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Street embraces Home BancShares' big M&A play in Florida

Analysts welcomed the acquisitive Home BancShares Inc.'s largest deal to date, a $778.4 million plan to buy coveted Stonegate Bank and, in doing so, bulk up substantially in Florida at a time when sizable M&A opportunities are increasingly scarce.

In announcing the stock-and-cash deal after markets closed March 27, Home Chairman John Allison labeled it "a game-changer" for the bank in Florida. He called Stonegate "a top-tier franchise with high profitability" and a target that provides "the perfect footprint to enhance Home's presence in Florida."

Pompano Beach, Fla.-based Stonegate, with about $3.1 billion in total assets, would give Conway, Ark.-based Home $2.5 billion in loans and $2.7 billion in deposits. That funding is spread across more than two dozen branches in what the buyer views as important growth markets in southern and western Florida, notably including Broward County, the second-most populous county in the state and where Home stands to gain No. 1 market share among community and small regional banks.

The combined bank will have about $13.5 billion in assets.

Should the deal close in the fourth quarter as planned, Florida will become Home's largest market, overtaking Arkansas. Stonegate's branches along the southeast and southwest coasts of Florida would complement Home's broader presence in the state, analysts said.

It would mark the ninth whole-bank deal for Home since 2012.

Stonegate is not only profitable, analysts said, but it boasts an enviable efficiency ratio of around 50% and consistently solid credit quality. It would provide Home with a loan mix that will bring down the buyer's commercial real estate concentration at a time when regulators are pushing for less reliance on CRE. Stonegate also is a proven acquirer itself, having closed five whole-bank deals since 2011. Its management team, led by President and CEO Dave Seleski, brings experience in both Florida and in closing deals, minimizing execution risk tied to the deal, analysts said. Seleski plans to join the combined bank in an executive role in Florida.

What is more, as Merion Capital Group analyst Joe Gladue noted, Stonegate is one of just nine publicly traded banks in the state with more than $1 billion in assets, and two of those banks — BankUnited Inc. and EverBank Financial Corp — are too large to be realistic targets for Home.

"So with Stonegate, there is clearly scarcity value," Gladue said in an interview.

Sandler O'Neill & Partners analyst Stephen Scouten echoed that thought. "It was the deal Home did not want to miss out on, and I really don't disagree with that thinking at all," he said in an interview. "I think this is a good move for them."

During morning activity in the first market session after Home announced its plan to buy Stonegate, shares of the buyer traded in a narrow range of slight gains and losses March 28, while shares of the seller climbed more than 3%.

To be sure, Home had to pay a full price to get Stonegate.

SNL valued the deal at 240.6% of tangible book. That is well above average. SNL data show that offers for bank and thrift targets in the Southeast region between March 27, 2016, and the same date this year averaged 146.10% of tangible book. But analysts noted that shares of both Stonegate and Home have risen in recent months amid a post-election rally, and that alone would push up the stock portion of the deal. They also said the target's scarcity value combined with its high performance made it more expensive to take out.

"You would expect to have to pay up," Gladue said. But he called the price fair, noting that Home has "the currency to do this deal without being dilutive."

Home said the deal would be accretive to both tangible book value and EPS. It will get help from branch consolidation opportunities that should drive cost savings. Home expects the deal to produce savings of at least 34%.

The deal also catapults Home over the important $10 billion level by more than $3 billion. While Home executives said they have long planned to cross that mark this year and were prepared to do so without a big acquisition, analysts said the heft provided by Stonegate will help Home as it pushes past the regulatory threshold. When crossing $10 billion, community lenders effectively become regional banks in the eyes of regulators. These banks face more scrutiny and stiffer rules on certain fronts. By surging past $10 billion with a deal instead of inching over it organically, banks can use their larger asset bases to spread out new costs and more easily absorb them, analysts say.

Home has "long been on a path to becoming a regional bank," Gladue said. "This clearly pushes them into that realm … and in a good way."