Participants

Mark Mason; Chairman of the Board, President, Chief Executive Officer; HomeStreet Inc

John Michel; Chief Financial Officer, Executive Vice President; HomeStreet Inc

Woody Lay; Analyst; Keefe, Bruyette & Woods.

Matthew Clark; Analyst; Piper Sandler Companies

Timothy Coffey; Analyst; Janney Montgomery Scott LLC,

Presentation

Operator

Good afternoon. My name is Brica, and I will be your conference operator today. At this time, I would like to welcome everyone to the 4Q 2024 analyst earnings call for HomeStreet Bank. Presenting on today's call will be Mark K. Mason, Chairman, President, and Chief Executive Officer of HomeStreet Bank; and John M. Michel, Executive Vice President and Chief Financial Officer. (Operator Instructions) Thank you. Mr. Mason, you may begin your conference.

Mark Mason

Hello and thank you for joining us for our fourth quarter 2024 analyst earnings call. Before we begin, I'd like to remind you that our detailed earnings release and our 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 and 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 will make certain predictive statements that reflect our current views, the expectations and uncertainties about the company's performance and our financial results. These are likely forward-looking statements that are made subject to the Safe Harbor Statements included in yesterday's earnings release, our Forms 8-K, 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 can be found in our earnings release and investor deck. Joining me today is our Chief Financial Officer, John Michel. 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. We will then respond to questions from our analysts.
John?

John Michel

Thank you, Mark. Good morning, everyone, and thank you for joining us. In the fourth quarter of 2024, our net loss was $123.3 million or $6.54 per share as compared to our net loss of $7.3 million or $0.39 per share in the third quarter of 2024. The fourth quarter results included an $88.8 million pretax loss or a tax affected $67.1 million loss on the sale of $990 million of multifamily loans and a $53.3 million deferred tax asset valuation allowance.
On a core basis, which excludes the impact of the loss on the sale of multifamily loans, the deferred tax asset valuation allowance and merger-related expenses, our net loss was $5.1 million or $0.27 per share as compared to our net loss of $6 million or $0.32 per share in the third quarter of 2024.
On a core basis, our loss before taxes was $6.4 million in the fourth quarter as compared to $7.8 million in the third quarter. The decrease in core loss before income taxes was primarily due to an increase in net interest income and a decrease in noninterest expense.
Due to our cumulative losses over the last three years, accounting rules require us to provide a valuation allowance for the balance of our net deferred tax assets which includes the deferred tax benefit of unrealized losses on our available-for-sale securities portfolio. Accordingly, in the fourth quarter of 2024, we recorded a $53.3 million deferred tax asset valuation allowance, which was recorded as an income tax expense.
Excluding this allowance, the income tax benefit would have been $22.4 million and would have resulted in an effective tax rate of 24.3% for the fourth quarter of 2024. Given our expectation of income before taxes in the near term and going forward, we expect to recognize no tax expense on our income tax before taxes when realized over the next few years.
Our net interest income in the fourth quarter of 2024 was $1 million higher than the third quarter of 2024 due to an increase in our net interest margin from 1.33% to 1.38%. The increase in the net margin was due to an 11-basis point decrease in the rates paid on interest-bearing liabilities partially offset by a 3-basis point decrease in the yield on interest-earning assets. As a result of decreases in the Fed funds rate, the yield on variable loans decreased.
The decrease in short-term interest rates resulted in lower rates paid on our certificates of deposit, borrowings, and long-term debt. There is no provision for credit losses recognized during the end of the fourth or third quarter of 2024.
For the fourth quarter of 2024, the benefits of the reduction in loan balances resulting from the loan sale was offset by specific reserves on commercial loans. In the fourth quarter, we continued to experience a minimal level of identified credit issues in our loan portfolio and a lack of significant potential credit issues arising in future periods.
Going forward, we expect the ratio of our allowance for credit losses to our held for investment loan portfolio to be relatively stable and provisioning in future periods to generally reflect changes in the compensation of and balance of our loans held for investment, assuming our history of minimal charge-offs continues.
During the fourth quarter of 2024, our ratios of nonperforming assets to total assets and total loans delinquent over 30 days, including nonaccrual loans increased, partially a result of the sale of $990 million in multifamily loans in the fourth quarter. As of December 31, 2024, our ratio of nonperforming assets to total assets was 71 basis points, and our ratio of total loans delinquent over 30 days, including nonaccrual loans to total loans was 106 basis points.
The $15 million increase in nonaccrual loans during the fourth quarter was primarily related to a syndicated commercial loan in which we are participating. Noninterest income in the fourth quarter of 2024 decreased from the third quarter of 2024, primarily due to the $88.8 million loss on the sale of multifamily loans. Gain on sales of Fannie Mae DUS loans were $1.7 million in the fourth quarter as compared to no gain in the third quarter.
Noninterest expenses were $5.2 million lower in the fourth quarter of 2024 due to a $1.7 million decrease in compensation benefits and a $4.2 million decrease in general, administrative and other expenses, which were partially offset by a $1.2 million increase in occupancy expenses. The decrease in compensation and benefits was primarily due to a 3% decrease in FTE.
The decrease in general, administrative, and other expenses was due to a $4.9 million difference in merger expenses related to negotiated reductions in incurred expenses from consultants and expense reimbursement from our merger accounting partner related to integration planning, consulting fees and related expenses. The increase in occupancy costs reflect an updated estimate of the cost impact of a lease space for which the sublease was not extended and expired in 2024.
One anomaly of the timing of our loan sale at the end of December was the impact it had on our Tier 1 leverage regulatory capital ratio. Because this ratio is based on average assets, our computing ratio was temporarily suppressed. If the $990 million loan sale had occurred at the beginning of the quarter, on a pro forma basis, the Tier 1 leverage ratio for the company and the bank would have been approximately 6.46% and 8.17%, respectively.
With expectations of future earnings and continued decreases in total assets, we expect the Tier 1 capital ratio in future periods to equal or exceed these pro forma levels. There is no similar impact to all of the regulatory capital ratios because they are based on inferior balance. I will now turn the call over to Mark.

Mark Mason

Thank you, John. After termination of the merger in the fourth quarter, we adopted a new strategic plan, which included the sale of $990 million of multifamily loans, a sale we closed on December 30, 2024. We sold loans with a weighted average interest rate of 3.3% and used the proceeds to pay off Federal Home Loan Bank advances and broker deposits with a weighted average interest rate of 4.65%.
The broker deposits were paid off in early January 2025. As a result of the loan sale, we improved our liquidity position, increased our available contingent funding, and reduced our commercial real estate concentrations as well as our loan-to-deposit ratio.
As of year-end, our cash, and securities balances of $1.5 billion were 18% of total assets. Our net noncore funding dependency ratio declined to 19.9%. Our contingent funding availability was $5.2 billion, equal to 80% of total deposits, and our loan-to-deposit ratio declined to 97.4%.
As expected, with the decrease in interest rates, our margin expanded in the fourth quarter due primarily to decreases in our funding costs. We anticipate that this balance sheet repositioning will return the company to profitability in the first half of this year and generate continuous growth in earnings for the foreseeable future as a consequence of the scheduled repricing of our remaining multifamily and other commercial real estate loans, further plan the reductions in borrowings, the expectation of ongoing reductions in short-term interest rates and continued effective noninterest expense management.
Of course, these expectations assume continued strong credit in the absence of other changes in the economy or otherwise, which might adversely impact these expectations. As John mentioned, our noninterest expenses were lower in the fourth quarter, and we continue to experience lower compensation and benefits costs through reductions in FTE which were 864 in December of 2023, declining to 792 in the fourth quarter of last year and 776 for the month of December.
We achieved these reductions through not replacing attrition generally and reorganizing responsibilities. Excluding brokered deposits, our average deposit balances were $80 million higher in the fourth quarter as compared to the third quarter due to the approximately 90% roll rate on our certificates of deposit and our ability to attract new depositors. Our level of uninsured deposits remains low at 9% of total deposits as well.
It is important to note that our deposits have continued to exhibit significant loyalty and resilience during the last three years despite external and internal stressors, including rising interest rates, bank failures, lower earnings and losses and a terminated merger.
As John mentioned earlier, our ratios of nonperforming assets, disposal assets and loans delinquent over 30 days, including nonaccrual loans increased partially as a result of the multifamily loan sale in the fourth quarter and the downgrading of a syndicated commercial loan in which we are participating that is in forbearance today and out of covenant compliance. The bank lending group is working with the borrower on a turnaround plan. The private equity sponsors of this company continue to support it, and we believe the borrower will ultimately successfully recover without loss to the lending group.
As a result of the loss on the loan sale and related tax impacts 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 year-end. The increase in interest rates also impacted our fair value as our estimated tangible fair value per share decreased to $12.41 as of December 31, 2024.
t should be noted that our estimate of tangible fair value per share is solely based on the market value of individual financial instruments and does not assign any additional value to our core deposit franchise, which we believe is substantial. This additional franchise value was shown in the initial value of our proposed merger last year. The initial value of that merger, based upon the exchange ratio and the current price of the stock we were to receive was meaningfully higher than our estimated tangible fair value per share as of the prior quarter end.
We have all seen and read about the property damage and loss of life in the Southern California wildfires. We have significant exposure in commercial real estate, primarily multifamily and single-family loans in or near the affected areas. Fortunately, we've only been advised of a loss on eight single-family residences with additional partial damage or other impacts to 19 additional homes.
All of these properties have current full insurance coverage, so we feel comfortable we will not suffer any losses associated with these wildfires. We will, however, be providing forbearance and assistance where possible to help our customers through this very challenging situation.
As of December 31, 2024, our accumulated other comprehensive income balance, which is a component of our shareholders' equity was a negative $87 million. And while this represents a $4.62 reduction on our tangible book value per share, we know it is not a permanent impairment in the value of our equity. It has no impact on our regulatory capital levels.
Given 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. As noted earlier, we did have to provide an allowance for the $28.3 million of deferred tax assets related to our available-for-sale securities, which did impact our regulatory capital levels.
The current interest rate environment has impacted our fair value and created significant challenges for our company over the past several years. The rate and general deposit competition from banks continues. However, with the ongoing repricing of our loan portfolio and recent interest rate reductions with the expectation of additional interest rate reductions, our current and forecasted results are improved.
Ultimately, we will experience an environment of stable rates, which has historically provided significantly better financial performance for our bank. We believe we have taken significant steps to endure this period, improve future earnings and preserve the value of our business so that we can evaluate strategic alternatives going forward from the position of greater stability and strength.
The Board of Directors is dedicated to continuing to evaluate all strategic alternatives to maximize shareholder value as we move forward. In summary, with the successful execution of a new strategic plan, we're optimistic about our ability to return to profitability early this year to continuously improve our results in the future and to ultimately return significant value to our shareholders.
With that, that concludes our prepared comments today. We appreciate your attention, and John and I would be happy to answer questions from our analysts at this time. Investors are welcome to reach out to John or I after the call if they have questions that are not covered during this session. Operator, if you would pull for questions.

Question and Answer Session

Operator

(Operator Instructions) Woody Lay, KBW.

Woody Lay

I wanted to start with the NIM. You should see a pretty meaningful pickup next quarter with the loan sale factored in. When you think of the NIM trajectory, is there a breakeven level in the NIM that you're targeting to achieve in the first half of the year that gets you back to the return in profitability?

John Michel

We don't have a targeted number specifically, but we do expect as we -- as Mark said, you could see what the change in difference between [3.30 and 4.65]. We're on the loans that we sold and the debt that we did retire. We -- the expectations going forward is that obviously, as with any kind of security or loan, it's going to take a couple of years to fully recover the value, but it does impact the positive impact on earnings immediately in the first quarter and going forward?

Mark Mason

Plus we have the impact of loan repricing, first quarter and moving forward.

Woody Lay

Yes. So, the expectation is that you don't need additional rate cuts from here to hit profitability in the first half of the year?

Mark Mason

That's correct.

Woody Lay

Got it. So, you completed the loan sale, which was great to see and as you're thinking about the return to profitability and growing from there, are there any other strategic initiatives or actions that need to take place in the near term?

Mark Mason

No. It's a pretty simple strategy. Now having said that, we are doing what we can to accelerate the process of returning to profitability and then thereafter improving it. Things like working proactively with our commercial real estate borrowers who have upcoming repricing to hopefully rewrite those loans either to sell or to improve their yields until you get very close to repricing date, as you would expect, most borrowers are ready to preemptively restructure their debt.
But given the current posture of the Federal Reserve on slowing rate decreases, we are getting more attention for the borrowers earlier than we have previously.

Operator

Matthew Clark, Piper Sandler.

Matthew Clark

Starting around the NIM. Do you have the spot rate on deposits after you pay down the brokered CDs here in January? Just trying to get a sense for where we stand here in January?

John Michel

Yes, as of December 31, our spot rate of all our deposits was [265]. Excluding our broker deposits, it's [239]. Going forward, we did pay off some of the broker deposits in -- already in the first quarter, and we intend to pay them off over the next few months and going forward. So, we'll get down to that -- closer to that [239] pretty quickly.

Matthew Clark

Got it. Okay. That's helpful. And then on the new nonperformer the commercial participation. Can you just remind us how much you haven't syndicated or participations in terms of the exposure there overall?

Mark Mason

That's not a number we generally disclose. I think that it's a little south of $200 million at this point, roughly.

Matthew Clark

Okay. That's fine. And then just on the DTA and you guys mentioned the fair value of tangible book based on the rate changes. But I just want to confirm that DTA is portable. I mean, a buyer could use that, right, and put it to work. So, your tangible book of 12 and change is -- could be grossed up by the DTA. Is that fair?

Mark Mason

It is. I mean it's going to be converted into net operating loss carryforward. Now remember, there's a Section 382 the tax code that deals with limitations on annual utilization in the event of a change of control. But given what we believe the value of the company is, we think that those annual limitations are not likely to reduce the full value.

John Michel

And also, just to be clear, we did add back the valuation allowance in terms of computing tangible book value per share. So, if you look at the schedule on the back of the earnings release and in the deck, you'll see the computation that shows that added back because the value is transferable and also realizable by us.

Mark Mason

Right.

Matthew Clark

Okay. So embedded in that [1,250] something?

John Michel

Yes.

Mark Mason

Yes, and that's in the calculation of non-GAAP measures, you'll see the number. Yes.

Matthew Clark

Okay. Sorry about that. And then just any update on potential conversations with conversations with potential buyers. Has that started yet? Has it been ongoing? I guess, where do we stand on that front?

Mark Mason

Well, I think I spoke to it in my prepared comments that the Board of Directors is continuously reviewing strategic alternatives. And that's what we can say at this time.

Operator

(Operator Instructions) Timothy Coffey, Janney.

Timothy Coffey

I guess my first question -- my first question has to do with kind of the fee income line items and servicing, the mortgage servicing. Did the loan sale have a material impact on what those values might be going forward? Or is that totally separate?

Mark Mason

Remember, we sold portfolio loans. So, we weren't previously recording servicing fees, so it doesn't impact that line item. There is a potential impact of retained servicing. And I say potential because even though we retained it, there is some probability that the buyer will be securitizing some meaningful portion those loans. And at that point, we would have to transfer the servicing or the buyer as to the transfer servicing to a regular servicing provider of a CMBS servicer.

John Michel

And just to be clear, we did not recognize a mortgage used asset related to that because of the temporary nature.

Mark Mason

Right. Because of the uncertainty of the timing of how long we'll service and how much.

Timothy Coffey

Okay. Great. That's helpful. And gain on -- what is your -- kind of out the phases. What is your appetite for doing more originate the sale business going forward?

Mark Mason

It's large. It's tempered somewhat by both ends of those transactions. One, the application activity for new loans has not yet picked up substantially, though there is some activity. I think I spoke a little bit to borrower trends to, most of the secondary market activity for buyers of loans has been focused on buying legacy low-rate loans and so we're not quite sure yet how significant the appetite will be for newly originated loans, but we're in discussions with several parties at this time, hopefully, to establish a flow program.

Timothy Coffey

Okay. And then on noninterest expenses. Obviously, you're doing what you can to lower that number. Is there more that you can do in the near term?

Mark Mason

Boy, we're really down to very small opportunities at this point. We never -- I mean, we never thought we would get down below [800] on FTE, which means we're probably running a little thin, and we have some positions that we were holding open in anticipation of the prior proposed merger.
Having said that, we're trying to hold the line on add-backs to really critical positions. And now if volume changes particularly in the origination areas, we'll have to add some support, but that is less costly support generally. So, we think we're getting pretty close to what we can do.
Unfortunately, each year, you do have inflation and compensation. And to be competitive, to retain and attract anyone we need to attract, we're going to have to like everyone else, provide merit increases this year. We're using a budget of about 3% again, which we think is consistent with our market. So even where we're at, inflation is going to hit our comp line like everyone else.

John Michel

Yes. On the other expenses too, no big changes in our other G&A expenses per se, other than as we continue to move forward here and restructure our balance sheet we expect our FDIC insurance fees to go down slightly.
Secondly, from the occupancy cost, we are kind of going through and managing those down. As we move out of spaces, we are not going renewed because we have adopted a remote and somewhat remote environment for the company. And so those are the two areas that you may see some stability or slight decrease in expenses.

Mark Mason

Have said that it's a tough market to sublet space. Yeah.

John Michel

But they're expiring.

Mark Mason

That is expiring, yeah.

Timothy Coffey

Okay. Great. Well, those are my questions.

Mark Mason

Thanks, Tim.

Operator

(Operator Instructions) This will conclude our question-and-answer session. I will now turn the call back over to Mark Mason for closing remarks.

Mark Mason

Thank you very much for joining us for our fourth quarter and full year analyst call today. Again, if any investors would like to ask questions or arrange a conference call with Jordan with John and I, please give us a shout, you know how to find us. Thank you.

Operator

Thank you all for joining. Thank you all for joining the call today. I can confirm that of today's call. Please enjoy the rest of your day and you may now disconnect.