425: HomeStreet Reports Net Loss for Q1 2024 Amidst Merger Costs and Margin Compression

HomeStreet, Inc. reported a net loss of $7.5 million for the first quarter of 2024, impacted by a decreased net interest margin and merger-related expenses.

Summary

• HomeStreet reported a net loss of $7.5 million for Q1 2024, compared to a net loss of $3.4 million in Q4 2023.
• The loss per fully diluted share was $0.40, compared to $0.18 in the previous quarter.
• The net interest margin decreased to 1.44% from 1.59% in the previous quarter due to increased funding costs.
• Core loss was $5.5 million, or $0.29 per fully diluted share, compared to a core loss of $2.2 million, or $0.12 per fully diluted share, in the prior quarter.
• Noninterest-bearing deposits increased by $5 million, and total deposits, excluding brokered deposits, increased by $25 million.
• Uninsured deposits represent 8% of total deposits, totaling $494 million.
• Nonperforming assets to total assets ratio was 0.56%.
• The allowance for credit losses to loans held for investment was 0.54%.
• Book value per share was $27.96, and tangible book value per share was $27.49.
• The company incurred $2.6 million in merger-related expenses during the quarter.
• A $10.4 million construction-bridge loan was downgraded to nonperforming status due to delays in project completion and leasing.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the reported net loss, decreased net interest margin, and merger-related expenses. However, there are some positive aspects, such as the increase in noninterest-bearing deposits and stable loan balances, which prevent the sentiment from being lower.

Positives

• Noninterest-bearing deposits increased by $5 million.
• Total deposits, excluding brokered deposits, increased by $25 million.
• The pace of deposit migration to higher-yielding products is slowing, and rates paid by competitors have started to decline.
• Loan balances have remained stable.
• Credit quality remains strong, with no potentially significant credit issues identified in the loan portfolio, aside from the one downgraded loan.

Negatives

• HomeStreet reported a net loss of $7.5 million for Q1 2024.
• The net interest margin decreased to 1.44%.
• The company incurred $2.6 million in merger-related expenses.
• A $10.4 million construction-bridge loan was downgraded to nonperforming status due to delays in project completion and leasing.
• Operating results are expected to continue to be adversely impacted by high funding costs relative to earning assets yields in the near term.

Risks

• The company's operating results will continue to be adversely impacted by high funding costs relative to earning assets yields in the near term.
• The completion and leasing of a multifamily and mixed-use project, backing a $10.4 million loan, has been delayed due to a dispute over an alleged minor building code violation.
• The company faces risks related to the successful consummation of the pending merger with FirstSun Capital Bancorp, including shareholder and regulatory approvals, and integration challenges.
• Changes in the interest rate environment may reduce interest margins.
• Changes in deposit flows, loan demand, or real estate values may adversely affect the business.
• There may be increases in competitive pressure among financial institutions or from non-financial institutions.

Future Outlook

While interest rates have stabilized and are projected to decline later in the year, HomeStreet expects its operating results will continue to be adversely impacted by high funding costs relative to earning assets yields in the near term.

Management Comments

• In the first quarter, we recognized a net loss of $7.5 million as our net interest margin decreased to 1.44% due to increased funding costs as lower cost deposits continued to migrate to higher yielding products, said Mark Mason, Chairman of the Board, President, and Chief Executive Officer.
• During the first quarter, our noninterest expenses include the impacts of seasonally higher employee benefit costs, the impact of wage increases effective in March, lower levels of full time equivalent employees and $2.6 million of costs incurred related to the merger process.
• Our deposit balances, excluding brokered deposits, were stable during the first quarter, and our noninterest-bearing balances increased slightly, continued Mark Mason.
• While we continue to be impacted by the migration of deposits to higher yielding products, the pace of migration is slowing and the rates paid on higher yielding accounts by competitors have started to decline.
• We anticipate that if these trends continue, our funding costs will become more stable.
• Our loan balances have remained stable as they continue to be impacted by historically low levels of prepayments, added Mark Mason.
• We continue to focus on variable rate loan products with appropriate margins over incremental funding costs.
• In the first quarter our nonaccrual loans and nonperforming assets increased due to the downgrade of a $10.4 million construction-bridge loan to nonperforming status.
• The completion and leasing of this 27% loan to value multifamily and mixed-use project has been delayed.
• Our credit quality, however, remains strong and we have not identified any potentially significant credit issues in our loan portfolio.

Industry Context

The results reflect the ongoing challenges faced by regional banks due to increased funding costs and margin compression in the current interest rate environment. The pending merger with FirstSun is likely aimed at improving the company's financial position and operational efficiency to better compete in the market.

Comparison to Industry Standards

• HomeStreet's net interest margin of 1.44% is below the industry average for regional banks, which has been under pressure due to rising deposit costs.
• The nonperforming assets to total assets ratio of 0.56% is within an acceptable range, but the increase from previous quarters warrants monitoring.
• Compared to peers like WaFd Bank and Columbia Banking System, HomeStreet's profitability metrics are weaker, reflecting the impact of merger-related expenses and margin compression.
• The tangible book value per share of $27.49 is comparable to some regional banks, but lower than others with stronger capital positions.

Stakeholder Impact

• Shareholders will be negatively impacted by the reported net loss and decreased profitability.
• Employees may experience uncertainty related to the pending merger with FirstSun.
• Customers may see changes in products and services as a result of the merger.
• The company's financial performance may impact its relationships with suppliers and creditors.

Next Steps

• The company will focus on managing funding costs and improving earning asset yields.
• HomeStreet will work to resolve the dispute delaying the completion and leasing of the multifamily and mixed-use project.
• The company will continue to pursue the merger with FirstSun Capital Bancorp, seeking shareholder and regulatory approvals.

Key Dates