As 3Q-2013 EPS reporting season bears down on us in the next 2-3 weeks, we find the Mortgage business once again an area of high interest among investors. It is widely expected that absolute dollars of Mortgage fee income retreats in this current quarter as refinance volume slows, but we still hear of many Banks with a considerably better mix of “Purchase” loans and still healthy contribution to overall Revenues and Earnings. Therefore, it remains to be seen whether the dedicated Mortgage Bank stocks are properly calibrated on their valuations for tangible book value and forward earnings expectations.
The table above illustrates the last 4 months’ evolution for Price-to-Tangible Book and P/E on the sixteen(16) public banks with at least 20% of Total Revenues from Mortgage and a minimum $50 Million in market capitalization. The change in attitude towards these stocks has not been uniform, as a few are the same valuation today as in May 2013, while others are more expensive (i.e., HTH-Hilltop in TX, ANCX-Access in VA, CFNL-Cardinal in VA, LION-Fidelity in GA, and WSBF-Waterstone in WI). One stock is cheaper on a price-to-tangible book basis but not on P/E (i.e., HMST-HomeStreet) and two are cheaper today on an earnings basis than in Spring 2013 (i.e., PULB-Pulaski in MO and BANC-Banc of California). Separately, we think Core Deposits and the underlying lack of premium on some of these stocks are critical issues overlooked by investors. See our analysis below Since when are such attractive Deposits worth so little? There is a disconnect here, in our opinion, and some clarity from 3Q-2013 EPS reports may be a helpful catalyst for certain stocks.