Q3 2024 HomeStreet Inc Earnings Call
Welcome to the third quarter 2024 analyst earnings call for home street bank.
Speaker Change: Presenting on today's call will be Mark Kay Mason, Chairman, President and Chief Executive Officer of Home Street Bank, and John M. Mitchell, Executive Vice President and Chief Financial Officer. I'll now turn today's call over to Mr. Mark Mason. Please go ahead, sir.
Mark Mason: Hello and thank you all for joining us for our third quarter 2024 analyst earnings call.
Mark Mason: Before we begin, I'd like to remind you that our details earnings release.
Mark Mason: Our Investor presentation and a press release provided an update on the status of our strategic merger we're filed with the SEC on Form 8K. Yesterday and our available on our website at IR.Homes Creek.com.
Mark Mason: Under the news in advance length, in addition to recording and a transcript of this call, we'll be available at the same address following our call.
Mark Mason: Please note that during our call today we will make certain predictive statements that reflect our current views, the expectations and uncertainties about the companies' performance and our financial results.
Mark Mason: These are likely forward-looking statements that are made subject to the safe harbor statements included in the yesterday's earnings release, our forms A.K. our investor deck and the risk factors disclosed and are their public finance.
Mark Mason: Additionally, reconciliation is a non-gap measure we referred to on our call today can be found in our earnings release in Investor deck.
Speaker Change: 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, the status of our strategic merger. And our outlook going forward. We'll then respond to questions for our analysts, John.
John Mitchell: Thank you, Mark. Good morning, everyone and thank you for joining us. In the third quarter of 2024, our net loss was 7.3 million, our 39 cents per share, as compared to our net loss to 6.2 million, our 33 cents per share in the second quarter of 2024.
John Mitchell: On a core basis, which includes the impact of merger-related expenses, our net loss was $6 million, or 302 cents per share, as compared to our net loss of $4.3 million, our 23 cents per share in the second quarter of 2024.
John Mitchell: The impact of higher interest rates continues to negatively impact our levels, the mid-interesting income, and non-interesting income.
John Mitchell: Our negative just income in the third quarter of 2024 was $1.1 million lower than the second quarter of 2024 due to a decrease in our net interest margin from 1.37% to 1.33% and a decrease in interest earnings assets.
John Mitchell: The decrease in our NHS margin was due to a three-point basis point decrease in the yield on interest-during the assets and a three-basis point increase in the rates paid on interest-during liabilities.
John Mitchell: The Eels on Interest Training Access decreased to lower Eels on investment securities. The increase in the rates paid on our interest-pray and liability was due to higher deposit costs due to a greater proportion of higher costs for difficult to deposit.
John Mitchell: The income tax benefit resulted in an effective rate of 23.3% for the third quarter 2024, as compared to an effective tax rate of 22.1% in the second quarter of 2024.
John Mitchell: I. There was no provision for credit losses recognized during the third or second quarter of 2024. This reflects the stable balance of our loan portfolio.
John Mitchell: and the minimal level of identified credit issues in our loan portfolio and the lack of significant expected credit issues arising in future periods.
John Mitchell: Going forward, we expect the ratio of our allowance for credit losses to our health for investment loan portfolio to remain relatively stable and provisioning in future periods to generally reflect changes in the balance of our loan health for investment, assuming our history of minimal charge-offs continues.
Speaker Change: Rations and Nump are coming to assets to total assets and total own link you'll input over 30 days including non-acruinal loans, remainder low levels.
Speaker Change: As the September 30th, 2024, a ratio of non-performing assets to total assets, to 0.4% while a ratio of total loans to the linkment over 30 days, including non-acrui loans to total loans with 69 basis points.
Speaker Change: Now, I'm interested in coming in third quarter of 2024 decrease from the second quarter of 2024. Priorly due to more income realized in the second quarter of 2024 from our investments in small business investment companies. As we continue experience low levels of single-family and commercial mortgage banking regulations.
Speaker Change: The 3.5% decrease in on-nature's expense in the third quarter of 2024 as compared to the second quarter of 2024. It reflects the company's emphasis on reducing operating expenses were possible. I will now turn the call over to Mark.
Mark Mason: Thanks, John. As a result of lower-notchist income and lower-netchist income, our net loss and corn-et-loss were higher in the third quarter than the second quarter.
Mark Mason: Well, our net interest margin decreased slightly during the quarter. We did see it stabilized during the latter part of the quarter. With the recent decrease in short-term interest rates, we expect our funding costs to decrease in the fourth quarter and beyond and our net interest margin to begin to increase.
Mark Mason: In the third quarter we reduce the rates offered on our promotional certificates of deposit.
Mark Mason: and our offering our highest rates on shorter duration CDs and anticipation of continued decreases in short-term interest rates in the future.
Mark Mason: Our budget, non-interest expenses decreased by $1.8 million in the third quarter.
Mark Mason: As we continue to focus on reducing expenses for possible.
Mark Mason: Our full-time equivalent employees declined to 809 for the month of September, versus 840 for June, and 864 for December of 2023. Primarily as a result of not replacing employees lost through attrition.
Mark Mason: First Sun at Home Street remains subject to their announced merger agreement of April the 30th, 2024 until it's amended, modified, or terminated. I said we are limited in what we can say about the merger, unless we are legally required to make disclosures about the transaction.
Mark Mason: which we did recently.
Mark Mason: As noted in our press release, which provided an update in our strategic merger, we're disappointed that the regulators are unwilling to grant the regulatory approvals necessary for our merger to proceed.
Mark Mason: As to the reasons that proposed merger did not get regular tour approval, I can only say that our joint press release.
Mark Mason: Speaks for itself. To repeat we have been advised by our bank regulators who shared with us that there were no regulatory concerns specifically related to Humstery that would have prevented approval of the merger.
If we are unable to obtain regulatory approval and the merger agreement is terminated, we will immediately consider all our strategic alternatives.
and including operating home street on a standalone basis for the foreseeable future.
The fact that we were informed that there were no regulatory concerns, specifically related to home street, that would have prevented approval of the murder. It leads us free to consider all our strategic options going forward.
Mark Mason: A sum in determination of our merger agreement, we intend to move forward with a news for the TG of plan. We expect will return the company to profitability in the near term.
Possibly as soon as the first quarter of next year. This would include a sale of approximately $800 million in multi-family loans. The proceeds of which would be used to pay off higher cost wholesale funding.
because we've arranged a multifamily loan sale as a part of the current merger agreement. We're very familiar with the current multifamily loan sale market, and we would expect to be able to transact the loan sale quickly.
Mark Mason: We do not believe we will need additional capital to complete this loan sale.
Mark Mason: Assuming a termination of our merger agreement, we feel our ability to meaningfully improve results of operations in the near term and consider this strategic opportunities as improved significantly since we agreed to the proposed merger with First Sun last January.
The research reductions in interest rates have provided an immediate reduction in funding costs and improvement in the fair value of our company. Future reductions in interest rates if they occur will assist us in further improve our results of operations in the value of our company.
As a result of lower interest rates, our tangible book value for share has increased. Due to the increase value of our available for sale securities portfolio.
in spite of the operating losses.
Mark Mason: We have incurred through the first nine months of this year. Our tangible book value per sharing increased from $28.11.
Mark Mason: at December 31, 2023.
28th dollars and 13 cents as of
Mark Mason: September 30, 2024.
As importantly, as a result of the recent reductions in interest rates and the passage of time as of September 30, 2024 are estimated tangible fair value per share, has increased $18.52.
Mark Mason: 2D increases the interest rates since the end of the quarter. We believe our estimated tangible fair value per share as of today has decreased between $15 and $16.
Mark Mason: and I'm sorry.
3rd quarter, we started to see positive results in our deposit base. As our quarter end and average balance of non-interpreter deposits remain stable, and our total deposits excluding broker deposits increased $111 million.
Our level of uninsured deposits remains low at 8% of total deposits today.
Mark Mason: It is important to note that despite rising interest rates, bank failures and home street stock price volatility, as well as the permutations of our proposed merger, are depositive shown significant loyalty and resilience.
Mark Mason: At quarter-end, our cash and security balances of $1.4 billion were 15% of total assets. At our contingent funding availability was $5.1 billion equal to 80% of total deposits.
Mark Mason: Our lone portfolio remains well diversified with our highest concentration at Western States, multifamily loan, historically one of the lowest risk loan types.
As the quality remains strong, as total past due to non-acruo loans and non-performing assets, as well as willing to link on seeds remain at historically low levels at the end of the quarter.
Our portfolio has been conservatively underwritten with a very low expected loss potential. As a result, credit quality remains solid and we currently do not see any meaningful credit challenges on the horizon.
Mark Mason: Also, it's important to remember that our credit quality and our allowance for credit loss has been subject to multiple due diligence exercises.
Mark Mason: and I'm going to regulatory reviews and examinations. Both in the normal course and now through two merger regulatory application processes. In addition to quarterly reviews and in annual audit by our independent accountants.
At September the 30th, 2024, our accumulated other comprehensive income balance, a component of shareholder's equity, was a negative $69 million.
Well this represents a $3.64 reduction in our tangible book value for share. We know this is not a permanent impairment in the value of our equity. It has no impact on our regulatory capile levels.
Given that our available liquidity earnings and cash will of our bank, we don't anticipate a need to sell any of these securities to meet our ongoing cash needs. So we don't anticipate realizing these temporary right-downs.
Mark Mason: The current interest rate environment has created to give a new challenge for our company.
In particular, the rate competition for deposits from banks, money market funds and treasury bonds has been significant.
However, the recent interest rate reductions in the expectation of additional reductions in our current and forecast results.
The Empire will be significant.
Ultimately, we will experience an environment of stable rates, which is historically provided significantly better financial performance for our bank.
We believe we've taken significant steps through endure this period and preserve the value of our business so that we can take advantage of the coming beneficial rate cycle. And as I noted earlier, the value of our company has risen significantly recently and is expected to continue to improve.
In summary, while we are disappointed in the failure today in obtaining regulatory approval for our proposed merger, we are optimistic about our ability to improve our results and return significant value to our shareholders.
Speaker Change: With that, this concludes our prepared comments today. We appreciate your attention. John, I would be happy to answer questions from our analysts at this time.
and I'm going to start with the question. Investors are welcome to reach out to John or I after the call. If they have questions that are not covered during this question and answer session.
Thank you. We will now open the lineup for questions. If you have dialed in and would like to ask a question, please press star, followed by the number one on your telephone keypad to raise your hand and join the queue.
Mark Mason: If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Our first question comes from the line of Matthew Clark with Piper's Miller. Please go ahead.
Good morning one thanks for the questions.
Matthew Clark: You know, the other bidders that were in your S4, there's no break-up fee. What's preventing you to go back to those bidders and seeking $13-15 a share, knowing that rates are modestly lower in the duration of your loan book is a little shorter.
We have restrictions in our merger agreement from soliciting interest to the bank.
today. We do have the ability.
If we are presented with a secure offer to consider that in our fiduciary responsibility, but we are restricted from...
Discussions and soliciting interest from either prior parties or others at this time.
Matthew Clark: So that's the current answer to that question.
Matthew Clark: If you assume...
A termination of the merger agreement will be free to consider all strategic options as I mentioned in my comments.
Speaker Change: Okay great and then...
The commoner around this alternative regulatory structure that you both are considering is that just going back to the OCC and there are some visibility, if you were to go back, that might increase the odds of the deal getting done.
Matthew Clark: Um
So I can't discuss the details of that at this time. It's obvious that any alternative regulatory structure would have to have.
Components that to be considered would have to have components that were meaningfully different.
and the two structures previously proposed to the OCC and the Federal Reserve, the Texas Department of Banking.
Matthew Clark: Ok.
and then the common in the merger update release around your regulators having no issues with home street.
Speaker Change: Is that suggesting there's a...
Matthew Clark: The combined theory concentration issue and related capital.
Matthew Clark: Rations or from my reading into that.
with respect to approval of the merger, I think you kind of assume that home streets, commercial real estate concentration, on a stand alone or a perform at basis was not an issue.
OK, so the potential sale of 800 million in multi-family loans.
Matthew Clark: I think.
Matthew Clark: Still keeps you above 600% at least relative to Tier 1 plus reserves down from, I think, just around 700%.
I mean, is there a, it doesn't seem like there's a need to go dramatically lower if your regulators are comfortable with the concentration, but I guess what are your thoughts on kind of a longer term?
Matthew Clark: View of the first concentration, it's on a standalone basis.
Speaker Change: First Correction, our current Siri concentration is roughly 600%.
Speaker Change: on a pro form of basis post an $800 million multi-family sale that would reduce that concentration to approximately 500%.
and um...
Speaker Change: Obviously we have not been required by our regulators to reduce our current concentration.
Speaker Change: I'm going to be clear that the credibility of our commercial-level state portfolio has been pristine.
Speaker Change: Good job, really underwritten.
Matthew Clark: and our risk management.
Surrounded our commercial real estate, origination and loan administration is consistent with the enhanced risk management required by regulatory guidance.
Having said that, our interest in this merger is not feasible.
in selling commercial real estate loans, multifamily loans in this case, is to, as quickly as possible, return the company to what would be moderate profitability and stability.
Matthew Clark: So that we can consider our path forward without concerns in that regard.
Speaker Change: Okay, thanks for that. And then what's the yield and duration on your 3.9 billion dollar multi-family portfolio and what's the current rate you can get on a new multi-family loan right now?
Speaker Change: First of all, I don't have the exact number but I think it's roughly two and a half years. Give her take a little bit. The yield I believe is...
Around 4%, maybe just below 4%, right, today. Of course, that yield is changing on a continuous basis as those loans begin to reprise.
Matthew Clark: Do it, on a...
Speaker Change: 100% basis.
Matthew Clark: Um
Matthew Clark: What's about 93 plus? 93 plus. However, to really understand the value of that portfolio from a sales standpoint of $800 million, let's say.
You have to consider which loans specifically you would be selling.
The lowest duration loans, there's loans that have already been placed or near-term repricing, have the highest market value today.
Matthew Clark: That makes sense because they have the highest current or near-term yield. The lowest value of N's and the longer duration loans, the loans with repricing dates far this down.
We generally, if we were to execute an $800 million sale to a sister return to profitability, we would...
Matthew Clark: Believe we would choose the longest duration loans.
which would have the lowest value but would create the greatest impact on improving profitability over the near term.
Matthew Clark: Alexander.
Yep, and then what's the right on new multifamily you think you can get right now?
Matthew Clark: Doug's moving around a little bit, rates have moved up a little, but they are kind of pivoting around the midpoint of the yield curve. Recently, five-year high-brids in the market were yielding.
Roughly 6% let's say 5.9 to 6.2% for portfolio quality loans of the type that we have.
Matthew Clark: Fanny May is much more competitive. Recently, loans have been done in the low 5% range and even, you know, maybe a month or so ago we saw one done in the high 4% range.
Accordingly, our Fannie May pipeline is larger than it's been for the last couple of years. We don't know that all those loans will close of course, but that's kind of the state of the market right now.
God, and then last one for me, maybe an easier one. Do you have the spot rate on interest-grain deposits at the end of September?
I do not.
Speaker Change: This is Spotry. Do you have the Spotry? I don't think we don't have that information or a finger tips and I don't know if we publish it.
If we can get back to you we will.
Yeah, I appreciate it. Trying to get some visibility going forward, giving a good much of done on the person's side. Thanks.
Our next question comes from the line of Woody Lay with KBW. Please go ahead.
Hey, thanks for taking my question.
Matthew Clark: [inaudible]
and that's going to depend on...
the feasibility of pursuing another alternative regulatory structure.
Speaker Change: I can't
I can't comment on that today because you don't have enough information yet. On how we might judge alternatives.
So it's all subject to either make it a decision to pursue another structure or negotiate what would be an early termination of our definitive agreement. Currently our agreement matures in the January.
Speaker Change: Kevin, the current impossibility of completing it, we would hope that absent another viable merger alternative that we would be negotiating that termination with the folks at first son.
but I don't have an answer for those as we see today.
I guess that's helpful. And then maybe I'll follow up point on the deposit cost. Could you just give more general statements on how deposit pricing is trended post 50 basis point cut and sort of your expectations for the margin in the fourth quarter?
John Michel: I'm John Michel.
Speaker Change: So some competitors have reduced pricing. If we think about time to pause at pricing, it's come down.
25 to 50 basis points.
and the Pinnip on the Tener. Most competitors have moved their highest.
Raid offerings to the shorter durations like we have all of this into Spain and opportunities to lower those rates going forward. There continue to be fairly high rate money market account offerings.
Speaker Change: For a couple of reasons, one for attain current deposits for folks with two.
Most competitors we expect to use a strategy that we've used in the past. We intend to use going forward.
Where we would seek to migrate time deposit customers to money market account customers To give us the ability to administrate those rates down more timely, assuming ongoing rate reductions by the Fed.
Speaker Change: So we still see very competitive money market offerings. Of course, treasuries are still trading. I mean, offering well into the 4% range. Anything associated with actual treasury bond purchases or money market funds.
Speaker Change: We're other fixed income funds are contained to be very very competitive to the end of the month.
Mark Mason: Mark Mason.
and what he just has a reminder, one of the biggest impacts we get from the drop and rates is our wholesale funding, both our borrowings and our broker CDs. We tend to be shorter term on the broker CDs, so our anticipation. So the biggest impact we have on our margin, immediately with these rate drops is on our wholesale funding.
and then lastly, just an opening comments you mentioned that the head count is down quite a bit to the start of the year. Just given the subsequent events, do you expect to backfill some of those positions going forward?
We don't.
Speaker Change: We've been trying to align our head count with a level of activity.
Speaker Change: and each of our business units.
Mark Mason: Subvenant Business units have not had FTE reductions.
of any material amount because of their level of activity. A good example is our home building landing unit or residential construction unit.
Mark Mason: is going to originate something.
Close to $700 million this year, very close to our plan, and so they have not experienced the new material reduction.
in Personnel.
and other business units such as our mortgage banking business unit and others have had more substantial reductions. Plus we continued to seek greater back office efficiency and some of that has come in the back office.
Mark Mason: and John Michel.
Alright, thanks for taking my question.
Speaker Change: Thank you.
Our next question comes from the line of Tim Coffee with Janney. Please go ahead.
Tim Coffee: Good morning, gentlemen. Thanks for the opportunity to ask a question or two here. Mark, you said that the Center of Agreement expires on January. Are you able to negotiate an extension if you chose?
Speaker Change: Always, I mean the parties can always agree to extend, modify, as they see fit, all right.
and I did have how far along the process of marketing the 800 million in loans you are. Other term-cheese out.
Speaker Change: We have not marketed an 800 million dollar pool.
I'm Tassel.
What we have.
Marketed and have substantially negotiated agreement to sell.
Speaker Change: is a long-sale associated.
Tim Coffee: with the merger structure.
Tim Coffee: That was presented to the Federal Reserve and the Texas Department of Banking. You may remember from that restructuring that we're going to sell at least $300 million of loans.
Tim Coffee: and a lone pool associated with that requirement was marketed, a buyer was selected, the buyer has completed due diligence, we've substantially completed negotiating that agreement.
Tim Coffee: and that's the work that we've done. But because of that, we're...
Tim Coffee: We're very familiar with the market, with buyers of size, with their pricing mechanics.
Tim Coffee: and we have an agreement that's been negotiated with a significant.
Party with no financing contingencies. The first thing we would probably do is see if we could negotiate what we think is a fair price and move forward with that group.
Tim Coffee: Given all the efficiencies.
Tim Coffee: [inaudible]
We'd have to see when the time comes.
Okay, or so is the 800 million income.
Speaker Change: in the field. Is that included the 300 million that you've already seen in the discussions about? Are there any additions to the 300 million?
No, it wouldn't because we have different.
Tim Coffee: We have different goals.
Tim Coffee: in these sales as two duration of the remaining portfolio. The pool that we have marketed as a part of our proposed merger has the shortest duration loan.
Tim Coffee: Pet, which would guard the highest prize.
and would leave the greatest amount of accretion, future earnings accretion in the remaining portfolio. Underpurchasing the county.
Speaker Change: Alright, thanks John. If we were to sell 800 million today in order to more quickly improve the profitability of the company, we would sell the longest-eration loans.
Tim Coffee: Um, because that would leave us with a faster improvement in loan yields and revenue in the portfolio.
Tim Coffee: yeah
Speaker Change: Hi, I'm Chris Hita. Yeah, absolutely. If you do move forward on a stand-alone basis, would you also consider selling other assets, obviously not securities, but other assets like the dust license or any kind of physical branch locations?
Speaker Change: We don't believe so, you know, we've been down that road several times.
This is where we know the value of it, which at least to this point has been low in relation to the ongoing value of it in our company.
I can never say we wouldn't.
and someone offered us $100 million is some folks who just they might but never did. We would be likely to sell it but I don't intend to again retrace all of that time wasting.
Tim Coffee: Discussion.
Speaker Change: Okay, I understood. And there's a lot of questions for John.
Speaker Change: Do you have the amount of CDs whether it's retail or broker, matured and the fourth quarter, and the first quarter of next year?
John Michel: I don't have that handy but I believe we do provide that in the call report.
We have to put directions in there. I can't remember what the directions are but I can check and get back to you Tim.
Okay, yeah, that'd be great. All right, thank you very much for the questions. Thanks, Jim.
Our next question comes from the line of David Chivoreenie with Red Bush Securities. Please go ahead.
Hey guys, this is Brooks.Non for David Shiver, and today I'm going to take my question here. I know you're going to discuss a lot about this, but just put a bull around it for the 800 million of proposed loan sales.
You guys possibly discussed what time of losses could be expected on a sale of these loans, but they'd be somewhere similar to 300 million. You guys had previously discussed and had bad of buyer line up for.
Well again it would be a different set of loans with longer durations.
So the pricing would be somewhat lower. We've, it are.
John Michel: 4 casting analysis work on this. We've used a range of values, those values have gotten better since we've come that work.
What do you think? Yeah, just, you know, with interest rates based on what it was at 930, we had a values in between 91 and 95, kind of going through that.
John Michel: Rains perspective, they have interest rates are a little bit higher, be a little bit lower than that. But from the perspective of the timing, we would probably put a mechanism in place that would adjust the price based on the yield. So that's what we did in the other.
Speaker Change: and Greg, let's look at that. But, of course it depends on the actual, as in fairness, right? And...
I think John shared earlier that we think that the fair value of total portfolio is maybe roughly 93 today.
These loans being the lower value subset would be something less than 93, not significantly less than the less.
Great, thank you, it's all the questions I had today. Goodbye.
This will conclude our question and answer session. I will now turn the call back over to Mark Mason for closing remarks.
Great, we appreciate good attention, it's for this call and the great questions by analysts, again, if any investors have questions not covered, please give us a ring and happy to stop a call to discuss.
John Michel: Good night.
This concludes today's conference call. Thank you all for joining us. You may now disconnect.
John Michel: [inaudible]