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

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

Summary

• HomeStreet and FirstSun have amended their merger agreement, initially dated January 16, 2024.
• FirstSun will increase its total equity capital raised in connection with the merger from $175 million 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.
• This represents a value of $13.53 per HomeStreet share, based on FirstSun's closing price on April 29, 2024.
• The termination fee payable by HomeStreet under 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 Federal Reserve System membership.
• FirstSun will issue $48.5 million of subordinated debt concurrently with the closing, contributing the proceeds to Sunflower Bank.
• HomeStreet will dispose of approximately $300 million of its Commercial Real Estate loans upon or shortly after the merger's closing.
• The transaction is expected to close in late 2024, pending regulatory and shareholder approvals.
• FirstSun also announced that it has amended its investment agreements with investors to raise capital to support the merger, led by Wellington Management, to increase the total equity capital raise from an aggregate of $175 million to up to $235 million, $80 million of which was issued to Wellington on January 17, 2024, immediately following the initial merger agreement announcement.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the revised terms are less favorable for HomeStreet shareholders, the increased capital raise and strategic adjustments are presented as beneficial for the combined entity's long-term prospects.

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.
• Disposing of commercial real estate loans reduces concentration risk.

Negatives

• The revised exchange ratio results in a lower value per share for HomeStreet shareholders compared to the original agreement.
• The need for additional capital raise may indicate underlying financial pressures or a less favorable outlook than initially anticipated.

Risks

• Failure to obtain necessary regulatory approvals or HomeStreet shareholder approval.
• Potential for adverse reactions from business or employee relationships.
• Outcome of any legal proceedings against FirstSun or HomeStreet.
• 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.

Management Comments

• Neal Arnold, CEO of FirstSun and Sunflower Bank, stated, 'We greatly appreciate the long history we have had with the OCC, including the supervisory staff in our local markets who have been great partners over the years, and we look forward to working with the Texas Department of Banking and the Federal Reserve Bank of Dallas as we continue to grow our presence in the State of Texas.'
• Mark Mason, CEO of HomeStreet and HomeStreet Bank, stated, 'We continue to believe FirstSun is the right partner and we are working well with the FirstSun team to remain focused on ensuring an effective integration and a 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 in the banking sector.

Comparison to Industry Standards

• The increased capital raise aligns with the industry trend of fortifying balance sheets in the face of economic uncertainty.
• The shift to a Texas state charter is a strategic decision based on the location of Sunflower Bank's headquarters, similar to other banks choosing charters that best suit their operational footprint.
• The CRE loan disposition is a proactive measure to manage concentration risk, a common concern for banks with significant CRE exposure.

Stakeholder Impact

• HomeStreet shareholders will receive a revised exchange ratio, resulting in a different value for their shares.
• 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 aims to create a stronger financial institution, benefiting shareholders and customers in the long term.

Next Steps

• Obtain HomeStreet shareholder approval.
• Obtain regulatory approvals from the Federal Reserve Board and the Texas Department of Banking.
• Close the merger transaction.
• Complete FirstSun's equity capital raise.
• Issue subordinated debt.
• Dispose of HomeStreet's commercial real estate loans.
• Convert Sunflower Bank to a Texas state-chartered bank.
• Integrate HomeStreet Bank into Sunflower Bank.

Key Dates