Business context and reporting period
Filing identity: The supplied filing is HomeStreet, Inc. (Nasdaq: HMST), not Mechanics Bancorp. This summary therefore describes HomeStreet’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020.
HomeStreet is a West Coast-focused financial services company engaged in commercial banking, mortgage banking and consumer banking. Its 2020 results reflect continuing operations; discontinued-operations accounting for its former home-loan-center mortgage business ended January 1, 2020.
Key financial results and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $51.5 million | $49.2 million | $96.9 million | $96.7 million |
| Provision for credit losses | $6.5 million | — | $20.5 million | $1.5 million |
| Noninterest income | $36.6 million | $19.8 million | $69.2 million | $27.9 million |
| Noninterest expense | $57.7 million | $58.8 million | $112.8 million | $106.7 million |
| Continuing-operations net income | $18.9 million | $8.9 million | $26.0 million | $14.0 million |
| Diluted EPS from continuing operations | $0.81 | $0.32 | $1.10 | $0.51 |
| Net interest margin | 3.12% | 3.11% | 3.03% | 3.11% |
| Efficiency ratio | 62.6% | 82.4% | 65.4% | 83.8% |
- Balance sheet at June 30: Total assets were $7.35 billion; loans held for investment, net, $5.37 billion; loans held for sale, $303.5 million; investment securities, $1.17 billion; deposits, $5.66 billion; borrowings, $713.6 million; long-term debt, $125.7 million; and shareholders’ equity, $694.6 million.
- Credit and capital: Allowance for credit losses was $65.0 million, or 1.30% of total loans (excluding specified government-insured or guaranteed balances). Nonaccrual loans were 0.40% of loans; nonperforming assets were 0.31% of assets. Bank total risk-based capital was 14.08%, above the filing’s 10.0% well-capitalized threshold.
- Cash flow, six months: Operating activities used $145.3 million; investing activities used $378.1 million; financing activities provided $531.4 million. Cash and cash equivalents increased $8.0 million to $65.9 million. Operating cash use chiefly reflected funding held-for-sale loan production ahead of sale proceeds.
- Liquidity: Available borrowing capacity at June 30 was $842 million from the FHLB and $373 million from the Federal Reserve Bank of San Francisco. The loans-to-deposits ratio was 101.4%, versus 99.7% at year-end 2019.
Material changes versus comparable periods
- Q2 continuing-operations pretax income increased to $24.0 million from $10.2 million. Management attributed the improvement to higher net interest income, increased noninterest income and lower noninterest expense, partly offset by credit-loss provision.
- Q2 noninterest income rose by $16.8 million, principally reflecting stronger loan-sale gains. HomeStreet reported higher rate-lock volumes and profit margins. For the six-month comparison, discontinued-operation presentation in 2019 materially affects comparability.
- Q2 funding costs fell: the average cost of interest-bearing liabilities was 0.81%, compared with 1.80%. Lower funding costs were partly offset by lower yields on earning assets. The six-month net interest margin declined to 3.03% from 3.11%.
- Credit-loss provision increased amid COVID-19 uncertainty, and the allowance rose from $41.8 million at December 31, 2019 to $65.0 million. CECL adoption on January 1 added $1.8 million to the loan allowance and reduced opening retained earnings by $3.7 million; prior-period credit-loss figures use the former incurred-loss method and are not directly comparable.
- Deposits increased 5.9% from year-end, while loans held for investment increased 5.8%. Commercial business loans rose to $697.3 million from $414.7 million, including PPP lending; multifamily loans rose to $1.31 billion from $999.1 million.
Outlook, risks, contingencies and unusual items
- COVID-19 and credit: Management stated that pandemic effects and their duration were highly uncertain. At June 30, 572 loans totaling about $349.5 million had been granted forbearance, excluding specified SBA-, FHA- and VA-supported loans; 428 loans totaling $221.4 million remained in forbearance. Management expects elevated default risk in affected commercial business and commercial real estate exposures and described its allowance as appropriate, while emphasizing continued caution.
- PPP: The company had closed or obtained SBA approval for 1,781 PPP loans totaling $296 million. These loans carry a 1% rate, are fully government-guaranteed, and generated SBA fees with a reported weighted-average fee of 3.3%; management expected a significant portion to be forgiven.
- Mortgage sensitivity: Management warned that single-family lending gains may be volatile as refinancing demand, interest rates, market capacity and pricing change. Mortgage servicing rights were $78.4 million; their fair value is sensitive to prepayment and discount-rate assumptions.
- Capital returns: HomeStreet repurchased 977,073 shares in the first six months at an average $26.20 per share. Repurchases were temporarily suspended in March and resumed in May. The board authorized a further $25 million program in July, subject to regulatory non-objection, and declared a $0.15-per-share dividend payable August 24, 2020.
- Other notable items: A second-quarter change in lease-renewal assumptions reduced both right-of-use assets and lease liabilities by approximately $39 million. Office-closure impairment charges were $1.6 million for Q2 and $1.8 million for the first half. Management reported no goodwill impairment at June 30.
- Contingencies and risks: The filing describes ordinary-course legal proceedings and mortgage representation-and-warranty repurchase exposure; management did not expect current legal matters to have a material adverse effect. Other stated risks include regional pandemic resurgence and economic weakness, commercial borrower stress, branch disruption from civil unrest, LIBOR transition execution, and regulatory limits on repurchases.
Important facts for investors to verify
- Confirm the issuer identity: the provided document is HomeStreet, Inc., not Mechanics Bancorp.
- Track subsequent delinquencies, defaults, allowance adequacy and losses among the $349.5 million of pandemic-related forbearances, especially commercial business and commercial real estate loans.
- Assess whether unusually strong mortgage production gains and refinancing-related margins persist as rates and market capacity change, and monitor mortgage-servicing-right valuation assumptions.
- Review the effects of PPP fee recognition and loan forgiveness, and distinguish government-guaranteed PPP balances from other commercial credit exposure.
- Monitor deposit costs and mix, borrowing dependence, liquidity capacity, capital ratios and regulatory approval for the additional share-repurchase authorization.
- Reconcile the cash-flow use from loan production with loan-sale proceeds and portfolio growth; compare future operating cash flows as production and sale volumes change.