Q3 2021 HomeStreet Inc Earnings Call
Good day and welcome to all the Street's third quarter 2021 earnings call.
All participants will be in listen only mode.
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After today's presentation will be an opportunity to ask questions. Please vote at this event is being recorded.
I would like to turn the call over to Mr. Mark Mason Chairman and CEO. Please go ahead.
Hello, and thank you for joining us for our third quarter 2021 earnings call.
Before we begin I'd like to remind you that our detailed earnings release and an accompanying investor presentation were filed with the SEC on form 8-K yesterday and are available on our website at IR Dot home Street Dot com under the news and events link.
In addition, a recording and a transcript of this call will be available at the same address following our call.
Please note that during our call today, we may make certain predictive statements that reflect our current views and expectations about the company's performance and financial results.
These are likely forward looking statements that are made subject to the safe Harbor statements included in yesterday's earnings release, our investor deck and the risk factors disclosed in our other public filings.
Additionally, reconciliations to non-GAAP measures referred to on our call today can be found in our earnings release and investor deck available on our website.
Joining me today is our Chief Financial Officer, John Mitchell, John will briefly discuss our financial results and then I'd like to give an update on our results of operations and our outlook going forward John.
Thank you Mark.
Good morning, everyone and thank you for joining us.
In the third quarter of 2021, our net income was $27 million.
Or $1 31 per share as compared to net income of $29 million or $1 37 per share in the second quarter of 2021.
Our annualized return on tangible common equity for the third quarter was 15, 6%.
Our annualized return on average assets was 148% and our efficiency ratio was 62, 8%.
Our net interest income in the third quarter was slightly lower than the second quarter due to a $1 $7 million decrease in interest income derived from PPP loans, which was partially offset by higher levels of non PPP launch.
P. P loans caused our net interest margin to be higher by 11 basis points.
<unk> the impact of PPP loans, our net interest margin in the third quarter of 2021 was consistent with our <unk> margin in the second quarter of 2021.
As of September 32021, outstanding PPP loans were $77 million with deferred fees of $2 4 million.
As a result of the continued favorable performance of our loan portfolio and the improving the outlook of the impact of COVID-19 on our loan portfolio, we recorded a $5 million recovery of our allowance for credit losses in the third quarter of 2021.
As we continue to have more clarity of the minimal impact COVID-19 is having on our loan portfolio and with projected improvements in our economies, we expect to recover additional amounts of our allowance for credit losses in future periods.
Our ratio of nonperforming assets to total assets improved to 26 basis points.
Our ratio of ACL to total loans was one 6%.
The $3 $8 million decrease in net gain on loan origination and sales activities in the third quarter of 2021 as compared to the second quarter of 2021 was due primarily to a lower volume of single family mortgage rate locks and lower levels of CRE loans sold in the third quarter.
0.9 million decrease in noninterest expense in the third quarter as compared to the second quarter was primarily due to lower compensation costs, which were partially offset by higher general administrative and other expenses.
The $3 $2 million decrease in compensation costs was primarily due to reduced commissions, resulting from lower levels of loans closed in our single family mortgage operations.
And lower benefit costs third quarter seasonality.
General administrative and other costs increased due to a $1 9 million reimbursement of legal costs, we receive from our insurance carrier in the second quarter of 2021 and higher marketing costs.
During the third quarter of 2021, we repurchased 2% of our outstanding common stock at an average price of $40 26 per share and declared and paid a dividend of <unk> 25 per share.
Since the beginning of 2021, we have repurchased 7% of our outstanding common stock.
This is in addition to the 12% and 9% repurchased in 2019 and 2020, respectively.
I'll now turn the call over to Mark.
Thank you John Holmes streets results for the third quarter continued our outstanding results for the year.
Our results reflect our diversified business model the benefits of our conservative credit culture, and continuing focus on operating efficiency.
Our loan origination levels remains strong with $804 million of originations and excluding.
The impact of PPP loans, and despite continuing high levels of prepayments.
Our total loans grew at an annualized rate of 19% during the quarter and 9% year to date.
As expected our single family mortgage loan volume and profit margins decreased from second quarter levels and our revenue has now declined to near normal levels.
The credit quality of our loan portfolio continued its strong performance as Jon mentioned greater clarity on the impact of Covid on our portfolio allowed us to recover $5 million of our ACL.
For the second consecutive quarter, our mortgage banking revenue comprised only 17% of total revenue.
In less than 8% of our net income.
We continue to anticipate a slight decrease in our origination and gain on sales activities over the next few quarters.
Due to increasing revenues from other operations, we expect the revenue contributions from our single family mortgage banking business to represent an even smaller share of total company revenue going forward.
We expect our overall net interest margin to continue to benefit in the fourth quarter of 2021 from the forgiveness of PPP loans looking.
Looking forward with the federal reserve, indicating that short term interest rates will remain low for the foreseeable future. We expect our net interest margin, excluding the impact of PPP loans to remain level as the benefit of our deposits continuing to reprice downward is expected to offset any decline in the yields on our portfolio loans.
As I have mentioned previously.
We continue to increase our commercial real estate loan originations, primarily multifamily both for sale and for our portfolio.
The strong fundamentals and demand in our markets and our successful platform has supported this initiative.
These continuing high levels of loan production are expected to result in 10% to 15% growth in our loan portfolio next year and beyond with.
With a commensurate increase in net interest income.
Our efficiency ratio in the third quarter was consistent with the prior quarter at 62, 8%.
While the expected decline in mortgage banking profitability is likely to result in upward pressure on our efficiency ratio through mid next year.
We anticipate that as a result of loan portfolio growth and related increases in net interest income and our ability to leverage our existing operating infrastructure, we have the opportunity to improve our efficiency ratio to approximately 60% in the second half of next year.
And ultimately to the mid to high 50% range beyond that.
Based upon our continuing strong financial results and positive outlook, we repurchased $15 million of our common stock during the quarter.
<unk> 25 per share dividend, which today equates to a yield of approximately two 3% on the market value of our common stock.
We anticipate continuing to efficiently retain capital for growth, while returning excess capital to shareholders in that regard and subject to our board of directors review and approval and the non objection of our regulators. We ran it we plan on repurchasing $20 million of our outstanding shares in the fourth.
For the quarter.
Additionally, given our consistently strong performance the board of directors anticipates discussing an increase in our dividend in the first quarter of next year.
Of course future declarations of the current or higher levels of dividends are subject to our financial condition and future outlook at that time, as well as corporate governance legal and regulatory requirements.
Yeah.
Last quarter, we disclosed that we were evaluating the use of securitizations as a tool to enable us to originate multifamily permanent loans to our full potential.
To uncap individual borrow lending limits.
And to improve our capital efficiency and retain the servicing on these loans.
And that we planned on completing our first securitization this year.
While we continue to evaluate the use of Securitizations, we have instead agreed to execute a whole loan sale in the fourth quarter due to extremely favorable prices available in the secondary market today.
Looking forward to 2022, we expect lower levels of portfolio loan sales either through whole loan sales or securitization as we plan to retain loans in our portfolio to generate increasing levels of net interest income.
Since going public in 2012 home Street has been executing a strategy to convert from a legacy thrift to a full service commercial and consumer bank.
This conversion focused on the development of commercial lending or deposit product lines and more recently, reducing the size of our single family mortgage banking business.
S&P has recently recognized our successful conversion.
At home Street's global industry classification standard code will be changed from a risk and mortgage finance institution to a regional bank.
As of November the first of this year.
This change may qualify home street for inclusion in certain regional bank indexes that currently exclude us.
To reiterate my comments from last quarter.
The investment we have the investments that we've made and the improvements in our efficiency and profitability and provide us with the operating leverage that will enable us the opportunity to grow revenue and in turn earnings.
Without commensurate additions to personnel or other operating expenses.
And while quarter to quarter earnings May show some degree of volatility.
Excluding recoveries of our allowance for credit losses, and excluding nonrecurring items, such as PPP loans and expense recoveries.
And of course subject to any unforeseen changes in the economy and our business.
We believe we have the opportunity to continue to grow year over year earnings per share over the next few years, specifically, we believe that current estimates.
Understood.
Possible earnings per share over the next few years.
Given our performance in relation to the peers and my forward looking comments today I believe our stock is significantly undervalued.
Today, we trade at a meaningful discount to our peers on a price to earnings our tangible book value basis.
Specifically based.
Based upon multiples of 2022 consensus earnings estimates today, the median of our peers.
Trade at over 30% higher than home straight.
Historically this discount was largely attributed to high levels of mortgage banking revenues and earnings and its associated volatility.
Historically this was accurate with mortgage banking revenues exceeding 50% of total revenues.
However, even at the height of last year's mortgage refinancing our mortgage banking revenues never exceeded 32% of total revenues in the last two quarters of mortgage banking revenue represented only 17% of revenues and less than 8% of the bottom line.
Today, any meaningful discount associated with mortgage banking volatility is unwarranted.
And I believe our shares represent a tremendous opportunity for investors.
The best way for me to describe the current state of affairs at home Street.
Is that while we are pleased to have achieved strong operating results in total shareholder returns over the prior decade. This is not the same home street of 10 years ago.
Nor is it the same home street of even three years ago, while we have been able to accomplish with our effective reorganization.
Is to have brought the company to a place where we can expect to achieve lower earnings volatility higher operational profitability and stronger earnings growth all of which we believe should compare very favorably to our regional banking peers going forward.
With that this.
This concludes our prepared comments today.
We appreciate it I appreciate your attention and John and I would be happy to answer any questions you have at this time.
Well now begin the question and answer Seth.
That's a good question you can press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
Well, it's part of your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First Gunther <unk> question comes from Jeff <unk> D. A Davidson. Please go ahead.
Good morning.
Hey, Jeff Hey, just a question on the <unk>.
On sale projections in 'twenty two.
You've got sort of flattish.
Fee income expectations, just trying to see what that line item year over year.
Maybe you could just detail a little bit more what what you see with the gain on sale.
Item.
Obviously, we expect gain.
Gain on sales of single family mortgage loans to decline from this year right. I mean earlier this year, we still had a much more meaningful levels of refinancing activity. So absent a meaningful decline in mortgage rates, we are expecting the revenues.
Next year in the single family mortgage banking area to look a lot more like the second half of this year.
So you can you can see there would be.
A noticeable decline in those revenues. Additionally.
Given my earlier statements that we are planning to sell less multifamily loans next year, either by whole loan sale or securitization. Those revenues are expected to decline also.
We are expecting to continue to grow our multifamily Fannie Mae <unk> business and of course those are all.
Loan sales Securitizations were expecting those related revenues to rise that mitigates those declines somewhat.
But.
You could foresee these revenues declining.
If you sort of mix up all of those comments.
Bye.
25% to say a third of of this years gain on sale for this year, yes. So just to add the third the third quarter revenue numbers, probably are pretty consistent from a single family perspective in terms of going forward and looking on a go forward basis should not be substantially different either up or down from that.
The other thing I wanted to point out is as we go through in this mortgage banking revenues as our as the prepayment speeds decline, we would expect some uptick in our loan servicing revenue on the single family mortgage side.
Some of that yes, right, yes, it's counter cyclical I know, Jeff you've looked at our results for a long time and seen that are servicing results have been pretty poor and they always are during falling rates right high levels of prepayment speeds, which create high levels of decay or amortization of servicing rights also when looking at this these third quarter.
<unk>.
We didn't have a multifamily loan sale right right. So you really need to look at both third and fourth quarters to get.
A realistic run rate going forward and as we mentioned we've agreed to have a a whole loan sale of multifamily loans in the fourth quarter.
At at premiums that.
Were sufficient to keep us from securitizing so.
We're expecting that to be a strong loan sale.
Got you.
Keeping item, maybe John what would the PPP balances at quarter end.
$77 million and the deferred fees were about two and a half.
Our expectations are is that through the fourth quarter. We continued some forgiveness activity and then we don't expect anything materially to be affecting next year's results on the PPP side be small benefit.
Got you.
Okay great.
So I'll also just kind of be on the revenue question.
We believe that revenue loss is going to be.
Made up.
By other revenue increases primarily greater net interest income.
And.
All of these things together, we believe along with continued repurchases that we are not going to see a <unk> mutation in earnings per share next year. Despite.
The broad estimates that exist today.
Yeah.
If you look at our numbers our expectations because of the declining balances. This year due to PPP loans is not only do we expect our year over year balances to increase by 10% to 15%, but we expect our average balance of loans increased by a similar level.
Next year also.
And that 10% to 15% includes the loans held for sale.
The 10% to 15% of loans held for sale tend to it would not include that from the perspective of going forward.
Loans held for sale, we'll kind of be more fluctuating and historically, we've been pretty consistent because we havent loan sale on a quarterly basis in the future that will be more fluctuating because we aren't going to necessarily do want on a quarterly basis going forward. So right to 10% to 15% is just loans held for investment.
Okay got it and then 19% annualized loan growth in the quarter.
Did you include the held for sale that we did.
Yes, because we did if you look at the held for sale between the second quarter in the third quarter. There was a big jump because of reclassification so to get that annualized number. We did include all of the loans. That's why we also included the loans for the whole year and that run rate was 9%. That's why we want to make sure. We're clarifying to everybody. What the growth is but we have we have strong growth when you pull back the PPP loans in terms of.
While the overall portfolio.
Got you thanks for clarifying I'll step back thank you.
Thanks, Jeff Thanks, Jeff.
Again to ask a question. Please press Star then one.
Next question is from Steve Moss of B Riley Securities go ahead. Please.
Hi, good morning.
Good morning, Steve.
Maybe just following up on the loan pipeline being strong here I hear you guys on multifamily originations, obviously, but kind of curious.
You saw some growth here in the quarter and construction.
And even other spots just kind of how you're thinking about the mix in terms of the growth going forward.
We have a very strong pipeline.
Particularly in the commercial real estate area of the multifamily area.
Obviously in the single family mortgage area, where coming into the seasonally lower volume period.
The fourth quarter tends to be a period.
<unk> youre drawing down the pipeline. So we will exit the fourth quarter at least in the single family area with a smaller pipeline than we enter.
That may not be true.
In the commercial area sort of remains to be to be seen.
Obviously loan rates continued to be attractive.
And.
In some areas like the centimetre dose area recent changes.
In.
The lending caps for Fannie Mae and Freddie Mac in the multifamily area.
Have spurred great originations there the change in administration has been good.
For the agencies with respect to multifamily lending caps those caps were increased about 10% from 2021 cap.
<unk>.
And the agencies have become much more competitive.
Since those announcements so we're expecting a.
Much stronger agency lending through the end of the year and at least next year.
And one other thing too is this our single family loans originated for portfolio have been strong this year and we continue to have pretty strong results next year, just the level of prepayments have been so high this last year and a half and it's been hard to keep pace with it we expect with prepayments going down next year that we expect our single family portfolio to continue.
Actually just start growing next year.
I mean, it's been write offs since we downsize the business right right.
Great.
Exactly Okay. That's helpful. And then in terms of just loan pricing kind of curious as to.
Where rates are in terms of what's coming on the books. These days versus what the rate of what is rolling off.
Well I mean, that's still.
That condition Hasnt changed right I mean loans that are prepaying are prepaying for a reason right.
And so.
Let me see if I can give you some.
Runoff note rates in the aggregate.
In the.
The third quarter.
Pick up.
We originated right Im looking for the run off the run off this year.
We ran loans off actually it appears balanced but it's not really in total we ran off loans at about a $3 38 spread and replaced them with $3 39, but that's not true by category right.
If you look at.
For example.
Single family loans, the loans that prepaid were 393% and the loans, we added over 336% right.
Put some perspective what.
What happens with run off.
One thing Thats affecting us too is the PPP loans or some of the runoff we have until those loan rates were low at one person right. That's what makes the aggregate LOE yet, but in the ongoing portfolios the multifamily perm portfolio.
Plus the nonresidential CRE Perm portfolio, we ran off at $4, two 1% and we added 322.
So.
These trends continue this is the same experience all of our peers are having fortunately our funding costs continue to fall.
In the aggregate, we believe we're able to maintain our core net interest margin.
Okay. That's helpful and then.
Turns on Mark you talked about capital deployment going up to $20 million year likely on the buyback.
Kind of.
I take that to be youre signaling sustained profitability closer to this quarter at current level.
Just kind of curious on how you guys are thinking about it, especially as we think about 2022.
Well, that's a great question.
We.
We have been fairly aggressive.
With our.
Buyback program, though we have been careful.
During the pandemic.
Two.
Structure, our buyback program.
So that buybacks during the quarter has generally not exceeded what we've earned in the quarter in conjunction with dividends total distributions if you will.
And we were sensitive to that relationship.
As the pandemic has extended to return to return to maintain.
A somewhat higher level of capital than we would.
Target.
In a normal course.
And going forward.
As the pandemic.
Cross my fingers on this one as the pandemic ends and does it extend.
Hugh.
You may see us.
Extend the buyback activity beyond.
Current earnings in conjunction with dividends.
That would have the impact of reducing our capital ratios.
Somewhat.
Not significantly, but a little beyond current levels, which which means that relative to capital our earnings our buyback program, maybe slightly elevated.
Okay.
Great.
Helpful. Thank you very much and most court.
Thank you Steve Great. Thanks, Steve.
This concludes our question and answer session.
Now I'd like to turn the call back over.
If the Mark Mason for final remarks. Please go ahead Sir.
We appreciate it.
Well before we leave we're looking at the Q does jetblue lists have another question.
Are we looking at the Q wrong.
Operator can you check moment, yes, I'll get them back and give me a moment please.
Alright, our next question will be from Jeff what was a follow up from D. A Davidson. Please go ahead.
Sorry, guys not the whole day went up but just a quick question on the on the EPS being understated I think a big piece of expectations might be at least year over year 'twenty one versus 'twenty two.
Is on the provision.
Year to date at $9 million recapture added.
Are those are you excluding that in that conversation just wanted to kind of get your sense. If you are including it I guess any expectations you have on the provision line for 'twenty two are irrelevant.
Great and thanks for asking that question.
We are anticipating.
Again absent changes in COVID-19 related risk or other credit risk we are anticipating further drawdowns in our ACL next year.
If we.
Realize.
What I would consider.
A normal a full normalization.
That credit risk related to Covid next year.
We would likely normalize our ACL.
Level, so our coverage levels, if you will which would anticipate us.
Recovering.
The remainder.
Provisions we established.
Against.
Pandemic related risk offset by <unk>.
Growth in the portfolio.
And.
Whatever other adjustments, we might feel are needed to adequately.
State our ACL.
In relation to.
Obviously, the new standards.
But if you consider that.
We've had a growing.
Composition of multifamily loans.
And our held for investment portfolio and that potential impact on the ACL.
Our ACL.
Could end up at or slightly lower.
Relatively to where we were pre pandemic.
We have not had losses in multifamily loans as an institution as simple statement.
Our relative credit risk when you consider.
Our high composition of real estate related lending and the hard collateral conservatively underwritten that comes with it.
We have a lot of safety in our ACL coverage and so.
Our next year's comments due.
Contain the assumption that we will.
Recover all or substantially all of the pandemic.
Related.
Provisions from 2020 offset by portfolio growth.
Got it so if youre growing loans, 10% to 15% and 22.
We could see continued drawdown our reserves in 'twenty two so be it that the provision.
Provision line is a net benefit.
Yes.
Yes.
That's correct.
Okay. Thank you guys.
Got it.
Thank you that will conclude our question and answer session will go Mr. Mark now for closing remarks. Thank you.
Thank you operator, and thank you to everyone, who joined US today for your attendance and patients in here in our prepared comments and.
The great Q&A.
We look forward to talking to you next quarter.
Yeah.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.