HomeStreet, Inc. — Form 10-Q for the quarter ended June 30, 2017
Entity note: The supplied filing is for HomeStreet, Inc., not Mechanics Bancorp. Figures below are reported in U.S. dollars; financial statement amounts are generally in millions unless otherwise stated.
Business context and reporting period
HomeStreet is a diversified financial services company operating primarily in the western United States, including Hawaii. Its businesses are Commercial and Consumer Banking and Mortgage Banking. This unaudited report covers the second quarter and six months ended June 30, 2017, with comparisons to 2016.
Financial performance and condition
- Second-quarter results: Net income was $11.2 million, down 48.5% from $21.7 million; diluted EPS was $0.41 versus $0.87. Net revenue (net interest income plus noninterest income) was $127.9 million, down 13%. Noninterest expense was nearly flat at $111.2 million.
- First-half results: Net income was $20.2 million, down 28.3% from $28.2 million; diluted EPS was $0.75 versus $1.15. Revenue was $248.0 million, down 4%, while noninterest expense increased 3% to $218.1 million.
- Interest income and margins: Second-quarter net interest income was $46.9 million, up from $44.5 million. Net interest margin declined to 3.29% from 3.48%; first-half margin was 3.26% versus 3.52%. Management attributed margin pressure mainly to higher funding costs and a larger share of lower-yielding investments.
- Business mix: Second-quarter Commercial and Consumer Banking net income rose to $9.4 million from $7.1 million, supported by loan growth. Mortgage Banking net income fell to $1.8 million from $14.7 million as mortgage volumes and related income weakened.
- Balance sheet at June 30: Total assets were $6.59 billion, up 5.5% from year-end 2016. Loans held for investment, net, were $4.16 billion; loans held for sale were $784.6 million; investment securities were $936.5 million; and mortgage servicing rights (MSRs) were $258.2 million. Shareholders’ equity was $655.8 million.
- Funding and debt: Deposits were $4.75 billion, up 7.2% from year-end; FHLB advances were $867.3 million and long-term debt was $125.2 million. Brokered deposits increased to $412.7 million, or 8.7% of deposits, from $234.4 million, or 5.3%, at year-end.
- Cash flow and liquidity: For the first half, operating cash flow was negative $9.4 million, investing cash flow negative $305.8 million, and financing cash flow positive $315.7 million; cash increased $0.5 million to $54.4 million. The Bank’s primary liquidity ratio was 26.8%, down from 31.2% at year-end. Available borrowing capacity was $472.2 million from the FHLB and $401.0 million from the Federal Reserve Bank.
- Credit and capital: Nonperforming assets were $20.1 million, or 0.30% of assets, versus $25.8 million, or 0.41%, at year-end. Nonaccrual loans were $15.5 million, or 0.37% of loans. The allowance for loan losses was $36.1 million, 0.86% of loans held for investment. The Company’s total risk-based capital ratio was 11.79% and the Bank’s was 14.01%; both were above stated well-capitalized thresholds.
Material changes and management commentary
- Mortgage interest-rate lock commitments fell 17% in the quarter and 14% in the first half versus the comparable 2016 periods. Management cited higher mortgage rates, which reduced refinancing, and tight housing inventory, which constrained purchase lending.
- Management reduced Mortgage Banking headcount by 73 employees versus March 31, including 41 reductions late in the quarter, and was implementing a new loan origination system. It said further staffing or office optimization could be necessary if market trends did not improve; possible restructuring charges were not quantified.
- Commercial and Consumer Banking continued to expand: loans held for investment increased 5% during the quarter, and the segment’s first-half net income more than doubled year over year. The company also reported an agreement to acquire an El Cajon, California branch, expected to close in the second half of 2017 subject to regulatory approval and customary conditions.
- For the first half, net recoveries were $1.7 million, compared with $0.8 million in 2016, and the provision for credit losses declined to $0.5 million from $2.5 million.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management described a near-term focus on mortgage cost control and operational efficiency while continuing commercial and consumer banking growth.
- Key risks include mortgage-volume sensitivity to rates and housing supply; MSR valuation and hedge performance; real estate and geographic concentration; credit losses; deposit and wholesale-funding availability and cost; and integration or execution risks from growth and acquisitions.
- MSR valuations rely on assumptions about prepayments, discount rates, and market conditions. The filing’s sensitivity analysis shows that adverse assumption changes could materially reduce MSR fair value.
- Mortgage repurchase liability was $3.0 million against $21.18 billion of servicing-retained loans subject to representations and warranties. The Company also had a $1.7 million reserve for Fannie Mae DUS loss sharing, with no losses reported under that arrangement in the periods shown.
- Unfunded loan commitments were $89.0 million; undistributed construction commitments were $614.2 million; and unused home-equity and commercial funding lines were $390.6 million. These commitments are not necessarily expected to be drawn in full.
- Management reported no material legal claims considered probable or reasonably possible of loss at June 30 and no significant subsequent event affecting the financial statements. Ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were concluded effective, with no material quarterly change in internal control over financial reporting.
- The Company said it does not expect to pay dividends in the near future, citing deployment of capital toward strategic growth. It also expects the forthcoming CECL credit-loss standard to have a material financial-statement impact; the impact had not been quantified.
Most important facts for investors to verify
- Confirm the issuer is HomeStreet, Inc.; the request metadata names a different company.
- Track mortgage production, rate locks, MSR valuation and hedging results, and any further mortgage staffing or restructuring actions.
- Assess whether commercial and consumer loan growth and deposit growth can offset mortgage weakness without further margin compression or higher funding costs.
- Monitor brokered-deposit reliance, liquidity measures, borrowing capacity, and capital ratios as the balance sheet grows.
- Review credit trends, including delinquencies, TDRs, nonaccrual loans, real estate concentrations, and the eventual effect of CECL adoption.
- Check regulatory approval and completion of the proposed El Cajon branch acquisition, and any resulting costs or changes to the company’s growth plans.