Q1 2022 HomeStreet Inc Earnings Call
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Fourth quarter of 2021.
In the first quarter of 2022, our annualized return on average tangible equity was 12, 2%.
Annualized return on average assets was one 1% and our efficiency ratio was 77%.
Our net interest income in the first quarter of 2022 was $2 $5 million lower as compared to the fourth quarter of 2021, due primarily to lower average loan balances interest expense related to the $100 million subordinated notes offering completed in January 2022, and we do.
Used revenue from PPP loans.
The lower average loan balances were primarily due to the sale of $244 million of multifamily portfolio loans in November of 2021, which was partially offset by the increase in loan balances during the first quarter.
Our effective tax rate for the first quarter was 19% due to excess tax benefits, resulting from divesting of stock awards in the quarter or.
Our quarterly effective tax our tax rate for the remainder of 2022 is expected to be 21, 5%.
As a result of the continued favorable performance of our loan portfolio and the improving outlook as the impact of COVID-19 on our loan portfolio, we recorded a $9 million recovery of our allowance for credit losses in the first quarter of 2022.
Our ratio of nonperforming assets to total assets improved to 17 basis points.
Our ratio of ACL to total loans was at 66 basis points at March 31 2022.
This is comprised of expected losses of 41 basis points and qualitative and other factors of 25 basis points.
The ratio of ACL to total loans upon the adoption of T cell at the beginning of 2020 was 87 basis points, which was comprised of expected losses of 71 basis points and qualitative and other factors just 16 basis points.
The decrease in expected losses is due to the continued low levels of loss experience since adoption of seasonal which has the effect of reducing the computation of projected losses and.
And a shift in our portfolio to lower risk assets during.
During this period, our permanent multifamily loans as a percentage of our loans held for investment increased from 19% at January one 2020% to 47% at March 31 2022.
As a reminder, we have never experienced a loss on our multifamily loan.
Going forward, we do not currently anticipate any significant additional recoveries of ACL is continued improvement of pandemic related credit risk is anticipated to be offset by loan portfolio growth.
The $13 $1 million decrease in noninterest income in the first quarter of 2022 as compared to the fourth quarter of 2021 was primarily due to a $4 $4 million decrease in single family gain on loan origination and sales activities due to a decrease in rate lock.
Volume and margins as a result of the effects of increasing interest rates.
A $7 $4 million decrease in CRE gain on loan origination sale activities.
Due to no sales of multifamily portfolio loans in the first quarter of 2022 as compared to $244 million of sales of multifamily portfolio loans in the fourth quarter of 2021.
The zero point $5 million increase in noninterest expense in the first quarter of 2022 as compared to the fourth quarter of 2021 was primarily due to a $1 million reversal in the first fourth quarter of 2021 of previously accrued medical benefits related to the positive experience in our self insured <unk>.
Benefits programs in 2021.
Higher occupancy costs related to higher common area maintenance charges and accelerated depreciation in the first quarter of 2022 and.
And higher legal costs incurred in the fourth quarter of 2021 on litigation activities and other legal matters.
During the fourth quarter of 2022, we issued $100 million of subordinated notes and we utilized $75 million of the net proceeds to purchase over 7% of our outstanding common stock at an average price of $50, 97% 97 per share.
We also declared and paid a dividend of <unk> 35 per share the first quarter dividend of <unk> 35 per share representing an increase of 40 or 40%.
<unk> over the prior quarter.
I will now turn the call over to Mark.
Thank you John .
During the quarter, we achieved a number of our goals, including growing our loan portfolio, completing our $100 million subordinate notes offering and returning excess capital to our shareholders, while improving our overall cost of capital.
We grew our held for investment loan portfolio at an annualized rate of 24% the.
The growth was achieved through the origination of $747 million of loans.
Absence of multifamily portfolio loan sales and a slowdown in prepayments.
Historically, we have sold a portion of our permanent multifamily loan production.
As a part of our growth strategy, we decided to forego the current revenue from these loan sales this year and instead establish a foundation for future earnings growth.
We currently anticipate again selling a portion of our portfolio of multifamily loan production in future years.
As a result of strong loan originations a focus on loan port retention and portfolio growth along with slower repaint prepayments are net interest income is expected to grow meaningfully growing forward and be a larger and more consistent component of our revenues.
While we expect 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 near term growth.
With the completion of our $100 million subordinated notes offering last quarter.
We accessed inexpensive capital to continue our stock repurchase program and support our future growth in earnings per share.
The credit quality of our loan portfolio continued its strong performance in the first quarter as John mentioned earlier greater clarity on the impact of Covid on our portfolio allowed us to recover a $9 million of our ACL.
This recovery reflects ongoing reduction pandemic related credit risk, our conservative credit culture, as well as our focus on originating lower risk multifamily loans.
As expected in the face of increasing interest rates, our single family mortgage banking revenues decreased during the first quarter.
And we're less than 10% of total revenues. Additionally.
Additionally, our first quarter, Fannie Mae D U S multifamily loan origination and sale activity was substantially lower than we anticipated.
Despite higher lending caps, the Fannie Mae <unk> program was often not competitive in the quarter in fact first quarter Fannie Mae D. U S national loan production declined 23% quarter over quarter and 8% from last year's quarterly average, we now expect Fannie Mae to be more.
Competitive over the remainder of the year and recently announced changes in underwriting and pricing support these expectations.
As such we anticipate significant improvement in our U S production and loan sales over the remainder of this year.
Due to lower revenues, our efficiency ratio in the first quarter increased to 77% and.
And we anticipate the second quarter efficiency ratio, while improved from first quarter results will remain elevated for the same reasons. However, as a result of loan portfolio growth and related increases in net interest income and our ability to leverage our existing operating expense infrastructure. We believe we will.
Improve our efficiency ratio to 60% or below for the second half of this year and.
And we believe we can reduce our efficiency ratio to the mid 50% range in 2023.
These levels include the impact of our single family mortgage banking operations, which historically have added three to five basis points to our overall efficiency ratio.
These anticipated improvements on our efficiency ratio are the result of our profitability improvement initiatives, we completed two years ago.
Let me state it simply.
Our decision to retain all of our portfolio permanent permanent multifamily loans.
And the more challenging environment for single family mortgage production have reduced current earnings. However, we believe that our strong loan portfolio growth and associated net interest income growth combined with our ability to lever our existing noninterest expense base and our continued efficient capital management should.
Provide for meaningful earnings per share growth starting in the second half of this year and for 2023 and beyond.
As much as I'd like to fast forward to the second half of the year when our results should better reflect the new level of earnings power that we have been creating the foundations for that earnings power are actually visible today.
Our annualized loan portfolio growth was 24% in the first quarter and much of that was originated near the end of the quarter.
Just consider what mid teens loan growth a stable net interest margin strong credit quality significant operating expense leverage and continued efficient capital management provides as one looks to future earnings potential.
We believe that our earnings growth will not be incremental but rather more of a step function upwards.
In that regard in the second half of this year, we are targeting a return on average assets in excess of one 5%.
And a mid teens or better.
Average return on tangible equity.
I'm sorry, our return on average tangible equity.
In 2023 and beyond we are targeting a return on average assets in excess of 1.35%.
At a high teens or better return on average tangible equity.
Of course, these targets imply that the potential of meaningful increases in earnings per share are possible.
Before going target returns assume a generally stable economic environment current consensus views on rising interest rates and the yield curve and an absence of changes in law or regulations or other events or factors, which could negatively impact the success of our business strategy.
Our hope our current shareholders as well as the analyst community will give appropriate weight to my comments today.
We have substantially reduced the contribution of single family mortgage banking to our earnings and we are significantly growing our held for investment loan portfolio with high quality lower credit risk loans, which together should provide for much more durable and reliable earnings going forward.
We have made meaningful efficiency improvements to our operations and processes, giving us significant operating leverage to support our expected future revenue growth.
We have used our capital wisely.
Providing for our balance sheet growth, while returning excess capital to shareholders through dividends and sizable share repurchases. These.
These actions should result in much higher and consistently growing levels of profitability when compared to our history.
Our combined efforts over the recent years have already produced superior returns for our investors for example.
Our one year three year and five year total shareholder returns as of the end of the first quarter were 10%.
89% and 78% respectively.
Versus the benchmark, <unk>, Rx, which were 3%, 38% and 32%.
And despite.
Spite, having consistently outperformed the care acts our valuation remains well below a level consistent with the quality and profitability prospects of our bank in relation to our peers.
We remain confident however, in our ability to execute our business strategy and achieve our goals.
Including appropriate valuation.
With that this concludes our prepared comments today and thank you for joining us and for your attention.
John and I would be happy to answer any questions you have at this time.
If you like to ask a question. Please press star followed by one on your telephone keypad and for any reason.
I'd like to turn into a question. Please press star followed by team again to ask a question timeline as.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
I'll pause here briefly ask questions are rich.
Our first question comes from Jeff.
But.
Please proceed.
Thanks, Good morning, Mark and John .
Good morning, Jeff.
On the loan growth side.
Well two questions were there any.
Loan purchases.
And that.
Growth this quarter.
Where geographically did you see kind of pockets of the greatest strength.
First we don't purchase loans from others.
All of our loan origination.
<unk> has been organic and will remain so.
In terms of strength I think you can look to.
Where our loans have historically been originated we have good data in our investor deck, particularly in commercial real estate about where we have concentrations.
We have a concentration in southern California, that's probably our largest concentration.
Los Angeles County, and greater Southern California, the next.
Concentration would be in the Puget sound area Western Washington.
And then the other areas.
Generally coastal areas that we serve so no real changes here are our business is concentrated in the big markets in the west the coastal west.
And those markets.
<unk> performed well during the pandemic they continued to perform well.
Real estate inflation is among the most significant in the west and that's helping fuel the unduly activity.
And Mark here.
Loan growth outlook.
20% plus this quarter annualized.
Is that sustainable is that kind of looking at your sort of guidance slide.
Up is basically that the guidance, but just wanted to kind of get a relative sense for <unk>.
Pace.
Sure.
Obviously, we're off to a hot start given our guidance.
I think that.
On the last call. We said we are expecting to be at the higher end of our guidance I think that's still true I might add or better at this juncture given given the start.
What is that guidance mark on a percent of <unk>.
<unk> is.
Is 10% to 15%.
<unk> growth this year, particularly given the start.
We feel good about the upper end of that.
Potentially better.
Got it thanks.
And.
Mark also just checking in on the on the buyback.
Obviously with the sub debt and kind of use of that but just the <unk>.
Your appetite going forward.
Given where.
Prices have moved.
Checking back in on buyback appetite.
While we we didn't use all of the proceeds.
As you've noted.
We are still interested in continuing to buy our stock back we had a.
And authorization of $75 million from our board in the first quarter.
We are going to be discussing.
When we may reenter the repurchase market.
Our board.
We didn't expect prices to come down this far right.
If any of US did we'd be making a lot of money on the short side I guess, so they are pretty attractive right. When you when you consider.
The returns, particularly in our cases, we think about.
The confidence we have in our growth and earnings growth.
And what the reasonable valuation of that growth should be these are pretty attractive levels to buy stock and so we're going to be discussing when we expand our program.
Thank you.
Thank you Jeff. The next question comes from Matthew Clark with Piper Sandler. Please proceed.
Hi, good morning.
Good morning Arnie.
The first on the on commercial real estate.
CRE in general including multifamily.
Yes.
I was wondering how high are you willing to let that.
Commercial real estate concentration go I guess do you have an internal limit relative to capital.
Just trying to get some color there.
Sure.
We are willing to let that concentration go to 600%.
Tier two capital.
We feel very confident in our credit culture.
And particularly.
In.
In our growth our growth is primarily going to come in permanent multifamily loans.
I wouldn't expect to see meaningful growth in some of the other categories of commercial real estate, though we will see some consistent.
With inflation at least.
Multi permanent multifamily loans are among the lowest risk assets and banking.
And if you're paying attention to what is happening with housing availability and the related impact on rental rate increases we feel very very good about the collateral we start with very conservative loan to values and debt coverage ratios.
We have seen shocking increases in rental rates, which of course simply make these loans safer just to give you an idea of of recent.
The increases over the last year fourth quarter, 21% to fourth quarter of 'twenty, we've seen rental rate increases ranging from 13% in Spokane to 33% in Scottsdale, Arizona.
Seattle, and Bellevue were 19% and 20% over that year.
And these are not unusual numbers.
There is still an absence.
Sufficient housing and the big Western markets, where we lend and we feel very very good about the collateral or land it against our regulators. Additionally.
<unk>.
Give us continued high marks for our risk management program. They say it is best in class and best practices and they feel very comfortable with our policy limit.
For CRE.
Okay and then.
CRE loan sales and tons of volume I think last quarter.
We discuss maybe being down 50% year over year.
This quarter year over year down more than that linked quarter, obviously also download or just without a whole loan sale.
Any updated thoughts on.
How much CRE long tail in terms of volume might be down I think you did $773 million last quarter, including the whole loans.
Right well our current plan is not to do any multifamily permanent portfolio quality loan sales this year.
We do expect our Fannie Mae.
Loan origination and sale activity to pick up meaningfully over the remainder of the year. If you look back on my earlier prepared comments, we're very disappointed.
With vanish program in the first quarter.
It was amazing.
How much less they did nationally and that reflects our experience, but also what was a little shocking.
If you look at Freddie Mac's multifamily production versus Fannie Maes in the first quarter Fannie Mae D U S. A.
Originations were one half.
Freddie Macs in the first quarter.
All of that points to.
Hopefully a much better remainder of the year for them to catch up.
Going forward in 2023 and beyond.
We are expecting or at least currently planning to sell about what we've averaged the last couple of years.
That number.
Should be roughly $600 million.
But we'll have to wait until we get to next year to see how we feel about it but as we planned.
In our planning, we're expecting to return to some amount of Av.
Permanent multifamily portfolio loan sales next year.
Okay.
And then just shifting today the buyback it sounds like youre going to be discussing that here shortly but.
Is there.
Does the lower TCE ratio.
Impact that decision to some degree I guess is there any kind of floor you want to manage team as it relates to TCE I know regulators care, obviously that regulatory capital more than anything but.
Any commentary around the level of the TCE ratio relative to the buyback.
Well that's a fair question, we watch all of the ratios not just the regulatory ones but.
Tangible capital ratios as well I think it's important to remember one thing.
Our capital ratios at the bank level.
We're at we're on impact it by the subordinated debt offering.
They were somewhat impacted from a tangible level by <unk>.
Increasing.
OCI levels.
But all of our stock activity and the funding of it in the first quarter occurred at the holding company right. So there is a.
Now meaningful difference between bank level.
Capital ratios, particularly tangible.
And.
And holding company we have different.
Risk appetites internally for.
Capital ratios at the bank level versus the holding company as well and I think that's true for most of our peers.
As a direct answer though.
<unk>.
Does enter into our considerations.
How low we would be comfortable letting our tangible capital.
Level.
Our common equity capital level.
In relation to.
Assets at the holding company and so we're going to watch that we're very comfortable today.
Roughly what 8% I think just under 8%.
Many of our peers are well below that level some people in the 5% range, which is a little surprising.
So it's a consideration we're very comfortable with that today.
So as we continue.
To make profits that continues to give us lots of room to consider repurchases.
Okay. Thank you.
You bet good question.
Thank you. The next question comes from Woody lay with <unk>. Please proceed.
Hey, good morning, guys.
101 <unk>.
One I wanted to touch on the single family mortgage outlook.
We've seen industry wide.
Revenues have been under pressure.
For you all just that'd be let's look at the quarters ahead do you think we could see a slight rebound in mortgage revenue rate or the <unk> 22.
Solid base from here.
Well run.
Theres always seasonality right and the larger volume periods or in the second and third quarters volume starts slowing down.
After the third quarter as you draw down the pipeline.
Typically first quarter.
You begin rebuilding a pipeline, but generally not until March.
Now overlaying that is the current changes in interest rates mortgage rates in particular.
That.
<unk> has a depressive effect on volume as you would expect.
And so our first quarter was especially low because of both factors.
We do have some concern.
Four.
The prospect of rising volume in the traditional home buying season in the middle of the year just by available inventory.
The levels.
<unk> resale and new home inventory.
But they've been low for years, but they are at critically low levels today.
And so we are being at least internally somewhat conservative about our expectations.
Sure.
For volume this year in total.
We do expect to see some improvements in volume in the middle of the year, how much kind of remains to be seen it's going to rely on large part on.
I think changes in the resale market.
Right. Okay. That's helpful color there.
And then I wanted to turn to the NIM I think on your guidance slide it calls for a stable NAV.
Wondering what rate assumptions that assumed in our guidance.
Oh the rate assumptions that we assumed in guidance is pretty consistent with what the.
Consensus is in terms of rate increases here.
We are being a little conservative from that perspective.
Our interest rate modeling is showing that we will benefit from a rising interest rate environment as with everybody else.
Somewhere in the 1% to 3% range for 100 basis points and higher than that for 200 basis points.
We're kind of evaluating that on a constant basis, obviously defense meeting next month.
To go through that in terms of the process. So.
The guidance, we provided was stable as a little bit conservative from a rising interest rate environment impact on US right. So we believe we have opportunity beyond stable.
And to the extent that the fed has larger increases.
<unk>, probably makes for a little larger opportunity initially and then we'll have to see how deposit betas go.
Right.
Alright, and then my last question obviously.
Loan growth, but then.
Really strong the past couple of quarters, how should we how should we think about deposit growth throughout this year do you think.
Can continue and it's high single digit range as it did in <unk> just how are you all thinking about it.
We're expecting it to.
We.
We believe we're going to be able to.
Generally fund.
Our growth with deposit growth.
We have very low levels of borrowings today, you know the pandemic was great for us and allowing us to.
Grow deposits and distinguish a lot of borrowings.
<unk>.
But we're currently planning to generally fund our growth with deposit growth.
Alright, thanks for taking my questions guys.
Thanks Louise.
Thank you.
Our next question comes from mass.
B Riley Securities. Please proceed.
Good morning.
Maybe give us more.
Yes.
Good morning.
Following upon on rates here just in terms of pretty.
Pretty big move in a foggy here towards last couple of weeks in the quarter kind of curious where you are seeing loan pricing. These days here.
As we move forward.
It depends on the product right in the commercial world.
Most of our lending is prime based.
So every time it moves up.
Spreads are staying the same generally so those yields are rising.
In lock step with a rising short end rates.
On the longer end.
Loan yields are starting to rise.
But.
Competition is still fears.
And rates have not moved competitive rates have not moved.
With changes in the yield curve completely now.
I expect that to catch up.
There is a tremendous amount of activity.
The permanent commercial real estate area.
A lot of.
Borrowers wanting to refinance or complete purchase transactions before additional changes in rates.
Originators like us, obviously had great quarters and satisfying.
Appetite.
Not sure where the yield curve is going to go though.
Is it actually going into two.
Have a healthy.
Curve or is it going to invert.
We've seen component inversions are partially versions already to your point about the five year three to five year area.
That's going to keep.
Longer rates more attractive.
And we're still actively lending based upon five and seven year rates mostly.
In commercial real estate, so very competitive rates have not risen as much as maybe they should or could.
But if you want to be an active originator.
Which obviously, we are you've got to be competitive.
Okay.
That's helpful. And then in terms of just thinking about credit cost and the reserve Youre going forward stepped down to 65 basis points, probably a bit more than I was thinking just kind of curious if thats kind of like the bottom as you guys think about the reserve ratio in.
Just kind of.
Oh.
Are there any overlays maybe I should ask in terms of economic assumptions as we think about that.
Yeah, Yeah, there were if you notice it.
Look out in my comments the difference between what the expected losses are and what the overlays where and while there are expected losses went down was one of the bigger drivers, we actually increased our overlays compared to when we adopt the seasonal instead of overlays, let's use the phrase qualitative factor, yes that would be better I call. It qualitative factors because it's a combination.
Of items and so those have actually increased as a percentage of portfolio in absolute dollars, even more because our portfolio is bigger.
So I think from that perspective.
We look at this is that we have room to absorb continued loan growth this year and we expect to.
Probably start provisioning on a regular basis beginning next year.
But we did have the larger recovery in the first quarter, just because China is supported through seasonal.
Didn't allow us to defer any of it.
Any longer any longer.
Yeah.
Okay.
And then.
Maybe just a little follow up on mortgage apologize if I missed it just on the.
Gain on sale margin here coming in just kind of curious as to.
Mark you mentioned, a lack of inventory here.
Obviously, there is a number of mortgage originators out there you have to cross.
When we have higher rates.
How are you feeling about gain on sale margins.
Well look it's very volume dependent right now we have had some compression and profit margins.
Which is.
Totally expected wind volumes fall like this.
So look our expectations are modest.
And have some modest growth.
And then we will get to the end of this year, you're going to see compression again right.
I think what's more important on this line item is to remember that this also includes our origination sale activities.
Fannie Mae multifamily loans and to a lesser extent SBA loans.
Consistent with my earlier comments, we are expecting.
Meaningful increases.
And Fannie Mae U S activity over the remainder of this year.
So.
For modeling purposes, I don't think you are just relying on single family volume activity for this line item, we expect it to improve.
Meaningfully this over the course of this year.
Okay.
Right.
Okay.
I appreciate all the color. Thank you very much.
Thanks, Steve.
Thank you.
Matthew Clark you May now proceed.
Yeah.
Actually no.
The question was.
Answer no I know I'm, sorry, I lost my train of thought.
The the borrowings that you added in the quarter can you just give us a sense for the rate.
What rate at one one.
<unk>.
Are you talking about the wholesale borrowings not the debt I'm assuming.
You asked about the sub debt.
Yes, okay.
The wholesale borrowings are coming in current rates are roughly in the 30 basis points overnight.
Right and that's.
What we've been adding on because it's a pretty low level.
And so we expect to continue to.
Fund those that at current rates going forward.
Our borrowings and as Mark said, we don't expect any significant increase in the level of borrowings over the next couple of years.
Okay. Thank you.
Thank you.
There are no additional questions waiting at this time, so I'll pass the conference back to Mark <unk> for closing remarks.
Thank you all for joining us today, Thank you to our analyst community for the great questions look forward to speaking with you again next quarter.
That concludes today's home Street Q1, 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Yeah.
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