HomeStreet Bank, a Seattle-based community bank, successfully raised $96 million in gross proceeds from an initial public offering that began on Friday. As the bell rang today, HMST was trading on the NASDAQ at $50.10, 13 percent above its offering price. HomeStreet was pushed into the IPO for regulatory reasons: the bank, like so many community banks, was under-capitalized.

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State and federal regulators have demanded that HomeStreet raise its Tier 1 Leverage Ratio to 10% in order to meet capital requirements and avoid being put into receivership. Prior to the IPO, according to SEC filings, the bank’s Tier 1 ratio was 6.5%.

Instead of selling assets or portions of its business, like New York’s Emigrant Savings Bank is considering for similar reasons, HomeStreet opted to go public. It’s not common that a financial institution goes public to raise capital. In fact, American Banker reports that this very well might be the first time a bank has recapitalized by doing so. HomeStreet offered 1.8 million shares at $44, starting Friday.

Prior to this, HomeStreet was privately held.

Day late, dollar short

The IPO, which had been delayed twice, has not brought HomeStreet to a 10% Tier 1 ratio, however. The bank expected to raise $77 million, netting about $41 for every $44 share they sold, and raising its Tier 1 ratio to 8.5%. After costs, the bank raised $88.7 million in fresh capital according to a press release, exceeding expectations by $11.7 million, or 15%.

This should push its Tier 1 ratio a bit higher than the bank expected — 8.8% instead of 8.5% — but perhaps not high enough to satisfy regulators. HomeStreet is seeking a modification in the capital requirements from state and federal regulators.

Good news for others

The IPO might offer a playbook for other undercapitalized banks — go public to recapitalize. Apparently the market does not consider an investment in undercapitalized community banks to be throwing good money after bad.

Hopefully, for the sake of keeping the banking industry diverse and competitive, that’s true. The vast majority of FDIC-insured bank failures have been smaller community banks — the sort of small bank whose success is directly tied to the economic development of its home community. Having a local bank that is interested in investing capital in local economic development is important for any community. It’s good to see that traders see value — real value — in this business model, too.

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