HomeStreet : Fourth Quarter Earnings Call Transcript

HomeStreet, Inc.

Year-End and Q4 2020 Earnings Conference Call

Tuesday, January 26, 2021, 1:00 PM Eastern

CORPORATE PARTICIPANTS

Mark Mason - Chief Executive Officer

John Michel - Chief Financial Officer

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PRESENTATION

Operator

Good day, everyone, and welcome to the HomeStreet Incorporated Year-End and Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the "*" key followed by "0." After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press "*" then "1" on your touchtone phone, to withdraw your question, please press "*" then "2." Please also note, today's event is being recorded.

I'd now like to turn the conference over to Mark Mason, Chief Executive Officer of HomeStreet. Please go ahead, sir.

Mark Mason

Hello and thank you for joining us for our fourth quarter 2020 earnings call. Before we begin, I'd like to remind you that our detailed earnings release and an accompanying 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 & 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 may make certain predictive statements that reflect our current views and expectations about the company's performance and financial results. These are likely forward-looking statements that are made subject to the Safe Harbor statements included in yesterday's earnings release, the 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 available on our website.

Joining me today is our Chief Financial Officer, John Michel. John will briefly discuss our financial results and then I'd like to give you an update on our results of operations, credit performance and our outlook going forward. John…

John Michel

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the fourth quarter, our net income was $28 million, or $1.25 per share, with core income of $32 million or $1.47 per share, and pre-provision core income before income taxes of $41 million. This compares to net income, core income and pre-provision core income before taxes of $26 million, $28 million and $36 million respectively in the fourth quarter…excuse me in the third quarter.

Our results included unusual activities that occurred during the fourth quarter, including, as part of restructuring and consolidation of our space at our corporate headquarters in Seattle and to acknowledge the impact of the pandemic on the leasing office market, we recognized a $6.1 million charge related to the impairment of our lease and related fixed assets on space we have vacated. We estimate that this will result in occupancy expense savings of approximately $1.3 million per year through the next seven years.

We paid off certain fixed rate FHLB advances and incurred a prepayment penalty of $1.5 million with the benefits expected to be realized evenly within our net interest income over the next five years. We recognized a $1.8 million reduction in our staff insurance medical benefit costs, which is due to lower usage of medical services by our employees in 2020. We are not anticipating similar savings in 2021 and future years.

HomeStreet, Inc. Tuesday, January 26, 2021, 1:00 PM Eastern

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Continued decreases in our funding costs had the result of increasing our net interest margin to 3.26%. As a result of the continuing strong performance of our loan portfolio and a stable low level of non-performing assets, no provision for credit losses was recorded in the third or fourth quarters of 2020.

Our ratio of non-performing assets to total assets remained low at 31 basis points, while our ratio of loans delinquent over 30 days to total loans decreased to 68 basis points at December 31st from 76 basis points at September 30th.

Loans remaining in forbearances in our commercial and CRE portfolios were $41 million at December 31st, 2020 representing 1.2% of such loans outstanding. And new forbearances granted in the fourth quarter for our commercial and CRE portfolio were less than $7 million.

Single-family and consumer loans remaining in forbearance excluding those guaranteed by Ginnie Mae were $76 million. In light of the recently passed Coronavirus Response and Relief Supplemental Appropriation Act, we anticipate that some single-family loans may request an additional forbearance in 2021.

Our single-family loan origination and sales volumes and profit margins remain strong in the fourth quarter driven by the ongoing mortgage refinancing boom. The increase in non-interest income in the fourth quarter was due to higher sales of multi-family loans including Fannie Mae DUS multi-family loans and higher servicing income, which resulted from more favorable risk management results on mortgage servicing rights realized in the fourth quarter.

The increase in non-interest expense in the fourth quarter over the third quarter was primarily due to the previously mentioned restructuring charges, higher lending commissions and management bonuses and the prepayment fee on the FHLB advances, which were partially offset by reduced medical costs.

I will now turn the call over to Mark.

Mark Mason

Thank you, John. HomeStreet reported strong results in the fourth quarter, concluding a year in which notwithstanding the challenges presented by the global pandemic, we benefited from our diversified business model, our conservatively underwritten loan portfolio and the steadfast commitment of our employees.

We'd like to take a moment to recognize and thank all of our frontline employees as well as those working from home for quickly adapting to the pandemic last year and serving our customers and communities, but also each other and thereby helping the company to achieve these stellar results.

During the just completed quarter, our net interest margin once again increased as a result of improvement in our funding costs. We continue to benefit from high loan volume and profitability in our single-family mortgage banking business and we had record origination volumes of commercial real estate loans and higher volumes of commercial real estate loan sales. These increased revenues along with the benefits of our efficiency and profitability improvement project initiated in 2019 resulted in meaningful improvement in our profitability and our efficiency.

HomeStreet, Inc. Tuesday, January 26, 2021, 1:00 PM Eastern

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I'm very proud of what we achieved last year. For the full year 2020, our core results from continuing operations resulted in a return on average assets of 1.23%, a return on average tangible common equity of 13.4% and our efficiency ratio of 61.4%. And for the fourth quarter, our core results from continuing operations resulted in a return on average assets of 1.73%, a return on average tangible common equity of 19% and an efficiency ratio of just 56.1%.

These fourth quarter and full year results all meaningfully exceed the targets we established in 2019 for profitability and efficiency improvement following the restructuring of our single-family mortgage business. And we accomplished these results despite the challenges of the pandemic and the significant additional loan loss provisions we recorded in the first half of the year.

We also returned $73 million of excess capital to our shareholders during 2020 via dividends totaling $0.60 per share, and the repurchase of 2.2 million shares or 9.2% of total shares outstanding at an average price per share of $26.31 substantially below our tangible book value at the time. Additionally, as a result of our repurchases and earnings for the year, our tangible book value per share increased 16% last year.

We're quite pleased that the combination of our strong operating results and our active capital management during the course of the year resulted in our shares outperforming other regional banks by a meaningful margin, returning 1.4% compared to the negative 8.7% total shareholder return of the KBW Regional Bank Index.

Looking forward, with the Federal Reserve indicating that interest rates will remain low for the foreseeable future, we expect our net interest margin to modestly expand as deposits continue to re-price downward and as we receive payoffs from the initial Paycheck Protection Program.

Single-family mortgage volumes should remain robust for the foreseeable future as the low interest rate environment has not completely been priced into mortgage interest rates due to the industry's inability to absorb the massive amount of volume spurred by these historically low interest rates.

As capacity normalizes in the industry, mortgage interest rates should decrease in line with our historical spread over long-term treasury rates. We expect that this transition will reduce the very strong gain on sale margins we are currently enjoying but maintain strong volumes for an extended period of time.

The transfer of our Fannie Mae DUS multifamily lending business to HomeStreet Bank from a holding company subsidiary announced last quarter has already resulted in higher levels of loan origination volume and should result in higher sales volumes going forward.

Despite the higher than expected mortgage loan volumes, we have continued to maintain discipline on the expense side, generally using overtime and temporary personnel to aid in processing the additional volume. We are also instituting more scalable technology solutions, which we believe will result in greater efficiencies when loan volumes return to more normalized levels.

In the fourth quarter, we finalized and executed an amendment to our core systems contract effective this month. As a result, we will begin to see the results of lower information systems expenses this quarter. Beginning last week, we have been granted access by the SBA to begin

HomeStreet, Inc. Tuesday, January 26, 2021, 1:00 PM Eastern