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HMST > SEC Filings for HMST > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for HOMESTREET, INC.

Form 10-Q for HOMESTREET, INC.


8-Aug-2014

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. All statements other than statements of historical fact are "forward-looking statements" for the purposes of these provisions. 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, and we may take actions that differ from our current plans and expectations. 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 or shareholder approvals;

• any statements concerning proposed new products or services;

• any statements regarding pending or future mergers, acquisitions or other transactions; 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;"

• implementation of new capital requirements under the Basel III rules and related regulations;

• 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;

• our ability to maintain our data security, including unauthorized electronic access, physical custody and inadvertent disclosure, and including potential reputational harm and litigation risks;

• general economic conditions, either nationally or in our market area, including increases in mortgage interest rates, declines in housing refinance activities, employment trends, business contraction, consumer confidence, real estate values and other recessionary pressures;

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

• compliance with regulatory requirements, including laws and regulations such as those related to the Dodd-Frank Act and new rules being promulgated under that Act, Basel III capital requirements and related regulations, 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, including the uncertain impact on the market for non-qualified mortgage loans resulting from regulations which took effect in


January 2014, as well as 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");

• costs associated with the integration of new personnel from growth through acquisitions and hiring initiatives, including increased salary costs, as well as time and attention from our management team that is needed to identify, investigate and successfully complete such acquisitions;

• 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.

Unless required by law, we do not intend to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results or changes in our expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Form 10-Q.

Except as otherwise noted, references to "we," "our," "us" or "the Company" refer to HomeStreet, Inc. and its subsidiaries that are consolidated for financial reporting purposes.

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 Six
                                                     At or for the Quarter Ended                                        Months Ended
(dollars in thousands,       Jun. 30,         Mar. 31,         Dec. 31,        Sept. 30,         Jun. 30,         Jun. 30,         Jun. 30,
except share data)             2014             2014             2013             2013             2013             2014             2013

Income statement data
(for the period ended):
Net interest income       $     23,147     $     22,712     $     21,382     $     20,412     $     17,415     $     45,859     $     32,650
Provision (reversal of
provision) for credit
losses                               -           (1,500 )              -           (1,500 )            400           (1,500 )          2,400
Noninterest income              53,650           34,707           36,072           38,174           57,556           88,357          116,499
Noninterest expense             62,971           56,091           58,868           58,116           56,712          119,062          112,511
Net income before tax
expense (benefit)               13,826            2,828           (1,414 )          1,970           17,859           16,654           34,238
Income tax expense
(benefit)                        4,464              527             (553 )            308            5,791            4,991           11,230
Net income (loss)         $      9,362     $      2,301     $       (861 )   $      1,662     $     12,068     $     11,663     $     23,008
Basic earnings (loss)
per common share          $       0.63     $       0.16     $      (0.06 )   $       0.12     $       0.84     $       0.79     $       1.60
Diluted earnings (loss)
per common share          $       0.63     $       0.15     $      (0.06 )   $       0.11     $       0.82     $       0.78     $       1.56
Common shares
outstanding                 14,849,692       14,846,519       14,799,991       14,422,354       14,406,676       14,849,692       14,406,676
Weighted average common
shares:
Basic                       14,800,853       14,784,424       14,523,405       14,388,559       14,376,580       14,792,638       14,368,135
Diluted                     14,954,998       14,947,864       14,523,405       14,790,671       14,785,481       14,956,079       14,794,805
Shareholders' equity
per share                 $      19.41     $      18.42     $      17.97     $      18.60     $      18.62     $      19.41            18.62
Financial position (at
period end):
Cash and cash
equivalents               $     74,991     $     47,714     $     33,908     $     37,906     $     21,645     $     74,991     $     21,645
Investment securities          454,966          446,639          498,816          574,894          539,480          454,966          539,480
Loans held for sale            549,440          588,465          279,941          385,110          471,191          549,440          471,191
Loans held for
investment, net              1,812,895        1,662,623        1,871,813        1,510,169        1,416,439        1,812,895        1,416,439
Mortgage servicing
rights                         117,991          158,741          162,463          146,300          137,385          117,991          137,385
Other real estate owned         11,083           12,089           12,911           12,266           11,949           11,083           11,949
Total assets                 3,235,676        3,124,812        3,066,054        2,854,323        2,776,124        3,235,676        2,776,124
Deposits                     2,417,712        2,371,358        2,210,821        2,098,076        1,963,123        2,417,712        1,963,123
Federal Home Loan Bank
advances                       384,090          346,590          446,590          338,690          409,490          384,090          409,490
Repurchase agreements           14,681                -                -                -                -           14,681                -
Shareholders' equity           288,249          273,510          265,926          268,208          268,321          288,249          268,321
Financial position
(averages):
Investment securities     $    447,458     $    477,384     $    565,869     $    556,862     $    512,475     $    462,338     $    467,865
Loans held for
investment                   1,766,788        1,830,330        1,732,955        1,475,011        1,397,219        1,798,384        1,371,801
Total interest-earning
assets                       2,723,687        2,654,078        2,624,287        2,474,397        2,321,195        2,689,075        2,283,090
Total interest-bearing
deposits                     1,900,681        1,880,358        1,662,180        1,488,076        1,527,732        1,890,576        1,535,644
Federal Home Loan Bank
advances                       350,271          323,832          343,366          374,682          307,296          337,125          227,639
Repurchase agreements            1,129                -                -                -           10,913              568            5,487
Total interest-bearing
liabilities                  2,313,937        2,267,904        2,232,456        2,045,155        1,917,098        2,291,049        1,835,302
Shareholders' equity           284,365          272,596          268,328          271,286          280,783          278,513          277,588


Summary Financial Data (continued)
                                                                                                         At or for the Six
                                                 At or for the Quarter Ended                               Months Ended
(dollars in thousands,     Jun. 30,        Mar. 31,        Dec. 31,         Sept. 30,     Jun. 30,     Jun. 30,     Jun. 30,
except share data)           2014            2014            2013             2013          2013         2014         2013

Financial performance:
Return on average
shareholders'
 equity (1)                  13.17 %          3.38 %         (1.28 )%           2.45 %      17.19 %       8.38 %      16.58 %
Return on average total
assets                        1.22 %          0.30 %         (0.12 )%           0.24 %       1.86 %       0.77 %       1.81 %
Net interest margin (2)       3.48 %          3.51 %          3.34  %           3.41 %       3.10 %       3.49 %       2.96 % (3)
Efficiency ratio (4)         82.00 %         97.69 %        102.46  %          99.20 %      75.65 %      88.71 %      75.44 %
Asset quality:
Allowance for credit
losses                    $ 22,168        $ 22,317        $ 24,089         $  24,894     $ 27,858     $ 22,168     $ 27,858
Allowance for loan
losses/total loans            1.19 % (5)      1.31 % (5)      1.26  % (5)       1.61 %       1.92 %       1.19 %       1.92 %
Allowance for loan
losses/nonaccrual loans     103.44 %         96.95 %         93.00  %          92.30 %      93.11 %     103.44 %      93.11 %
Total nonaccrual loans
(6)                       $ 21,197   (7)  $ 22,823   (7)  $ 25,707    (7)  $  26,753     $ 29,701     $ 21,197     $ 29,701
Nonaccrual loans/total
loans                         1.16 %          1.35 %          1.36  %           1.74 %       2.06 %       1.16 %       2.06 %
Other real estate owned   $ 11,083        $ 12,089        $ 12,911         $  12,266     $ 11,949     $ 11,083     $ 11,949
Total nonperforming
assets                    $ 32,280   (7)  $ 34,912   (7)  $ 38,618    (7)  $  39,019     $ 41,650     $ 32,280     $ 41,650
Nonperforming
assets/total assets           1.00 %          1.12 %          1.26  %           1.37 %       1.50 %       1.00 %       1.50 %
Net charge-offs           $    149        $    272        $    805         $   1,464     $  1,136     $    421     $  2,293
Regulatory capital
ratios for the Bank:
Tier 1 leverage capital
(to average assets)          10.17 %          9.94 %          9.96  %          10.85 %      11.89 %      10.17 %      11.89 %
Tier 1 risk-based
capital (to
risk-weighted assets)        13.84 %         13.99 %         14.12  %          17.19 %      17.89 %      13.84 %      17.89 %
Total risk-based
capital (to
risk-weighted assets)        14.84 %         15.04 %         15.28  %          18.44 %      19.15 %      14.84 %      19.15 %
Other data:
Full-time equivalent
employees (ending)           1,546           1,491           1,502             1,426        1,309        1,546        1,309

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

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

(3) 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 Trust Preferred Securities ("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 3.08% for the six months ended June 30, 2013.

(4) Noninterest expense divided by total revenue (net interest income and noninterest income).

(5) Includes acquired loans. Excluding acquired loans, allowance for loan losses/total loans is 1.31%, 1.46% and 1.40% at June 30, 2014, March 31, 2014 and December 31, 2013, respectively.

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

(7) Includes $6.5 million, $6.6 million and $6.5 million of nonperforming loans at June 30, 2014, March 31, 2014 and December 31, 2013, respectively, that are guaranteed by the Small Business Administration ("SBA").


                                                                                                                     At or for the Six
                                                    At or for the Quarter Ended                                        Months Ended
                            Jun. 30,         Mar. 31,         Dec. 31,        Sept. 30,         Jun. 30,         Jun. 30,         Jun. 30,
(in thousands)                2014             2014             2013             2013             2013             2014             2013

SUPPLEMENTAL DATA:
Loans serviced for
others
Single family            $  9,895,074     $ 12,198,479     $ 11,795,621     $ 11,286,244     $ 10,404,613     $  9,895,074     $ 10,404,613
Multifamily                   704,997          721,464          720,429          722,767          720,368          704,997          720,368
Other                          97,996           99,340           95,673           50,629           51,058           97,996           51,058
Total loans serviced
for others               $ 10,698,067     $ 13,019,283     $ 12,611,723     $ 12,059,640     $ 11,176,039     $ 10,698,067     $ 11,176,039

Loan production
volumes:
Single family mortgage
closed loans (1) (2)     $  1,100,704     $    674,283     $    773,146     $  1,187,061     $  1,307,286     $  1,774,987     $  2,499,442
Single family mortgage
interest rate lock
commitments(2)              1,201,665          803,308          662,015          786,147        1,423,290        2,004,973        2,459,112
Single family mortgage
loans sold(2)                 906,342          619,913          816,555        1,326,888        1,229,686        1,526,255        2,590,030
Multifamily mortgage
originations                   23,105           11,343           16,325           10,734           14,790           34,448           63,909
Multifamily mortgage
loans sold                     15,902            6,263           15,775           21,998           15,386           22,165           65,973

(1) Represents single family mortgage production volume designated for sale to the secondary market during each respective period.

(2) Includes loans originated by WMS Series LLC and purchased by HomeStreet Bank.


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 2013 Annual Report on Form 10-K.

Management's Overview of Second Quarter 2014 Financial Performance

We are a diversified financial services company founded in 1921 and headquartered in Seattle, Washington, serving customers primarily in the Pacific Northwest, California and Hawaii. HomeStreet, Inc. is principally engaged in real estate lending, including mortgage banking activities, and commercial and consumer banking. Our primary subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation. The Bank is a Washington state-chartered savings bank that provides mortgage and commercial loans, deposit products and services, non-deposit investment products, private banking and cash management services. Our primary loan products include single family residential mortgages, loans secured by commercial real estate, construction loans for residential and commercial real estate projects, 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 Agency, 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 with WMS Series LLC, whose business is known as Windermere Mortgage Services.

We generate revenue by earning "net interest income" and "noninterest income." Net interest income is primarily the difference between 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 from fees earned on deposit services and investment and insurance sales.

At June 30, 2014, we had total assets of $3.24 billion, net loans held for investment of $1.81 billion, deposits of $2.42 billion and shareholders' equity of $288.2 million.

Results for the second quarter of 2014 reflect the continued growth of our mortgage banking business and investments to expand our commercial and consumer business. Since June 2013, we have increased our lending capacity by adding loan origination and operations personnel in all of our lending lines of business. We added 21 home loan centers, one commercial lending center, one residential construction center and eight retail deposit branches, two de novo and six from acquisitions, to bring our total home loan centers to 50, our total commercial centers to five and our total retail deposit branches to 31.

On January 1, 2015, the Company and the Bank will become subject to new capital standards commonly referred to as "Basel III" which raise our minimum capital requirements. For more on the Basel III requirements as they apply to us, please see "Capital Management - New Capital Regulations" within the Liquidity and Capital Resources section of this Form 10-Q. In preparation for the higher capital targets under these new regulatory requirements and to better diversify our balance sheet and improve our risk profile, we sold single family mortgage loans that previously were held for investment and sold single family mortgage servicing rights during the first half of the year.

During the quarter, we sold $210.7 million of loans that had been transferred in March from the held for investment portfolio into loans held for sale and recognized $3.9 million in pre-tax gain on single family mortgage origination and sale activities from the sales.

On June 30, 2014, the Company sold the rights to service $2.96 billion of single family mortgage loans serviced for Fannie Mae, representing 24.3% of HomeStreet's total single family mortgage loans serviced for others portfolio as of March 31, 2014. The sale resulted in an increase of $4.7 million in pre-tax mortgage servicing income during the quarter, net of transaction costs. The Company expects to transfer the servicing of these loans to the purchaser by October 1, 2014, and is subservicing these loans on behalf of the purchaser until the transfer date; however, these loans are excluded from the Company's MSR portfolio at June 30, 2014.

In addition, in order to provide flexibility in the event that we decide to issue securities in support of an acquisition or to provide capital for growth in the future, on April 29, 2014, the Company filed a shelf registration statement on Form S-3 providing for the potential issuance of up to $125 million of equity or debt securities. We have no current plan to issue securities under this shelf registration statement.

1 DUS® is a registered trademark of Fannie Mae 56


We continued to execute our strategy of diversifying earnings by expanding the commercial and consumer banking business; growing our mortgage banking market share in existing and new markets; growing and improving the quality of our deposits; and bolstering our processing, compliance and risk management capabilities. Despite substantial growth in home loan centers and mortgage production personnel, our production volume has been less than expected due in part to macroeconomic forces and sluggishness in our markets. In recent periods we have experienced very low levels of homes available for sale in many of the markets in which we operate. The lack of housing inventory has had a downward impact on the volume of mortgage loans that we originate. Further, it has resulted in elevated costs, as a significant amount of loan processing and underwriting that we perform are to qualifying borrowers for mortgage loan transactions that never materialize. The lack of inventory of homes for sale may continue to have an adverse impact on mortgage loan volumes into the foreseeable future.

Consolidated Financial Performance

                             At or for the Three Months                              At or for the Six Months
                                   Ended June 30,               Percent Change            Ended June 30,               Percent Change
 (in thousands, except
per share data and
ratios)                        2014               2013          2014 vs. 2013          2014             2013           2014 vs. 2013

Selected statement of
operations data
Total net revenue        $      76,797       $      74,971              2  %      $    134,216       $ 149,149               (10 )%
Total noninterest
expense                         62,971              56,712             11              119,062         112,511                 6
Provision for credit
losses                               -                 400           (100 )             (1,500 )         2,400              (163 )
Income tax expense               4,464               5,791            (23 )              4,991          11,230               (56 )
Net income               $       9,362       $      12,068            (22 )%      $     11,663       $  23,008               (49 )%

Financial performance
Diluted earnings per
common share             $        0.63       $        0.82                        $       0.78       $    1.56
Return on average
common shareholders'
equity                           13.17 %             17.19 %                              8.38 %         16.58 %
Return on average
assets                            1.22 %              1.86 %                              0.77 %          1.81 %
Net interest margin               3.48 %              3.10 %                              3.49 %          2.96 % (1)

Capital ratios (Bank
only)
Tier 1 leverage
. . .
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