FirstSun Capital’s high-stakes merger of HomeStreet hits regulatory wall — What this means for CRE

In a major setback for the FirstSun Capital Bancorp and HomeStreet merger, FirstSun has announced it was unable to secure necessary regulatory approvals, leading the companies to explore alternative paths to complete the deal or potentially terminate it. Following consultations with both the Federal Reserve and the Texas Department of Banking, FirstSun and its subsidiary, Sunflower Bank, were advised to withdraw their initial merger application.

This merger, initially structured as an all-stock transaction valued at $286 million, encountered regulatory friction due to concerns over the companies’ combined exposure to commercial real estate (CRE) and changing market dynamics. Notably, the Office of the Comptroller of the Currency (OCC) raised apprehensions, particularly regarding FirstSun’s CRE concentration, prompting the bank to consider switching from a national to a state charter under the Federal Reserve’s supervision. The move aligns with FirstSun’s expanding presence in Texas, which it has pursued aggressively since entering the market in 2017.

Regulatory Hurdles Prompt Charter Change

The revised charter plan came after the OCC expressed concerns over FirstSun’s high CRE exposure, particularly within multifamily loans. FirstSun’s CEO Neal Arnold emphasized that the OCC’s cautious stance on CRE, especially multifamily projects, influenced the merger discussions, especially given FirstSun’s substantial holdings in this asset class. Regulatory sensitivity toward CRE, exacerbated by increasing interest rates and high urban vacancy rates, has pushed regulators to examine bank mergers closely, delaying FirstSun’s progress on its acquisition plans. This charter switch allows FirstSun to bypass OCC scrutiny and potentially obtain quicker approval from Texas regulators and the Federal Reserve, which Arnold indicated would be more attuned to the merger’s risk profile.

Financial Adjustments and Alternative Strategies

In a bid to address regulatory concerns, FirstSun amended its original merger terms, reducing the exchange ratio for HomeStreet shareholders and increasing its planned equity raise to approximately $235 million. HomeStreet also agreed to sell $300 million of its CRE portfolio, a significant adjustment aimed at alleviating regulators’ CRE concerns and solidifying the merger’s financial soundness. These strategic revisions, designed to smooth the regulatory pathway, have yet to yield the desired approval, leaving both companies exploring other potential regulatory structures.

Following the announcement, HomeStreet’s stock faced a sharp 28% decline, underscoring investor concerns over the viability of the merger. FirstSun’s share price, however, remained steady. Both Arnold and HomeStreet CEO Mark Mason expressed their continued commitment to finding a mutually acceptable resolution, though they acknowledged the potential for deal termination should alternative regulatory structures prove unworkable.

Industry Reaction and Outlook

The failed approval underscores a growing trend of regulatory caution toward bank consolidations involving significant CRE exposure, particularly within multifamily segments prone to market volatility. Financial analysts suggest that regulatory bodies are increasingly wary of banks with concentrated CRE portfolios due to economic shifts and heightened interest rates. This regulatory hesitancy signals a challenging climate for bank mergers, especially for institutions heavily vested in CRE, a sector facing uncertainties tied to the post-pandemic shift in office and multifamily property usage.

FirstSun and HomeStreet’s merger challenges highlight broader implications for future bank consolidations, as regulatory expectations continue to evolve with market conditions. Both companies remain engaged in discussions, yet this latest development indicates that significant restructuring may be necessary for FirstSun to meet regulatory expectations in any future merger or acquisition efforts.