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TheStreet Open House

10 Cheapest Bank Stocks for 2013

Stocks in this article: BAC C JPM RF COF DFS PNC BPOP OFG HMST FBC

1. HomeStreet


Shares of HomeStreet, Inc. (HMST) of Seattle closed at $25.25, Friday, returning 110% (adjusted for stock splits) since the company went public on Feb. 14. The shares underwent a two-for-one split on Nov. 8, following a previous two-for-one split in March.

HomeStreet trades for 1.5 times tangible book value, and for five times the consensus 2013 EPS estimate of $5.02.

The company had $2.5 billion in total assets as of Sept. 30. Earnings have been very strong since the company went public, with returns on average assets ranging from 3.04% to 3.50% over the past three quarters, according to Thomson Reuters Bank Insight, while the return on average tangible common equity has ranged between 35.61% to 39.95%, for what is, by far, the strongest earnings performance among the 10 banks being discussed here.

HomeStreet focuses on originating mortgage loans, including single family loans and multifamily loans through its HomeStreet Capital Corp. subsidiary. The company reported total third-quarter originations of single-family mortgage loans designated for sale of $1.4 billion, increasing from $1.1 billion the previous quarter, and $480 million a year earlier.

Third-quarter earnings totaled $21.3 million, or $2.90 a share, increasing from $18.0 million, or $2.42 million, in the second quarter, and $15.3 million a year earlier (before the company went public).

HomeStreet CEO Mark Mason explained that the company was continuing "to realize the benefits in origination volume and market share from our continued focus on recruiting top production and support personnel in our markets."

The company has also been able to buck the industry trend, with its third-quarter net interest margin expanding to 3.08% from 2.83% the previous quarter and 2.38% a year earlier, "reflecting improvement in asset yields in part as a result of new lending and expected decreases in our cost of deposits," according to Mason.

FIG Partners analyst Timothy Coffey rates HomeStreet "Outperform," with a price target of $40, saying in October after the split was announced that "the stock benefits from significant growth in tangible book value from an underappreciated mortgage banking business. HMST originated more than $1 billion in mortgage loans (residential and multifamily) for the second consecutive quarter in 3Q-12 and sold them at an estimated net margin of 3.28%, which is an exceptionally strong number compared to the estimated net margin of 1.72% in 3Q-11."

The analyst said that "HMST is a stock that should approach a normalized P/E ratio of 10x forward EPS, but until then is likely to trade at increasing multiples to tangible book value," and that the stock has been "hindered by relative obscurity having IPO'd earlier this year, optically troubled credit quality (although nonperforming assets , excluding restructured credits, are a benign 4.22% of Loans Held for Investment+ repossessed real estate ) and a pair of regulatory orders (that we anticipate are lifted shortly)."

The company is operating under regulatory orders initially entered into during 2009 with the Office of Thrift Supervision agreeing to "augment regulatory capital and reduce problem assets." The OTS order is now administered by the OTS. HomeStreet expects the orders soon to be lifted, as a similar order by State Regulators and the Federal Deposit Insurance Corp. covering main subsidiary HomeStreet Bank was lifted in March, and because the company was quite strongly capitalized with a regulatory Tier 1 leverage ratio of 10.8% and a total risk-based capital ratio of 17.9%, as of Sept. 30.

Asset quality has also improved dramatically, with nonperforming assets making up 2.20% of total assets as of Sept. 30, compared to 3.04% the previous quarter and 6.88% a year earlier.

Coffey estimates that HomeStreet will earn $6.78 a share in 2013, improving from an estimated $5.18 a share in 2012. The analyst also expects "the initiation of a quarterly $0.20 per share cash dividend starting in 1Q-13," although "the company has not announced such a dividend plan yet."

Interested in more on HomeStreet? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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