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:
- With short terms rates likely coming down in 2024, banks will attempt to quickly reduce their deposit costs (100% beta) to protect their NIMs;
- 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;
- 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
