8-K: HomeStreet Inc. Reports Third Quarter 2024 Results with Increased Losses Despite Deposit Growth

HomeStreet Inc. reported a net loss of $7.3 million for the third quarter of 2024, an increase from the $6.2 million loss in the previous quarter, despite growth in deposits excluding brokered deposits.

Summary

• HomeStreet Inc. reported a net loss of $7.3 million for the third quarter of 2024, compared to a $6.2 million loss in the second quarter.
• The net loss per fully diluted share was $0.39, up from $0.33 in the previous quarter.
• The company's net interest margin decreased slightly to 1.33% from 1.37% in the second quarter, but stabilized later in the quarter.
• Core net loss was $6.0 million, compared to $4.3 million in the second quarter.
• Excluding brokered deposits, total deposits increased by $111 million.
• Uninsured deposits totaled $509 million, representing 8% of total deposits.
• Loans held for investment decreased by $46 million.
• Nonperforming assets to total assets ratio increased to 0.47% from 0.42% at the end of the previous quarter.
• Total loan delinquencies increased to 0.69% from 0.66% at the end of the previous quarter.
• The allowance for credit losses to loans held for investment was 0.53%.
• Book value per share was $28.55, and tangible book value per share was $28.13.
• The company reduced rates on promotional certificates of deposit and is offering higher rates on shorter duration certificates of deposit.
• Noninterest expenses decreased by $1.8 million due to cost-cutting measures.
• Full-time equivalent employees decreased to 819 from 840 in the prior quarter.

Sentiment

Score: 3

Explanation: The sentiment is negative due to increased losses, decreased net interest margin, and rising nonperforming assets. While there are some positives like deposit growth and cost reductions, the overall financial performance is weak.

Positives

• Total deposits, excluding brokered deposits, increased by $111 million.
• Noninterest expenses decreased by $1.8 million due to cost-cutting measures.
• The company's tangible book value per share increased slightly from $28.11 at the end of 2023 to $28.13 as of September 30, 2024.
• The estimated tangible fair value per share increased to $18.52 as of September 30, 2024.
• The company is reducing rates on promotional certificates of deposit and offering higher rates on shorter duration certificates of deposit in anticipation of further decreases in short term interest rates.
• Noninterest-bearing deposits have stabilized and the company is seeing growth in deposits from new business customers.

Negatives

• The company reported a net loss of $7.3 million for the third quarter of 2024, an increase from the $6.2 million loss in the second quarter.
• The net interest margin decreased slightly to 1.33% from 1.37% in the previous quarter.
• Loans held for investment decreased by $46 million.
• Nonperforming assets to total assets ratio increased to 0.47% from 0.42% in the previous quarter.
• Total loan delinquencies increased to 0.69% from 0.66% in the previous quarter.
• Core net loss was $6.0 million, compared to $4.3 million in the second quarter.

Risks

• The company's net interest margin decreased due to lower yields on investment securities and higher deposit costs.
• The company is experiencing operating losses through the first nine months of 2024.
• There is a risk that the pending merger with FirstSun Capital Bancorp may not be successfully consummated.
• The company faces risks related to changes in the U.S. and global economies, interest rate environment, and deposit flows.
• There are risks associated with maintaining relationships with customers, associates, and business partners due to the announced merger.
• The company faces potential challenges in meeting current underwriting standards, which may impact the value of rate-lock loan activity.
• There are risks related to technological changes, cyber-attacks, and the success of new business initiatives.

Future Outlook

The company expects funding costs to decrease in the fourth quarter and beyond due to recent decreases in short-term interest rates, and anticipates the interest margin to begin to increase. They are also focusing on variable rate loan products with appropriate margins over incremental funding costs.

Management Comments

• As a result of lower noninterest income and lower net interest income, our net loss and core net loss were higher in the third quarter than in the second quarter, said Mark Mason, Chairman of the Board, President, and Chief Executive Officer.
• While our net interest margin decreased slightly during the quarter we did see it stabilize during the latter part of the quarter.
• With the recent decrease in short term rates, we expect our funding costs to decrease in the fourth quarter and beyond and our interest margin to begin to increase.
• Our quarter-end deposit balances, excluding brokered deposits, increased $111 million.
• Our noninterest-bearing deposits have stabilized and we continue to see growth in deposits from new business customers.
• Our loan balances decreased $46 million during the third quarter and we are seeing a low level of prepayments in our commercial real estate loan portfolio.
• Our loan originations continue to be focused on variable rate loan products with appropriate margins over incremental funding costs.
• In the third quarter our ratio of nonaccrual assets to total assets and our total loan delinquencies remained low at 0.47% and 0.69%, respectively.
• Our credit quality remains strong and we have not identified any potentially significant credit issues in our loan portfolio.
• With the benefits of lower interest rates, our tangible book value per share has increased due to the increased value of our available for sale securities portfolio.
• Importantly, as a result of the recent reductions in interest rates and the passage of time, as of September 30, 2024, our estimated tangible fair value per share has increased to $18.52.

Industry Context

The results reflect the challenges faced by financial institutions in a fluctuating interest rate environment, with increased funding costs impacting net interest margins. The focus on variable rate loans and cost reduction measures are common strategies in the current market.

Comparison to Industry Standards

• HomeStreet's net interest margin of 1.33% is below the average for many regional banks, which have been closer to 3% in recent periods, indicating a potential weakness in their interest rate management.
• The increase in nonperforming assets to 0.47% is slightly above the average for well-capitalized banks, which typically aim for below 0.4%, suggesting a need for closer monitoring of loan quality.
• The company's efficiency ratio of 118.7% is significantly higher than the industry average, which is typically around 60%, indicating that HomeStreet is spending more on operating expenses relative to its revenue.
• Compared to peers like Umpqua Holdings Corporation (UMPQ) and Columbia Banking System (COLB), which have reported stronger profitability and better efficiency ratios, HomeStreet's performance is lagging.
• The increase in tangible book value per share is a positive sign, but the estimated tangible fair value per share of $18.52 is still below the book value of $28.13, indicating a potential market discount.

Stakeholder Impact

• Shareholders are negatively impacted by the increased losses and decreased profitability.
• Employees may be affected by ongoing cost reduction measures and staffing adjustments.
• Customers may experience changes in deposit and loan product offerings.
• Creditors may be concerned about the company's financial performance and credit quality.

Next Steps

• The company will continue to focus on reducing expenses.
• The company will monitor the impact of decreasing short-term interest rates on funding costs and interest margins.
• The company will continue to focus on variable rate loan products.
• The company will work towards completing the merger with FirstSun Capital Bancorp.

Key Dates

Keywords

financial results, net loss, net interest margin, deposits, loans, nonperforming assets, delinquencies, book value, tangible book value, merger, interest rates, credit quality, cost reduction, banking, financial services