Founded in 1921, HomeStreet Bank had weathered many storms, but the Federal Reserve’s move to raise interest rates in 2022 shook its foundations.
HomeStreet’s CEO, Mark Mason, had steered the bank through the aftermath of the Great Recession, but this time, the challenge was different.
As interest rates soared, HomeStreet’s strategy of aggressive lending backfired. The bank found itself in a “Great Asset-Liability Mismatch.”
The rates on the loans made by HomeStreet remained fixed, while the costs of borrowing surged, squeezing the net interest margin.
Despite Mason’s efforts to shift to variable-rate loans, the impact was too slow to counteract the effects of rising rates.
By the end of 2022, HomeStreet’s earnings plummeted by 71%, and by 2023, they turned negative, leading to a real need to explore alternatives.
FirstSun Capital Bancorp’s Lifeline:
In the face of adversity, FirstSun Capital Bancorp emerged as a potential savior. The Denver-based bank, riding a wave of expansion, made a strategic move to acquire HomeStreet.
FirstSun’s deep pockets and the compatibility of its variable-rate business loans portfolio made it a suitable match.
The all-stock deal, valued at around $286 million, reflects the relative worth of the banks. FirstSun shareholders will own the majority, while HomeStreet retains a share.
The acquisition provides HomeStreet with stability, and Mason will continue to lead the bank’s operations and serve as the executive vice chair of the new board.
WaFd Bank’s Resilience:
Meanwhile, WaFd Bank, founded in 1917, demonstrated resilience in the face of the interest rate chaos.
CEO Brent Beardall strategically shifted away from fixed-rate loans to variable-rate commercial loans as early as 2005.
WaFd’s diversified loan portfolio, with a reduced emphasis on sensitive assets like certificates of deposit, cushioned the impact of rising interest rates.
Despite a 26% dip in fourth-quarter earnings in 2023, WaFd outperformed the Dow Jones U.S. Select Regional Banks Index.
Recognizing an opportunity, WaFd seized the chance to acquire Luther Burbank Savings, a California-based bank struggling with fixed-rate residential loans.
WaFd’s Acquisition of Luther Burbank:
Luther Burbank Savings, with its traditional thrift structure, faced a stark decline in earnings as rates rose.
WaFd’s strategic move to acquire Luther Burbank in an all-stock deal valued at $654 million represents a significant bargain.
The acquisition not only compensates for the compressed margins of Luther Burbank but also provides WaFd with a foothold in California.
The deal aligns with WaFd’s goal of reaching the “sweet spot” for regional banks, achieving the scale for efficiency while maintaining personal relationships with customers.
The Human Element:
Beyond the financial intricacies, the mergers underscore the human stories within these banks.
For HomeStreet, the decision to explore alternatives was born out of a genuine desire to protect shareholders and employees.
Mason’s acknowledgment of the need for an alternative to “going alone through this low-margin period” reflects the emotional toll of tough decisions.
In WaFd’s case, the focus on being “the bank for almost everybody else” reflects a commitment to the community, even in the face of economic challenges.