Tuesday, January 16, 2024

HomeStreet: BANC/PACW Style Merger with FirstSun, Cheap Proforma

This morning, FirstSun Capital Bancorp (FSUN) (~$850MM market cap) announced they were acquiring HomeStreet (HMST) (~$200MM market cap) in an all-stock transaction that includes a PIPE investment, lead by Wellington (being done at $32.50 per FSUN, or $14.12 per HMST), that neutralizes the mark-to-market impact of HomeStreet's balance sheet.  FirstSun is an insider controlled (69% insider ownership) C&I loan heavy bank that trades OTC with geographic concentration in Kansas, Texas, Colorado, New Mexico and Arizona.  FSUN will be the surviving entity, with FSUN management in charge (HMST's Mark Mason given a semi-ceremonial position as Vice Chair of the board) and be listed on the NASDAQ post "mid-2024" close, increasing the liquidity of their shares.

The credit quality of HomeStreet's assets has never really been in question, by re-marking them at current values, along with cost synergies, FirstSun will be able to enjoy outsized earnings in the early years of the deal.


HomeStreet shareholders will be receiving 0.4345 shares of FSUN for every share of HMST.  As I write this, there's actually a negative spread, likely because FSUN is OTC and illiquid, but the proforma entity is trading at approximately 5.9x next years estimated earnings, well below peer banks.

At 8x, still below peers but accounting for some of the overearning related to the marks, HMST would be worth $21/share.
I'm going to hang onto my shares, stick this in the same mental bucket as Banc of California (BANC) where a stronger bank takes over a weak one, extracts a lot of synergies and as we get closer to 2025, the market will start to recognize the new earnings profile of the combined bank.  I continue to like regional banks in today's market, for a few reasons:

  1. With short terms rates likely coming down in 2024, banks will attempt to quickly reduce their deposit costs (100% beta) to protect their NIMs;
  2. Commercial real estate exposure is generally overstated by the media/market, it will take a long time to play out giving bank's time to reserve and workout loans;
  3. We'll continue to see a lot of mergers, banks need more diversified deposit platforms to extend deposit duration.
Any other banks out there ripe for a similar transaction structure?

Disclosure: I own shares of HMST

18 comments:

  1. Large Margin of SafetyJanuary 17, 2024 at 7:10 PM

    Am I reading the earnings bridge right? There is no increase in earnings after taking out the loan interest accretion?

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    1. No, the increase in earnings is $92.5MM, $64.7MM of it is loan interest accretion, there's also synergies and other offsetting things in there.

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    2. Large Margin of SafetyJanuary 17, 2024 at 8:44 PM

      Right, but the share count is up a lot too, so normalized EPS is roughly unchanged?

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    3. Oh sorry, true. But could say the same thing for the deposit accretion too, HMST has expensive deposits that should normalize under FSUN. Not sure if you can isolate just the loan accretion.

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    4. "HMST has expensive deposits..." Does this mean they are paying high interest rates to customers keeping money with them? What would lead them to normalize under FSUN?

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  2. Any idea what this means "...asset-sensitive FirstSun and a liability sensitive HomeStreet"?

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    Replies
    1. FirstSun's balance sheet benefits from increases in rates, HomeStreet's is hurt by an increase in rates, and vice versa when rates drop.

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  3. Any thoughts on MithaQ's offer for AIMFF. Decent chance of being taken private at a nice premium.

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    1. Sorry, I haven't looked at that one, thanks for pointing it out.

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  4. Regional banks as a sector getting slaughtered. With the recent move on HMST, the setup is looking more attractive although hard to know given how illiquid FSUN is

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  5. Are there any closing risks here? Seems 'safe' enough. But...?

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  6. Hey any further updates here on deal timeline?

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  7. They've recut the deal to 0.3867 shares of FSUN from 0.4345 shares. Always a headache when the underlying bank is in trouble.

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    1. Yep, but I still continue to think this is a compelling combo.

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  8. Market seems to be pricing in either a full break of the deal or another recut. Any merger document experts have thoughts on the tightness of this merger agreement?

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    1. FSUN raised another 60 million in equity and 48.5 million in debt, so I don't think that they intend to walk. The bigger problem is with the regulators, no? Switching from the OCC to the state banking regulator in Texas isn't a great sign, and you've got to wonder about the amount of career risk a regulator wants to take. Consider recent troubled, high-profile bank mergers like NYCB-Signature, which was kind of embarrassing for the OCC.

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    2. I viewed this more as a way to speed up the closing , where OCC mergers have really dragged on lately.

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  9. NYCB & Signature was a failed bank buying another failed bank.

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