Regulations Vault Lender Into Acquisition Deal

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Another small L.A. lender, tired of fighting an uphill battle against new regulations, decided it was time to hitch its wagon to a bigger horse.

Covina savings and loan Simplicity Bancorp Inc. announced last week that it has entered into an agreement to be purchased by Seattle thrift HomeStreet Inc. in an all-stock deal that would boost HomeStreet’s assets to $4.1 billion.

Dustin Luton, Simplicity’s chief executive, said he decided to seek an acquirer mainly because new regulatory requirements have made it prohibitively expensive to run a smaller bank.

On the other side, Mark Mason, HomeStreet’s chief executive, saw Simplicity’s strong balance sheet as a way to add needed capital to his company without diluting shareholders. He also said the size of the combined company makes the regulatory burden easier to handle – spreading costs out over a bigger business – and will make more products and services available to Simplicity’s existing customers.

“Scale isn’t just nice to have, it’s critical today,” Mason said. “We see what Dustin and his team have struggled with in complying with all of the additional requirements of being a bank today. The opportunities they have not been able to take, and the new lines of business they sorely need, would require substantial investment and time, and this transaction accelerates all of that.”

Merger mania

This is just the latest in a string of recent bank mergers in the L.A. area. Since Jan. 1, 2013, there have been six local banks acquired, with several more deals announced.

Most recently, prior to the Simplicity deal, CU Bancorp in Encino announced plans in July to buy downtown L.A.’s 1st Enterprise Bank in an all-stock deal that would boost CU Bancorp’s assets to about $2.2 billion.

One key motivator behind the recent merger activity has been new regulations that have made it harder and more expensive for smaller banks to be profitable. Big banks have the resources to hire an army of compliance attorneys and other specialists, but a community savings and loan, with a few hundred million in assets, does not.

Luton said Simplicity, with about $880 million in assets, has the same regulatory requirements as HomeStreet, which has $3.2 billion in assets. That’s why he sought a larger partner, and why he expects other banks around Simplicity’s size to continue to struggle if they go it alone.

“There’s honestly more work the smaller you are because you’ve got the same requirements as the bigger guys,” Luton said. “It’s going to make it very difficult for smaller organizations to be profitable and provide the services that customers just take for granted.”

Quick search

In March, Simplicity hired New York investment bank Keefe Bruyette & Woods to help find a buyer, and the firm quickly zeroed in on HomeStreet.

The Seattle firm had recently expanded its mortgage lending operations in Southern California, opening 18 home loan storefronts, but wanted a larger, full-service presence in the area. Mason saw Simplicity as a good match early on, attracted by the lender’s 60,000 retail deposit accounts and long relationship with health care giant Kaiser Permanente. Simplicity was known as Kaiser Federal Bank until 2012 and started in 1953 as Kaiser’s credit union.

What’s more, Mason said the two banks strengths and weaknesses lined up nicely.

“Simplicity needed a broader array of products and services – we brought that,” he said. “We needed an entry into Southern California and into strong markets – they had that. They’re currently somewhat overcapitalized; we’re growing so quickly we need more capital.”

Paul Miller, an analyst who covers HomeStreet for Arlington, Va., investment bank FBR & Co., said that Simplicity’s strong capital position made it an especially appetizing target. As HomeStreet has grown and issued more loans, the thrift has come up against new, stricter capital requirements.

Through the merger with Simplicity, HomeStreet will be able to add more capital relative to its liabilities without affecting existing shareholders, as would be the case if the company raised money on the stock market. That had been a concern when HomeStreet earlier this year filed registration papers for a potential stock issuance.

While better for them than a new capital raise, HomeStreet’s investors were lukewarm on the deal, with the company’s stock sliding 6 percent in the two days after the deal’s announcement and closing Oct. 1 at $16.67. Simplicity’s shares rose less than 1 percent over the same time period, closing Oct. 1 at $16.64.

Under terms of the acquisition, Simplicity shareholders will trade their stock for HomeStreet shares, one for one, though the ratio would be adjusted if HomeStreet’s stock price climbs above $20 or falls below $15.

Miller said that’s a good deal for HomeStreet and that the final price is likely to be below Simplicity’s book value, or it’s assets minus liabilities. Most recent bank deals have been priced above book value.

“All things aside, it was really price,” Miller said.

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