HomeStreet's Piecemeal Cost Reductions Still Just Scratch The Surface Of What Needs To Be Done

DALLAS, June 15, 2018 /PRNewswire/ -- Blue Lion Capital and its affiliates ("Blue Lion") are the beneficial owners of 6.1% of the stock of HomeStreet, Inc. (Nasdaq: HMST) ("HomeStreet" or the "Bank"). This week, HomeStreet announced that it was going to further streamline its Mortgage Banking Operations.  During the past eight months, Blue Lion has consistently recommended that HMST should aggressively reduce its mortgage banking origination footprint and associated headcount.  Despite HMST criticizing Blue Lion's plan as reckless and irresponsible, the Bank has now announced two restructurings in the mortgage segment in less than sixty days. 

Unfortunately, the piecemeal cost reductions still don't go far enough to address the poor returns in the Mortgage Segment. Blue Lion believes that all mortgage origination offices that are unable to earn the Company's cost of capital on a fully allocated basis should be closed.  Blue Lion also believes that HomeStreet should sell its single family mortgage servicing rights ("MSR") because the servicing operation is sub-scale and is located in the very expensive Seattle, WA market.  Further, HMST refuses to show its shareholders the segment profitability of either the servicing operation or the origination operation.  Shouldn't shareholders be given the information necessary to be fully informed about the Company that THEY own?  A sale of the MSR would enable HMST to repurchase up to 20% of the Company's shares at a time when HMST remains one of the cheapest banks in the country.

Curiously, there was no mention in HMST's press release of ongoing cost reduction initiatives in its Commercial Bank.  As Blue Lion has detailed in its presentations to management and shareholders, HMST needs to reduce its expenses in this segment by $25 million just to be average when compared to its peers.  Thus far, HMST has announced an estimated $7.0 million of expense reductions (included in the Company's 1Q 2018 earnings press release).  Why has HMST remained silent regarding all the shareholder money spent on marketing and promotional expenses, including the corporate box at CenturyLink Field, the Miss HomeStreet racing boat sponsorship, the biannual mortgage banking getaways to Hawaii, the golf tournaments sponsored and the first class travel by management?

On May 30^th, HMST announced it would close two bank branches.  Unfortunately, HMST has a terribly inefficient branch network that includes another 60 branches, 17 of which have less than $25 million in deposits.  Not surprisingly, the two branch closures that HMST did announce in Washington State were both on our list of branches that were candidates for closure.  Rather than complain that selling the MSR would impact its funding costs, shouldn't HMST's management be developing a plan that would enable the Bank to have a great deposit franchise?  Every one of HMST's peers has developed strong deposit franchises and capitalized on operating in some of the best markets in the country.  Is it asking too much of HMST's management to do the same?

It's undeniable that HMST's shareholders want the Company's management and Board to proactively and aggressively restructure the Bank and its operations.  However, the current pace of change is much too slow given the poor performance of the Company and stock over the past 5+ years.  Rather than continuing to announce piecemeal and reactionary cost reductions, HMST's management needs to craft a comprehensive strategy that will enable the Company to be a top performing bank in its markets.  Absent a comprehensive operating plan that is easy to understand and execute, the Board should hire an investment bank and put HomeStreet up for sale.  Either way, shareholders would finally be rewarded.

Blue Lion wants to encourage all shareholders to keep pushing for the change that we deserve.  Rest assured, Blue Lion will continue to do its part.

SOURCE Blue Lion Capital