The proposed merger between Denver-based FirstSun Capital Bancorp and Seattle-based HomeStreet needs further tweaks, the companies told investors Tuesday.
FirstSun and HomeStreet are “discussing the pursuit of an alternative regulatory structure” for the deal, as well as “terms on which they would terminate the merger agreement” if they can’t find one, the companies said.
The merger proposal has already undergone one major overhaul since it was announced in January. FirstSun said in April it would seek to obtain a Texas state charter rather than a national one – a move that would make it unnecessary to obtain the blessing of the Office of the Comptroller of the Currency. Sunflower Bank, the FirstSun subsidiary into which HomeStreet would merge, is based in Dallas.
“In our discussions with the OCC in Washington, it became obvious that we would not gain near-term approval given their recent experience with multifamily and [commercial real estate] positions,” FirstSun CEO Neal Arnold said on a conference call in April.
FirstSun said Tuesday the revamped deal has not yet received necessary approvals, based on discussions with the Federal Reserve and the Texas Department of Banking, either.
“We are disappointed in the process to date, but we remain hopeful that we will be able to continue productive discussions with regulators,” Arnold said in a statement Tuesday.
HomeStreet, meanwhile, appeared to distance itself slightly in the joint release.
“We are disappointed that the regulators are unwilling to grant the regulatory approvals necessary for the merger to proceed,” HomeStreet CEO Mark Mason said Tuesday. “Importantly, HomeStreet has been advised by its regulators that there were no regulatory concerns specifically related to HomeStreet that would have prevented approval of the merger.”
It wouldn’t be the first time HomeStreet has put itself at arm’s length from perceived issues with the transaction.
“Ours is a West Coast-based portfolio, which is significantly different from the East Coast, particularly relative to New York City,” Mason said in April, referring to commercial real estate.
Arnold, however, qualified the distinction. “Our belief is CRE is not the same across all categories and all geographies,” he said.
Among the changes FirstSun floated in its April revamp of the deal, HomeStreet investors would receive 0.3867 shares of FirstSun common stock for every HomeStreet share they own, or $13.53 per share. That’s down from January’s figure: 0.4345, or $14.75 per share.
FirstSun agreed to increase the amount it aimed to raise in equity – from $175 million to as much as $235 million – to support the deal. FirstSun also said it would issue $48.5 million in subordinated debt and channel that into Sunflower.
As part of the revamped deal, HomeStreet would sell or dispose of $300 million in CRE loans around the time the deal closes. That timeline, though, has also varied. The banks initially expected the transaction to close in mid-2024, then adjusted that in April to the end of the year.
FirstSun is hardly the first bank to retool a merger proposal based on the likelihood that certain regulators would approve it – or not.
New York Community Bank restructured to complete its acquisition of Flagstar in 2022, such that Flagstar would be the surviving entity, and the company would be regulated by the OCC rather than the Federal Deposit Insurance Corp.
The FDIC, at the time, had misgivings about NYCB’s CRE exposure. The OCC, however, gave the deal a green light, calling the charter change “a business decision.”
But the OCC’s approval of the Flagstar deal – and the bank’s subsequent acquisition of assets from the failed Signature Bank just months later – prompted Sens. Elizabeth Warren, D-MA, and Richard Blumenthal, D-CT, to accuse regulators of being “asleep at the wheel” regarding its merger approval process.
It’s entirely possible, then, that the regulators now evaluating a potential FirstSun-HomeStreet combination may have flagged some of the same issues the OCC did in its earlier look at the deal.
FirstSun has “worked tirelessly to obtain regulatory approval,” Arnold said Tuesday.
“We firmly believe the external environment and landscape regarding regulatory approvals for bank mergers of this nature has become more challenging,” he said. “We intend to continue to work with HomeStreet and our regulators on possible solutions that will also make sense for our shareholders.”
If the banks can’t find a solution, HomeStreet may see a short-term windfall in the form of a termination fee. For reference, Memphis, Tennessee-based First Horizon received $200 million from would-be acquirer TD, plus a $25 million reimbursement for fees associated with the failed deal, valued initially at $13.4 billion.
TD and First Horizon scrapped the deal in May 2023 over what the banks termed “uncertainty” as to a timeline for regulatory approval. TD, however, has since come under intense scrutiny for anti-money laundering deficiencies regulators found, resulting in $3 billion in penalties for the Canadian lender and an asset cap on its U.S. operations.