HomeStreet - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 GAAP net loss was $123.3M ($6.54 diluted EPS) driven by non-core charges: an $88.8M loss on sale of $990M multifamily loans and a $53.3M deferred tax asset valuation allowance; core net loss improved to $5.1M ($0.27) as NIM rose to 1.38% with lower funding costs.
• Balance sheet repositioning completed: sold lower-yield (3.30%) multifamily loans at ~92% of par and used proceeds to retire higher-cost FHLB advances and brokered CDs (~4.65%), with brokered CDs paid down in early January 2025; management expects NIM to keep improving.
• Deposits remain resilient and stable with low uninsured exposure (9% of total); loan-to-deposit ratio fell to 97.4%; credit metrics deteriorated modestly on a syndicated commercial loan (NPA/TA 0.71%, total delinquencies 1.06%) but provisioning remained minimal (no provision in Q4).
• Guidance: management expects a return to profitability in 1H 2025 (vs Q3 commentary suggesting “possibly as soon as Q1 2025”), continued NIM expansion, further reductions in borrowings, and tight expense discipline; Board continues to strategic alternatives post-terminated merger.
• Stock reaction catalysts: the sizable GAAP loss and DTA allowance vs the positive core trends and NIM trajectory; loan-sale execution and visible funding-cost relief, plus the strategic-alternatives narrative could drive sentiment near term.

What Went Well and What Went Wrong

• What Went Well

  • Balance sheet repositioning completed and funding costs reduced: “sold loans with a weighted average interest rate of 3.30% and used the proceeds to pay off FHLB advances and brokered deposits with a weighted average interest rate of 4.65%”.
  • Core performance improved sequentially: core pre-tax loss narrowed to $6.4M from $7.8M; core net loss improved to $5.1M vs $6.0M in Q3, driven by higher NIM and lower noninterest expense.
  • Expense control: noninterest expenses fell by $5.2M QoQ (comp and benefits down $1.7M; G&A down $4.2M), aided by headcount reductions and merger expense reimbursements; FTE down to 792 in Q4 (from 819 in Q3).

• What Went Wrong

  • Large non-core loss and tax allowance: $88.8M loss on loan sale and $53.3M DTA valuation allowance drove GAAP net loss of $123.3M and BV/TBV declines.
  • Modest credit metric deterioration: NPA/TA rose to 0.71% and delinquency to 1.06%, largely due to a syndicated commercial participation in forbearance and covenant non-compliance.
  • Tangible fair value per share fell to $12.41 on higher rates and valuation impacts, highlighting market-value sensitivity despite strong core deposit franchise (not reflected in TFV).

Transcript

Operator (participant)

Good afternoon. My name is Rika, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4Q 2024 analysts' earnings call for HomeStreet Bank. Presenting on today's call will be Mark K. Mason, Chairman, President, and Chief Executive Officer of HomeStreet Bank, and John M. Michel, Executive Vice President and Chief Financial Officer. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be an analyst question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. Thank you. Mr. Mason, you may begin your conference.

Mark K. Mason (Chairman, President, and CEO)

Hello, and thank you for joining us for our fourth quarter 2024 analyst earnings call. Before we begin, I'd like to remind you that our detailed earnings release and our investor presentation were filed with the SEC on Form 8-K yesterday and are available on our website at ir.homestreet.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 will make certain predictive statements that reflect our current views, the expectations, and uncertainties about the company's performance and our financial results. These are likely forward-looking statements that are made subject to the safe harbor statements included in yesterday's earnings release, our Forms 8-K, 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. Joining me today is our Chief Financial Officer, John Michel. 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. We will then respond to questions from our analysts. John?

John M. Michel (EVP and CFO)

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the fourth quarter of 2024, our net loss was $123.3 million, or $6.54 per share, as compared to our net loss of $7.3 million, or $0.39 per share in the third quarter of 2024. The fourth quarter results include an $88.8 million pre-tax loss, or a tax-affected $67.1 million loss, on the sale of $990 million of multifamily loans, and a $53.3 million deferred tax asset valuation allowance. On a core basis, which excludes the impact of the loss on the sale of multifamily loans, the deferred tax asset valuation allowance, and merger-related expenses, our net loss was $5.1 million, or $0.27 per share, as compared to our net loss of $6 million, or $0.32 per share in the third quarter of 2024.

On a core basis, our loss before taxes was $6.4 million in the fourth quarter, as compared to $7.8 million in the third quarter. The decrease in core loss before income taxes was primarily due to an increase in net interest income and a decrease in non-interest expense. Due to our cumulative losses over the last three years, accounting rules require us to provide a valuation allowance for the balance of our net deferred tax assets, which includes the deferred tax benefit of unrealized losses on our available for sale securities portfolio. Accordingly, in the fourth quarter of 2024, we recorded a $53.3 million deferred tax asset valuation allowance, which was recorded as an income tax expense. Excluding this allowance, the income tax benefit would have been $22.4 million and would have resulted in an effective tax rate of 24.3% for the fourth quarter of 2024.

Given our expectation of income before taxes in the near term and going forward, we expect to recognize no tax expense on our income tax before taxes when realized over the next few years. Our net interest income in the fourth quarter of 2024 was $1 million higher than the third quarter of 2024 due to an increase in our net interest margin from 1.33% to 1.38%. The increase in the net margin was due to an 11 basis point decrease in the rates paid on interest-bearing liabilities, partially offset by a 3 basis point decrease in the yield on interest-earning assets. As a result of decreases in the Fed funds rate, the yield on our variable rate loans decreased. The decrease in short-term interest rates resulted in lower rates paid on our certificates of deposit, borrowings, and long-term debt.

There is no provision for credit losses recognized during either the fourth or third quarter of 2024. For the fourth quarter of 2024, the benefits of the reduction in loan balances resulting from the loan sale were offset by specific reserves on commercial loans. In the fourth quarter, we continue to experience a minimal level of identified credit issues in our loan portfolio and a lack of significant potential credit issues arising in future periods. Going forward, we expect the ratio of our allowance for credit losses to our held for investment loan portfolio to be relatively stable and provisioning in future periods to generally reflect changes in the composition and balance of our loans held for investment, assuming our history of minimal charge-offs continues.

During the fourth quarter of 2024, our ratios of non-performing assets to total assets and total loans delinquent over 30 days, including non-accrual loans, increased, partially a result of the sale of $990 million of multifamily loans in the fourth quarter. As of December 31, 2024, our ratio of non-performing assets to total assets was 71 basis points, and our ratio of total loans delinquent over 30 days, including non-accrual loans to total loans, was 106 basis points. The $15 million increase in non-accrual loans during the fourth quarter was primarily related to a syndicated commercial loan in which we are participating. Non-interest income in the fourth quarter of 2024 decreased from the third quarter of 2024, primarily due to the $88.8 million loss on the sale of multifamily loans.

Gain on sales of Fannie Mae DUS loans were $1.7 million in the fourth quarter, as compared to no gain in the third quarter. Non-interest expenses were $5.2 million lower in the fourth quarter of 2024 due to a $1.7 million decrease in compensation benefits and a $4.2 million decrease in general administrative and other expenses, which were partially offset by a $1.2 million increase in occupancy expenses. The decrease in compensation and benefits was primarily due to a 3% decrease in FTE. The decrease in general administrative and other expenses was due to a $4.9 million difference in merger expenses related to negotiated reductions in incurred expenses from consultants and expense reimbursement from our merger partner related to integration planning, consulting fees, and related expenses.

The increase in occupancy costs reflects an updated estimate of the cost impact of a leased space for which the sublease was not extended and expired in 2024. One anomaly of the timing of our loan sale at the end of December was the impact it had on our Tier 1 leverage ratio. Because this ratio is based on average assets, our computed ratio was temporarily suppressed. If the $990 million loan sale had occurred at the beginning of the quarter on a pro forma basis, the Tier 1 leverage ratio for the company and the bank would have been approximately 6.46% and 8.17%, respectively. With expectations of future earnings and continued decreases in total assets, we expect the Tier 1 capital ratio in future periods to equal or exceed these pro forma levels.

There is no similar impact to all other regulatory capital ratios because they are based on interperiod balance. I will now turn the call over to Mark.

Mark K. Mason (Chairman, President, and CEO)

Thank you, John. After termination of the merger in the fourth quarter, we adopted a new strategic plan, which included the sale of $990 million of multifamily loans, a sale we closed on December 30, 2024. We sold loans with a weighted average interest rate of 3.3% and used the proceeds to pay off Federal Home Loan Bank advances and brokered deposits with a weighted average interest rate of 4.65%. The brokered deposits were paid off in early January 2025. As a result of the loan sale, we improved our liquidity position, increased our available contingent funding, and reduced our commercial real estate concentrations, as well as our loan-to-deposit ratio. As of year-end, our cash and securities balances of $1.5 billion were 18% of total assets. Our net non-core funding dependency ratio declined to 19.9%.

Our contingent funding availability was $5.2 billion, equal to 80% of total deposits, and our loan-to-deposit ratio declined to 97.4%. As expected, with the decrease in interest rates, our margin expanded in the fourth quarter due primarily to decreases in our funding costs. We anticipate that this balance sheet repositioning will return the company to profitability in the first half of this year and generate continuous growth in earnings for the foreseeable future. As a consequence of the scheduled repricing of our remaining multifamily and other commercial real estate loans, further planned reductions in borrowings, the expectation of ongoing reductions in short-term interest rates, and continued effective non-interest expense management. Of course, these expectations assume continued strong credit in the absence of other changes in the economy or otherwise, which might adversely impact these expectations.

As John mentioned, our non-interest expenses were lower in the fourth quarter, and we continue to experience lower compensation and benefits costs through reductions in FTE, which were 864 in December of 2023, declining to 792 in the fourth quarter of last year, and 776 for the month of December. We achieved these reductions through not replacing attrition generally and reorganizing responsibilities. Excluding brokered deposits, our average deposit balances were $80 million higher in the fourth quarter as compared to the third quarter due to the approximately 90% roll rate on our certificates of deposit and our ability to attract new depositors. Our level of uninsured deposits remains low at 9% of total deposits as well.

It is important to note that our deposits have continued to exhibit significant loyalty and resilience during the last three years, despite external and internal stressors, including rising interest rates, bank failures, lower earnings and losses, and a terminated merger. As John mentioned earlier, our ratios of non-performing assets to total assets and loans delinquent over 30 days, including non-accrual loans, increased, partially as a result of the multifamily loan sale in the fourth quarter and the downgrading of a syndicated commercial loan in which we are participating that is in forbearance today and out of covenant compliance. The bank lending group is working with the borrower on a turnaround plan. The private equity sponsors of this company continue to support it, and we believe the borrower will ultimately successfully recover without loss to the lending group.

As a result of the loss on the loan sale and related tax impacts, and the impact of increasing interest rates during the fourth quarter on the value of our securities portfolio, our tangible book value per share decreased to $20.67 as of year-end. The increase in interest rates also impacted our fair value, as our estimated tangible fair value per share decreased to $12.41 as of December 31, 2024. It should be noted that our estimate of tangible fair value per share is solely based on the market value of individual financial instruments and does not assign any additional value to our core deposit franchise, which we believe is substantial. This additional franchise value was shown in the initial value of our proposed merger last year.

The initial value of that merger, based upon the exchange ratio and the current price of the stock we were to receive, was meaningfully higher than our estimated tangible fair value per share as of the prior quarter-end. We have all seen and read about the property damage and loss of life in the Southern California wildfires. We have significant exposure in commercial real estate, primarily multifamily, and single-family loans in or near the affected areas. Fortunately, we've only been advised of a loss on eight single-family residences with additional partial damage or other impacts to 19 additional homes. All of these properties have current full insurance coverage, so we feel comfortable we will not suffer any losses associated with these wildfires. We will, however, be providing forbearance and assistance where possible to help our customers through this very challenging situation.

As of December 31, 2024, our accumulated other comprehensive income balance, which is a component of our shareholders' equity, was a -$87 million, and while this represents a $4.62 reduction on our tangible book value per share, we know it is not a permanent impairment in the value of our equity and has no impact on our regulatory capital levels. Given available liquidity, earnings, and cash flow of our bank, we don't anticipate a need to sell any of these securities to meet our cash needs, so we don't anticipate realizing these temporary write-downs. As noted earlier, we did have to provide an allowance for the $28.3 million of deferred tax assets related to our available for sale securities, which did impact our regulatory capital levels. The current interest rate environment has impacted our fair value and created significant challenges for our company over the past several years.

The rate and general deposit competition from banks continues. However, with the ongoing repricing of our loan portfolio and recent interest rate reductions, with the expectation of additional interest rate reductions, our current and forecasted results are improving. Ultimately, we will experience an environment of stable rates, which has historically provided significantly better financial performance for our bank. We believe we have taken significant steps to endure this period, improve future earnings, and preserve the value of our business so that we can evaluate strategic alternatives going forward from the position of greater stability and strength. The Board of Directors is dedicated to continuing to evaluate all strategic alternatives to maximize shareholder value as we move forward.

In summary, with the successful execution of a new strategic plan, we're optimistic about our ability to return to profitability early this year, to continuously improve our results in the future, and to ultimately return significant value to our shareholders. With that, that concludes our prepared comments today. We appreciate your attention, and John and I would be happy to answer questions from our analysts at this time. Investors are welcome to reach out to John or I after the call if they have questions that are not covered during this session. Operator, if you would pull the questions.

Operator (participant)

Thank you. Just a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. If for any reason you would like to remove that question, please press star followed by two. And again, to ask a question, please press star one. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We have the first question on the phone lines from Woody Lay with KBW. Please go ahead.

Woody Lay (VP)

Hey, thanks for taking my question. I wanted to start with the NIM. It should be a pretty meaningful pickup next quarter with the loan sale factored in. When you think of the NIM trajectory, is there a break-even level in the NIM that you're targeting to achieve in the first half of the year that gets you back to the return in profitability?

John M. Michel (EVP and CFO)

We don't have a targeted number specifically, but we do expect, as Mark said, you could see what the change in difference between 330 and 465 were on the loans that we sold and the debt that we did retire. The expectations going forward is that, obviously, as with any kind of security or loan, it's going to take a couple of years to fully recover the value, but it does impact the positive impact on earnings immediately in the first quarter and going forward.

Mark K. Mason (Chairman, President, and CEO)

Plus, we have the impact of loan repricing first quarter-end moving forward.

Woody Lay (VP)

Yeah. So the expectation is that you don't need additional rate cuts from here to hit profitability in the first half of the year?

Mark K. Mason (Chairman, President, and CEO)

That's correct.

Woody Lay (VP)

Got it. So you completed the loan sale, which was great to see. And as you're thinking about the return to profitability and growing from there, are there any other strategic initiatives or actions that need to take place in the near term?

Mark K. Mason (Chairman, President, and CEO)

No. It's a pretty simple strategy. Now, having said that, we are doing what we can to accelerate the process of return to profitability and then thereafter improving it. Things like working proactively with our commercial real estate borrowers who have upcoming repricing to hopefully rewrite those loans, either to sell or to improve their yields. Until you get very close to repricing dates, as you would expect, most borrowers aren't ready to preemptively restructure their debt. Given the current posture of the Federal Reserve on slowing rate decreases, we are getting more attention from the borrowers earlier than we have previously.

Woody Lay (VP)

Got it. All right. That's all for me. Thanks for taking my questions.

Mark K. Mason (Chairman, President, and CEO)

Thanks, Woody.

Operator (participant)

Thank you. We now have another question from Matthew Clark with Piper Sandler. Please go ahead when you're ready, Matthew.

Matthew Clark (Managing Director and Senior Research Analyst)

Thanks. Good morning, everyone. Starting around the NIM, do you have a spot rate on deposits after you pay down the brokered CDs here in January? Just trying to get a sense for where we stand here in January.

John M. Michel (EVP and CFO)

Yeah. As of December 31st, our spot rate of all our deposits was 265. Excluding our brokered deposits, it's 239. Going forward, we did pay off some of the brokered deposits already in the first quarter, and we intend to pay them off over the next few months and going forward. So we'll get down to that close to that 239 pretty quickly.

Matthew Clark (Managing Director and Senior Research Analyst)

Got it. Okay. That's helpful. And then on the new nonperforming, the commercial participation, can you just remind us how much you have in syndicated or participations in terms of the exposure there overall?

Mark K. Mason (Chairman, President, and CEO)

That's not a number we generally disclose. I think that it's a little south of $200 million at this point, though, roughly.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. That's fine. And then just on the DTA, and you guys mentioned the fair value of tangible book based on the rate changes, but I just want to confirm that DTA is portable. I mean, a buyer could use that, right, and put it to work. So your tangible book of 12 and change could be grossed up by the DTA. Is that fair?

Mark K. Mason (Chairman, President, and CEO)

It is. I mean, it's going to be converted into net operating loss carry forward. Now, remember, there's a Section 382 in the tax code that deals with limitations on annual utilization in the event of a change of control. But given what we believe the value of the company is, we think that those annual limitations are not likely to reduce the full value.

John M. Michel (EVP and CFO)

Just to be clear, we did add back the valuation allowance in terms of computing tangible book value per share. If you look at the schedule on the back of the earnings release and in the deck, you'll see the computation that shows that added back because the value is transferable and also realizable by us.

Mark K. Mason (Chairman, President, and CEO)

Right.

Matthew Clark (Managing Director and Senior Research Analyst)

Yep. Okay. So it's embedded in that $12.50-something?

John M. Michel (EVP and CFO)

Yes.

Mark K. Mason (Chairman, President, and CEO)

Yeah. That's in the calculation.

Matthew Clark (Managing Director and Senior Research Analyst)

Yes.

Mark K. Mason (Chairman, President, and CEO)

The bottom gap measures. You'll see the number. Yeah.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. Sorry about that. And then just any update on potential conversations with potential buyers? Has that started yet? Has it been ongoing? I guess, where do we stand on that front?

Mark K. Mason (Chairman, President, and CEO)

I think I spoke to it in my prepared comments that the Board of Directors is continuously reviewing strategic alternatives, and that's what we can say at this time.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. Fair enough. Thank you.

Mark K. Mason (Chairman, President, and CEO)

Thanks, Matt.

Operator (participant)

Thank you. Just as a quick reminder, if you would like to ask any further questions, please press star followed by one on your telephone keypads now. We have Timothy Coffey with Janney.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Thanks, Mark and gentlemen.

Mark K. Mason (Chairman, President, and CEO)

Hey, Tim.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Hey, guys. My first question has to do with kind of the fee income line items and servicing, the mortgage servicing. Did the loan sale have a material impact on what those values might be going forward, or is that totally separate?

Mark K. Mason (Chairman, President, and CEO)

Remember that we sold portfolio loans, so we weren't previously recording servicing fees, so it doesn't impact that line item. There is a potential impact of retained servicing, and I say potential because even though we retained it, there is some probability that the buyer will be securitizing some meaningful portion of those loans, and at that point, we would have to transfer the servicing, or the buyer has told us they'd transfer servicing to a regular servicing provider, a CMBS servicer.

John M. Michel (EVP and CFO)

Just to be clear, we did not recognize a mortgage servicing asset related to that because of the temporary nature.

Mark K. Mason (Chairman, President, and CEO)

Right. Because of the uncertainty of the timing of how long they'll service and how much.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. That's helpful. And, then, what is your. I'm trying to figure out the phrases. I'll spit it out bluntly. What is your appetite for doing more originate-to-sale business going forward?

Mark K. Mason (Chairman, President, and CEO)

It's large. It's tempered somewhat by both ends of those transactions. One, the application activity for new loans has not yet picked up substantially, though there is some activity. I think I spoke a little bit to borrower trends. Two, most of the secondary market activity for buyers of loans has been focused on buying legacy low-rate loans. And so we're not quite sure yet how significant the appetite will be for newly originated loans, but we're in discussions with several parties at this time, hopefully to establish a flow program.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. And then on non-interest expenses, obviously, you're doing what you can to lower that number. Is there more that you can do in the near term?

Mark K. Mason (Chairman, President, and CEO)

Boy, we're really down to very small opportunities at this point. I mean, we never thought we would get down below 800 on FTE, which means we're probably running a little thin, and we have some positions that we were holding open in anticipation of the prior proposed merger. Having said that, we're trying to hold the line on add-backs to really critical positions. And now, if volume changes, particularly in the origination areas, we'll have to add some support, but that is less costly support generally. So we think we're getting pretty close to what we can do. Unfortunately, each year you do have inflation and compensation. And to be competitive, to retain and attract anyone we need to attract, we're going to have to, like everyone else, provide merit increases this year. We're using a budget of about 3% again, which we think is consistent with our market.

So even where we're at, inflation is going to hit our comp line like everyone else.

John M. Michel (EVP and CFO)

Yeah. On the other expenses too, no big changes in other G&A expenses per se, other than as we continue to move forward here and restructure our balance sheet, we expect our FDIC insurance fees to go down slightly. Secondly, from the occupancy costs, we are kind of going through and managing those down. As we move out of spaces, we are not going to renew because we have adopted a remote and somewhat remote environment for the company. And so those are the two areas that you may see some stability or slight decrease in expenses.

Mark K. Mason (Chairman, President, and CEO)

Having said that, it's a tough market to sublet space.

John M. Michel (EVP and CFO)

Yeah, but they're expiring.

Mark K. Mason (Chairman, President, and CEO)

Yeah. They're expiring. Yeah.

Timothy Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. Well, thank you. Those are my questions.

Mark K. Mason (Chairman, President, and CEO)

Thanks, Tim.

Operator (participant)

Thank you. Just as a quick reminder, press star one if you wish to register for any further questions. I can confirm we currently have no questions registered. Oh, I do apologize. We have. Yes. That does conclude the end of the Q&A session, and I'd like to hand it back to management for some closing.

Mark K. Mason (Chairman, President, and CEO)

Thank you very much for joining us for our fourth quarter and full-year analyst call today. Again, if any investors would like to ask questions or arrange a conference call with John and I, please give us a shout. You know how to find us. Thank you.

Operator (participant)

Thank you all for joining. Thank you all for joining the call today. I can confirm that we've completed today's call. Please enjoy the rest of your day, and you may now disconnect.