HomeStreet(US:HMST)2022-10-26 00:09Financial Data and Key Metrics Changes - In Q3 2022, net income was $20.4 million or $1.08 per share, compared to $17.7 million or $0.94 per share in Q2 2022, reflecting a positive trend in profitability [4] - Annualized return on average tangible equity was 14.2%, and annualized return on average assets was 91 basis points, with an efficiency ratio of 68.4% [4] - Net interest income increased by $3 million from Q2 2022, driven by a 13% rise in interest-earning assets, although net interest margin decreased from 3.27% to 3% [4][5] Business Line Data and Key Metrics Changes - The loan portfolio grew by $454 million or 7% in Q3 2022, and year-to-date growth reached $1.7 billion or 31%, primarily due to strong loan origination levels [15] - Noninterest income remained consistent with Q2 2022, with a $4.3 million gain on the sale of Eastern Washington branches offset by a decrease in single-family loan origination and sales activities [9] - Noninterest expenses decreased by $0.7 million compared to Q2 2022, mainly due to reduced headcount from branch sales and lower commission expenses [10] Market Data and Key Metrics Changes - The effective tax rate for Q3 was 23%, expected to remain stable going forward [7] - The ratio of nonperforming assets to total assets remained low at 15 basis points, indicating strong credit quality [9] - The weighted average rate for all interest-bearing deposits was less than 10 basis points, with 39% of deposits being noninterest-bearing [21][93] Company Strategy and Development Direction - The company plans to replace wholesale funding with lower-cost promotional deposit products, aiming to grow certificate and money market deposit balances [18][20] - An acquisition of three retail deposit branches in Southern California is expected to close in Q1 2023, anticipated to improve net interest margin by approximately 25 basis points [20][22] - The company is focused on maintaining a loan-to-deposit ratio below 100%, with efforts to replace borrowings with deposits [83] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges from rising short-term interest rates, which have disrupted financial goals, but expressed confidence in achieving profitability targets in the second half of 2023 [12][39] - The company expects a temporary decline in net interest margin over the next two quarters due to rising wholesale funding costs [23][24] - Management remains optimistic about the credit quality of the loan portfolio, expecting to perform well relative to the industry during potential economic downturns [26][48] Other Important Information - The accumulated other comprehensive income (AOCI) balance declined from a positive $21 million at year-end 2021 to negative $106 million at the end of Q3 2022, impacting tangible book value per share [34][35] - The company has restructured its portfolio to reduce duration and is buying shorter-duration securities to mitigate the impact of rising interest rates [35][37] Q&A Session Summary Question: Margin in September relative to quarterly average - Management indicated that they do not provide month-by-month changes but expect margin compression in Q4 to be similar to Q3 [51][52] Question: Expectations for margin Q4 to Q1 - Management anticipates some recovery in margins, particularly with the expected closing of the deposit deal, which could improve margins by about 25 basis points [53] Question: Increase in net nonaccruals - Management noted that the increase in nonaccruals represents volatility rather than a trend, with delinquency levels remaining stable [57][60] Question: Decline in loan servicing revenue - The decline was attributed to difficulties in hedging and a decay in the servicing portfolio, with no single major factor driving the decrease [64][65] Question: Targeted loan-to-deposit ratio for Q4 - Management prefers to keep the loan-to-deposit ratio below 100% and aims to reduce it over the next several quarters [83] Question: Changes to promotional CD rates - Management did not change promotional CD rates during Q3 but recently increased them to accelerate deposit growth before anticipated rate hikes [85][88]