FirstSun’s HomeStreet deal has ended. What happens now?

The rocky courtship between FirstSun Capital Bancorp and HomeStreet is officially over, as the companies sign an agreement that thwarts their attempted merger.

The companies had hoped they could get skeptical regulators to sign off on their $286 million deal. But canceling them is “in the best interests of their respective businesses,” the two banks said in separate securities filings on Tuesday. The cancellation also gives HomeStreet the freedom to pursue other options.

The split between Denver-based FirstSun and Seattle-based HomeStreet comes after state and federal regulators declined to sign off on the deal. Sensing a direction forward, the banks had said in late October they were investigatingan alternative regulatory structureThat would be more pleasant for government regulators.

FirstSun is “disappointed with the outcome” but is focused on growth in local markets, CEO Neal Arnold said in a statement Tuesday. Outside of Colorado, FirstSun and its banking subsidiary Sunflower Bank operate in markets including Texas and the Southwest.

“We are proud of our strong history of earnings performance and we remain as healthy and strong as ever,” said Arnold. “Furthermore, we remain well positioned to continue our strong performance and capitalize on growth opportunities in all attractive markets across our footprint.”

HomeStreet declined a request for comment.

Analysts say the cancellation of the deal means the real estate-rich HomeStreet is up for grabs for a new buyer. The company’s shares fell in 2023 on concerns that high interest rates are putting pressure on its multifamily loan portfolio, prompting the bank to sign a deal to be acquired.

In a joint press release last month, HomeStreet CEO Mark Mason said regulators told the bank there were “no regulatory concerns specifically related to HomeStreet that would prevent approval of the merger.”

The inclusion of that line could mean “new candidates could emerge” for HomeStreet, Wedbush Securities analyst David Chiaverini wrote in a note to clients this month. He noted the “significant buyer interest” HomeStreet received in its initial marketing of the sale.

The most likely scenario is that HomeStreet will find another buyer, Piper Sandler analyst Matthew Clark wrote in a note to clients, although he also questioned whether it can get the same level of interest and price as before.

Although bank stock prices have risen since the victory of newly elected President Donald Trump, This also applies to longer-term interest rates that underlie many commercial real estate loans. The latter could represent “some downside” to the prices potential bidders were looking at earlier this year, Clark wrote.

Still, selling HomeStreet to another bank might be preferable “as doing so on its own would likely require more expensive loan sales” and require some difficult decisions, Clark wrote.

The bank has outlined plans to sell about $800 million in multifamily loans as part of a broader effort to reduce the excessive concentration of commercial real estate.

But that amount does not appear to be enough, Clark wrote, emphasizing that it would only reduce its CRE concentration to 538% of its capital. While that would be lower than 620%, it remains well above the 300% threshold set by regulators in previous guidance. once again attracting interest among investors.

A more meaningful reduction could require HomeStreet to raise more capital and dilute existing shareholders, he wrote.

“We believe more loan sales are necessary and require a dilutive capital increase,” Clark wrote.

The two banks announced the deal in mid-January, touting it as an opportunity to create a “first regional bank” that does business in attractive U.S. markets. In addition to its home base in the Pacific Northwest, HomeStreet also operates in Southern California and Hawaii. FirstSun has a significant presence in the Southwest and its banking subsidiary Sunflower Bank is based in Dallas.

FirstSun was regulated by the Office of the Comptroller until this year, when the OCC sent signals that it would block HomeStreet’s purchase of the latter’s commercial real estate portfolio.

Because OCC approval is unlikely, FirstSun and HomeStreet changed their deal in April. A key part of the new merger strategy was for FirstSun to relinquish OCC oversight and instead become a state-chartered bank overseen by Texas regulators and the Federal Reserve.

But late last month the companies said they had not received regulatory approval after talks with the central bank and Texas regulators.

“We are disappointed with the process to date, but we remain hopeful that we can continue productive discussions with regulators to obtain regulatory approval,” Arnold said last month.

Arnold said the bank has “worked tirelessly to obtain regulatory approval,” but the process has “become more challenging” recently. Bankers have been hopeful that the return of the Trump administration will ease the problems bank mergers and acquisitions processespecially on relatively small deals that are unlikely to make big news.