Columbia Law School
Sky Blog
The announcement by Denver-based FirstSun Capital Bancorp and Seattle-based HomeStreet, Inc. on October 29 that the Federal Reserve and the Texas Department of Banking had asked them to withdraw their applications for approval of their pending merger illustrates the potential pitfalls of the current regulatory environment for bank M&A. As we have previously written, there is a fracture among the federal bank regulators as to the merits of bank mergers. The Federal Reserve and the OCC are, at the moment, more receptive to bank mergers than the FDIC. The regulators have differing views on other matters as well. Relevant to the FirstSun – HomeStreet deal, the OCC has generally been more sensitive to commercial real estate exposures than the other two regulators.
FirstSun and HomeStreet announced their merger in January 2024. FirstSun, with approximately $7.8 billion in total assets, would acquire the larger HomeStreet, with approximately $9.5 billion, with the support of a $175 million capital raise. A portion of the capital raise was contingent on the closing of the merger, but a substantial portion ($80 million) was not, and was funded as permanent capital shortly after the announcement of the merger. According to the merger proxy, there were multiple bidders for HomeStreet, with one bidder proposing a higher cash purchase price than FirstSun’s all-stock bid. Although HomeStreet did not disclose its reasons for selecting FirstSun over the higher bidder, the merger proxy indicates that HomeStreet was focused on each bidder’s perceived ability to complete a transaction in a timely manner. The qualitative factors in accepting an all-stock bid over a higher cash bid can require complex and difficult judgments. In order to close the transaction as originally structured with FirstSun, the parties would need approval from the Federal Reserve and the OCC.
In the ensuing months, investors and regulators began to grow increasingly concerned about CRE concentrations in the banking industry, sparked in part by issues relating to New York Community Bancorp. On May 1, 2024, FirstSun and HomeStreet announced significant amendments to their merger agreement, including reducing the merger consideration payable to HomeStreet shareholders, increasing the size of the FirstSun capital raise, lowering the termination fee payable by HomeStreet in certain circumstances if it accepted another acquisition proposal, and most significantly, providing for the conversion of FirstSun’s subsidiary bank from a national bank to a Texas state chartered bank and a member of the Federal Reserve System immediately prior to the closing of the merger. By doing so, FirstSun would remove the need for OCC approval for the merger, and the parties would instead need approval from the Federal Reserve and Texas. FirstSun’s CEO’s remarks at the time are notable for their unusual level of detail about FirstSun’s regulatory discussions:
We believe the Fed and the State of Texas have a firm understanding of our business and the nature of our CRE risks. 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 other CRE positions. We believe their position also resided in the fact that they were not the primary regulator for HomeStreet. The Fed is taking a very different approach, in part due to the changes we have made to the transaction.
Abruptly, FirstSun and HomeStreet announced last week that, based on their discussions with the Federal Reserve and Texas, regulatory approvals necessary for the merger had not been obtained and FirstSun had been asked to withdraw its merger applications. In the joint press release, the CEOs of the two companies issued dissonant statements. FirstSun’s CEO sounded an optimistic note, pointing to the external environment and suggesting that the parties would keep trying to obtain regulatory approval:
We are disappointed in the process to date, but we remain hopeful that we will be able to continue productive discussions with regulators in order to obtain regulatory approval. While we have worked tirelessly to obtain regulatory approval, we firmly believe the external environment and landscape regarding regulatory approvals for bank mergers of this nature has become more challenging, particularly following industry news earlier this year.
In contrast, HomeStreet’s CEO stated with relative finality:
We are disappointed that the regulators are unwilling to grant the regulatory approvals necessary for the merger to proceed. 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.
Whether FirstSun and HomeStreet complete their merger remains to be seen. Their odyssey to date is a vivid illustration of the potential jeopardy of engaging in regulatory arbitrage once a transaction has been announced. Converting the charter of a bank to the optimal regulator can and should be a part of structuring a transaction pre-signing. However, doing so requires careful consultation with senior regulatory officials to obtain an appropriate level of comfort that the required regulatory approvals will be received on a timely basis. Once a transaction is announced, it becomes significantly more difficult to do so, and engaging in regulatory forum shopping midstream during the pendency of a transaction can backfire.
This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Regulatory Arbitrage Can Be a Risky Merger Strategy,” dated November 5, 2024.