[May 09, 2018] |
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HomeStreet Sends Letter to Shareholders
The Chairman of the Board of Directors of HomeStreet, Inc. (Nasdaq:HMST)
(the "Company" or "HomeStreet"), the parent company of HomeStreet Bank,
today sent a letter to shareholders in connection with the Company's
upcoming 2018 Annual Meeting of Shareholders (the "2018 Annual
Meeting"), which is scheduled to be held on May 24, 2018.
This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20180509005726/en/
The full text of the letter follows:
May 9, 2018
Dear Fellow Shareholders,
On behalf of the Board of Directors, we would like to take this
opportunity to communicate to you the progress that HomeStreet is making
in executing our strategic plan and delivering shareholder value, as
well as the importance we place on ensuring that our Board of Directors
has the right combination of experience and expertise to serve the best
interests of all shareholders. As we approach the 2018 Annual Meeting,
we ask you to carefully consider the following points.
HomeStreet Has Been Executing its Plan - And it is Working
HomeStreet's strategy has produced exceptional growth and delivered
significant shareholder value since our IPO in February 2012. Since that
time, total shareholder return (TSR (News - Alert)) has reached 149%, in-line with the
KBW Regional Banking Index and outperforming the SNL U.S. Thrift Index
by 28 percentage points.1 Over this period, the Company has
been focused on growing and diversifying our earnings to maximize
long-term value.
The four core components of our strategy are:
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Expand our Commercial and Consumer Banking Segment;
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Optimize our Single Family Mortgage Banking Segment;
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Manage expenses, including investments in growth, in a
disciplined manner; and
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Adhere to an efficient use of capital.
We have made significant progress to date against this strategy.
HomeStreet's story is one of transformation - from a troubled thrift
following the 2008-2009 financial crisis, during which time many banks
and thrifts failed, into a regional commercial bank with a diversified
array of products and services.
However, building a commercial banking business from the ground up takes
time, and there is more work to be done. We believe that our strategy
will maximize shareholder value, which is why we are focused on
consistent execution. Below are some specific examples of how we have
been implementing our strategy thus far:
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In the years since our IPO we have made substantial progress toward
our goals of growth and diversification:
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Total assets have grown from $2.3 billion to $6.9 billion, a 20%
compound annual growth rate (CAGR).
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Our loans held for investment have grown from $1.3 billion to $4.8
billion, a 23% CAGR.
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Our deposits have grown from $2.0 billion to $5.0 billion, a 16%
CAGR.
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Our retail branch network has expanded from 20 to 62.
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We were ranked the 4th largest bank headquartered in
Washington State by 12/31/17 assets.
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Named to Fortune Magazine's 2017 "100 Fastest Growing Companies"
list.
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12/31/2011
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3/31/2018
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CAGR
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Total Assets
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$2.3B
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$6.9B
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20%
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Loans Held for Investment
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$1.3B
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$4.8B
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23%
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Deposits
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$2.0B
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$5.0B
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16%
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Retail Branches
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20
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62
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Since our IPO, we have invested significantly in our commercial
banking segment to diversify our net income, and we have built a
powerful commercial and consumer banking platform in highly attractive
markets.
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The Commercial and Consumer Banking Business reported record net
income of $42.1 million for 2017, driven primarily by an 18%
increase in loans held for investment, all of which was from
organic growth.
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In the first quarter of 2018, both deposits and loans held for
investment increased by 6%.
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The growth of the Commercial and Consumer Banking Business has
reduced our reliance on the Mortgage Banking Business while allowing
us to benefit from periods of strong mortgage performance. Our
reliance on mortgage banking revenue and income has been declining
since our IPO in 2012.
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Revenue from our Commercial and Consumer Banking Business
increased from 20% of total revenue in 2012 to 43% in 2017,
increasing by a compound annual growth rate of 30%. In the first
quarter of 2018 revenue from our Commercial and Consumer Banking
Business represented 48% of total revenue.
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Consistent with our strategy, we restructured our Mortgage Banking
Business in Q3 2017 - including expense reductions - in response to
growing challenges in the mortgage market. These efforts have
continued in 2018, with Q1 2018 headcount reductions of 37 full-time
equivalents in the Mortgage Banking segment.
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The Mortgage Banking Business remains an important part of
HomeStreet's heritage - since our founding as a privately held
mortgage company in 1921 - and our business going forward. We
believe that these restructuring steps will align our cost
structure with our current production opportunities and return the
profitability of the Mortgage Banking Business to appropriate
levels.
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As Sandler O'Neill and Partners noted in an April 25, 2018
research report, "… [HomeStreet] has weathered many mortgage
cycles in the past and it remains extremely well capitalized and
well prepared to adjust as needed and move on."
Ensuring the Right Board is in Place
We believe that HomeStreet's Board of Directors has the experience,
perspectives, and independence needed to protect and promote the
interests of all shareholders. Our directors are highly-qualified and
are proven leaders - each of them has more than 20 years of executive
and operating experience in banking, finance, real estate or other
related industries.
Our directors up for re-election at this year's Annual Meeting are three
valuable members of our Board.
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Scott M. Boggs, our Lead Independent Director and Audit Committee
Chair, has extensive audit, accounting and financial experience and
expertise. Mr. Boggs is an important central voice for the
independent directors. He is a former corporate controller of
Microsoft (News - Alert) Corporation and a former accounting and information systems
professor at Seattle University's business school, where he currently
serves on the University's Internal Audit Advisory Board. Mr. Boggs
started his career as a certified public accountant (currently
inactive) with Deloitte (News - Alert), Haskins & Sells, and has also previously
served on the Board of Cascade Natural Gas Corporation.
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Douglas I. Smith, Chair of our Human Resources and Corporate
Governance Committee, has valuable experience in residential
construction lending as well as home building and land development. He
is a director of and has worked for Miller and Smith Inc., a privately
held residential land development and home building company in
metropolitan Washington, D.C., since 1992, and has served as its
president since 2002. Mr. Smith holds an MBA degree from Harvard
Business School.
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Mark Patterson brings a valuable perspective as a sophisticated
institutional investor with extensive operational experience in
addition to his experience serving on the board of a public financial
services company. He also possesses intimate knowledge of
HomeStreet, both from his time as a portfolio manager at NWQ
Investment Management Company, overseeing financial services sector
investments, and as a substantial individual HomeStreet shareholder
himself (including 95,000 shares purchased in the open market). Mr.
Patterson was recently appointed to our Board as part of its
continuing refreshment process. He was a director of FBR & Co. from
2015 until the company's sale in 2017, having served on its audit and
compensation committees. Mr. Patterson began his career in 1989 at
U.S. Bancorp, including as VP of Investor Relations, where he was a
primary contact between the bank holding company and the investment
community. In that role, he performed detailed valuation and capital
planning financial analysis that informed the company's strategic
direction.
Diversity on our Board is also a key issue for us. Drawing from a
diverse pool of candidates can broaden the range of talent and help us
in our ongoing pursuit of effective, independent decision-making. We
have an active search underway for a qualified candidate who meets the
stated diversity goals of the Company, as we noted in a press
release in January 2018, and we expect to be able to appoint an
additional director in the coming months. This is also why we've
explicitly stated our diversity goals in HomeStreet's Principles of
Corporate Governance.
Furthermore, we are focused on ensuring that we have sound corporate
governance mechanisms in place to protect the best interests of all
shareholders. We believe that independent oversight is paramount, which
is why we have a strong Lead Independent Director and why this role is
built on a broader set of structures and practices to create a culture
of independence and objectivity in the boardroom.
Roaring Blue Lion's Critiques are Misguided, Misleading or False
Recently, you may have received or seen a letter and various materials
from Roaring Blue Lion Capital Management, L.P. or its affiliates (each
such entity, "Roaring Blue Lion") soliciting votes against the election
of two of our director candidates for HomeStreet's Board at the 2018
Annual Meeting. We urge you NOT to use any proxy card provided by
Roaring Blue Lion, and instead to complete and return the Company's WHITE
proxy card today.
Roaring Blue Lion's recommended actions with respect to our business
would increase risk, delay our strategy and negatively impact the
long-term prospects of our business. Despite the Board's repeated
attempts to engage with Roaring Blue Lion in productive discussions, its
principal, Charles W. Griege, Jr., remains resolute in pursuing a
disruptive and costly proxy contest. Furthermore, Roaring Blue Lion has
made many baseless, misleading and - in some cases simply false - claims
about the Company in what we believe is a desperate attempt to sway
shareholders.
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Roaring Blue Lion's selective choice of performance periods and
mischaracterization of HomeStreet's IPO pricing don't tell the whole
story.
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Using a five-year TSR evaluation period for HomeStreet - which has
a significant Mortgage Banking Business - introduces the potential
for cyclical bias.
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Performance since our IPO is a more representative timeframe. Over
this period (2/9/2012 to 5/7/2018), HMST's TSR was 149%,
performing in-line with the KRX's TSR of 144%. The stock
appreciated significantly in the nine months following our IPO - a
direct consequence of the cyclically strong returns of our
mortgage business.
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Since the first quarter of 2012, our tangible book value per share
has grown at a compound annual growth rate of 10.9%; in contrast,
the California and Pacific Northwest peers used by Roaring Blue
Lion grew tangible book value per share at median CAGRs of 6.0%
and 2.2%, respectively.
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HomeStreet's IPO was priced at 84% of pro forma tangible book
value per share. Price-to-pro-forma tangible book value (P/TBV)
per share is an industry standard way to describe valuation in an
IPO, and a method that is widely used by many investors. The use
of non-standard definitions in the P/TBV per share ratio can
reduce transparency and comparability versus peers. Investors
typically incur immediate accretion or dilution in book value per
share when an offering is consummated, so the pre-IPO book value
per share is no longer relevant the moment that the offering
occurs and is not the appropriate valuation measure for IPO
investors.
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Performance over the last year has been challenged by the cyclical
nature of the mortgage industry, which has caused us to
underperform other financial institutions who are not as
concentrated in the mortgage business as we are - our
diversification strategy is designed to mitigate the impact of
mortgage banking cyclicality over time.
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Roaring Blue Lion's characterization of the Securities and Exchange
Commission (SEC (News - Alert)) settlement and its implications ignores the facts.
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There were no fraud or intent to deceive findings made by the SEC,
and in the settlement agreement, the Company did not admit or deny
the SEC's findings or any wrongdoing.
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In 2014, the Company itself identified the hedge accounting
errors, voluntarily disclosed them and fully remediated them
within weeks and, notably, before any SEC
investigation.
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Lead Independent Director Scott Boggs led an investigation through
a special Board committee with Mary Oldshue, who was a member of
the Bank Board at the time - along with independent outside
counsel - to identify, remediate and disclose the relevant
activity in 2014, before the SEC investigation started. The
special committee found no reasonable evidence that anyone took
any action to intentionally misstate the financial results or
financial position and found no intent to deceive or defraud.
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The only times HomeStreet reported that it had a material weakness
in its internal accounting controls was in its Q3 2014 Form 10-Q
and 2014 Form 10-K.
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While the Company has included a risk factor in each of its annual
and quarterly reports since 2015 noting that we have had
significant deficiencies in internal controls in the past and
cautioning that there is a possibility of significant deficiencies
in the future, the inclusion of such a risk factor is not a
reporting of actual events. The Company has not reported that it
has had significant deficiencies in each of those years, contrary
to what Blue Lion has stated.
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HomeStreet has addressed all whistleblower protection matters that
were the subject of the SEC settlement.
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We voluntarily - and prior to the settlement with the SEC - took
steps to prevent future violations by adopting standard severance
agreement language which makes clear that nothing in those
agreements limits former employees' ability to speak with the SEC.
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Furthermore, we reviewed and updated our whistleblower protection
policies to ensure they reflect market best practices. Both
internal and external stakeholders have access to our
whistleblower hotline, which is featured prominently on our
internal human resources and external investor relations websites.
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The members of HomeStreet's Audit Committee know the importance of
corporate culture that promotes audit and accounting transparency,
and they have made sure our updated systems promote an excellent
culture of accountability and robust whistleblower protections.
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We emphasize to all our managers how important it is to protect
whistleblower rights through training and internal policies.
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In every Audit Committee meeting, our general counsel provides a
report on any calls that we receive on our whistleblower hotline.
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HomeStreet's strategy is the right way to improve results of
operations and improve our valuation - not the financial engineering
moves Roaring Blue Lion suggests.
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We believe there is substantial value in achieving a balanced,
diverse stream of income, which drives our strategy. Since our
IPO, we have built a significant Commercial and Consumer Banking
franchise in highly attractive markets, thereby reducing our
reliance on the Mortgage Banking Business.
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Mortgage banking is an attractive business that generates a high
return on capital across the business cycle and remains a valuable
component of our strategy.
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A sale of our mortgage servicing rights and subsequent stock
buybacks as suggested by Roaring Blue Lion would have a
detrimental impact on future operations:
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The fact that we retain servicing on the majority of our
mortgage loans sold is a competitive advantage to mortgage
customers who value the customer service provided by us
throughout the life of their loan, and has historically
allowed us to capture a meaningful amount of refinancing or
future home purchases for these customers.
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Because of our long history of superior customer service,
strong compliance culture and high credit quality on the loans
we originate, our servicing platform is highly efficient and
our cost to service these loans is among the lowest in the
industry.
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Overall, mortgage servicing provides a strong return on
invested capital through the business cycle and has
historically been countercyclical to mortgage origination.
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Since our IPO, we have grown our Commercial and Consumer Banking
business and have made substantial progress toward our goal of
converting from a traditional thrift to a full service commercial
and consumer bank. This process takes time and requires
substantial changes in the composition of loans and deposits as
well as substantial investment in personnel, technology, and
infrastructure. Only recently (2016) did we convert our state
banking charter from a thrift to a commercial bank.
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HomeStreet's geographic diversity is an asset, not a liability.
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HomeStreet and its investors benefit from geographic diversity.
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The markets the Company has entered have attractive demographics
and growth prospects, and HomeStreet believes it has excellent
managers in place to oversee those markets.
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Our markets outside of Washington and Oregon are very attractive
markets:
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We have been doing business in the Hawaiian Islands for almost
40 years; Hawaii represents a stable economy with strong,
consistent international demand and has provided the Company
substantial opportunity for deposit gathering and loan
origination and includes our largest retail deposit branch in
Honolulu, Oahu, with deposits of $307.4 million as of March
31, 2018.
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California is one of the largest economies in the world on a
stand-alone basis, which allows us to grow meaningfully even
without gaining a significant market share.
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We have a presence in all of the top ten most active housing
markets in the Western U.S.
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HomeStreet's compensation program is aligned with long-term
performance and in-line with industry standards.
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The majority of our program is performance-based and tied to the
achievement of measurable financial metrics selected to
incentivize achievement of growth and diversification of earnings
and maximize shareholder value.
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Annual Incentive Awards are predominantly performance-based, and
tied to corporate, business unit or personal goals (i.e.,
CEO's program is 80% corporate, 20% individual) with
pre-established financial metrics. Targets are rigorous - in 2017,
the Annual Incentive Plan achieved 76.86% of target, which
resulted in a reduced payout.
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Long-term Incentives are 50% time-based RSUs that vest over a
three-year period and 50% performance-based RSUs that vest over a
three-year period. Performance-based RSUs use Core ROTE2
- a key measure of profitability - as a performance metric since
it is closely linked to long-term shareholder value creation.
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Roaring Blue Lion's implication that the Compensation Committee
increased the CEO's salary by 40% in 2018 is wrong. Our CEO's
salary remained unchanged from 2017 to 2018, and increased by
7.69% in March 2017 from the prior year's levels.
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With regard to the compensation of certain executives in our
Mortgage Banking segment, it is standard industry practice for
compensation incentives for division-level executives to include
origination volume in this line of business. For example, Rose
Marie David, the head of our Mortgage Banking division, has
compensation incentives tied 50% to origination volumes and 50% to
profitability.
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Roaring Blue Lion's nomination notice was incomplete in myriad
ways, which we believe calls into question its credibility and
transparency.
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Roaring Blue Lion had previously announced its intent to solicit
votes for three proposals and the election of two individuals to
HomeStreet's Board at the 2018 Annual Meeting, but the notice
failed to comply with the Company's advance notice bylaw.
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This was not just a simple foot fault or a matter of
technicalities as Roaring Blue Lion has suggested.
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The 23-page nomination notice was materially incomplete. Our
counsel identified at least 32 failures to satisfy the bylaw
requirements.
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Roaring Blue Lion did not disclose information with respect to
the participants in its proxy solicitation, which is both
required by the SEC and our bylaws, including share ownership
and contracts or understandings with respect to HomeStreet
securities.
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Roaring Blue Lion declined to disclose an estimate of its
proxy solicitation costs and whether it will seek
reimbursement of those costs from HomeStreet's shareholders.
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The rest of the 133-page submission consisted of two copies of the
standard director questionnaire, which each director completes
every year.
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Roaring Blue Lion sued the Company, but the Superior Court of King
County, Washington affirmed the Company's position in a March 30,
2018 ruling.
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The Board believes it is important to treat all shareholders
fairly and equally, with the same rules and deadlines applying to
everyone.
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HomeStreet discloses any loans made to insiders according to all
applicable rules.
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As is common practice in our industry, HomeStreet has made and
continues to make home loans and commercial and consumer loans to
directors, officers and other related parties in the ordinary
course of business. These loans are made on terms readily
available to third parties, do not contain features unfavorable to
the Company and are underwritten to our normal credit quality
standards.
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Contrary to Roaring Blue Lion's claims, we reported these loans
made to directors and officers or their related parties as
required by "Regulation O".
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The SEC proxy rules do not require that such loans be reported
under the proxy rules, and we note as much in our proxy statement
on page 79.
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Any suggestion of Roaring Blue Lion that these loans were
improperly made, inadequately reported or represent any special
treatment for related parties is completely false.
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This is yet another example of Roaring Blue Lion not understanding
the legal requirements applicable to HomeStreet.
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Our Board has a clear strategy for HomeStreet - which has already
achieved meaningful results - and the experience and expertise to
execute it. The Company's highly-qualified nominees, Scott M. Boggs,
Douglas I. Smith and Mark R. Patterson, have a strong track record of
enhancing shareholder value and a deep understanding of HomeStreet's
business. We ask for your support going forward as we continue to
execute on our strategy to drive shareholder value creation at
HomeStreet.
Support continued value creation at HomeStreet
and vote for the Company's nominees on
HomeStreet's WHITE proxy card today.
Sincerely,
/s/ Mark Mason
Chairman of the Board of Directors
###
If you have any questions, or need assistance voting your WHITE
proxy card, please contact:
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OKAPI PARTNERS
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1212 Avenue of the Americas, 24th Floor
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New York, NY 10036
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Telephone for Banks, Brokers, and International Shareholders: +1
212-297-0720
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Shareholders may call toll-free (from the U.S. and Canada):
877-796-5274
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Email: [email protected]
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About HomeStreet, Inc.
HomeStreet, Inc. (Nasdaq:HMST) is a diversified financial services
Company headquartered in Seattle, Washington, serving consumers and
businesses in the Western United States and Hawaii through its various
operating subsidiaries. The Company operates two primary business
segments: Mortgage Banking, which originates and purchases single family
residential mortgage loans, primarily for sale into secondary markets;
and Commercial & Consumer Banking, including commercial real estate,
commercial lending, residential construction lending, retail banking,
private banking, investment, and insurance services. Its principal
subsidiaries are HomeStreet Bank and HomeStreet Capital Corporation.
Certain information about our business can be found on our investor
relations web site, located at http://ir.homestreet.com.
Forward-Looking Statements
This letter contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation
Reform Act of 1995. All statements relating to events or results that
may occur in the future, including, but not limited to, the effects of
acquisitions and restructuring, are forward-looking statements. When
used in this letter, terms such as "anticipates," "believes,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of those
terms or other comparable terms are intended to identify forward-looking
statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause us to fall short of our
expectations or may cause us to deviate from our current plans, as
expressed or implied by these statements. The known risks that could
cause our results to differ, or may cause us to take actions that are
not currently planned or expected, are described under the heading Item
1A- "Risk Factors" in the Company's Annual Report on Form 10-K for the
year ended December 31, 2017, filed with the Securities and Exchange
Commission (the "SEC"). Unless required by law, the Company does not
intend, and undertakes no obligation, to update or publicly release any
revision to any forward-looking statements, whether as a result of the
receipt of new information, the occurrence of subsequent events, the
change of circumstance or otherwise. Readers are cautioned not to place
undue reliance on these forward-looking statements, which apply only as
of the date of this letter.
Important Additional Information
On April 17, 2018, the Company filed a definitive proxy statement on
Schedule 14A and form of associated WHITE
proxy card with the Securities and Exchange Commission ("SEC") in
connection with the solicitation of proxies for its 2018 Annual Meeting
of Shareholders (the "Definitive Proxy Statement"). The Company, its
directors and certain of its executive officers are participants in the
solicitation of proxies from shareholders in respect of the 2018 Annual
Meeting of Shareholders. Information regarding the names of the
Company's directors and executive officers and their respective
interests in the Company by security holdings or otherwise is set forth
in the Definitive Proxy Statement. BEFORE MAKING ANY VOTING DECISION,
INVESTORS AND SHAREHOLDERS OF THE COMPANY ARE URGED TO READ ALL RELEVANT
DOCUMENTS FILED WITH OR FURNISHED TO THE SEC, INCLUDING THE COMPANY'S
DEFINITIVE PROXY STATEMENT AND ANY SUPPLEMENTS THERETO AND ACCOMPANYING WHITE
PROXY CARD, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. The
Definitive Proxy Statement was first sent to the shareholders of the
Company on or about April 17, 2018 and is accompanied by a WHITE proxy
card. Shareholders may also obtain a free copy of the Definitive Proxy
Statement and other relevant documents that the Company files with the
SEC from the SEC's website at www.sec.gov
or the Company's website at www.homestreet.com/proxy
as soon as reasonably practicable after such materials are
electronically filed with, or furnished to, the SEC.
_____________________________
1 Sources: Bloomberg (News - Alert) Finance LP and SNL Financial. Total
return includes stock price appreciation and dividends from February 9,
2012 to May 7, 2018. KBW Regional Bank Index is comprised of 50 publicly
traded, regionally diversified midcap banking institutions, and is
calculated using equal float-adjusted market-capitalization weighted
methodology. SNL U.S. Thrift includes all Major Exchange-traded (NYSE,
NYSE MKT, NASDAQ) Thrifts in SNL Financial's coverage universe.
2 Core Return on Tangible Equity (ROTE) is a non-GAAP
financial measure.
View source version on businesswire.com: https://www.businesswire.com/news/home/20180509005726/en/
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