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HMST > SEC Filings for HMST > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for HOMESTREET, INC.


9-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Form 10-Q and the documents incorporated by reference contain, in addition to historical information, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements relate to our future plans, objectives, expectations, intentions and financial performance, and assumptions that underlie these statements. When used in this Form 10-Q, terms such as "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should," or "will" or the negative of those terms or other comparable terms are intended to identify such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Our actual results may differ significantly from the results discussed in such forward-looking statements. All statements other than statements of historical fact are "forward-looking statements" for the purposes of these provisions, including:

• any projections of revenues, estimated operating expenses or other financial items;

• any statements of the plans and objectives of management for future operations or programs;

• any statements regarding future operations, plans, or regulatory approvals;

• any statements concerning proposed new products or services;

• any statements regarding pending or future mergers or acquisitions; and

• any statement regarding future economic conditions or performance, and any statement of assumption underlying any of the foregoing.

These and other forward looking statements are, among other things, attempts to predict the future and, as such, may not come to pass. A wide variety of events, circumstances and conditions may cause us to fall short of management's expectations as expressed herein, or to deviate from the plans and intentions we have described in this report. Some of the factors that may cause us to fall short of expectations or to deviate from our intended courses of action include:

• the qualifying disclosures and other factors referenced in this Form 10-Q including, but not limited to, those listed under Item 1A "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations;"

• our ability to manage the credit risks of our lending activities, including potential increases in loan delinquencies, nonperforming assets and write offs, decreased collateral values, inadequate loan reserve amounts and the effectiveness of our hedging strategies;

• our ability to grow our geographic footprint and our various lines of business, and to manage that growth effectively, including our effectiveness in managing the associated costs and in generating the expected revenues and strategic benefits;

• general economic conditions, either nationally or in our market area, including a continuation or worsening of the weakness in the housing market, employment trends, business contraction, consumer confidence, real estate values and other recessionary pressures;

• our ability to anticipate and respond effectively to changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources;

• compliance with regulatory requirements, including new laws and regulations such as the Dodd-Frank Act as well as restrictions that may be imposed by our federal and state regulatory authorities, including the extent to which regulatory initiatives may affect our capital, liquidity and earnings;

• the effect on our mortgage origination and resale operations of changes in mortgage markets generally, and in monetary policies and economic trends and initiatives as those events affect our mortgage origination and servicing operations;

• compliance with requirements of investors and/or government-owned or sponsored entities, including Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing Administration (the "FHA") the Department of Housing and Urban Development ("HUD") and the Department of Veterans' Affairs (the "VA");

• our ability to control costs while meeting operational needs and retaining key members of our senior management team and other key managers and business producers; and


• competition.

We do not intend to update any of the forward-looking statements after the date of this report, whether to conform these statements to actual results or changes in our expectations or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.

You may review a copy of this quarterly report on Form 10-Q, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission's Public Reference Room at, 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as HomeStreet, Inc., that file electronically with the Securities and Exchange Commission. Copies of our Securities Exchange Act reports also are available from our investor relations website, http://ir.homestreet.com. Except as otherwise expressly noted in that section of our investor relations website, information contained in or linked from our websites is not incorporated into and does not constitute a part of this report.


Summary Financial Data
                                                                  At or for the Quarter Ended
(dollars in thousands, except          Mar. 31,          Dec. 31,          Sept. 30,          Jun. 30,          Mar. 31,
share data)                              2013              2012              2012               2012              2012

Income statement data (for the
period ended):
Net interest income                 $     15,235      $     16,591      $      16,520      $     14,799      $     12,833
Provision for loan losses                  2,000             4,000              5,500             2,000                 -
Noninterest income                        58,901            71,720             68,976            56,743            40,097
Noninterest expense                       55,757            55,754             45,819            46,847            34,687
Net income before taxes                   16,379            28,557             34,177            22,695            18,243
Income tax expense                         5,439             7,060             12,186             4,017            (1,716 )
Net income                          $     10,940      $     21,497      $      21,991      $     18,678      $     19,959
Basic earnings per common share
(1)                                 $       0.76      $       1.50      $        1.53      $       1.31      $       1.94
Diluted earnings per common share
(1)                                 $       0.74      $       1.46      $        1.50      $       1.26      $       1.86
Common shares outstanding (1)         14,400,206        14,382,638         14,354,972        14,325,214        14,325,214
Weighted average common shares:
Basic                                 14,359,691        14,371,120         14,335,950        14,252,120        10,292,566
Diluted                               14,804,129        14,714,166         14,699,032        14,824,064        10,720,330
Shareholders' equity per share      $      18.78      $      18.34      $       16.82      $      15.05      $      13.41
Financial position (at period
end):
Cash and cash equivalents           $     18,709      $     25,285      $      22,051      $     75,063      $     92,953
Investment securities available
for sale                                 415,238           416,329            414,050           415,610           446,198
Loans held for sale                      430,857           620,799            535,908           415,189           291,868
Loans held for investment, net         1,358,982         1,308,974          1,268,703         1,235,253         1,295,471
Mortgage servicing rights                111,828            95,493             81,512            78,240            86,801
Other real estate owned                   21,664            23,941             17,003            40,618            31,640
Total assets                           2,508,251         2,631,230          2,511,269         2,427,203         2,368,729
Deposits                               1,934,704         1,976,835          1,981,814         1,904,749         2,000,633
FHLB advances                            183,590           259,090            131,597            65,590            57,919
Shareholders' equity                     270,405           263,762            241,499           215,614           192,139
Financial position (averages):
Investment securities available
for sale                            $    422,761      $    418,261      $     411,916      $    431,875      $    381,129
Loans held for investment              1,346,100         1,297,615          1,270,652         1,304,740         1,338,552
Total interest-earning assets          2,244,563         2,244,727          2,187,059         2,143,380         2,090,190
Total interest-bearing deposits        1,543,645         1,609,075          1,625,437         1,640,159         1,705,371
FHLB advances                            147,097           122,516            112,839            79,490            57,919
Total interest-bearing
liabilities                            1,752,599         1,794,006          1,818,611         1,833,875         1,825,147
Shareholders' equity                     274,355           262,163            231,361           207,344           140,794


Summary Financial Data (continued)
                                                         At or for the Quarter Ended
(dollars in thousands, except        Mar. 31,        Dec. 31,      Sept. 30,      Jun. 30,      Mar. 31,
share data)                            2013            2012          2012           2012          2012

Financial performance:
Return on average
common shareholders' equity (2)        15.95 %         32.80 %        38.02 %       36.03 %        56.70 %
Return on average assets                1.75 %          3.46 %         3.60 %        3.15 %         3.45 %
Net interest margin (3)                 2.81 % (4)      3.06 %         3.12 %        2.85 %         2.51 %
Efficiency ratio (5)                   75.21 %         63.13 %        53.59 %       65.48 %        65.53 %
Asset quality:
Allowance for credit losses         $ 28,594        $ 27,751      $  27,627      $ 27,125      $  35,402
Allowance for loan losses/total
loans                                   2.04 %          2.06 %         2.11 %        2.13 %         2.64 %
Allowance for loan
losses/nonaccrual loans                88.40 %         92.20 %        71.80 %       81.28 %        46.58 %
Total nonaccrual loans (6)          $ 32,133        $ 29,892      $  38,247      $ 33,107      $  75,575
Nonaccrual loans/total loans            2.31 %          2.23 %         2.94 %        2.62 %         5.66 %
Other real estate owned             $ 21,664        $ 23,941      $  17,003      $ 40,618      $  31,640
Total nonperforming assets          $ 53,797        $ 53,833      $  55,250      $ 73,725      $ 107,215
Nonperforming assets/total assets       2.14 %          2.05 %         2.20 %        3.04 %         4.53 %
Net charge-offs                     $  1,157        $  3,876      $   4,998      $ 10,277      $   7,398
Regulatory capital ratios for the
Bank:
Tier 1 leverage capital (to
average assets)                        11.97 %         11.78 %        10.86 %       10.20 %         9.33 %
Tier 1 risk-based capital (to
risk-weighted assets)                  19.21 %         18.05 %        16.76 %       15.83 %        14.23 %
Total risk-based capital (to
risk-weighted assets)                  20.47 %         19.31 %        18.01 %       17.09 %        15.50 %
Other data:
Full-time equivalent employees
(ending)                               1,218           1,099            998           913            821

(1) Share and per share data shown after giving effect to the 2-for-1 forward stock splits effective March 6, 2012 and November 5, 2012.

(2) Net earnings available to common shareholders divided by average common shareholders' equity.

(3) Net interest income divided by total average interest-earning assets on a tax equivalent basis.

(4) Net interest margin for the first quarter of 2013 included $1.4 million in interest expense related to the correction of the cumulative effect of an error in prior years, resulting from the under accrual of interest due on the TruPS for which the Company had deferred the payment of interest. Excluding the impact of the prior period interest expense correction, the net interest margin was 3.06%.

(5) The efficiency ratio is noninterest expense divided by total revenue (net interest income and noninterest income).

(6) Generally, loans are placed on nonaccrual status when they are 90 or more days past due.


Summary Financial Data (continued)
                                                          At or for the Quarter Ended
                                    Mar. 31,        Dec. 31,        Sept. 30,       Jun. 30,        Mar. 31,
(in thousands)                        2013            2012            2012            2012            2012

SUPPLEMENTAL DATA:
Loans serviced for others
Single family                    $  9,701,396     $ 8,870,688     $ 8,109,669     $ 7,468,982     $ 6,947,278
Multifamily                           737,007         727,118         760,820         772,473         766,433
Other                                  52,825          53,235          53,617          56,840          59,370
Total loans serviced for others  $ 10,491,228     $ 9,651,041     $ 8,924,106     $ 8,298,295     $ 7,773,081
Loan production volumes:
Single family mortgage closed
loans (1)                        $  1,192,156     $ 1,518,971     $ 1,368,238     $ 1,068,656     $   712,302
Single family mortgage interest
rate lock commitments               1,035,822       1,254,954       1,313,182       1,303,390         915,141
Single family mortgage loans
sold                                1,360,344       1,434,947       1,238,879         962,704         534,310
Multifamily mortgage
originations                           49,119          40,244          20,209          35,908          15,713
Multifamily mortgage loans sold        50,587          33,689          26,515          27,178          31,423

(1) Represents single family mortgage closed loan volume designated for sale during each respective period.


This report contains forward-looking statements. For a discussion about such statements, including the risks and uncertainties inherent therein, see "Forward-Looking Statements." Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes presented elsewhere in this report and in HomeStreet, Inc.'s 2012 Annual Report on Form 10-K.

Management's Overview of First Quarter 2013 Financial Performance

We are a 91-year-old diversified financial services company headquartered in Seattle, Washington, serving consumers and businesses primarily in the Pacific Northwest and Hawaii. HomeStreet, Inc. (the "Company") is principally engaged in real estate lending, including mortgage banking activities, and consumer and commercial banking operations. Our primary subsidiaries are HomeStreet Bank (the "Bank") and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides residential and commercial loans, deposit products and services, non-deposit investment products, and cash management services. Our primary loan products include single family residential mortgages, loans secured by commercial real estate, loans for residential and commercial real estate construction, and commercial business loans. HomeStreet Capital Corporation, a Washington corporation, originates, sells and services multifamily mortgage loans under the Fannie Mae Delegated Underwriting and Servicing Program ("DUS"®)1 in conjunction with HomeStreet Bank. Doing business as HomeStreet Insurance, we provide insurance products and services for consumers and businesses. We also offer single family home loans through our partial ownership in an affiliated business arrangement known as Windermere Mortgage Services Series LLC ("WMS LLC").

We generate revenue by earning "net interest income" and "noninterest income." Net interest income is primarily the difference between our interest income earned on loans and investment securities less the interest we pay on deposits and other borrowings. We earn noninterest income from the origination, sale and servicing of loans and fees earned on deposit services and investment and insurance sales.

At March 31, 2013, we had total assets of $2.51 billion, net loans held for investment of $1.36 billion, deposits of $1.93 billion and shareholders' equity of $270.4 million.

Results for the first quarter of 2013 as compared to the same quarter in the prior year reflect the growth of our mortgage banking business and our commercial and consumer businesses, partially offset by historically low housing inventories that constrained the purchase mortgage market. The Company has historically pursued an origination strategy focused on the purchase mortgage market, while retaining its customers through refinancing their mortgages as well as through repeat purchase transactions. Consequently, our originations have historically had a higher composition of purchase mortgages than peer institutions. We expect to grow our purchase mortgage and overall market share as total mortgage market originations decline and the market transitions away from one dominated by mortgage refinancing. We continued to focus on the purchase mortgage market by offering incentive pricing, developing additional targeted shared marketing relationships with builders, real estate agents and other real estate professionals and continuing to hire loan officers who have proven track records in generating purchase mortgage loans. First quarter interest rate lock commitments were comprised of 50% purchase and 50% refinance transactions compared to 33% purchase and 67% refinance in the fourth quarter 2012.

Our loan portfolio grew $50.0 million, or 3.8%, for the quarter with new lending in each of our traditional lending lines. To support this growth, we continued to expand our branch network with the addition of three new mortgage lending offices and our third commercial lending center. Going forward in 2013, we currently intend to continue to focus on the purchase mortgage business, growing our mortgage production capacity and personnel, and working toward our long-term goal of business and revenue diversification.

1 DUS® is a registered trademark of Fannie Mae 51


Financial Performance

                                                          At or for the Three Months
                                                                Ended March 31,                % Change
 (in thousands, except per share data and ratios)           2013               2012          2013 vs. 2012

Selected statement of operations data
Total net revenue                                     $      74,136       $      52,930           40  %
Total noninterest expense                                    55,757              34,687           61
Provision for credit losses                                   2,000                   -           NM
Income tax expense (benefit)                                  5,439              (1,716 )         NM
Net income                                                   10,940              19,959          (45 )

Financial performance
Diluted earnings per common share                     $        0.74       $        1.86          (60 )%
Return on average common shareholders' equity                 15.95 %             56.70 %        (72 )
Return on average assets                                       1.75 %              3.45 %        (49 )
Net interest margin                                            2.81 %              2.51 %         12

Capital ratios (Bank only)
Tier 1 leverage capital (to average assets)                   11.97 %              9.33 %         NM
Tier 1 risk-based capital (to risk-weighted assets)           19.21 %             14.23 %         NM
Total risk-based capital (to risk-weighted assets)            20.47 %             15.50 %         NM
NM = Not meaningful

For the first quarter of 2013, net income was $10.9 million, or $0.74 per diluted share, compared with $20.0 million, or $1.86 per diluted share a year ago. Return on equity for the first quarter of 2013 (on an annualized basis) was 15.95%, compared to 56.70% for the same period last year, while return on average assets for the first quarter of 2013 (on an annualized basis) was 1.75%, compared to 3.45% for the same period a year ago.

The decrease in net income as compared to same quarter in the prior year was primarily driven by a $7.2 million increase in income tax expense as well as a $2.0 million increase in the provision for credit losses. A $21.2 million increase in net revenue during the first quarter of 2013 was mostly offset by a $21.1 million increase in noninterest expense during the same period.

Net revenue of $74.1 million increased 40% from the first quarter of 2012, primarily driven by increased mortgage loan origination and sale revenue, which was mainly the result of increased single family loan production volume and higher secondary market profit margins. Partially offsetting this increase to noninterest income was a decrease in mortgage servicing income, primarily resulting from a reduction in income recognized from MSR risk management activities.

Noninterest expense of $55.8 million in the first quarter of 2013 increased 61% from the first quarter of 2012 primarily due to an increase in salaries and related costs, including commissions to lending personnel, and higher general and administrative expenses, reflecting the Company's growth and increased mortgage production capacity.

The provision for credit losses was $2.0 million in the first quarter of 2013, compared to no provision recorded in the first quarter of 2012, reflecting the growth of our loans held for investment portfolio. Net charge-offs were $1.2 million in the first quarter of 2013 compared to $7.4 million in the prior year. Overall, the allowance for loan losses (which excludes the allowance for unfunded commitments) was 2.04% of loans held for investment at March 31, 2013 compared to 2.06% of loans held for investment at December 31, 2012. Nonperforming assets of $53.8 million, or 2.14% of total assets at March 31, 2013, were relatively unchanged from nonperforming asset balances at December 31, 2012.


Income tax expense was $5.4 million in the first quarter of 2013 compared to an income tax benefit of $1.7 million in the first quarter of 2012. Our estimated annual effective income tax rate for the quarter was 33.2% as compared to an annual effective tax rate of 20.8% for 2012. The lower effective income tax rate in 2012 compared to 2013 primarily reflected the benefit of a full reversal of deferred tax asset valuation allowances during 2012.

Expansion of Mortgage Banking Operations

During the first quarter of 2013, we added approximately 32 mortgage production personnel and opened three new mortgage loan production offices, including opening a stand-alone lending center in Pasadena, California. Including mortgage origination and operational support personnel, we currently have a total of 743 employees in our mortgage banking operations.

Regulatory Matters

We improved our Bank regulatory capital ratios during the first quarter of 2013, increasing our Tier 1 leverage and total risk-based capital ratios to 12.0% and 20.5%, compared to 11.8% and 19.3% at December 31, 2012, respectively. As a result of the overall improvement in the Company's financial condition, results of operations and risk profile, in March 2013 the Federal Reserve Board terminated the cease and desist order that had been imposed on the Company since May 2009.
In March 2013, the Company paid all deferred interest due on its outstanding Trust Preferred Securities ("TruPS") and the current interest payment due on March 15, 2013.

Recent Developments

On April 22, 2013, the Company paid a common stock dividend of $0.11 per share payable to shareholders of record as of April 11, 2013.

Critical Accounting Policies and Estimates

Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates and assumptions that may affect the value of our assets or liabilities and financial results. Three of these policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. These policies govern:
• Allowance for Loan Losses

• Fair Value of Financial Instruments, Single Family MSRs and OREO

• Income Taxes

These policies and estimates are described in further detail in Part II, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 1, Summary of Significant Accounting Policies within the 2012 Annual Report on Form 10-K.


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