425: FirstSun and HomeStreet Amend Merger Agreement, Increase Capital Raise to $235 Million

FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement, increasing the total equity capital raise to $235 million and revising the exchange ratio.

Summary

• FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement.
• The amendment includes an increase in FirstSun's total equity capital raised by $45 million to $60 million, bringing the aggregate capital raise to $235 million.
• The exchange ratio has been revised to 0.3867 shares of FirstSun common stock for each share of HomeStreet common stock, representing a value of $13.53 per share based on FirstSun's closing price on April 29, 2024.
• The termination fee payable by HomeStreet in certain circumstances has been reduced to $2.6 million, plus reimbursement of FirstSun's transaction fees and expenses.
• The combined company's banking operations will operate under a Texas state charter, with Sunflower Bank converting from a national bank to a Texas state chartered bank and seeking membership in the Federal Reserve System.
• FirstSun will issue $48.5 million of subordinated debt concurrently with the closing, contributing the proceeds to Sunflower Bank's capital.
• HomeStreet will dispose of approximately $300 million of its Commercial Real Estate loans upon or soon after the merger's closing.
• The necessary bank regulatory approvals are now the approval of the Federal Reserve Board and the Texas Department of Banking.
• FirstSun has amended its investment agreements to increase the total equity capital raise to up to $235 million, with $80 million already issued on January 17, 2024.
• The remaining equity capital of up to $155 million will be issued concurrently with the merger closing.
• The transaction is expected to close in late 2024.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook, highlighting the benefits of the amended merger agreement and the increased capital raise. While there are risks and challenges, the overall tone is optimistic and focused on the long-term value creation potential of the combined company.

Positives

• Increased capital raise strengthens the pro forma company's balance sheet.
• Revised exchange ratio reflects current market conditions.
• Reduced termination fee provides HomeStreet with more flexibility.
• Texas state charter aligns with Sunflower Bank's headquarters in Dallas.
• Subordinated debt issuance further supports Sunflower Bank's capital.
• Disposition of commercial real estate loans reduces concentration risk.
• The deal is expected to be 24%+ EPS accretive in 2025.
• The deal is expected to have a ~2.8 year TBV earn back.
• The deal is expected to have a 25%+ IRR.
• The pro forma ROAA in 2025 is expected to be 1.3%.

Negatives

• Revised exchange ratio reduces the value received by HomeStreet shareholders compared to the original agreement.
• Disposition of commercial real estate loans may result in losses.
• The deal is expected to have a ~(14%) Fully Loaded TBV Dilution.

Risks

• Failure to obtain necessary regulatory approvals.
• Failure of HomeStreet to obtain shareholder approval.
• Failure to satisfy closing conditions.
• Potential difficulties in integrating the two companies.
• Adverse reactions from business or employee relationships.
• Outcome of legal proceedings.
• Changes in asset quality and credit risk.
• Inability to sustain revenue and earnings growth.
• Changes in interest rates and capital markets.
• Inflation.
• Customer borrowing, repayment, investment and deposit practices.
• Impact, extent and timing of technological changes.
• Capital management activities.
• Actions of the Federal Reserve Board and legislative and regulatory actions and reforms.

Future Outlook

The transaction is expected to close in late 2024, subject to regulatory and shareholder approvals and other customary closing conditions. The combined company anticipates significant financial benefits and upside for both sets of shareholders.

Management Comments

• Neal Arnold, CEO of FirstSun and Sunflower Bank, expressed appreciation for the OCC and looked forward to working with the Texas Department of Banking and the Federal Reserve Bank of Dallas.
• Mark Mason, CEO of HomeStreet and HomeStreet Bank, stated that they continue to believe FirstSun is the right partner and are focused on ensuring an effective integration and seamless conversion of systems.

Industry Context

The amendment reflects adjustments to the original merger agreement in response to changing market conditions, including interest rate volatility and regulatory considerations. The shift to a Texas state charter aligns with Sunflower Bank's headquarters and may offer certain regulatory advantages.

Comparison to Industry Standards

• The pro forma company's capital ratios are in line with recently closed M&A deals and peers.
• The pro forma company's CRE concentration is higher than peers but is being addressed through the disposition of $300 million in commercial real estate loans.
• The deal's EPS accretion, TBV earn back, and IRR are compelling compared to other bank mergers.
• The company is trading at a valuation discount vs. $15 $30B Peers, 1.2x P/TBV vs. Peer range of 1.4x 1.8x and 6.3x 2025 P/E vs. Peer range of 10.3x 11.7x.

Stakeholder Impact

• HomeStreet shareholders will receive a revised exchange ratio of 0.3867 shares of FirstSun common stock for each share of HomeStreet common stock.
• Employees of both companies may experience changes as a result of the integration.
• Customers of both banks will eventually be served by the combined entity.
• The combined company will be better positioned to serve its customers and compete in the market.

Next Steps

• Obtain regulatory approvals from the Federal Reserve Board and the Texas Department of Banking.
• Obtain shareholder approval from HomeStreet shareholders.
• Satisfy other customary closing conditions.
• Close the merger in late 2024.
• Issue the remaining equity capital of up to $155 million.
• Issue $48.5 million of subordinated debt.
• Dispose of approximately $300 million of HomeStreet's Commercial Real Estate loans.
• File merger and conversion applications with the Federal Reserve and Texas Department of Banking in mid to late May.
• Execute in conjunction with closing: common equity capital raise, subordinated debt raise, and asset and wholesale funding reductions.
• Anticipated systems conversion and bank merger late in 2024 or early in 2025.
• Execute on business and financial plans; 100% of synergy targets expected to be achieved in 2025.

Key Dates