The Long and Short
Good value in callable community bank paper
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Callable community bank paper is available at impressive yields relative to larger, regional bank bullet structures in the investment grade domestic bank sector. Furthermore, the balance sheets of the smaller community banks in the investment grade space appear well equipped to weather potential economic uncertainty, and well positioned to benefit from a higher rates. The HomeStreet Inc (HMST) 10NC5 bonds issued earlier this year offer a compelling risk-reward profile at an attractive discount to par.
Exhibit 1. Community and small regional bank 10NC5 callable notes vs large IG regional bank bullets
Source: Amherst Pierpont, Bloomberg/TRACE Indications
3MM HMST 3.50% 1/30/32 @ $88.25
YTC: 6.64% (~288/5-year)
Issuer: HomeStreet Inc. (HoldCo of HomeStreet Bank)
Amount outstanding: $100 million (Non-Index)
Senior Rating: Kroll – BBB/Stable
Subordinated HoldCo Issue: Kroll – BBB-/Stable
Callable @ par 1/30/27
Cpn: 3.50% to 1/30/27; TSFR3M +215 back-end
HMST is headquartered in Seattle, WA and has about 60 branches in its relatively small Westcoast footprint throughout the states of WA, CA, OR, and HI. The bank has total assets of $8.6 billion, which is up from $7.2 billion at year-end 2021, with $6.8 billion in total loans/leases and $6.1 billion in total deposits. Management has mostly pursued a moderate growth strategy over past 4-5 year with few acquisitions since 2016. HMST has moved away from mortgage banking in recent years and become more focused on traditional commercial lending.
HMST has been focused in growing its multifamily loan offerings, which currently represent just under 50% of the total loan portfolio as of the second quarter of 2022, and has increased from 28% at year-end 2020. The remainder of the lending profile is 19% residential, 17% commercial real estate (CRE) plus 8% in construction and development loans, and 6% in commercial & industrial (C&I).
The bank maintains adequate capital ratios relative to its risk profile. The Tier 1 Common (CET1) ratio stood at 8.66% as of the second quarter, with a total risk-based capital of 11.49%.
Non-performing assets (NPA) are at a negligible level of 0.35% of total assets as of 2Q22. The bank has booked enough reserves to cover over 124% of those loans classified as non-performing. The Texas ratio—which measures NPAs and 90-day past-due loans as a percentage of all reserves as well as equity—is just over 5%, which is down from nearly 10% just two years ago. For banks of this size/stature we consider a Texas ratio below 20% as typically manageable.
With its current loan balance larger than deposits, a loan-to-deposit ratio of 110%, HMST has seen its reliance on wholesale funding increase over the past year. As of the second quarter of 2022, reliance on wholesale funding was up to just under 25%, which is elevated but still highly manageable. Dependence on shorter-term wholesale funding sources is also currently elevated at about 22%, but management has demonstrated its ability to temporarily lean on wholesale funding during periods of expansion before demonstrating a more stable funding profile over time. The use of brokered deposits remains limited at just 4.37% of total deposits.
Dan Bruzzo, CFA
1 (646) 776-7749
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.