KBRA Maintains Watch Developing Status for HomeStreet, Inc.

Following the update regarding the proposed merger with FirstSun Capital Bancorp (NASDAQ: FSUN) ("FirstSun"), KBRA maintains its Watch Developing Status for the ratings of HomeStreet, Inc. (NASDAQ: HMST) ("HomeStreet"), including the senior unsecured debt rating of BBB-, the subordinated debt rating of BB+, and the short-term debt rating of K3, as well as the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for its subsidiary, HomeStreet Bank. The ratings were initially placed on Watch Developing Status on January 18, 2024, in response to the announcement of the proposed merger agreement with FirstSun (Senior BHC rating of BBB/ Stable Outlook).

On October 29, 2024, HomeStreet, Inc. and FirstSun Capital Bancorp announced that the necessary regulatory approvals for their proposed merger had not been obtained, and the companies were asked to withdraw their application. Although the specific reasons for the lack of approval remain unclear, regulatory focus on CRE concentrations, pro forma capital levels, and CRA compliance under the current framework has been notably highlighted in other recent transactions. KBRA has observed these regulatory priorities in recent deal evaluations. Furthermore, the HMST management team stated that there were no regulatory concerns specifically related to HomeStreet that would have prevented approval of the merger. Given the uncertainty surrounding a potential termination and the expiration of the current agreement in mid-January 2025, as well as the unclear path to approval under a renewed application, KBRA is maintaining the Watch Developing Status on HomeStreet's ratings.

Currently, two scenarios appear most probable, in our view: either the existing merger application is terminated, with both parties moving forward independently; or, the merger application is withdrawn and resubmitted with revised terms. In either case, the ratings for both entities will be reviewed once greater clarity emerges. If HomeStreet opts to remain independent, its management team has launched a strategic initiative to address balance sheet and profitability challenges, which may include the sale of approximately $800 million in multifamily loans. Given the expectation of multifamily loan sales under the current proposed merger agreement, albeit at a smaller size (~$300 million), management is familiar with the process and has a solid understanding of potential buyers and pricing expectations (91%-95% of par). Management's preference is to sell its longer-duration multifamily loans, which could result in pricing at the lower end of the range, depending upon the interest rate environment. Successfully executing this sale could improve profitability and stabilize HomeStreet in 2025. Proceeds from the loan sale are intended to de-lever the balance sheet by reducing wholesale borrowings, which would result in a minimal impact to the capital position based on current market conditions. HomeStreet’s credit quality remains strong, with an NPA ratio of 0.59% as of 3Q24 and minimal NCO activity year-to-date. Liquidity is also considered ample, with on-balance sheet liquidity representing 15% of assets and contingent funding covering 80% of total deposits. Although rising deposit costs (2.67% in 3Q24) have applied continued pressure to NIM during 3Q24, management noted that shorter-duration wholesale borrowings and brokered CDs will reprice promptly in conjunction with the Fed rate cuts, which could provide margin expansion in 4Q24 and into 2025. Core deposit growth in 3Q24 was also solid, with an increase of $111 million (8% annualized).

If the current merger agreement is terminated and HomeStreet resumes independent operations, a rating review will take place. However, without a clear path toward profitability through loan sales, an increase in capital via a common equity raise, or a potential new merger partner, negative rating action could follow. Should a new merger application be submitted with FSUN, ratings for HMST would also be reviewed and would likely remain at current levels depending on the terms of the new deal.

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