DALLAS, Jan. 23, 2018 /PRNewswire/ -- Blue Lion Capital
("BLC") and its affiliates are the beneficial owners of 5.5% of the
stock of HomeStreet, Inc. (Nasdaq: HMST) ("HomeStreet" or the
"Bank"). BLC has expressed its intention to nominate two
directors to the HomeStreet Board of Directors at the 2018 annual
meeting of HomeStreet shareholders.
HomeStreet released fourth quarter and full-year 2017 earnings
last night and is conducting a conference call today at
1:00 pm Eastern Time with analysts
and investors to discuss those results.
BLC is disappointed with yet another earnings period in which
HomeStreet failed to execute on a strategy that would enable the
Bank to reach its full potential or generate earnings and cash flow
commensurate with its assets and opportunity.
The mortgage segment was unprofitable for the fourth time in the
past five quarters, despite its supposed restructuring. The
commercial and consumer banking segment sold significantly more
commercial real estate loans than it originated during the quarter,
generating a one-time boost to earnings of more than 11 cents per share. Further, despite
significant new loan growth, the Bank did not take a loan loss
provision. In fact, in 2017, the increase in the provision
for loan losses was a mere $750,000,
despite $680 million of net loan
growth and a $4.1 million increase in
the loan loss provision in 2016.
BLC believes analysts and investors in HomeStreet should want
answers to some critical questions during today's conference
call. BLC encourages HomeStreet's management to proactively
address these questions during the call, or, failing that, for
analysts and investors to ask management these questions during the
time allotted for questions and answers:
- After adjusting for the high volume of sales of commercial real
estate loans during the quarter (and the 11
cents per share boost to earnings from those sales) as well
as a reasonable provision for loan losses (another 5 cents per share), HomeStreet missed consensus
earnings estimates by 15 cents per
share or 35% (see reconciliation
below). Is a mere 27 cents per
share the true, sustainable earnings power of this Bank or did the
management team fail to execute on the Bank's full opportunity?
- The Bank's efficiency ratio was 1,000 basis points higher than
its peers in the Pacific Northwest and 1,800 basis points higher
than its peers in California
(collectively, the "Peers"). Has the management team of HomeStreet
done everything it is capable of to streamline the Bank's cost
structure? If not, why hasn't management already made the Bank more
efficient?
- During 2017, HomeStreet's commercial and consumer banking
segment had net loan growth
of more than $680 million. The
Bank took a loan loss provision of $750,000
or 11 basis points on those loans. Further,
HomeStreet's allowance for loan losses currently sits at 90 basis
points of originated loans (down from 100 basis points a year ago)
while its Peers average 123 basis points. Should investors and
regulators expect the commercial business to experience just 11
basis points in losses or has the Bank under-reserved for its
future losses on these loans? Is the Bank adequately reserved
across its loan book even though it has substantially lower
allowances than its Peers?
- The Bank realized losses of approximately $534,000 on its securities portfolio during the
quarter while the portfolio's duration (and risk) continued to
increase. What are the embedded losses in that portfolio today? The
duration of this portfolio increased from 3.6 years to 5.7 years
over the past three quarters; which is optimal, the 3.6 year
duration or the 5.7 year duration? Why did management so radically
change the duration in just three quarters?
- Despite large restructuring charges and promises of
improvements in the mortgage segment, HomeStreet missed its most
recent guidance for mortgage loan lock volume, closed loan volume,
profitability and efficiency ratio. Is management satisfied with
the performance of the mortgage business or are further adjustments
required? If further adjustments are required, why has there been a
delay in taking those actions? When will shareholders earn an
adequate return in the mortgage business and when will management
meet its guidance in this segment?
- HomeStreet already has the highest commercial real estate
exposure of any of its Peer banks, as a percentage of total
capital. And, the Bank is already above the risk thresholds as
outlined by the Federal Reserve. Despite this, during the fourth
quarter, HomeStreet had $283
million of new construction loan commitments. Given the
existing over-exposure to this high-risk loan category, is
management intentionally growing this portion of the loan book
further or is the outsized growth the result of a lack of
discipline?
BLC further notes that HomeStreet generated just 27 cents of normalized, sustainable earnings
during the quarter, as shown in the table below:
|
Q4
2017
|
Commercial &
Consumer Bank
|
|
Net interest income -
reported
|
$
|
45,876
|
|
|
Non-interest income -
reported
|
12,697
|
Adjust:
Gain (loss) on sale of securities
|
(534)
|
Adjust:
Pull forward of FNMA DUS, SBA and Other CRE gains
|
(4,504)
|
Non-interest income -
adjusted
|
8,727
|
Total revenues -
adjusted
|
$
|
54,603
|
|
|
Provision expense -
reported
|
-
|
Adjust:
Provision expense consistent with Peers (123 bps)
|
2,333
|
Provision expense -
adjusted
|
2,333
|
|
|
Non-interest expense
- reported
|
38,716
|
Adjust:
Office closure
|
(497)
|
Non-interest expense
- adjusted
|
38,219
|
Total expenses –
adjusted
|
$
|
40,552
|
|
|
Pre-tax
income
|
$
|
14,051
|
Income
taxes
|
4,450
|
Tax
rate
|
31.7%
|
Net income
|
$
|
9,601
|
Commercial &
Consumer Banking Segment EPS
|
$
|
0.35
|
|
|
Mortgage Segment
EPS
|
$
|
(0.08)
|
|
|
Normalized EPS for
4Q17
|
$
|
0.27
|
Consensus EPS
Expectations
|
$
|
0.42
|
Miss of
Expectations (%)
|
35%
|
Additional materials concerning BLC's views on HomeStreet are
available at the Securities and Exchange Commission's website at
https://tinyurl.com/y8mpemcw and https://tinyurl.com/y8qvcfkn.
Important Information
This press release is not a
solicitation of a proxy from any security holder of HomeStreet,
Inc. (the "Company"). Charles W.
Griege, Jr., intends to nominate individuals as nominees to
the Company's board of directors and intends to solicit votes for
the election of those individuals as members of the Company's board
of directors (the "Nominees"). Mr. Griege will send a
definitive proxy statement, proxy card and related proxy materials
to shareholders of the Company seeking their support of the
Nominees at the Company's 2018 Annual Meeting of
Shareholders. Shareholders are urged to read the
definitive proxy statement and proxy card when they become
available, because they will contain important information about
the Nominees, the Company and related matters.
Shareholders may obtain a free copy of the definitive proxy
statement and proxy card (when available) and other documents filed
by Mr. Griege with the Securities and Exchange Commission ("SEC")
at the SEC's web site at www.sec.gov. The definitive proxy
statement (when available) and other related SEC documents filed by
Mr. Griege with the SEC may also be obtained free of charge from
Mr. Griege.
Participants in Solicitation
The following persons are
participants in the planned solicitation from the Company's
shareholders of proxies in favor of the Nominees: Mr. Griege,
Roaring Blue Lion Capital Management, L.P., and the Nominees.
The participants may have interests in the solicitation, including
as a result of holding shares of the Company's common stock.
Information regarding the participants and their interests may
currently be found in the amended Schedule 13D, dated January 17, 2018, as filed with the SEC on
January 17, 2018, which is
incorporated herein by reference.
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SOURCE Blue Lion Capital