HomeStreet, Inc. Reports First Quarter 2013 Results
Net Income of $10.9 Million; Return on Equity of 16.0%
SEATTLE--(BUSINESS WIRE)-- HomeStreet, Inc. (NAS: HMST) (the "Company" or "HomeStreet"), the parent company of HomeStreet Bank (the "Bank"), today announced net income of $10.9 million, or $0.74 per diluted share, for the first quarter of 2013, compared to net income of $21.5 million, or $1.46 per share, for the fourth quarter of 2012 and $20.0 million, or $1.86 per share, for the first quarter of 2012.
Financial performance for first quarter 2013:
Pre-tax income of $16.4 million, down 42.6% from the fourth quarter of 2012 and down 10.2% from the first quarter of 2012.
Net interest margin, excluding the impact of a $1.4 million prior period interest expense correction, was 3.06%, unchanged from the fourth quarter of 2012 and improved from 2.51% in the first quarter of 2012. Including the impact of the interest expense correction, net interest margin was 2.81% for the quarter.
The Company's estimated annual effective income tax rate for the quarter was 33.2% as compared to 20.8% for 2012. The prior year effective income tax rate reflected the benefit of the full reversal of deferred tax asset valuation allowances.
Return on average equity of 16.0% and return on average assets of 1.75%.
Mortgage banking results for first quarter 2013:
Single family mortgage closed loan production of $1.19 billion, down 21.5% from the fourth quarter of 2012 and up 67.4% from the first quarter of 2012. Sequential quarter decrease in closed loan production due to reduced regional market origination activity partially offset by continued growth in production personnel.
Net gain on mortgage origination and sale activities of $53.9 million, down 21.6% from the fourth quarter of 2012 and up 82.8% from the first quarter of 2012.
Loans held for investment were $1.36 billion at March 31, 2013, a net increase of $50.0 million, or 3.8%, from December 31, 2012 with $114.8 million of new loan commitments and originations in all of HomeStreet's lending product lines: commercial and industrial, commercial real estate, residential construction and single family mortgage.
Transaction and savings deposits grew to $1.16 billion, or 60.1% of total deposits, up from $1.05 billion, or 52.9% of total deposits, at December 31, 2012.
During the quarter, HomeStreet added 32 mortgage production personnel and opened three new mortgage loan production offices, including opening a stand-alone lending center in Pasadena, California.
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 in 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.
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.
"We were very pleased to declare a dividend in the first quarter, our first since 2008, reflecting our strong profitability and financial condition and the recent removal of the final regulatory order instituted during the recession," said President and Chief Executive Officer Mark K. Mason. "HomeStreet's loan portfolio grew for the third consecutive 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. As the mortgage market transitions, we will continue to focus on the purchase mortgage business, growing our mortgage production capacity and personnel, and working toward our long-term goal of business diversification."
Single family mortgage interest rate lock commitments, net of estimated fall out, totaled $1.04 billion in the first quarter of 2013, down $219.1 million, or 17.5%, from $1.25 billion in the fourth quarter of 2012 and up $120.7 million, or 13.2%, from the first quarter of 2012. The decline in interest rate lock commitments in the first quarter of 2013 as compared to the fourth quarter of 2012 reflected an overall decrease in regional mortgage origination activity in part due to expected seasonal weakness, as well as historically low housing inventories that constrained the purchase market. The overall decline was partially offset by the continued expansion of our mortgage production personnel which grew by 9.4% in the first quarter.
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. First quarter interest rate lock commitments were comprised of 50% purchases and 50% refinance transactions compared to 33% purchases and 67% refinances in the fourth quarter 2012.
Single family closed loan volume designated for sale was $1.19 billion in the first quarter of 2013, down $326.8 million, or 21.5%, from $1.52 billion in the fourth quarter of 2012 and up $479.9 million, or 67.4%, from $712.3 million in the first quarter of 2012. At March 31, 2013, the combined pipeline of outstanding rate lock commitments, net of estimated fallout, and mortgage loans held for sale was $909.5 million, compared to a total of $1.18 billion at December 31, 2012.
Net gain on mortgage loan origination and sale activities in the first quarter of 2013 was $53.9 million, a decrease of $14.8 million, or 21.6%, from the fourth quarter of 2012 and up $24.4 million, or 82.8%, from the first quarter of 2012. The results for the first quarter of 2013 include an adjustment of $4.3 million related to a change in accounting estimate that resulted from a change in the application of our methodology used to value the Company's interest rate lock commitments. This refinement of the Company's valuation methodology was effective on March 31, 2013.
Due to differences in the timing of revenue recognition between components of the gain on loan origination and sale activities, the Company analyzes the profitability of these activities using a 'Composite Margin,' which is comprised of the ratios of the components to their respective populations of interest rate lock commitments, loans closed and loans sold. The Composite Margin for the first quarter of 2013 was 412 basis points, down from 494 basis points in the prior quarter (see the Mortgage Banking Activity table for details).
Mortgage servicing income of $3.1 million in the first quarter of 2013 increased $2.4 million, or 371.9% from the fourth quarter of 2012 and decreased $4.8 million, or 61.0% from the first quarter of 2012. The increase from the fourth quarter of 2012 was primarily driven by the impact in the prior quarter of changes in the fair value of the Company's mortgage servicing rights (MSRs) due to changes in model inputs and assumptions related to changes to the Federal Housing Administration (FHA) streamlined refinance program and expected increases in housing values, both of which generally lead to higher projected prepayment speeds, which are not within the scope of the Company's MSR hedging strategy. Additionally, during the first quarter of 2013 actual prepayment speeds were lower due to seasonality and reduced refinance activities.
The decrease from the prior year period largely reflected a reduction in sensitivity to interest rates for MSRs, which has enabled the Company to reduce the notional amount of derivative instruments used to economically hedge MSRs. The lower notional amount of derivative instruments, along with lower effective yields on derivative instruments utilized to hedge MSRs, resulted in lower net gains from MSR risk management, which negatively impacted mortgage servicing income.
Mortgage servicing fees collected in the first quarter of 2013 increased $84 thousand, or 1.1%, from the fourth quarter of 2012 and increased $1.2 million, or 18.2%, from the first quarter of 2012. The total loans serviced for others portfolio increased to $10.49 billion compared to $9.65 billion at December 31, 2012, primarily due to the increase in single family loans serviced for others.
Classified assets of $90.1 million, or 3.59% of total assets at March 31, 2013, increased by $3.8 million, or 4%, from $86.3 million, or 3.28% of total assets, at December 31, 2012. Nonperforming assets (NPAs) 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.
Nonaccrual loans of $32.1 million, or 2.31% of total loans at March 31, 2013, increased from $29.9 million, or 2.23% of total loans at December 31, 2012, primarily driven by an increase in nonaccrual single family loans. Other real estate owned (OREO) balances of $21.7 million at March 31, 2013 declined from $23.9 million at December 31, 2012, primarily as a result of valuation adjustments on certain commercial real estate properties. Loan delinquencies of $92.6 million, or 6.66% of total loans at March 31, 2013, were relatively unchanged from delinquencies of $88.2 million, or 6.58% of total loans at December 31, 2012. Excluding FHA-insured and Department of Veterans' Affairs (VA)-guaranteed single family mortgage loans, loan delinquencies were $38.5 million, or 2.94% of total non-FHA/VA loans at March 31, 2013 as compared to 2.93% at December 31, 2012.
The allowance for credit losses was $28.6 million at March 31, 2013 as compared to $27.8 million at December 31, 2012. The marginal increase in the allowance for credit losses primarily resulted from the continued growth of the Company's loan portfolio. The allowance for loan losses (which excludes the allowance for unfunded commitments) as a percentage of loans held for investment declined slightly to 2.04% of total loans at March 31, 2013 compared to 2.06% of total loans at December 31, 2012. A provision for credit losses of $2.0 million was recorded for the first quarter of 2013, compared to $4.0 million recorded in the fourth quarter of 2012 and zero in the first quarter of 2012. Net charge-offs in the quarter decreased to $1.2 million, down from $3.9 million in the fourth quarter of 2012 and $7.4 million in the first quarter of 2012.
Deposit balances were $1.93 billion at March 31, 2013 as compared to $1.98 billion at December 31, 2012 and $2.00 billion at March 31, 2012. Certificates of deposit decreased $132.3 million, or 20%, from the prior quarter and $367.5 million, or 41%, from a year ago as a result of the managed reduction of these higher-cost deposits and replacement with transaction and savings deposits, which increased $117.1 million, or 11%, from the prior quarter and $301.3 million, or 35%, from a year ago. The improvement in the composition of deposits was primarily the result of our successful efforts to attract transaction and savings deposit balances through our branch network and convert customers with maturing certificates of deposit to transaction and savings deposits.
Results of Operations
Net Interest Income
Net interest income in the first quarter of 2013 was $15.2 million, down $1.4 million, or 8%, from the fourth quarter of 2012 and up $2.4 million, or 19%, from the first quarter of 2012. Interest expense for the first quarter of 2013 included $1.4 million 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. The first quarter of 2013 net interest margin, on a tax equivalent basis, decreased to 2.81% from 3.06% in the fourth quarter of 2012, but was up from 2.51% in the first quarter of 2012. The Company's net interest margin for the first quarter of 2013 excluding the impact of the $1.4 million prior period interest expense correction was 3.06%.
Total average interest earning assets increased from the first quarter of 2012 primarily as a result of higher mortgage production volumes resulting in a higher average balance of loans held for sale, partially offset by a decrease in cash and cash equivalents which had been used to fund loans held for sale. Total average interest bearing deposit balances declined from the prior periods mostly as a result of a decline in higher-cost certificates of deposit, partially offset by an increase in transaction and savings deposits.
Noninterest income in the first quarter of 2013 was $58.9 million, down $12.8 million, or 18%, from $71.7 million in the fourth quarter of 2012 and up $18.8 million, or 47%, from $40.1 million in the first quarter of 2012. The decrease from the prior quarter was primarily driven by lower mortgage loan origination and sale revenue, being partially offset by higher mortgage servicing income.
The increase from the first quarter of 2012 was primarily driven by increased mortgage loan origination and sale revenue, primarily resulting from 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 was unchanged from the fourth quarter of 2012, and was up $21.1 million, or 61%, from $34.7 million in the first quarter of 2012. During the first quarter of 2013, a decrease in salaries and related costs resulting from lower incentive bonuses and mortgage origination commissions was partially offset by higher salary and benefits costs of new employees, seasonally higher payroll taxes, and increased general and administrative expenses resulting from higher marketing, collection and loan expenses when compared to the fourth quarter of 2012.
The increase in noninterest expense compared to a year ago was 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 Company's income tax expense was $5.4 million for the quarter. The Company's estimated annual effective income tax rate for the quarter was 33.2% as compared to 20.8% for 2012. The prior year effective income tax rate reflected the benefit of the full reversal of deferred tax asset valuation allowances.
Regulatory capital ratios for the Bank are as follows:
Tier 1 leverage capital (to average assets)
Tier 1 risk-based capital (to risk-weighted assets)
Total risk-based capital (to risk-weighted assets)
The Bank continues to meet the capital requirements of a "well-capitalized" institution.
HomeStreet, Inc. will conduct a quarterly earnings conference call on Monday, April 29, 2013 at 10:00 a.m. PST (1:00 p.m. EST). The Company will discuss first quarter 2013 results and provide an update on recent activities. A question and answer session will follow the presentation. Shareholders, analysts and other interested parties may join the call by dialing 1-888-317-6016 shortly before 10:00 a.m. PST. A rebroadcast will be available approximately one hour after the conference call by dialing 1-877-344-7529 and entering passcode 10023354.
About HomeStreet, Inc.
HomeStreet, Inc. (NAS: HMST) is a diversified financial services company headquartered in Seattle, Washington, and the holding company for HomeStreet Bank, a state-chartered, FDIC-insured savings bank. HomeStreet Bank offers consumer and commercial banking, investment and insurance products and services in Washington, Oregon and Hawaii. HomeStreet Bank conducts lending activities in Washington, Oregon, Hawaii, Idaho, California, Arizona, Utah and Alaska. For more information, visit http://ir.homestreet.com. Information contained in or linked from our website is not incorporated into, and does not form a part of, this release.
This report to shareholders contains forward-looking statements concerning HomeStreet, Inc. and HomeStreet Bank and their operations, performance, financial conditions and likelihood of success. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements are based on many beliefs, assumptions, estimates and expectations of our future performance, taking into account information currently available to us, and include statements about the competitiveness of the banking industry. When used in this press release, the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "should," "will" and "would" and similar expressions (including the negative of these terms) may help identify forward-looking statements. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. Forward-looking statements speak only as of the date made, and we do not undertake to update them to reflect changes or events that occur after that date.
We caution readers that a number of factors could cause actual results to differ materially from those expressed in, implied or projected by, such forward-looking statements. Among other things, our ability to expand our banking operations geographically and across market sectors, grow our franchise and capitalize on market opportunities, and generate positive net income and cash flow, may be limited due to future risks and uncertainties including, but not limited to, changes in general economic conditions that impact our markets and our business, actions by the Federal Reserve affecting monetary and fiscal policy, regulatory and legislative actions that may constrain our ability to do business, significant increases in the competition we face in our industry and market and the extent of our success in problem asset resolution efforts. In addition, we may not recognize all or a substantial portion of the value of our rate-lock loan activity due to challenges our customers may face in meeting current underwriting standards, a decrease in interest rates, an increase in competition for such loans, unfavorable changes in general economic conditions, including housing prices, the job market, consumer confidence and spending habits either nationally or in the regional and local market areas in which the Company does business and legislative or regulatory actions or reform (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act). Further, our ability to pay cash dividends in the future is dependent upon a variety of factors, including our net income, liquidity, capital resources, regulatory and financial condition, and our compliance with the terms of our trust preferred securities and applicable banking laws and regulations. A discussion of the factors that we recognize to pose risk to the achievement of our business goals and our operational and financial objectives is contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. These factors are updated from time to time in our filings with the Securities and Exchange Commission, and readers of this release are cautioned to review those disclosures in conjunction with the discussions herein.
Information contained herein, other than information at December 31, 2012 and for the twelve months then ended, is unaudited. All financial data should be read in conjunction with the notes to the consolidated financial statements of HomeStreet, Inc., and subsidiaries as of and for the fiscal year ended December 31, 2012, as contained in the Company's Annual Report on Form 10-K for such fiscal year.
HomeStreet, Inc. and Subsidiaries
Summary Financial Data
(dollars in thousands, except share data)
Operations Data (for the period ended):
Net interest income (1)
Provision for loan losses
Net income before taxes
Basic earnings per common share (2)
Diluted earnings per common share (2)
Common shares outstanding (2)
Weighted average common shares
Shareholders' equity per share
Financial position (at period end):
Cash and cash equivalents
Investment securities available for sale
Loans held for sale
Loans held for investment, net
Mortgage servicing rights
Other real estate owned
Financial position (averages):
Investment securities available for sale
Loans held for investment
Total interest-earning assets
Total interest-bearing deposits