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

FirstSun Capital Bancorp and HomeStreet, Inc. have announced an amendment to their definitive merger agreement to address the impact of higher interest rates and regulatory concerns over commercial real estate concentrations.

Summary

• FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement due to a more volatile banking environment.
• The primary factors influencing the amendment are rising interest rates and increased regulatory scrutiny of commercial real estate (CRE) concentrations.
• FirstSun will raise up to an additional $108 million in bank-level capital, including $60 million in common equity and $48 million in subordinated debt.
• The companies plan to reduce CRE exposure by approximately $300 million.
• They have identified an additional $7.5 million in pre-tax cost savings, bringing total cost savings to around 30%.
• The exchange ratio has been modified to 0.3867 shares of FirstSun for each HomeStreet share, reflecting an 11% reduction.
• The merger closing is now expected in late 2024 instead of summer 2024.
• FirstSun will pursue regulation by the Federal Reserve and the State of Texas Department of Banking instead of the OCC.
• The revised transaction is expected to result in mid-20s EPS accretion for 2025 and over 30% run-rate accretion with 140+ ROAs in 2026 and beyond.
• Wellington and a new investor group will own about 18% of the combined company at a price of $32.50 per share.

Sentiment

Score: 6

Explanation: While the companies maintain a positive outlook and emphasize the strategic benefits of the merger, the need for amendment, capital raise, and exchange ratio adjustment suggests underlying challenges and a less favorable environment than initially anticipated.

Positives

• The strategic rationale for the merger remains intact.
• The combined company is 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 strong with minimal charge-offs.
• The combined company is positioned for growth in attractive markets.
• The companies are nimble and have de-risked effectively.
• The combined rate sensitivity positions the company well for either rising or falling rates.
• The shareholder value creation thesis remains firmly intact.

Negatives

• The higher-for-longer rate environment has negatively impacted HomeStreet's near-term earnings contribution.
• The exchange ratio was modified to partially offset the earnings friction created by the higher-for-longer impact on HomeStreet's net interest income.
• There is more TBV dilution, although the earn back is still under three years.
• The merger closing is delayed from summer to late 2024.

Risks

• The volatile bank operating environment could present further challenges.
• Regulatory approval is not guaranteed, although the companies believe they have a pathway for approval with the Fed and the State of Texas.
• The successful integration of the two companies is critical to achieving the expected synergies and performance.
• The reduction in CRE exposure may impact earnings.
• The actual cost savings may differ from the estimated $7.5 million.

Future Outlook

The combined company is expected to deliver top-tier performance, with strong net interest margins, ROA, and return on common equity. They are positioned for growth and believe their shareholder value creation thesis remains intact.

Management Comments

• Neal Arnold: 'The strategic rationale and industrial logic remains fully intact.'
• Neal Arnold: 'We have not changed our perspective on our combined company's asset quality.'
• Mark Mason: 'Our view of the attractiveness of this merger remains intact.'
• Mark Mason: 'Our combined geographic reach, our product diversity and top-tier earnings power is well positioned for growth.'

Industry Context

The announcement comes amidst increased volatility in the banking sector, driven by rising interest rates and regulatory concerns over CRE concentrations. This has led to a re-evaluation of merger terms and strategies across the industry.

Comparison to Industry Standards

• The company trades at 6.3 times its revised 2025 EPS estimates, while peers are trading in the range of 10 to 12.
• The company trades at 1.18 times its pro forma fully diluted tangible book value, which is a meaningful discount to peers.
• The company's CRE to total risk-based capital ratio is better than many recently closed mergers and on its way to peer metrics as it gets toward the end of 2025.
• 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 from the capital raise.
• Employees will be affected by the integration process and potential cost savings initiatives.
• Customers may benefit from the combined company's expanded geographic reach and product diversity.
• The combined company aims to deliver exceptional financial benefits to its collective shareholders.

Next Steps

• Complete the capital raise of up to $108 million.
• Reduce CRE exposure by approximately $300 million.
• Obtain regulatory approval from the Federal Reserve and the State of Texas Department of Banking.
• Continue integration planning and system selection.
• Close the merger in late 2024.
• Achieve full integration in early 2025.

Key Dates