Q4 2021 HomeStreet Inc Earnings Call
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Good day and welcome to the home Street fourth quarter 2021 earnings call.
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Please note this event is being recorded.
I would now like to turn the conference over to Mark Mason, Chairman, Chief Executive Officer, and President. Please go ahead.
Hello, and thank you for joining us for our 2021 fourth quarter and full year earnings call.
Before we begin I'd like to remind you that our detailed earnings release and accompanying investor presentation were filed with the SEC on form 8-K yesterday.
Are available on our website at IR Dot home Street Dot com under the news and events link and.
In addition, a recording and transcript of this call will be available at the same address following our call.
Please note that during our call today, we will 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 harvest 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.
An investor deck available on our website.
Joining me today is our Chief Financial Officer, John Mitchell, John will briefly discuss our financial results and I would 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 fourth quarter of 2021, our net income was $29 million or $1 43 per share as compared to net income of $27 million or $1 31 per share in the third quarter of 2021.
For the full year 2021, our net income was $115 million or $5 46 per share a record for the company.
For the fourth quarter of 2021, our annualized return on average tangible equity was 17% our annualized return on average assets was 159% and our efficiency ratio was 62, 2%.
For the full year 2021, our return on average tangible equity was 16, 8% our return on average assets was 158%.
Our efficiency ratio was 61, 9%.
Our net interest income in the fourth quarter was slightly lower than the third quarter due to a $2 $1 million decrease in interest income derived from the PPP loans, which was substantially offset by higher levels of non PPP loans.
P. P loans caused our net interest margin to be higher by three basis points in the quarter.
Excluding the impact of PPP loans, our net interest margin in the fourth quarter of 2021 was consistent with our net interest margin in the third quarter of 2021.
As of December 31, 2021 outstanding P. P. P loans were only $38 million with deferred fees a million dollars.
As a result of the continued favorable performance of our loan portfolio and the improving now elective the impact of COVID-19 on our loan portfolio. We recorded a 6 million dollar recovery of our allowance for credit losses in the fourth 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.
Changes in the composition of our loan portfolio to higher credit quality assets and barring any negative developments affecting our loan portfolio, 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 18 basis points.
Our ratio of ACL to total loans was 88 basis points.
The $4 $3 million increase in noninterest income in the fourth quarter of 2021 as compared to the third quarter was primarily due to a $2 $6 million increase in net gain on loan origination and sales activities.
Due to a 2.3% gain realized on the sale of $244 million of permanent multifamily loans in the fourth quarter, which was partially offset by a lower volume of single family mortgage rate locks.
And an increase in other noninterest income, which was due primarily to a zero point $6 million gain on sale of Oreo in the fourth quarter.
The 2.1 million the increase in noninterest expenses in the fourth quarter of 2021 as compared to the third quarter was primarily due to higher general administrative and other costs, partially offset by lower compensation and benefit costs.
The lower level of compensation and benefit costs reflect a $1 million reversal of previously accrued medical benefits.
Weighted to the positive experience in our self insured medical program.
Legal costs, which are included in general and administrative and other costs were $2 $5 million higher than the fourth quarter of 2021 as compared to the third quarter due to costs incurred on certain legal matters.
During the fourth quarter of 2021, we repurchased 2% of our outstanding common stock at an average price of $51 17 per share and declared and paid a dividend of 25 per share.
Since the beginning of 2021, we have repurchased 9% of our outstanding common stock.
This is in addition to the 12% and 9% repurchased in 2019 and 2020, respectively.
I will now turn the call over to Mark.
Alright, Thank you John Holmes Street, which celebrated its 100 year anniversary in 2021 for the first time achieved earnings in excess of $100 million.
I Love the cemetery, a record $115 million of net income in 2021 reflected the success of our diversified business model the benefits of our conservative credit culture.
Continued focus on operating efficiency.
Our portfolio of loan origination levels remained strong with $795 million originations in the fourth quarter and a record $3 $3 billion for the full year.
Excluding the impact of PPP loans, and despite high levels of prepayments or total loans grew 11% during 2021.
In the fourth quarter, our single family mortgage loan volume decreased from third quarter levels as we return to normal seasonal levels of activity.
Historically fourth quarter single family lock volume is lower the loan closing volume, which reduces our mortgage banking net income as the majority of our revenue is recognized upon interest rate lock in the majority of the loan origination expenses are recognized at closing.
This was particularly true in the fourth quarter.
Looking forward to the first quarter of this year, we anticipate the lower normal seasonal volume of interest rate locks with a balanced or higher volume of locks versus closings.
The credit quality of our loan portfolio continued its strong performance in the fourth quarter and as John mentioned to greater clarity on the impact of Covid on our portfolio allowed us to recover $6 million of our ACL in the quarter.
As we head into the new year, we believe home Street has the ability to provide more consistent and less volatile earnings our mortgage banking revenues, which created significant volatility in the past, we're only 12% of our total revenues during the fourth quarter are expected to normalize at a smaller share of total company revenue.
Going forward.
We're focused on growing our loan portfolio between 10 and 15% in the coming years as a result of growth in our loan originations lower prepayments and reduced portfolio of loan sales and accordingly, our net interest income is expected to be a larger and more consistent component of our revenues while we.
Growth in our portfolio coming from all our business units are commercial real estate loan originations, primarily multifamily are expected to be the primary driver of our growth.
Our efficiency ratio in the fourth quarter was consistent with the prior quarter at 62 points to 2%.
While the decline in mortgage banking profitability and reduced sales of permanent multifamily loans is likely to result in upward pressure on our efficiency ratio through mid year. This year, we anticipate that as a result of loan portfolio growth and related to increases in net interest income and our ability to leverage our <unk>.
<unk> operating infrastructure, we believe we will improve our efficiency ratio to levels consistent with the last two years in the second half of this year.
And next year, we believe we can reduce our efficiency ratio to below 60% and trending to the mid to high 50% range going forward.
Based upon our continuing strong financial results and positive outlook, we repurchased $19 million of our common stock during the quarter and paid a <unk> 25 per share dividend.
We could we anticipate continuing to efficiently retain capital for growth.
While returning excess capital to shareholders.
With the completion of our $100 million subordinated notes offering this month, we accessed inexpensive capital to continue our stock repurchase program and support our future growth.
That regard and subject to our board of Directors review and approval and the non objection of our regulators we plan on repurchasing $75 million of our outstanding shares in the coming quarters.
Additionally gear.
Given our consistently strong performance the board of directors anticipates discussion discussing an increase in our dividend in the first quarter. This year.
Of course future declarations of the current or higher levels of dividends are subject to our financial condition.
Outlook at the time as well as corporate governance legal and regulatory requirements.
To reiterate my comments from prior quarters, the investments, we've made and the improvements in our efficiency and profitability have enabled us the opportunity to grow revenue without commensurate additions to personnel or other operating expenses.
We previously told you that excluding recoveries of our allowance for credit losses, and nonrecurring items, such as PPP loans and subject to any unforeseen adverse changes in the economy or our business. We believe we have the opportunity to continue to grow year over year earnings per share we.
We expect this to hold true as we consider our earnings per share prospects for 2022.
We are planning on reduced sales of permanent multifamily loans, which combined with lower expected prepayments should support our guidance for growth in our held for investment portfolio. This year positioning the company for a meaningful increase in recurring earnings per share in 2023 versus 2000.
'twenty two.
Accordingly, we expect earnings in the first quarter of this year to be lower than the fourth quarter of last year due to the absence of a permanent multifamily loan sale.
Additionally, compensation expenses in the first quarter of each year are higher than the prior quarter due to merit increases employer taxes, and the four O K match.
Given these expectations, we anticipate earnings in the first quarter to be the lowest of any quarter. This year.
So while quarter to quarter earnings this year May show some volatility depending upon the levels of sales of permanent multifamily loans if any.
As well as the seasonality of our mortgage banking revenues as we move into the second half of 2022, we believe that our decision to increase loan retention. The early part of this year will set a strong foundation for meaningful earnings growth. After this year.
As a result of our 2019 mortgage banking restructuring and our initiatives to improve operating efficiency and profitability. We have brought the company to a place where we can expect to achieve lower earnings volatility higher profitability and stronger earnings growth all of which have and we believe we'll continue to compare.
Favorably to our regional banking peers going forward.
We have made substantial progress and our shareholders have benefited.
Our total shareholder return for one year three years, and five years was 58%, 156% and 72%.
First is the care acts, which was 37%, 55% and 30% respectfully.
And I am very happy about the job we have been doing for our shareholders.
Despite our recent stock price performance I believe our relative valuation remains well below a level consistent with the current quality and profitability of our bank in relation to our peers.
Before concluding I want to recognize the recent bank Director magazine 2022 ranking banking report.
Which ranked our board of directors as one of the top 10 bank.
Bank boards of all banks nationwide is.
As the chairman of the board I'm, particularly proud of that honor.
Thanks Director also recognized home Street as one of the top 10 small regional banks nationally.
And with that this concludes our prepared comments today. We appreciate your attention Jonathan I would be happy to answer any questions you have at this time.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Jeff <unk> with D. A Davidson.
Please go ahead.
Thanks, just had a couple of questions on guidance.
Slide just.
Dig into the margin assumptions, a little bit and Mark I appreciate the commentary on expectations, but just margin you mentioned some stability or are stable outlook two to three quarters out.
Does that include any.
Sort of rates are bad assumption within that.
No it doesn't.
Were lousy prognosticators of forecasters that fed timing or fed movement. So obviously that could have an impact.
Generally.
A positive that impact near term right given.
The the adjustable rate loans, we have and given the historical historical lag in repricing deposits.
Okay, and then just following up on the on the.
Noninterest income line, you mentioned decreasing and I get that Q1.
May be lower than Q4.
Pretty decent volatility and a gain from origination so.
Could you characterize that any further about as gip stepped down in Q1 expectations or.
Noninterest income for the sort of the balance or how it relates to at least in magnitude full year or within the range of quarterly and in 'twenty one.
We will see we will see a decline.
We have some offsetting or mitigation as expected, where we're expecting our loan servicing income as an example.
To perform better this year because of lower prepayments and in turn lower decay of our MSR is.
But our.
Our single family.
Related gain on sale will be we expect a little lower in part because of lower volume. If you look at first quarter over first quarter.
First quarter of 2021 was still a pretty strong quarter both in volume.
And the gain on sale. Additionally, we are not anticipating a sale of.
Commercial real estate loans of multifamily loans portfolio loans in the first quarter.
Those two differences should.
Make for a meaningful.
Big difference or decline.
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And gain on sale.
Safe first quarter over first quarter I mean, the first quarter of 2021, I believe our gain on sale line was over $30 million right and it came down to as low as $17 million in the third quarter.
Because there was no.
Portfolio quality multifamily loan sale in the third quarter, but third quarter is still had higher levels.
Single family volume. So if you look at the third quarter level of say, a little over $17 million third quarter of 'twenty. One we expect the first quarter of 'twenty two to be lower.
Yeah.
I think that Jeff just the biggest difference between the fourth quarter and the first quarter is going to be the multifamily Perm sale that we did in the fourth quarter otherwise the single family levels than in the first quarter from a revenue perspective are probably going to be somewhat consistent with the fourth quarter.
Okay, that's very helpful because the seasonality.
Right yes.
Okay got that.
Sprint that up I appreciate I'll step back.
The next question comes from Woody lay with Cade VW. Please go ahead.
Hey, Thanks for taking my question guys.
Okay.
Wanted to start off looking at expenses. So your guidance calls for them to be slightly increasing over the coming quarters, but I'm just trying to figure out sort of the base of expenses for that guidance is that sort of off the reported number of roughly 54 million or is that you know looking at the core number I know you had some outside that will litigate.
Expensive you strip that out it's around $51 5 million really.
Really just looking for some for some guidance on next quarters expenses.
Yeah.
I was going to say there is two items in the fourth quarter looking at that perspective that that will impact going forward. One is we had $1 million recovery on our assurance and the compensation and benefits and two we had some additional legal costs in the fourth quarter that we do not expect to be recurring on those were the two biggest items that are not being carried forward.
Our nonrecurring from that perspective, and I think Mark also mentioned the fact that our compensation expenses in the first quarter compared to the fourth quarter always hire for the reasons you stated.
So I think the guidance that we provided and Mark is provided in the past as kind of a run rate of around 54 million plus on a quarterly basis, and obviously fluctuates up and down based on a little bit of seasonality. So you have some things going both directions right the absence of nonrecurring.
Expenses like a legal accrual.
But the absence of a credit on health benefits.
So I would take that slightly phrase to heart.
If you just look at the overall number of quarter over quarter.
Yes.
Okay. That's helpful. And then in the expense guidance you started talking about expenses incurred to support our loan portfolio growth is that signaling you'll you'll look to be active on the hiring front or is that really just higher expenses for retaining current employees.
We don't think we're going to have materially higher expenses to generate the additional loan volume we are not anticipating a significant level of hiring that we do have.
A fair number of open positions that we've had opened for some time.
So we expect our FTE count to go up.
Probably in the 20 to 30, FTE range, which would kind of get us back to where we were earlier in the year last year, but not really over that and we'll be lucky to hire those folks frankly in this market.
Yes.
And then last for me.
Sure.
Great quarter on the loan grades Ron could you just give some color on one prepayment levels in the fourth quarter and sort of I know you said a couple of times that you expect prepayment levels.
To dropdown in 2022 are you seeing any signs of that so far.
Oh boy.
The fourth quarter.
Prepayment rate was pretty consistent with third quarter, but a lot better than the second quarter.
And yet.
The one thing we know about prepayments and prepayment speeds as you can only prepay alone what's right and there is a burnout factor that begins occurring and we're starting to we're starting to see that.
In some loan types, yeah, I think the single family definitely recognize that.
Significant decrease in prepayments on our single family on the multifamily were seeing a trend slightly going down and we expect that to continue.
And the next year to be more stable and consistent with what historically multifamily has which is a pretty base.
I will have prepayments, it's not a wide range when youre looking at multifamily portfolio based on our experience.
Now obviously, the fed and they have a lot to do with that.
Both on the short end and the long end with quantitative easing.
It kind of remains to be seen what the total impact.
Right Alright, thanks, guys.
Thanks Wendy.
The next question comes from Steve Moss with B Riley Securities. Please go ahead.
Alright, good morning, guys.
Maybe just tying out loan sales would further is it just that you guys do not expect just to be clear you guys don't expect to do a loan sale in the first quarter.
Will that carry on throughout the year or just how do we think about.
Commercial real estate loan sales for 2023 relative to the.
773 million number for the for full year 'twenty one.
Well.
It's something that we're just going to watch in terms of our ability to meet our growth targets first of all in our portfolio.
We always have Fannie Mae loan.
Loan sales.
And we're hoping for a stronger year this year with respect to those sales.
We're not we have decided not to do a multifamily sale in the first quarter.
We could have won in the second quarter based upon our success.
I would say that our preference is to obtain loans today.
In that regard we are expecting our commercial real estate concentrations to go up somewhat as we retain more multifamily loans. So it remains to be seen if we were successful in originating the amount of loans, we hope too.
And we haven't really missed our target for several years, even though the target keeps going up.
If we're successful we will probably have a loan sale could be second quarter could be later.
To the extent that we.
We have higher prepayments.
More or less originations.
That loan sale.
May be deferred or eliminated this year.
I think Steve one of the important things to remember and we kind of mentioned that last last quarter as well, we are providing guidance of 10% to 15% in the first year, especially 2022, we're going to be looking at being much closer to the higher end of that range and thats kind of our goal and that's why Mark's answers kind of.
Depending on.
Conditions.
Okay.
That's helpful.
Then just maybe in terms of loan pricing. These days I know theres PPP noisy stuff, but just kind of curious as to.
What youre seeing for loan pricing and just thinking about loan yields here going forward.
Well, it's still a competitive market.
Yes.
You still have single family mortgages in the say three four to three five range multifamily is about three and a quarter.
C&I continues to be very.
Competitive in the low threes today.
Yeah.
Okay.
Okay.
That's helpful and then in terms of just you know.
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Thinking about funding.
Finding costs in <unk>.
In asset sensitivity.
I heard the.
Don't want to guess on on fed rate hikes and stuff, but just kind of curious is that what youre thinking for deposit rates.
Fed hike or with a fed hike or two if you think youll see any movement if at all.
Well, it's a great question I mean, historically, our deposit beta has been in the 40% to 45% range, but that history was also dominated by.
Many years of like 20% annual growth, where we had to utilize promotional money market and CD deposits to fund that growth in part and.
Our decision to stop growing for a couple of years allowed us to run off the most interest rate sensitive depositors.
And reorient, our core depositors toward.
Lower deposit rates relative to our peers and we are going to try to hold that strategy going forward. So.
Our our beta may be different we hope lower.
We're going to be as interested as you are to see to see how it works out.
One thing too different than in the past Steve is our level of wholesale borrowing is almost nominal in terms of that and that tends to reprice quicker than deposits too. So when we're looking at this especially this next coming year, we don't see a lot of pressure on our rates from that perspective, because of the low level of wholesale borrowing behalf.
And then there's a hell of a lot of liquidity in the market still so we don't see a lot of pressure on rates, even if the fed raises rates a couple of times.
Right and then maybe just in terms of liquidity on your balance sheet.
Do we think about.
Keeping the investment securities portfolio, more or less stable here or would you look to do maybe a little bit of a remix towards loans here as we as we go forward.
We are we try to stay pretty loaned up if you look at our history, particularly in relation to our peers recently, our loan to deposit ratio has remained fairly consistent and fairly high between 90 and 100%.
We seek to keep our liquidity at about 15% of assets we have some.
Some liquidity or securities needs. It has to do with collateral we have fairly large.
Hedging program that requires collateral.
So part of that.
Liquidity in the securities portfolio are pledged as collateral.
But we don't intend to grow our securities portfolio beyond its need we intend to stay loaned up.
Alright, I appreciate that thank you very much guys. Thanks.
Thanks, Steve.
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Matthew.
I wanted to hone in on the commercial.
You know the C&I and CRE loans sold.
In terms of this year relative to last I think he did a $773 million in 'twenty one.
How should we think about.
That level of those level of that level of sales this year relative to last.
So it's a great question and it relates somewhat to prior questions about sales and timing and probability.
As we think internally.
We have.
Consider reducing that number meaningfully.
If we have a loan sale.
And so we've been thinking about numbers that that maybe half of that number this year, but it's not assured that we will have a loan sale.
No.
For your purposes, I know thats not real clear guidance.
But.
If we have a loan sale.
We're expecting it to be probably a onetime event as opposed to a multi quarter event.
Probably in the.
The second half of the year again wanting to see if we're going to outperform.
And the sizing being.
Meaningfully less maybe half.
Okay. Thank you and then.
On the reserve coverage ratio I know more.
Most of your growth is coming from multifamily you've got a 24 basis point reserve on multifamily.
The quality of that asset class, but.
It would also suggest that your reserve.
Would come down.
A decent amount from here and it sounds like Youre looking for negative provisioning to persist in the near term I guess, how should I guess, how where would you where would you expect that coverage ratio to bottom I guess, what's your comfort level and you know what's the what's the ratio that you would want it to go below I know that's a simplified it.
Question simple question, but.
Got more complex, our assumptions, but yeah, I think I think from our perspective, we can probably address it more from the perspective of the provisioning I think in the first half of this year, we still anticipate having recoveries as we mentioned we think it will then stabilize and then as we look into 'twenty, three and 'twenty four probably having normal provisioning for the growth in the portfolio.
That's probably the way I would.
Rephrase that we don't have a set number we're going down too, but I can tell you that we still have excess reserves from our COVID-19 provisioning and I can also tell you because of the shift in the the structure of our portfolio to the lower credit I mean, the lower credit risk multifamily portfolio that we are freeing up reserves that way, it's a new world still with the season.
<unk> analysis and going through the process and we're still learning from that as I am sure everybody else's.
But thats kind of where we're looking at in the near term and the longer term.
Okay, and then just a housekeeping item do you happen to have the PPP loan balance at the end of the year end.
I did mention that in my comments it was about.
$38 million I think was the number that we have left our balances and only less than a $1 million in terms of the year.
Fees fees less so.
Got it okay $38 million and $1 million. So we don't expect any significant impact from the PPP loan amortization, because we think that will be spread out over six to nine months.
Okay. Thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Mark Mason for any closing remarks.
Thank you all for joining US today, we look forward to speaking with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Okay.
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