HMST Financial Analysis

Analysis Date: 1/30/2025

Business Model

HomeStreet, Inc. generates revenue primarily through net interest income from lending activities and investment securities, as well as noninterest income from loan origination and sales, loan servicing, and deposit fees.

Revenue Sources

• Net Interest Income: Income from loans and investment securities minus interest expense on deposits and borrowings.
• Noninterest Income: Includes net gain/loss on loan origination and sale activities (single family, commercial & CRE loans), loan servicing income (single family and commercial), deposit fees, and other income (BOLI, SBIC, insurance agency commissions, swap income, gain/loss on sale of securities, and other miscellaneous income).

Income Statement Analysis

• Net interest income increased by 3.5% QoQ, driven by an improved net interest margin from 1.33% to 1.38% due to decreasing interest rates reducing funding costs.
• Noninterest income significantly decreased QoQ, primarily due to an $88.8 million loss on the sale of multifamily loans in Q4 2024.
• Noninterest expenses decreased by 10.6% QoQ, mainly due to lower compensation and benefits and general, administrative, and other expenses, partially offset by increased occupancy expenses. Reduction in FTE contributed to lower compensation.

Balance Sheet Analysis

• Total assets decreased by 11.7% QoQ, primarily due to a $1.1 billion decrease in Loans Held for Investment, reflecting the sale of multifamily loans.
• Loans Held for Investment decreased significantly by 15.1% QoQ as a result of the strategic sale of multifamily loans.
• Borrowings decreased by 47.3% QoQ, indicating the use of proceeds from loan sales to pay down higher-cost wholesale funding.
• Total shareholders' equity decreased by 26.3% QoQ, likely impacted by the net loss in Q4 2024, including the loss on loan sale and deferred tax asset allowance.
• Deposits remained relatively stable, decreasing slightly by 0.35% QoQ, with average deposit balances (excluding broker deposits) increasing.

Capital Allocation

The company's capital allocation strategy in Q4 2024 was focused on strategic balance sheet repositioning through the sale of multifamily loans. Proceeds were primarily used to pay down higher-cost wholesale funding (Federal Home Loan Bank advances and brokered deposits). There is no mention of dividends or share repurchases in the provided documents. The focus appears to be on improving profitability and financial position through strategic asset sales and debt reduction. Management continues to evaluate all strategic alternatives.

Management Commentary

"After termination of the merger in the fourth quarter, we implemented a new strategic plan which included selling $990 million of multifamily loans in the fourth quarter," said Mark Mason, Chairman of the Board, President, and Chief Executive Officer. "This loan sale repositioned our balance sheet and accelerated our return to profitability which we expect to occur in the first half of 2025."

"With the positive impact of the loan sale and anticipated continued decreasing interest rates, we expect the net interest margin to continue to increase in the coming quarters."

"Given the scheduled repricing of our remaining multifamily and other commercial real estate loans, future anticipated reductions in borrowings, the expectation of ongoing reductions in short-term interest rates by the Federal Reserve and continued effective noninterest expense management, we anticipate continuous growth in earnings for the foreseeable future."

"Due to our cumulative losses over the last three years, accounting rules require us to provide a valuation allowance for the balance of our deferred tax assets, which include the deferred tax benefit of unrealized losses in our available for sale securities portfolio," added Mark Mason. "Accordingly, in the fourth quarter of 2024, we recorded a $53 million deferred tax allowance which was recorded as an income tax expense."

"As a result of the loss on the loan sale, the recorded allowance for deferred tax assets 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 December 31, 2024."

"Net loss: $123.3 million compared to $7.3 million" for QoQ

Overall Sentiment: Cautiously optimistic. Management expresses confidence in returning to profitability in the first half of 2025 and anticipates continuous growth in earnings due to strategic actions and expected interest rate environment changes. However, the significant net loss in Q4 2024 and decrease in tangible book value per share are negative points, reflecting the costs associated with strategic repositioning.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation based on the company's strategic repositioning efforts showing potential for future profitability, balanced against significant losses in the current quarter and ongoing strategic evaluation.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 1/30/2025, 10:20:38 AM