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14 companies are scheduled to raise $3.7 billion in December including Zynga (ZYNG). See the full IPO calendar.

Based in Seattle, Washington, HomeStreet (NASDAQ:HMST) scheduled a $166 million IPO with a market capitalization of $196 million at a price range mid-point of $23 for Thursday December 8, 2011.

OBSERVATIONS

HMST is a bank turnaround that hasn’t turned around on a consistent basis, and had cease and desist issues with regulatory agencies.

Without a successful IPO or private placement, HMST’s future appears in doubt.

Industry trends are negative for smaller banks. For example, "Small Banks Are Getting Smaller"… read more

SEPTEMBER QUARTER INCOME

Net income for the quarter ended September 30, 2011 included net valuation gains of $12.2 million relating to changes in value of MSRs (mortgage servicing rights and associated hedging investments).

Noninterest income for the three and nine months ended September 30, 2011 was $37.3 million an increases of $9.6 million, or 34.5% ,from $27.7 million for the same periods in the prior year. These increases in noninterest income reflect an increase in mortgage servicing income.

CONCLUSION

The spike in income for the September quarter was due to mortgage servicing income, which is lumpy and unpredictable. Another $5.6 million income year-to-date was generated from an accounting restatement, rather than from operations.

It seems prudent to pass on the proposed HMST IPO. This seems to be a case of “go broke or go public.”

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 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.” July 25 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 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 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 PROCEEDS

Of $150 million:

  • $108mm for bank capital, as stipulated by regulators;
  • $10mm for interest on preferred securities, deferred since December 2008;
  • Remaining proceeds for working capital
Source: IPO Preview: HomeStreet Bank