425: FirstSun and HomeStreet Amend Merger Agreement Amidst Volatile Banking Environment

FirstSun Capital Bancorp and HomeStreet, Inc. have announced an amendment to their merger agreement to address a more volatile bank operating environment, including rising interest rates and regulatory concerns over commercial real estate concentrations.

Summary

• FirstSun Capital Bancorp and HomeStreet, Inc. have adjusted their merger agreement due to a volatile banking environment.
• The changes include raising up to an additional $108 million in bank level capital, reducing CRE exposure by approximately $300 million, and modifying the exchange ratio.
• FirstSun will raise an additional $60 million in common equity and $48 million in subordinated debt.
• The companies have identified an additional $7.5 million in pre-tax cost savings, bringing the total to about 30%.
• The merger closing is now expected in late 2024 instead of summer 2024.
• The exchange ratio was modified to 0.3867 shares of FirstSun for each HomeStreet share, roughly an 11% reduction.
• FirstSun's 2025 forecast remains intact, while HomeStreet's earnings projections have been reforecasted lower due to the higher for longer rate environment.
• The pro forma bank will be primarily regulated by the Federal Reserve and the State of Texas Department of Banking.
• EPS accretion is expected to be slightly in excess of 24% for 2025 and over 30% for the near term run rate thereafter.
• The expected CRE to total risk-based capital ratio improves to about 385% at close and quickly heads towards 300% as we get through 2025 and into 2026.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive. While the merger faces challenges and requires adjustments, the companies express confidence in the strategic rationale, asset quality, and long-term performance of the combined entity. The additional capital raise and de-risking efforts are viewed favorably, but the delayed closing and reduced earnings projections temper the overall outlook.

Positives

• The strategic rationale for the merger remains intact.
• The combined company's asset quality is considered high.
• The merger is still expected to deliver high EPS accretion and top tier performance metrics.
• The pro forma bank will have a more fortified balance sheet with lower CRE concentration risk and higher capital levels.
• Additional cost savings of up to $7.5 million pre-tax have been identified.
• FirstSun has hired an experienced C&I team in Southern California expected to deliver material deposits and loans.
• HomeStreet's credit performance remains very strong with minimal charge offs.
• The combined company is positioned for growth in some of the best U.S. banking markets.
• The combined company is positioned for either rising or falling rates with the combined rate sensitivity of this institution.

Negatives

• HomeStreet has reforecast its earnings projections, resulting in a lower near-term earnings contribution to the pro forma.
• The higher for longer rate environment has put HomeStreet's earnings recovery one year behind what was anticipated.
• There is more TBV dilution, although the earn back is still under three years.
• The merger closing has been delayed from summer to late 2024.
• The exchange ratio was modified to 0.3867 shares of FirstSun for each HomeStreet share, roughly an 11% reduction.

Risks

• Expected cost savings and synergies from the merger may not be realized within the expected time frames or at all.
• Integration matters could be more costly or difficult than expected.
• HomeStreet shareholders may not approve the merger.
• Required governmental and regulatory approvals of the merger may not be obtained when expected or at all.
• FirstSun may not be able to consummate their investment agreements to obtain the necessary capital to support the transaction.
• Closing conditions in the merger agreement may not be satisfied, or there may be unexpected delays in closing the merger.
• The diversion of management's attention from ongoing business operations and opportunities.
• Potential adverse reactions or changes to business or employee relationships.
• The outcome of any legal proceedings that have been or may be instituted against FirstSun or HomeStreet.

Future Outlook

The combined company aims to deliver top-tier performance with superb net interest margin, ROA, and return on common equity, positioning itself for growth and attracting clients and talent.

Management Comments

• Neal Arnold: 'The strategic rationale and industrial logic remains fully intact.'
• Neal Arnold: 'We are planning on delivering high EPS accretion and top tier performance metrics.'
• Mark Mason: 'Our combined geographic reach, our product diversity and top-tier earnings power is well positioned for growth.'
• Mark Mason: 'Our very complementary rate risk, product offerings and credit cultures actually improve our individual risk profiles, making the combined company that much stronger.'

Industry Context

The announcement reflects the challenges faced by regional banks in a rising interest rate environment and increased regulatory scrutiny of CRE portfolios, particularly multifamily loans. The merger aims to create a stronger, more diversified institution capable of navigating these challenges.

Comparison to Industry Standards

• The document mentions that the combined company's CRE to total risk-based capital ratio will improve to about 385% at close, heading towards 300% by 2026, which is better than many recently closed mergers.
• The document states that exclusive of multifamily, the CRE to total risk-based capital ratio would be about 135%, which is well below recent deals and well below the peer group set who have much higher ratios.
• The document states that the company trades at 6.3 times its revised 2025 EPS estimates, while peers are trading in the range of 10 to 12.
• The document states that the company trades at 1.18 times its pro forma fully diluted tangible book value, which is a meaningful discount to peers.
• The document states that the company's AOCI is only roughly 3.4% of GAAP equity, while peers are nearly 11%, indicating much less TCE volatility.

Stakeholder Impact

• Shareholders will experience a modified exchange ratio and potential dilution, but are expected to benefit from long-term value creation.
• Employees face potential changes due to integration and cost-saving measures.
• Customers can expect a broader range of products and services from the combined company.
• The merger aims to create a stronger institution that can better serve its communities and stakeholders.

Next Steps

• FirstSun and HomeStreet will continue working on integration planning and system selection and conversions.
• FirstSun will proceed with an application to have the pro forma bank primarily regulated by the Federal Reserve and the State of Texas Department of Banking.
• FirstSun will market and secure the $48 million in subordinated debt closer to the closing date.
• The companies will work to obtain the necessary regulatory and shareholder approvals for the merger.
• FirstSun will continue to monitor the risk and the rate involved in the HomeStreet portfolio.

Key Dates