8-K: FirstSun and HomeStreet Amend Merger Agreement, Increase Capital Raise

FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement, increasing the total capital raise and adjusting the exchange ratio.

Summary

• FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement originally dated January 16, 2024.
• The amendment includes an increase in FirstSun's total equity capital raise from $175 million to up to $235 million.
• The exchange ratio has been reduced from 0.4345 to 0.3867 shares of FirstSun for each share of HomeStreet.
• HomeStreet's termination fee has been reduced to $2.6 million plus reimbursement of FirstSun's transaction fees under certain conditions.
• The bank merger structure has been changed so that Sunflower Bank will convert to a Texas state-chartered bank and HomeStreet Bank will merge into it.
• FirstSun will issue $48.5 million in subordinated debt.
• HomeStreet will dispose of approximately $300 million in commercial real estate loans.
• Additional investors will invest $45 million, bringing the total investment to $140 million, with a potential for an additional $15 million.
• The transaction is expected to close in the fourth quarter of 2024.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While the increased capital raise and strategic adjustments are positive, the reduced exchange ratio and the need to dispose of loans are concerning. The overall sentiment is cautiously optimistic, with some potential risks.

Positives

• The increased capital raise strengthens the pro forma balance sheet.
• The reduced termination fee provides HomeStreet with more flexibility.
• The change to a Texas state charter aligns with Sunflower Bank's headquarters in Dallas.
• The disposition of commercial real estate loans reduces risk.
• The revised exchange ratio reflects current market conditions.
• The subordinated debt issuance will further support Sunflower Bank's capital.

Negatives

• The reduced exchange ratio means HomeStreet shareholders will receive less stock in the combined entity.
• The need to dispose of $300 million in commercial real estate loans may result in losses.
• The merger is subject to regulatory approvals and shareholder votes, which could delay or prevent the transaction.

Risks

• The merger is subject to regulatory approvals and shareholder votes, which could delay or prevent the transaction.
• The integration of the two companies may be more difficult or costly than expected.
• There is a risk of potential litigation or regulatory action related to the transaction.
• The combined company may face challenges in retaining customers and employees.
• The transaction is subject to changes in the interest rate environment.
• The ability of FirstSun to obtain the necessary capital to support the transaction is not guaranteed.
• The failure of the closing conditions in the Merger Agreement could prevent the transaction.

Future Outlook

The transaction is expected to close in the fourth quarter of 2024, subject to regulatory and shareholder approvals. The combined company aims to achieve significant cost synergies and earnings accretion.

Management Comments

• Neal Arnold, CEO of FirstSun, stated they appreciate their long history with the OCC and look forward to working with the Texas Department of Banking and the Federal Reserve Bank of Dallas.
• Mark Mason, CEO of HomeStreet, stated they continue to believe FirstSun is the right partner and are working well with the FirstSun team to ensure an effective integration and a seamless conversion of systems.

Industry Context

This merger is occurring in a period of increased consolidation in the banking industry, driven by factors such as regulatory pressures, technological advancements, and the need for scale. The change in bank charter from a national bank to a Texas state-chartered bank reflects a strategic decision to align with the location of the combined company's headquarters.

Comparison to Industry Standards

• The pro forma combined company is expected to have a CET1 ratio of mid-9% at the holding company level and mid-10% at the bank level, which is comparable to other recent bank mergers.
• The CRE concentration ratio at closing is estimated to be 385%, which is higher than some peers but is being addressed through the planned loan disposition.
• The transaction is expected to be 24%+ EPS accretive in 2025, which is a strong result compared to other bank mergers.
• The tangible book value earn back is estimated to be around 2.8 years, which is a reasonable timeframe for a merger of this size.
• The pro forma valuation of 1.2x P/TBV is at a discount to peers in the $15-$30B range, which trade at 1.4x-1.8x.

Corporate Governance

Stakeholder Impact

• HomeStreet shareholders will receive a reduced number of shares in the combined entity due to the revised exchange ratio.
• FirstSun shareholders will benefit from the increased capital and potential synergies.
• Employees of both companies may experience uncertainty during the integration process.
• Customers of both banks will be impacted by the merger and the transition to a new bank charter.
• Creditors of both companies will be impacted by the merger and the changes to the balance sheet.

Next Steps

• File merger and conversion applications with the Federal Reserve and Texas Department of Banking.
• Close the transaction, targeted for late 2024.
• Execute the common equity capital raise, subordinated debt raise, and asset and wholesale funding reductions.
• Complete the systems conversion and bank merger, anticipated for late 2024 or early 2025.
• Achieve 100% of synergy targets in 2025.

Key Dates

Keywords

merger, acquisition, capital raise, exchange ratio, termination fee, regulatory approvals, subordinated debt, commercial real estate loans, bank charter, shareholders