After the regional bank and FirstSun Capital Bancorp (FSUN, Financial) were instructed by authorities to withdraw their merger proposal, HomeStreet Inc. (HMST, Financial) saw its shares tumbling 33% late Wednesday morning. Citing issues with the banks' commercial real estate (CRE) approach, Janney analyst Timothy Coffey responded to the development by demoting HomeStreet to a Neutral rating.
Coffey pointed out that the merger agreement is still under active discussion, and the banks could resubmit their application notwithstanding the setback. He noted that a bigger loan sale could be needed to handle regulatory issues since authorities were probably not impressed with HomeStreet's proposal to sell $300 million in CRE loans from its portfolio. The diverse portfolio of HomeStreet made up for 490% of its risk-based capital as of the second quarter.
"If HMST remains independent, a substantial expense reduction strategy would be necessary," Coffey said, pointing out the lender's quarterly noninterest expenses were at +150% of net interest revenue.
Reflecting investor concerns over the bank's future strategy and regulatory scrutiny of its merger intentions, HomeStreet traded noticeably lower.
