IPO Preview: HomeStreet

Aug.10.11 | About: HomeStreet, Inc. (HMST)

Based in Seattle, Washington, HomeStreet [proposed symbol (NASDAQ:HMST)] scheduled a $180 million IPO with a market capitalization of $212 million at a price range mid-point of $23 for Thursday, August 11, 2011. The full IPO calendar for the week of August 8 includes 12 scheduled IPOs trying to raise almost $2 billion.

OBSERVATIONS -- HMST is a bank turnaround that hasn’t turned around, and had cease and desist issues with regulatory agencies. Without a successful IPO or private placement, HMST’s future appears in doubt.

CONCLUSION -- It seems prudent to pass on the proposed HMST IPO.

HMST Valuation Metrics

BUSINESS -- HMST is a 90-year-old diversified financial services company headquartered in Seattle, Washington, that has grown from a small mortgage bank to a full-service community bank serving consumers and businesses in the Pacific Northwest and Hawaii.

The bank has the oldest continuous relationship of all Fannie Mae (OTCQB:FNMA) seller servicers in the nation, having been the second company approved by Fannie Mae at its founding in 1938.

ECONOMIC DOWNTURN HURTS HMST -- New loan demand is generally weak because of the economic downturn, resulting in increased competition for good customers in spite of industry consolidation.

ILLUSORY PROFITS CREATED BY BOOKKEEPING MAGIC -- “Gain on sale of investment securities available for sale of $5.8 million for the three months ended June 30, 2010 was the result of balance sheet restructuring activities during the period, the proceeds of which were utilized to prepay FHLB advances.” S-1 page 65

So instead of a $1.2 million profit for the June 2011 quarter, HMST on an adjusted basis would have reported a $4.5 million loss.

CEASE & DESIST BANK ORDER -- HMST is currently subject to a "cease and desist" order from the Federal Reserve Board that prohibits HMST from declaring, making or paying any dividends on common stock without the prior written consent of the Federal Reserve.

OTHER ACTIONS -- HMST has taken several other actions to comply with the requirements of the Bank Order including:

  • Retained a new Chief Executive Officer and other senior management who possess the qualifications, experience and proven ability to manage a bank of comparable size and experience in upgrading a low-quality loan portfolio, raising capital and improving earnings;
  • Enhanced the infrastructure for the Bank’s credit administration functions; and
  • Implemented revised lending, loan concentration and collection policies and procedures.

REASON FOR THE IPO -- Among other things, the Cease & Desist Orders directed HMST to increase capital to certain specified levels, improve management, reduce classified assets and improve earnings.

Pursuant to the order, HMST Company has agreed, among other things, to refrain from engaging in all unsafe and unsound practices that have resulted in HMST’s low earnings and inadequate capital.

Pursuant to the bank order, HMST was directed, among other things, to have and maintain a Tier 1 capital ratio that equals or exceeds 10% and a total risk-based capital ratio that equals or exceeds 12% by October 5, 2009, as well as to develop and adopt a plan to reduce the Bank’s exposure to adversely classified assets.

The HMST has not yet satisfied the capital ratios mandated by the bank order. This offering is intended to help HMST satisfy these requirements. As of June 30, 2011, the minimum amount of additional capital necessary to satisfy the capital ratio requirements of the Bank Order was $115.3 million. HMST expects to contribute $132 million of the proceeds of this offering to the Bank.

COMPETITION -- HMST faces heavy competition in virtually all aspects of its business, and the number and character of competitors are continuing to increase.

USE OF IPO PROCEEDS -- HMST expects to net $164 million, and intends to use $132 million for regulatory capital requirements, balance sheet growth, expanding operations through new branch offices and general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.