The planned merger between FirstSun Capital Bancorp and HomeStreet, Inc. has encountered significant obstacles, as regulators have refused to grant the necessary approvals. The Federal Reserve and the Texas Department of Banking have requested that FirstSun and its subsidiary, Sunflower Bank, withdraw their merger applications, throwing the deal into jeopardy. As a result, the merger faces a potential permanent halt without regulatory clearance. The delay is particularly noteworthy considering the previous smooth progress made by the companies. Both FirstSun and HomeStreet had secured shareholder approval in June and had revised the terms of the deal in April, increasing FirstSun’s equity capital commitment. Despite these efforts, the regulatory landscape has proven to be an insurmountable hurdle for the deal.
Regulatory Challenges
Increased Scrutiny in the Banking Sector
In recent months, the banking sector has faced increased scrutiny and tougher regulations, impacting merger approvals. This environment has been influenced by various industry developments, including heightened regulatory concerns following multiple high-profile bank failures earlier this year. Regulators are now more cautious, scrutinizing proposed deals with unprecedented rigor, particularly those involving significant financial adjustments or changes in control. This heightened scrutiny has led to the Federal Reserve and the Texas Department of Banking declining to approve the FirstSun-HomeStreet merger in its current structure. Despite the revisions made to the deal terms, which included increasing equity capital and adjusting the share exchange ratio, regulators remain unconvinced. FirstSun’s commitment to increase equity capital from $175 million to $235 million and HomeStreet’s share valuation adjustments, though significant, were not enough to alleviate regulatory concerns.
Efforts to Address Regulatory Concerns
Both FirstSun and HomeStreet have expressed a commitment to working closely with regulators to address these concerns and explore alternative structures to salvage the merger. Neal Arnold, CEO of FirstSun, expressed disappointment but remains hopeful that productive discussions with regulators could still secure the necessary approvals. Meanwhile, HomeStreet’s Chairman and CEO Mark Mason assured that no specific regulatory issues concerning HomeStreet were blocking the merger, emphasizing their willingness to navigate this challenge. This collaborative stance highlights an ongoing effort to find a path forward despite the current impasse. However, there is no guarantee that these discussions will lead to a successful resolution. If an alternative regulatory structure cannot be devised, the companies will have to negotiate the terms to terminate the merger agreement. In such an event, HomeStreet could potentially pursue another acquisition offer, though it would come with a $2.6 million termination fee payable to FirstSun.
Future Business Prospects
Strategic Adjustments and Financial Commitments
Should the merger proceed, FirstSun plans to transition Sunflower Bank from a national bank to a Texas state-chartered bank, applying for membership in the Federal Reserve System. Part of this strategic transition involves issuing $48.5 million in subordinated debt to boost Sunflower’s capital. These financial maneuvers aim to strengthen Sunflower Bank’s position and compliance with regulatory standards. Meanwhile, HomeStreet plans to sell or dispose of $300 million in commercial real estate loans to streamline its operations and align with the merger’s financial prerequisites. These strategic adjustments and financial commitments are crucial in demonstrating FirstSun and HomeStreet’s determination to align their business operations with regulatory expectations. The companies believe that by taking these steps, they can present a more robust and compliant merger proposition to the regulators. This proactive approach may serve as a testament to their long-term strategy and commitment to creating a stable and profitable banking entity through their combined resources.
Maintaining Focus on Core Operations
FirstSun and HomeStreet have committed to collaborating closely with regulators to tackle concerns and explore alternatives to save their merger despite the current deadlock. Neal Arnold, CEO of FirstSun, expressed his disappointment but remains optimistic that discussions with regulators could eventually secure the necessary approvals. HomeStreet’s Chairman and CEO, Mark Mason, stated that no specific regulatory issues regarding HomeStreet were hindering the merger and stressed their readiness to overcome this challenge. This cooperative approach underscores their effort to find a way forward despite the current impasse. However, success is not guaranteed. If an alternative regulatory structure cannot be devised, the companies will need to renegotiate the terms to terminate the merger agreement. Should this occur, HomeStreet might consider pursuing another acquisition offer, although it would incur a $2.6 million termination fee payable to FirstSun. This potential fee adds a financial dimension to the ongoing situation, influencing strategic decisions and highlighting the high stakes involved in the merger’s success or failure.
