Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. HomeStreet, Inc. (1518715) 10-Q published on Aug 04, 2017 at 2:33 pm
Reporting Period: Jun 29, 2017
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU clarifies the principles for recognizing revenue from contracts with customers. On August 12, 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. On March 17, 2016, the FASB issued Accounting Standards Update 2016-08 to clarify the implementation guidance on principal versus agent considerations. We intend to adopt this new guidance on January 1, 2018. We are in the process of completing an analysis that includes (1)identification of all revenue streams included in the financial statements ; (2) of the revenue streams identified, determine which are within the scope of the pronouncement; (3) determination of size, timing and amount of revenue recognition for streams of income within the scope of this pronouncement; (4) determination of the sample size of contracts for further analysis; and (5) completion of analysis on sample of contracts to evaluate the impact of the new guidance. Based on this analysis, we are developing processes and procedures in 2017 to address the amendments of this ASU, including new disclosures. Additionally, we do not expect the implementation of this guidance to have a material impact on our consolidated financial statements.
In the second quarter of 2017, we entered into an agreement to acquire a branch located in El Cajon, California. This transaction is expected to close in the second half of 2017 and is subject to customary closing conditions, including receipt of regulatory approval.
Although our business traditionally has been centered heavily in mortgage banking, we have invested significantly in the growth of our commercial and consumer banking business since our initial public offering in 2012. The significant development of this business over the last five years has been helpful in offsetting the relatively lower performance of our residential mortgage banking operations in 2017, as the scarcity of homes available for sale in our key markets is creating challenges for customers looking for suitable housing at an affordable price which in turn has reduced our ability to originate purchase mortgages in those markets. As a result of this shift in market trends, we have begun to reassess the optimum staffing level and geographic scope of our mortgage operations, including a recent reduction in headcount in our mortgage origination operations by 73 employees. We are continuing to monitor market factors and to assess the appropriate office locations and staffing levels for mortgage banking. We expect that unless trends reverse sharply in the coming months, it may become necessary to further optimize staffing levels and reconsider maintaining the full complement of our existing office locations for mortgage banking operations. Some of the scenarios currently under consideration include measures that may require us to incur restructuring charges. However, if these steps become necessary, management expects to respond promptly and proactively to promote efficient growth in the business overall while still providing exceptional service to our customers.
Results for the second quarter of 2017 reflect the benefit of our investment in growth and diversification. We have continued to execute on our strategy of becoming a leading west coast regional bank by combining steady organic growth and effective integration of our bank and branch acquisitions. At the same time, our mortgage business has been impacted by both the low supply of houses in our primary markets and higher interest rates, resulting in lower rate locks. In response to these changes in market forces, we are currently focused on cost control and optimization in this segment, including implementing a new loan origination system and a reduction in workforce. Our commercial and consumer banking segment continued to have strong growth, including an increase of loans held for investment of 5% in the quarter.
While demand for mortgages remains strong in our primary markets, as is evidenced by a continued demand from customers for mortgage loan applications and pre-approvals, new and resale home availability in those markets has not kept pace with demand. Despite sustained job and population growth, the number of homes listed for sale in Washington and California has decreased year over year by 21% and 18% respectively, according to Zillow.com, and there is no indication that there will be any near-term meaningful change in this imbalance. While this limit of supply has not negatively impacted our market share to date, it has negatively impacted our loan volume and may continue to impair both our volume and earnings in the mortgage banking segment.
The housing supply constraint is complicated by a slow development of new home construction, which is itself constrained by the geography of the West Coast and the lingering effects of the last recession. Newly constructed single family home inventory remains extremely low as homebuilders struggle to find and develop available and appropriate land for new housing and meet increased land use regulations which increase costs and limit the number of lots per parcel. In addition, because the timeline for converting raw land to finished development may exceed five years, the curtailment of development following the recession means that inventory will likely remain low for the foreseeable future.
Further, we recently implemented a series of cost-control measures that were intended to make our mortgage operations more efficient in light of the expected market conditions. These included a reduction of 73 jobs that were focused on mortgage origination as well as an investment in a new mortgage loan origination system that we hope will make our operations both more accurate and less personnel-intensive. However, if our expectations about changing market conditions ultimately prove to be inaccurate, we may be less well-positioned to take advantage of such changes and, as a result, we may suffer a loss of market share, which could affect our mortgage banking segment revenues and our overall revenues and profitability.