HomeStreet Inc. (HMST), a diversified financial services company headquartered in Seattle, Washington, has navigated a challenging landscape in recent years, demonstrating its resilience and adaptability. With a focus on commercial banking, mortgage banking, and consumer-retail banking activities, HomeStreet has strategically positioned itself to capitalize on emerging opportunities and overcome market headwinds.
Business Overview and History
Established in 1921, HomeStreet has a rich history of serving customers primarily in the Western United States. The company's operations are primarily conducted through its wholly-owned subsidiary, HomeStreet Bank, which was incorporated in 1986 and is subject to examination by the State of Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC).
Over the years, HomeStreet has expanded its footprint and faced various challenges. In 2023, the company recorded a $39.9 million goodwill impairment charge due to sustained decreases in its stock price and associated market value. This non-cash charge to earnings had no impact on tangible or regulatory capital, cash flows, or the company's liquidity position. Despite these obstacles, HomeStreet has maintained its focus on serving customers and communities.
As of December 31, 2024, HomeStreet had $8.1 billion in total assets, $6.2 billion of loans, and $6.4 billion of deposits. The company's diversified business model has enabled it to navigate various economic cycles, adapting its strategies to meet the evolving needs of its customer base.
Financial Performance and Ratios
Financials
In the fiscal year 2024, HomeStreet reported a net loss of $144.3 million, or $7.65 per share, a significant decline compared to the previous year's net income of $27.5 million, or $1.46 per share. This negative financial performance was primarily attributable to a $88.8 million pretax loss on the sale of $990 million in multifamily loans and a $53.3 million deferred tax asset valuation allowance.
However, on a core basis, excluding the impact of the loan sale, the deferred tax asset valuation allowance, and merger-related expenses, HomeStreet's net loss narrowed to $5.1 million, or $0.27 per share, in the fourth quarter of 2024, as compared to a net loss of $6.0 million, or $0.32 per share, in the previous quarter. This improvement was primarily driven by an increase in net interest income and a decrease in noninterest expenses.
The company's financial ratios reflect the challenges it has faced. As of December 31, 2024, HomeStreet's return on assets (ROA) stood at -1.78%, while its return on equity (ROE) was -29.12%. The company's debt-to-equity ratio was 0.57, indicating a relatively conservative capital structure.
In the fourth quarter of 2024, HomeStreet reported revenue of $99.1 million and a net loss of $123.3 million. The company's net interest margin improved from 1.33% in Q3 2024 to 1.38% in Q4 2024, primarily due to an 11 basis point decrease in the rates paid on interest-bearing liabilities.
Liquidity
The company's liquidity position remained strong, with a cash and securities balance of $1.5 billion, representing 18% of its total assets. As of December 31, 2024, HomeStreet had $406.6 million in cash and cash equivalents. The Bank had available borrowing capacity of $1.3 billion from the Federal Home Loan Bank (FHLB) and $1.6 billion from the Federal Reserve Bank of San Francisco (FRBSF).
Operational and Strategic Developments
In the fourth quarter of 2024, HomeStreet implemented a new strategic plan, which included the sale of $990 million in multifamily loans. The company used the proceeds from this sale to pay down higher-cost Federal Home Loan Bank borrowings and brokered deposits, improving its liquidity position and reducing its commercial real estate concentrations. This strategic move is expected to accelerate the company's return to profitability in the first half of 2025.
Furthermore, HomeStreet has been proactive in managing its noninterest expenses, reducing its full-time equivalent (FTE) employees from 864 in December 2023 to 776 as of December 2024, primarily through attrition and reorganization of responsibilities. The company has also been working to manage its deposit base, with average deposit balances (excluding brokered deposits) increasing by $80 million in the fourth quarter of 2024 compared to the previous quarter, driven by a 90% roll rate on certificates of deposit and the ability to attract new depositors.
Business Segments
HomeStreet operates in two primary business segments: Commercial Banking and Consumer Banking.
The Commercial Banking segment includes commercial real estate (CRE), multifamily, construction and land development, owner-occupied CRE, and commercial business loan classes. As of December 31, 2024, the commercial loan portfolio totaled $4.71 billion, representing 75.6% of the total loan portfolio. The CRE loan class, including non-owner occupied CRE and multifamily loans, was the largest component, accounting for $4.04 billion or 65.0% of total loans. Multifamily loans represented $2.99 billion or 48.1% of total loans.
The Consumer Banking segment includes single family and home equity loan classes. As of December 31, 2024, the consumer loan portfolio totaled $1.52 billion, accounting for 24.4% of the total loan portfolio. The single family loan class was the largest component, representing $1.11 billion or 17.8% of total loans.
Risk Management and Credit Quality
HomeStreet closely monitors its loan portfolio, with commercial loans categorized into risk ratings ranging from 1 to 8, where higher ratings indicate increased risk. As of December 31, 2024, 85.5% of commercial loans were rated as "Pass" assets, 3.5% were rated as "Special Mention", and 3.1% were rated as "Substandard".
The allowance for credit losses (ACL) allocated to the commercial portfolio was $31.9 million as of December 31, 2024, representing 0.61% of commercial loans. The consumer loan portfolio experienced a slight increase in delinquencies, with loans 30-89 days past due representing 0.11% of the portfolio as of December 31, 2024, compared to 0.08% at the end of 2023. The ACL allocated to the consumer portfolio was $6.8 million, representing 0.47% of consumer loans.
The company's ratio of nonperforming assets to total assets increased to 71 basis points as of December 31, 2024, and its ratio of total loans delinquent over 30 days, including nonaccrual loans, increased to 106 basis points.
Risks and Challenges
HomeStreet's operations are not without risks and challenges. The company has significant exposure in commercial real estate, primarily multifamily and single-family loans, in areas affected by wildfires in Southern California. While these properties have full insurance coverage, the company is providing forbearance and assistance to its impacted customers.
Additionally, the company's substantial reliance on the Western United States, with a concentration in the Puget Sound region of Washington, the Portland, Oregon metropolitan area, and the Southern California markets, exposes it to regional economic volatility and natural disasters, which could have a disproportionate impact on its operations.
The current interest rate environment has also posed challenges for HomeStreet, with the company's net interest margin declining from 1.88% in 2023 to 1.38% in 2024. However, the company expects that the recent decreases in short-term interest rates and the continued repricing of its loan portfolio will help improve its net interest margin and profitability going forward.
Geographic Footprint and Operations
HomeStreet operates primarily in the western United States, including Washington, Oregon, California, Hawaii, Utah, and Idaho. The company has 56 full-service bank branches across these states, as well as three primary stand-alone commercial lending centers located in Southern California, Idaho, and Utah. As a small-cap company, HomeStreet does not have significant international operations.
Human Capital Management
As of December 31, 2024, HomeStreet employed 787 employees across its geographic footprint, with 94 classified as full-time. The company's employee turnover rate was 21% during 2024. HomeStreet places a strong emphasis on its corporate culture, promoting values such as fairness, honesty, integrity, and community service. The company is committed to inclusion and belonging, providing fair treatment and opportunities for employees.
HomeStreet's compensation programs are designed to attract and retain highly qualified employees, utilizing a mix of base salary, cash incentives, and equity-based compensation. The company also provides extensive training and development opportunities for its employees and encourages community involvement.
Guidance and Outlook
Despite the challenges faced in 2024, HomeStreet is optimistic about its ability to return to profitability in the first half of 2025. The company's strategic actions, including the sale of multifamily loans and the reduction of higher-cost funding sources, are expected to have a positive impact on its financial performance.
HomeStreet expects the ratio of its allowance for credit losses to its held for investment loan portfolio to remain relatively stable, with future provisioning generally reflecting changes in the composition and balance of its loans held for investment, assuming its history of minimal charge-offs continues.
The company anticipates its Tier 1 leverage regulatory capital ratio to equal or exceed the pro forma levels of approximately 6.46% for the company and 8.17% for the bank, based on the $990 million loan sale that occurred at the end of Q4 2024.
Moreover, the company's management team is proactively working with commercial real estate borrowers to address upcoming loan repricing, seeking to improve the yields on these loans or facilitate their sale. With the expectation of ongoing reductions in short-term interest rates and continued effective noninterest expense management, HomeStreet believes it is well-positioned to generate continuous growth in earnings and deliver value to its shareholders.
Conclusion
HomeStreet Inc. has navigated a turbulent period, demonstrating its resilience and adaptability. Through strategic decisions, such as the sale of multifamily loans and the reduction of higher-cost funding sources, the company is taking steps to strengthen its financial position and return to profitability. While challenges remain, including exposure to regional economic conditions and the interest rate environment, HomeStreet's management team is actively managing these risks and positioning the company for long-term success. As the financial services industry continues to evolve, HomeStreet's diversified business model and focused execution will be critical factors in its ability to capitalize on future opportunities and create value for its shareholders.