What happened
Several bank stocks plunged this week after reporting first-quarter earnings results. Shares of HomeStreet (HMST +0.00%) traded more than 39% lower this week as of 12:44 p.m. ET Thursday, according to data provided by S&P Global Market Intelligence.
Meanwhile, shares of Cambridge Bancorp (CATC +0.00%) traded roughly 17.2% lower, while shares of Atlantic Union Bankshares (AUB 0.53%) were down about 14.2%.
So what
Seattle-based HomeStreet, which has total assets just under $10 billion, reported diluted earnings per share of $0.27 on total revenue of $59.6 million in the first quarter, both numbers that missed analyst estimates.
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HomeStreet saw its funding costs rise in the quarter and was not able to offset the rise with an increase in asset yields. The bank's portfolio is mostly composed of commercial and residential real estate loans, and it has a liability-sensitive balance sheet, meaning it doesn't do well in a rising interest rate environment. The company has also struggled with the slowdown in the mortgage market and recently cut its dividend by more than 71%.
The $5.5 billion-asset Cambridge Bancorp, which is based in the Boston area, delivered diluted earnings per share of $1.58 in the first quarter on total revenue of nearly $45 million. Earnings missed analyst estimates.
Cambridge has also been dealing with margin compression, as its cost of funds has soared from 1.02% at the end of 2022 to 1.96% at the end of the first quarter of the year. The private bank and wealth manager saw clients move funds into higher-yielding products, and management expects to see margin compression continue for at least the next few quarters.
Atlantic Union, a $20 billion asset bank based in Virginia, reported diluted earnings per share of $0.44 on total revenue of nearly $167 million, both numbers that missed analyst estimates.
NASDAQ: HMST
Key Data Points
Similar to many other banks, Atlantic Union dealt with higher funding costs that led to margin compression in the quarter. The bank also saw a pretty decent step-up in its provision for loan losses in order to deal with higher expected losses, although the bank had practically zero losses in its loan portfolio heading into the quarter. Management noted that this is the first quarter of material projected loan losses in three years, the bulk of which is related to a loan to a healthcare facility.
Now what
As a result of the banking crisis in March and the high interest rate environment, most banks are dealing with much higher funding costs, which is pressuring margins. Investors are also increasingly concerned about normalizing credit quality, especially when dealing with commercial real estate.
Bank stocks have gotten considerably cheaper, but they will likely continue to be faced with higher funding costs for most of the year, and the trajectory for interest rates is still unclear. Therefore, I don't see any need to rush into any of these names right now.
That said, I expect Cambridge Bancorp and Atlantic Union to be able to get through the difficult environment. I would definitely avoid HomeStreet.
