HomeStreet’s Q1 Miss: A Speed Bump or a Red Flag?
14min read Investors in homestreet (HMST) were dealt a bumpy ride this earnings season. The Seattle-based bank reported a Q1 2025 net loss of $4.5 million, with an EPS of -15 cents, missing estimates by 8 cents. Revenue came in at $45.4 million, $1.25 million below expectations, sparking immediate selling that sent shares down 1% on the news. But here’s the twist: This isn’t the end of the story. Let’s dig deeper into whether this miss is a fleeting stumble—or a warning sign for this bank’s turnaround.
The Good News Hiding in the Numbers
While the headline losses are painful, adjusted results tell a different tale. Excluding merger-related costs and tax impacts, the core net loss shrank by 44% compared to Q4 2024. More importantly, the net interest margin—a critical metric for banks—jumped to 1.82%, up from 1.38% last quarter. This expansion is no accident: It’s the direct result of HomeStreet’s strategic sale of $990 million in low-yielding multifamily loans in late 2024. By offloading these assets, the bank slashed its reliance on expensive borrowings (paying 4.65% interest) and reduced its commercial real estate exposure—a move that’s already paying off.
The loan sale also freed up capital to boost non-brokered deposits by $131 million, a sign of stronger organic growth. Meanwhile, the bank’s standalone subsidiary, HomeStreet Bank, actually turned profitable in Q1 with a $1.1 million net income, hitting a key management target. As CEO Mark Mason put it: "We’re laser-focused on repricing loans, cutting costs, and rebuilding liquidity—and the margin improvement proves it."
Ask Aime: What's next for HomeStreet after a tough Q1?
The Red Flags Investors Can’t Ignore
But let’s not sugarcoat the misses. The $1.25 million revenue shortfall and wider-than-expected EPS gap show execution risks remain. Analysts are now questioning whether management can sustain progress. Here’s why:
Ask Aime: Can HomeStreet's strategic loan sale and margin expansion help in its earnings recovery?
- Cost Discipline Is Fragile: While noninterest expenses dropped due to fewer full-time employees, occupancy costs rose, hinting at inefficiencies. If the bank can’t keep trimming costs, margins could stall.
- Loan Growth Is a Double-Edged Sword: Loans held for investment fell by $169 million, which improved liquidity but raised concerns about future top-line growth. With commercial real estate still a risk, the bank can’t afford a lending slowdown.
- The Tax Shield Has Limits: The deferred tax asset valuation allowance is a one-time boost—no taxes for a few years. Once that’s gone, profits will take a hit unless revenue accelerates.
Why the Stock Might Still Be Worth a Look
Despite the Q1 stumble, two factors give me pause before hitting the sell button:
1. The Roadmap to Profitability Is Clear
Management’s 2025 return-to-profitability goal isn’t just a slogan. The bank’s loan portfolio is 85% repriced, with the remaining 15% (mostly commercial real estate) set to reset at higher rates over the next 18 months. If interest rates stabilize—or even dip slightly—this could supercharge net interest income.
2. Analysts Are Starting to Buy In
While the stock trades at just $11.17—near its 52-week low—two analysts upgraded HMST to "Buy" or "Neutral" in recent weeks. Piper Sandler raised its price target to $14, citing improved liquidity and margin trends. The $14.25 average price target suggests the market is pricing in a rebound—if execution improves.
The Bottom Line: A "Buy the Dip" Opportunity?
HomeStreet’s Q1 miss is a speed bump, not a cliff. The bank is de-risking its balance sheet, cutting costs, and showing signs of margin strength—all of which should lead to a $0 EPS for 2025 and $1 EPS in 2026, per analyst estimates. The stock’s low valuation (just 0.8x tangible book value) and the deferred tax advantage give it a cushion.
But here’s the catch: Investors must stay vigilant. If the bank can’t narrow the revenue gap in Q2 or if loan defaults rise in its commercial portfolio, shares could crater further. For now, though, this feels like a "Mad Money" moment—a chance to buy a bank with a turnaround story at a discount. Just keep the position size small and set strict stop-losses.
As Jim would say: “When the tape turns red, ask why—not just ‘how low can it go?’” For HomeStreet, the “why” is clear: The foundation for a comeback is there. The question is whether management can build on it.
Final Call: Hold with a 12-month price target of $14, contingent on Q2 execution and loan repricing progress.
