425: FirstSun Capital Bancorp and HomeStreet Amend Merger Agreement, Increase Capital Raise

FirstSun Capital Bancorp and HomeStreet, Inc. have amended their merger agreement to increase equity capital raised, revise the exchange ratio, and modify regulatory approvals.

Summary

• FirstSun Capital Bancorp and HomeStreet, Inc. have amended their definitive merger agreement originally entered into on January 16, 2024.
• The amendment includes an increase in FirstSun's total equity capital raised by an additional $45 million to $60 million, bringing the aggregate capital raise to up to $235 million.
• The exchange ratio has been revised, with HomeStreet shareholders now receiving 0.3867 shares of FirstSun common stock for each HomeStreet share, 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 $2,600,000, plus reimbursement of FirstSun's transaction fees and expenses, if HomeStreet receives a competing acquisition proposal within 30 days after the effective date of the amendment.
• 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, with proceeds contributed to Sunflower Bank to support its 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 now include the approval of the Federal Reserve Board and the Texas Department of Banking, and the previous application with the OCC has been withdrawn.
• FirstSun has amended its investment agreements to increase the total equity capital raise to up to $235 million, with $80 million already issued to Wellington Management on January 17, 2024, and the remaining equity capital to be issued concurrently with the merger closing.
• The transaction is expected to close in late 2024.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the increased capital raise is a positive, the reduced exchange ratio and the need to dispose of commercial real estate loans introduce some concerns. The companies are working together to ensure a smooth integration, which is encouraging.

Positives

• Increased capital raise strengthens the pro forma company's balance sheet.
• Revised exchange ratio may be more favorable given current market conditions.
• Operating under a Texas state charter could provide regulatory advantages.
• Disposition of commercial real estate loans reduces risk exposure.
• The companies believe FirstSun is the right partner and are working well together to ensure an effective integration and a seamless conversion of systems.

Negatives

• Revised exchange ratio means HomeStreet shareholders will receive fewer shares of FirstSun.
• The need to dispose of $300 million in commercial real estate loans suggests potential concerns about that portfolio.
• The transaction is subject to regulatory and shareholder approvals, which introduces uncertainty.

Risks

• Failure to obtain necessary regulatory approvals or shareholder approval could prevent the merger.
• Integration of the two companies may be more difficult or costly than expected.
• Changes in economic conditions or interest rates could negatively impact the combined company.
• Potential adverse reactions from customers or employees could disrupt the business.
• Legal proceedings could delay or prevent the merger.

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 realizing synergies and growth opportunities.

Management Comments

• Neal Arnold, CEO of FirstSun and Sunflower Bank, expressed appreciation for the OCC and looks 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 a seamless conversion of systems.

Industry Context

The banking industry is currently experiencing increased merger activity as institutions seek to achieve economies of scale and navigate a complex regulatory environment. This merger reflects a trend of consolidation within the regional banking sector.

Comparison to Industry Standards

• The pro forma company's capital ratios are expected to be in line with or better than peers with assets between $15 and $30 billion.
• The CRE concentration ratio is being addressed through the disposition of $300 million in commercial real estate loans.
• The deal aims for 24%+ EPS accretion in 2025 and a ~2.8 year TBV earn back, which are competitive metrics compared to other recent bank mergers.

Stakeholder Impact

• Shareholders of HomeStreet will receive a revised exchange ratio of 0.3867 shares of FirstSun for each share of HomeStreet.
• Employees of both companies may experience uncertainty during the integration process.
• Customers of both banks will eventually be served by the combined entity under a Texas state charter.
• The combined company will aim to provide enhanced services and opportunities for its stakeholders.

Next Steps

• File merger and conversion applications with the Federal Reserve and Texas Department of Banking.
• Close the transaction, targeted for late 2024.
• Execute common equity capital raise, subordinated debt raise, and asset and wholesale funding reductions in conjunction with closing.
• Anticipate systems conversion and bank merger late in 2024 or early in 2025.
• Execute on business and financial plans and achieve synergy targets in 2025.

Key Dates