Business context and reporting period
This is HomeStreet, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 6, 2019. The request identifies Mechanics Bancorp, but the filing names HomeStreet, Inc. as the registrant; confirm the entity before relying on this summary. HomeStreet is a Seattle-based financial services company operating primarily in the western United States, with Commercial and Consumer Banking and Mortgage Banking segments.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total net revenue | $439.4 million | $506.6 million |
| Net interest income | $202.5 million | $194.4 million |
| Noninterest income | $237.0 million | $312.2 million |
| Provision for credit losses | $3.0 million | $0.8 million |
| Noninterest expense | $390.6 million | $439.7 million |
| Net income | $40.0 million | $68.9 million |
| Diluted EPS | $1.47 | $2.54 |
| Net interest margin | 3.23% | 3.31% |
| Efficiency ratio | 88.88% | 86.79% |
Net income fell 41.9%. Lower mortgage production and margins and a smaller one-time tax-reform benefit were key factors; expense reductions partly offset the decline. The 2018 tax benefit from deferred-tax revaluation was $4.9 million versus $23.3 million in 2017. Return on average assets was 0.57% (1.05% in 2017); return on average equity was 5.40% (10.20%).
Commercial and Consumer Banking earned $56.8 million, up 35.0%, supported by loan growth and tax effects. Mortgage Banking recorded a $16.7 million net loss, versus $26.9 million net income in 2017. Single-family mortgage originations were $6.31 billion, down 22%; closed-loan volume was down 22%, and rate-lock commitments fell 21%.
Cash flows: operating activities provided $286.0 million; investing activities used $565.2 million; financing activities provided $263.9 million. Cash and cash equivalents ended at $58.0 million, down from $72.7 million. Net cash, cash equivalents and restricted cash decreased $15.3 million during 2018.
At year-end, assets were $7.04 billion, net loans held for investment $5.08 billion, deposits $5.05 billion and shareholders’ equity $739.5 million. Deposits rose 6.1%, while loans held for investment rose 12.6%. FHLB advances were $932.6 million; long-term debt was $125.5 million, including $63.6 million of 6.5% senior notes due 2026 and $61.9 million of junior subordinated debentures. About $927 million of FHLB advances mature in 2019. The Bank’s primary liquidity ratio was 19.4%, and reported unused borrowing capacity was $492.7 million at the FHLB and $333.5 million at the Federal Reserve Bank.
Asset-quality indicators improved: nonperforming assets were $12.1 million, or 0.17% of assets, versus $15.7 million, or 0.23%, in 2017; nonaccrual loans were $11.6 million, or 0.23% of loans. The allowance for credit losses was $42.9 million, including unfunded commitments. The Bank reported 10.15% Tier 1 leverage and 14.72% total risk-based capital ratios and remained well capitalized.
Material changes versus the prior comparable period
- Net interest income increased 4.1%, but funding costs rose faster than asset yields; interest expense increased 57.8% and net interest margin declined 8 basis points.
- Noninterest income fell 24.1%, mainly from lower mortgage origination and sale gains and lower servicing income. Mortgage production was pressured by higher rates, scarce housing inventory, competition and weaker margins.
- Noninterest expense declined 11.2%, reflecting lower commissions, staffing and office costs; the year included $6.2 million of restructuring charges, compared with $3.7 million in 2017.
- HomeStreet sold servicing rights on approximately $4.90 billion of single-family loans in the second quarter. Loans serviced for others totaled $21.69 billion at year-end, down from $24.02 billion.
- The workforce decreased to 2,036 full-time equivalents from 2,419; mortgage-segment headcount fell 24.1%.
Outlook, management commentary, risks and unusual items
In February 2019, HomeStreet entered a non-binding letter of intent to sell assets and transfer personnel associated with its home-loan-center mortgage origination business; it was also seeking buyers for related mortgage servicing rights. No definitive sale agreement had been signed, and any transaction remained subject to customary conditions, including third-party and regulatory approvals. If completed, the company expected to retain a smaller mortgage business sourced through branches, online channels and affinity relationships. Management gave no quantified earnings guidance.
Management cited continued uncertainty over mortgage-industry volumes and profitability and expected slower company growth than in prior years. Its strategy emphasized expanding and diversifying Commercial and Consumer Banking, growing deposits and commercial lending, and pursuing selective acquisitions. A Silvergate branch and lending-team acquisition, expected to close in March 2019, was subject to customary conditions.
Principal risks include interest-rate and yield-curve changes, deposit and wholesale funding costs, concentrated real-estate exposure, credit losses, mortgage servicing-rights valuation and hedging, and execution risks around the proposed mortgage-business sale and cost reductions. The filing also notes regulatory and compliance costs, including alleged RESPA violations requiring remediation, cyber and third-party vendor risks, and potential effects of natural disasters in the company’s western U.S. markets. Management reported no material legal claims considered probable or reasonably possible at year-end. The company did not pay dividends in 2018 or 2017 and had no formal dividend policy. The audited financial statements received an unqualified opinion; management and the auditor reported effective internal control over financial reporting at December 31, 2018.
Most important facts an investor should verify
- Confirm the registrant: the supplied filing is HomeStreet, Inc., not Mechanics Bancorp.
- Track whether the proposed mortgage-originations and MSR sales reach definitive agreements, close, and deliver the expected cost savings and capital benefits.
- Assess whether Commercial and Consumer Banking earnings can offset reduced mortgage activity and whether deposit costs continue to pressure margins.
- Review the quality and concentration of the growing loan portfolio, allowance adequacy, and exposure to real-estate and regional economic conditions.
- Monitor liquidity and refinancing needs, particularly the approximately $927 million of FHLB advances maturing in 2019, as well as deposit mix and borrowing capacity.
- Evaluate the potential impact of CECL adoption, expected January 1, 2020, and the new lease standard, for which the company estimated approximately $125 million of right-of-use assets and $142 million of lease liabilities at transition.