HomeStreet, Inc.

Hello and thank you for joining us for our first quarter 2023 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 8K on Monday and are available on our website at ir.homestreet.com under the news and events link. In addition, a recording of it 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 financial results. These are likely forward-looking statements that are made subject to the Safe Harbor statements included in Monday's earnings release, 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 be found in our earnings release and investor deck available on our website. Joining me today is our Chief Financial Officer, John Mitchell. 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. John?

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the first quarter of 2023, our net income was $5.1 million, or 27 cents per share. as compared to net income of 8.5 million, or 45 cents per share, in the fourth quarter of 2022. In the first quarter of 2023, our annualized return on average tangible equity was 4.1 percent, our annualized return on average assets was 22 basis points, and our efficiency ratio was 87.2 percent. These results reflect the continuing adverse impact the significant increase in short-term interest rates has had on our business. Our net interest income in the first quarter of 2023 was $6.3 million, lower than the fourth quarter of 2022 due to a decrease in our net interest margin from 2.53% to 2.23%. The decrease in our net interest margin was due to a 52 basis point increase in the cost of interest-bearing liabilities, which was partially offset by an 11 basis point increase in the yield on interest-bearing assets. Yields on interest-earning assets increased as yields on investment securities improved, and the adjustable rate loan yields increased due to increases in the indices in which their rates are based. The increase in the cost of interest-bearing liabilities was due to the overall higher deposit and borrowing costs. Our cost of borrowings increased 64 basis points during the first quarter, while the cost of deposits increased 56 basis points. Our effective tax rate for the first quarter of 2023 was 22%, which is the expected tax rate for the rest of 2023. A $0.6 million provision for credit losses was recorded during the first quarter of 2023, compared to a $3.8 billion provision for credit losses in the fourth quarter of 2022. The provision for the first quarter of 2023 primarily related to the net charge-offs realized in the quarter, as overall portfolio loan balance has only increased $60 million. Going forward, we expect the ratio of our allowance for credit losses to our loans held for investment portfolio to remain relatively stable and provisioning in future periods to generally reflect changes in the balance of our loans held for investments, assuming our history of minimal charge-offs continues. Our ratio of non-performing assets to total assets remain low at 15 basis points. The increase in non-interest income in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to a $1.1 million increase in single-family lending gain on sale activities. The $2.1 million increase in non-interest expenses in the first quarter of 2023 as compared to the fourth quarter of 2022 was primarily due to higher compensation and benefit costs, partially offset by lower information services costs. The higher level of compensation and benefit cost was due to seasonally higher benefit costs, primarily employer taxes and 401 matches, and a reduction in deferred costs due to lower levels of loan production. Additionally, the benefits of lower levels of staffing resulting from layoffs in our loan origination operations in the first quarter were offset by the impact of raises given during the first quarter and the employees added from the acquisition of three branches in Southern California. I will now turn the call over to Mark.

Thank you, John. The banking industry experienced significant turmoil during the first quarter driven by the now historically record velocity and magnitude of the Federal Reserve's increases in short-term rates during this cycle. As with other banks, we experienced some marginal deposit outflow in March beyond that, which we have experienced to date from deposit competition as A few depositors move funds from community and regional banks to national banks. Very few, actually. Consistent with our peers, however, these depositor anxiety outflowers appear to be substantially abated in April. We're fortunate in this environment that our level of uninsured deposits is among the lowest in banking at 14% of deposits at the end of March. However, we expect rate-based competition for deposits to continue until the Federal Reserve stops raising rates and ultimately reduces rates. While we have not seen any material deposit or anxiety, we took steps at quarter end to improve our liquidity position. At quarter end, we held substantially more cash than we would in the normal course, over $300 million more. And while we are unlikely to continue this practice, we felt a temporary increase in on-balance sheet liquidity was appropriate at that time. Also where appropriate, we are working with a few of our customers to secure additional FDIC insurance coverage, either through changes in account vesting or through the Intrify, ICS, and CDARS programs. Additionally, in the quarter, we utilized the Fed Bank Term Funding Program, which for us is a lower-cost wholesale funding option, which provides for fixed-rate funding that can be refinanced without penalty if rates decrease. We have used this program to replace FHLB borrowings in part, given the lower rates, term structure, and greater collateral utilization. At quarter end, our contingent funding availability was $6 billion, representing six times the level of uninsured deposits and 85% of total deposits. During the first quarter, we significantly reduced our level of loan originations and continued to offer very competitive promotional price deposits, which allowed us to attract and retain deposits without immediately repricing our existing interest-bearing deposit base. Over time, of course, customers in our non-promotional deposit products are expected to migrate to the better-yielding promotional products, though this migration has been slow. However, this ongoing migration is part of the continuing increase in our overall deposit costs. The competitive rate environment has resulted in reductions on our net interest margin, which are expected to continue until rates stabilize and later fall. Today, based upon commentary from the Federal Reserve, that time appears to run through the end of this year. We have not experienced material identifiable deposit loss related to concerns about deposit security, and other than seasonal tax payments, we have seen stability in our deposit balances in April. We are fortunate to have a valuable retail deposit franchise, with customers who will invest in certificates of deposit and money market deposit accounts at rates well below brokerage money market funds, treasuries, and wholesale borrowing rates. Additionally, based on our experience, we expect many of these new promotional deposit customers will convert to full relationship core deposit customers over time. In addition to our ongoing organic deposit gathering, we acquired three retail deposit branches from Union Bank, U.S. Bank in Southern California. During the quarter, these branches experienced higher than anticipated levels of runoff, both before and after our transaction closed on the 10th of February. The balance of deposits acquired was $373 million, which declined to $322 million at March 31 due to a number of factors, including greater customer concerns than we expected about the relative size and branch footprint of HomeStreet versus U.S. Bank, deposit outflows due to the rate-sensitive environment, deposit or security anxiety caused in part by turmoil in the banking industry, and data-driven conversion challenges that cause frustrations experienced by deposit customers. We constructively worked through these conversion issues with U.S. Bank, which resulted in a reduction to the deposit premium we paid. As a result, we did not pay a premium for a majority of the post-closing runoff we experienced in the quarter, and the additional goodwill recorded from this acquisition was substantially lower than originally anticipated, reducing the impact on our tangible book value. In spite of these challenges, we're excited about the branches and teams that joined the bank, and our opportunity to now grow our customer base in these new communities. These communities have only been served by large national banks, and until this transaction, they did not have a community bank choice. In the first quarter, we recorded a $0.6 million addition to our allowance for credit losses. This addition primarily relates to replenishing the ACL for the minimal level of net charge-offs as the loan portfolio barely increased during the quarter. Charge-offs in the quarter were .6 million dollars and non-performing assets remained low at .15% of total assets. Total delinquencies were slightly higher in the quarter at 41 basis points versus 29 basis points in the prior quarter. While delinquencies remained low, an increase in the over 90-day past due and still accruing category was due to one residential construction loan that matured at the end of 2022. This project, which has a substantial level of overcollateralization, has been completed and sales are now occurring. So we have no concerns about it. Overall, we are happy with the velocity of sales in our residential construction book. Generally, today we are getting a higher level of project completions and payoffs than new projects. This developer conservatism is appropriate for this point in the cycle, despite the ongoing low level of homes available. We expect home building loan volume to begin growing again once rates stabilize and mortgage rates return to normal spreads. Our loan portfolio remains well diversified, with our highest concentration in Western states' multifamily loans, one of the lowest risk loan types Historically, our delinquencies, non-performing assets, and classified assets remain at historically low levels. Our portfolio is conservatively underwritten with a very low expected loss potential. Credit quality remains solid, and we currently do not see any meaningful credit challenges on the horizon. We are continuing to experience the cyclical downturn in commercial real estate and single-family mortgage loan volume. which fell to historically low levels in the fourth quarter of last year, but only marginally improved in the first quarter. One of the largest challenges for us has been the impact on prepayment speeds, which continue at historically low levels, particularly for multifamily loans. We are generally not making any new multifamily loans today, with the exception of Fannie Mae DUS loans, which we sell. We're focused today on working with our existing borrowers to create prepayments or to modify existing loans to advance more proceeds where appropriate or extend fixed rate periods in exchange for increasing the interest rate on these loans. Over time, we expect these efforts to make a meaningful improvement in both the size and yield on our multifamily portfolio. As previously noted, only during the first quarter, we grew our loan portfolio by only $60 million, or 1%. We are continuing to limit our loan portfolio growth, focusing our loan origination activity primarily on floating rate products, such as commercial loans, residential construction loans, and home equity loans. We are also experiencing diminished demand for loans generally, mostly due to uncertainty regarding the economy and the overall higher level of interest rates. Accordingly, we are anticipating only a modest increase in our loan portfolio in 2023. At March 31, 2023, our accumulated other comprehensive income balance, which is a component of our shareholders' equity, was a negative $86 million. This represents a sizable $4.60 reduction to our tangible book value per share, but it is not a permanent impairment in the value of our equity and has no impact on our regulatory capital levels. Given the 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. While our current lower level of profitability is less than adequate to us, it has been materially driven by the exogenous interest rate environment. We look forward to what an environment of stable rates, whenever that comes, can provide for improved financial performance for our bank. Until that time, we are doing all we can to limit balance sheet growth, maintain liquidity, defer or reduce expenses, reduce staffing to required levels without damaging our business. As we shared last quarter, the significant uncertainty of future interest rates, deposit flows, and the economic environment, among other things, may providing guidance on the timing, and levels of financial targets too difficult at this time. We expect to return to such guidance after these uncertainties have substantially subsided. Our long-term goals to meet or exceed our peers with respect to our financial performance remain. And I'll repeat my comments from last quarter. We acknowledge the relative disadvantages of our existing model in an environment such as the one we are experiencing today. We note that while this period of lower earnings is painful and somewhat unexpected, our higher than expected earnings of both 2020 and 2021 was similarly great and unexpected. The current structure that makes our bank more sensitive to cyclical changes in interest rates allows us to over-earn in decline rate environments. And while we have worked to reduce the impact of the cyclicality, it's important to acknowledge through the cycle earnings performance. I repeat these comments, again, not to excuse our current low level of earnings, but to put them in perspective. With that, this continues our prepared comments today. We appreciate your attendance and attention. John and I would be happy to answer any questions you have at this time.