents were $57.9 million. Full-year cash flows were $258.8 million provided by operations, $83.9 million provided by investing, and $343.5 million used in financing; cash and restricted cash decreased $0.7 million.
Funding included $346.6 million of FHLB advances, $125.0 million of federal funds purchased and repurchase agreements, and $125.7 million of long-term debt, comprising $65.0 million of 6.5% senior notes due 2026 and $61.9 million of junior subordinated debentures. The Bank’s primary liquidity ratio was 18.7%; stated additional borrowing capacity was $943.3 million at the FHLB and $267.1 million at the Federal Reserve Bank of San Francisco.
Credit quality remained relatively strong, though nonperforming assets rose to $14.3 million, or 0.21% of assets, from $12.1 million, or 0.17%. Nonaccrual loans were $12.9 million, 0.25% of loans. The allowance for credit losses was $42.8 million; the company recorded a $0.5 million reversal of provision in 2019.
Material changes versus prior year
- Net income declined 56.2% from 2018. The company cited a $21.6 million pretax disposal loss and restructuring costs, reduced servicing income after MSR sales, and lower mortgage activity. Continuing-operations income increased, but the comparison is affected by the discontinued-operations reclassification and retained mortgage business reporting.
- Net interest margin fell 22 basis points to 3.01%. Higher deposit costs and a flatter yield curve offset growth in average loans held for investment.
- Deposits increased 5.7% to $5.34 billion, while FHLB advances fell substantially, to $346.6 million from $932.6 million.
- Shareholders’ equity decreased to $679.7 million from $739.5 million, primarily reflecting $98.5 million of share repurchases, partly offset by net income and other comprehensive income.
- Single-family loans serviced for others fell to $7.02 billion from $20.15 billion following the sale of servicing rights on $14.26 billion of unpaid principal balance.
Outlook, risks, and unusual items
Management’s strategy is to emphasize commercial and consumer banking, improve efficiency, and reduce exposure to cyclical mortgage earnings. Branch openings were suspended. Efficiency initiatives began in 2019 and were expected to continue through 2020 and beyond; the filing says the company expected to substantially complete most cost-cutting measures before the end of the third quarter of 2021, while cautioning that timing and savings were uncertain. No specific earnings or revenue guidance is provided.
In January 2020, the Board adopted a quarterly dividend policy and declared a $0.15-per-share first-quarter dividend, paid February 21, 2020. The Board also authorized up to $35 million of additional repurchases, subject to regulatory non-objection for the additional authorization. These are subsequent events, not 2019 operating results.
Key stated risks include interest-rate and yield-curve movements, regional real-estate and economic concentration, credit losses, MSR valuation and hedging, funding access, mortgage-loan repurchase obligations, execution of expense reductions, and operational, regulatory, cyber, and vendor risks. The filing also identified COVID-19 as a potential risk to its markets, workforce, customers, and results; the ultimate effect was uncertain as of the filing date.
Unusual items include the $21.6 million pretax loss on disposal of discontinued operations and $4.5 million of continuing-operations restructuring costs. In November 2019, HomeStreet agreed to and paid a $1.35 million FDIC civil money penalty related to alleged RESPA violations in former mortgage marketing programs; the filing states the matter was resolved without additional sanctions. The company adopted CECL on January 1, 2020 and estimated an approximately $3.7 million, or 9%, increase in reserves at adoption; the final effect could vary.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2019.
Important facts for investors to verify
- Confirm issuer identity: the filing is for HomeStreet, Inc. (HMST), despite the request metadata naming Mechanics Bancorp.
- Review the discontinued-operations and disposal disclosures to distinguish continuing results from legacy mortgage operations and assess comparability.
- Track whether management achieves the cost-reduction targets and timeline, and whether the efficiency ratio improves.
- Verify CECL’s actual opening reserve adjustment and subsequent effects on provisions, earnings, and capital.
- Monitor deposit pricing, funding mix, liquidity capacity, and regulatory capital after dividends and share repurchases.
- Assess credit trends, real-estate exposure by geography and loan type, MSR valuation sensitivity, and potential repurchase or indemnification claims.