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Item 1A. Risk Factors

2025-05-08 compared with 2024-11-08 · 80 added, 44 removed, 8 unchanged (94% of the section changed)

ITEM 1A RISK FACTORS

Refer to Item 1A of Part I of our 2023 Annual Report on Form 10-K,” Item 1A of Part II of our First Quarter 2024 Form 10-Q, and our definitive proxy statement for our shareholder meeting on June 16, 2024 filed with the SEC on May 16, 2024 (the “2024 Proxy Statement”) for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.

The following risk factors relate to and update certain risks described in these filings.

Regulatory approvals may not be received, have taken longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

On October 29, 2024, we and FirstSun announced that, based on discussions FirstSun and its subsidiary, Sunflower Bank, have had with the Federal Reserve and the Texas Department of Banking, that regulatory approvals necessary for the Merger to proceed have not been obtained and FirstSun and Sunflower Bank have been asked to withdraw their merger applications.

We and FirstSun are discussing the pursuit of an alternative regulatory structure for the Merger.

We and FirstSun are also discussing terms on which the merger agreement would be terminated if no alternative structure is feasible.

There can be no assurance that an alternative regulatory structure may ultimately be feasible.

Under the Merger Agreement, the parties are not obligated to complete the Merger should any required regulatory approval contain any condition or restriction that would reasonably be expected to have a “material adverse effect” (as defined in the Merger Agreement) on the surviving entity in the Merger and its subsidiaries, taken as a whole, after giving effect to the Merger and the related merger of HomeStreet Bank into a wholly owned subsidiary of FirstSun.

Shareholder litigation could prevent or delay the completion of the Merger or otherwise negatively impact the business and operations of FirstSun and the Company.

On April 11, 2024, a putative shareholder of the Company filed a complaint against the Company and the Company’s Board of Directors in the U.S.

District Court for the Southern District of New York (the “Complaint”), alleging, among other things, that the proxy statement/prospectus filed with the SEC on March 8, 2024 in connection with the Merger was materially incomplete and misleading.

The Complaint seeks remedies, including an injunction enjoining the Merger and rescission or rescissory damages in the event the Merger contemplated by the Merger Agreement is consummated.

For more information, see Part II, Item 1 Legal Proceedings in this Quarterly Report on Form 10-Q.

One of the conditions to the closing is that there must be no order, injunction or decree issued by any court or governmental entity of competent jurisdiction or other legal restraint preventing the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement.

If any plaintiff were successful in obtaining an injunction prohibiting FirstSun or the Company from completing the Merger or any of the other transactions contemplated by the Merger Agreement, then such injunction may delay or prevent the effectiveness of the Merger and could result in significant costs to FirstSun or the Company, including any cost associated with the indemnification of directors and officers of each company.

FirstSun and the Company may incur additional costs in connection with the defense or settlement of any stockholder or shareholder lawsuits filed in connection with the Merger.

Such litigation could have an adverse effect on the financial condition and results of operations of FirstSun and the Company and could prevent or delay the completion of the Merger.

Refer to Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2024 for a discussion of factors that could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position.

There have been no material changes in our risk factors from those described in our 2024 Annual Report on Form 10-K, other than the risk factors set forth below.

Risks Related to the Merger

The pendency of the Merger could adversely affect our business, results of operations and financial condition.

The pendency of the Merger could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the proposed Merger is completed.

In particular, we could potentially lose additional important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the Merger.

We could also potentially lose additional customers or suppliers, and business relationships with new customers or supplier contracts could be delayed or decreased.

In addition, we have allocated, and will continue to allocate, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

We are subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell or transfer our assets, and amend our organizational documents.

These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities, retain key employees and may otherwise harm our business, results of operations and financial condition.

Because of the risks associated with the Merger, we can provide no assurance that the Merger will close on the terms and conditions we currently anticipate.

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

Before the Merger may be completed, various consents, approvals, waiver or non-objections must be obtained from state and federal governmental authorities, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”), the California Department of Financial Protection and Innovation (“DFPI”),the Director of the State of Washington Department of Financial Institutions, and certain applications or notices must be filed with the Oregon Department of Consumer and Business Services (the “ODCBS”) and the Hawaii Department of Commerce and Consumer Affairs (the “HDCCA”) with respect to Mechanics Bank maintaining the existing HomeStreet Bank offices in such states.

These approvals could be delayed or not obtained at all, including due to an adverse development in either party’s regulatory standing or in any other factors considered by regulators when granting such approvals;

governmental, political or community group inquires, investigations or opposition;

or changes in legislation or the political environment generally.

Some recent transactions comparable to the Merger have encountered lengthy delays, and the Merger may be subject to similar delays in obtaining its required approvals.

The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the Merger agreement.

There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the Merger Agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the Merger or otherwise reducing the anticipated benefits of the Merger if the Merger were consummated successfully within the expected time frame.

In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Merger, as Mechanics Bank and its affiliates are not required (and without the consent of Mechanics Bank, HomeStreet and its subsidiaries are not permitted) to take, or agree to take, any action or agree to any condition or restriction in connection with obtaining the required permits, authorizations, consents, orders or approvals of governmental entities that would reasonably be expected to have, either individually or in the aggregate, a material adverse effect (as defined in the Merger Agreement) on HomeStreet and its subsidiaries, taken as a whole, after giving effect to the Merger (a “material burdensome condition”).

Additionally, the completion of the Merger is conditioned on the absence of certain orders, injunctions or decrees by any court or governmental entity of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the Merger Agreement.

The Merger Agreement and the transactions contemplated by the Merger Agreement are subject to approval by shareholders of the Company.

The Merger cannot be completed unless, among other conditions, the Merger Agreement and the transactions contemplated by the Merger Agreement are approved by the affirmative vote of a majority of the outstanding shares of the Company’s common stock entitled to vote thereon (the “Requisite Company Vote”).

If the Company’s shareholders do not approve the Merger and related transactions by the Requisite Company Vote, the Merger cannot be completed.

Combining the Company and Mechanics Bank may be more difficult, costly, or time-consuming than expected, and the combined company may fail to realize the anticipated benefits of the Merger.

The success of the Merger will depend, in part, on the ability to realize the anticipated cost savings from combining the businesses of the Company and Mechanics Bank.

To realize the anticipated benefits and cost savings from the Merger, the Company and Mechanics Bank must successfully integrate and combine their businesses in a manner that permits those cost savings to be realized without adversely affecting current revenues and future growth.

If the Company and Mechanics Bank are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected.

In addition, the actual cost savings of the Merger could be less than anticipated, and integration may result in additional and unforeseen expenses.

An inability to realize the full extent of the anticipated benefits of the Merger and the other transactions contemplated by the Merger Agreement, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the combined company following the completion of the Merger, which may adversely affect the value of the common stock of the combined company following the completion of the Merger.

The Company and Mechanics Bank have operated and, until the completion of the Merger, must continue to operate independently.

It is possible that the integration process could result in the loss of key employees, the disruption of the Company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the Company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger.

In addition, the loss of key employees could adversely affect the Company’s ability to successfully conduct its business, which could have an adverse effect on the Company’s financial results and the value of the Company’s common stock.

Integration efforts between the companies may also divert management attention and resources.

Failure to complete the Merger could negatively impact the Company.

If the Merger is not completed for any reason, including as a result of the Company’s shareholders’ failure to approve the HomeStreet articles amendment proposal or the HomeStreet share issuance proposal or Mechanics Bank shareholders’ failure to approve the Merger proposal by written consent, there may be various adverse consequences and the Company may experience negative reactions from the financial markets and from its customers and employees.

For example, the ongoing business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger.

Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could decline, including to the extent that the current market prices reflect a market presumption that the Merger will be completed.

The Company or Mechanics Bank could also be subject to litigation related to any failure to complete the Merger, including litigation seeking to force the Company and/or Mechanics Bank to perform their respective obligations under the Merger Agreement.

If the Merger Agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $10 million to Mechanics Bank.

In addition, the Company has incurred and will incur substantial expenses in connection with the completion of the transactions contemplated by the Merger Agreement, as well as the costs and expenses of preparing, filing, printing and mailing the proxy statement/prospectus/consent solicitation statement, and all filing and other fees paid in connection with the Merger.

If the Merger is not completed, the Company would have to pay these expenses without realizing the expected benefits of the Merger.

Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Merger, including the diversion of management’s attention from pursuing other opportunities and the constraints in the Merger Agreement on the ability to make significant changes to the Company’s ongoing business during the pendency of the Merger, could have a material adverse effect on the Company’s businesses, financial conditions and results of operations.

Additionally, the Company’s business may be adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger.

If the Merger Agreement is terminated and the Company’s board of directors seeks another merger or business combination, the

Company’s shareholders cannot be certain that the Company will be able to find a party willing to engage in a transaction on more attractive terms than the proposed Merger.

Issuance of shares of common stock to Mechanics Bank shareholders in connection with the Merger may adversely affect the market price of the Company’s common stock.

The Merger is structured as a reverse merger whereby the existing shareholders of Mechanics Bank will receive common stock in the Company in exchange for their Mechanics Bank shares.

Upon completion of the Merger, the Company will be renamed Mechanics Bancorp and remain a publicly traded company and the Company will issue approximately 202 million shares of common stock to Mechanics Bank shareholders.

The issuance of these new shares of the Company’s common stock may result in fluctuations in the market price of the Company’s common stock, including a stock price decrease, including as a result of the dilution caused by such issuance.

In connection with the Merger, the Company’s outstanding debt obligations under its indentures will remain outstanding, and the combined company’s level of indebtedness following the completion of the Merger could adversely affect the combined company’s ability to raise additional capital or to meet its obligations.

In connection with the Merger the Company’s outstanding debt obligations under the indentures will remain outstanding.

This debt, together with any future incurrence of additional indebtedness, could have important consequences for the combined company’s creditors and the combined company’s shareholders.

For example, it could:

• limit the combined company’s ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;

• restrict the combined company from making strategic acquisitions or cause the combined company to make non-strategic divestitures;

• restrict the combined company from paying dividends to its shareholders;

• increase the combined company’s vulnerability to general economic and industry conditions; and

• require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on the combined company’s indebtedness, thereby reducing the combined company’s ability to use cash flows to fund its operations, capital expenditures and future business opportunities.

The announcement of the proposed Merger could disrupt the Company’s relationships with its customers, suppliers, business partners and others, as well as its operating results and businesses generally.

Whether or not the Merger is ultimately consummated, as a result of uncertainty related to the proposed transactions, risks relating to the impact of the announcement of the Merger on the Company’s businesses include the following:

• its employees may experience uncertainty about their future roles, which might adversely affect the Company’s ability to retain and hire key personnel and other employees;

• customers, suppliers, business partners and other parties with which the Company maintain business relationships may experience uncertainty about the Company's future and seek alternative relationships with third parties, seek to alter their business relationships with the Company or fail to extend an existing relationship with the Company;

• The Company has expended and will continue to expend significant costs, fees and expenses for professional services and transaction costs in connection with the proposed Merger.

If any of the aforementioned risks were to materialize, they could lead to significant costs or lost opportunities which may impact the Company's results of operations and financial condition.

The Merger Agreement limits the Company’s ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire the Company.

The Merger Agreement contains “no shop” covenants that restrict the Company’s ability to, directly or indirectly, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to the exercise of fiduciary duties by the Company’s board of directors, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any alternative acquisition proposal.

These provisions, which include a $10 million termination fee payable by the Company under certain circumstances, may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition.

In addition, the terms of the Merger Agreement limit the ability of the Company to pursue alternative business opportunities, including sales or transfers of multifamily loans or other assets, or make changes to its business pending the completion of the Merger and other restrictions on the Company’s ability to conduct its business.

We are subject to business uncertainties and contractual restrictions while the Merger is pending that could harm our business relationships, financial condition and results of operations.

During the period prior to the closing of the Merger and pursuant to the terms of the Merger Agreement, our business is exposed to certain inherent risks and contractual restrictions that could harm our business relationships, financial condition, results of operations, and business, including:

• potential uncertainty in the market for our banking products and services, which could lead to the loss of customers or cause customers to remove their accounts from the Company and move their business to competing financial institutions;

• difficulties maintaining existing and establishing new business relationships with customers, associates and other business partners;

• disruption to our business and operations, including diversion of management attention and resources;

• the inability to attract and retain key personnel and recruit prospective employees, and the possibility that our current employees could be distracted, and their productivity decline as a result, due to uncertainty regarding the Merger;

• the inability to pursue alternative business opportunities or make changes to our business pending the completion of the Merger and other restrictions on our ability to conduct our business;

• our inability to freely issue securities, incur certain indebtedness, declare or authorize dividends or distributions or make certain material capital expenditures without FirstSun’s approval;

• our inability to solicit other acquisition proposals during the pendency of the Merger under the terms of the Merger Agreement;

• the costs, fees, expenses and charges related to the Merger Agreement and the Merger, including but not limited to the cost of professional services, insurance, regulatory compliance and litigation;

• other developments beyond our control, including, but not limited to, changes in U.S.

or global economic conditions that may affect the timing or success of the Merger.

If any of these effects were to occur, it could adversely impact our business, cash flow, results of operations or financial condition, as well as the market price of our common stock and our perceived value, regardless of whether the Merger is completed.

The Company may need to initiate litigation against FirstSun to seek judicial relief from the Merger Agreement if the parties are unable to reach agreement on an alternative regulatory structure for the Merger or a mutual termination of the Merger Agreement if no alternative structure is deemed feasible.

On October 29, 2024, FirstSun and the Company announced that based on discussions with the Federal Reserve and the Texas Department of Banking, regulatory approvals necessary for the Merger to proceed have not been obtained and FirstSun and Sunflower Bank have been asked to withdraw their merger applications.

FirstSun and the Company are discussing the pursuit of an alternative regulatory structure for the Merger.

The parties are also discussing terms on which they would terminate the Merger Agreement if no alternative regulatory structure is deemed feasible.

There can be no assurance that an alternative regulatory structure may ultimately be feasible.

If the Company and FirstSun are unable to agree that an alternative regulatory structure is feasible, or upon terms on which a mutual termination of the Merger Agreement would be acceptable, the Company may need to initiate litigation against FirstSun to seek judicial relief from the Merger Agreement.

Litigation is subject to inherent risk, and therefore, the Company’s success as to the outcome of any litigation cannot be guaranteed.

Any litigation could also result in substantial costs to the Company, including litigation costs and potential settlement costs, and disruption to the Company’s business and operations, including diversion of management attention and resources.

The pursuit of any judicial relief or the settlement, or failure to reach a settlement, for any claims may result in negative media attention, and may adversely affect our business, financial condition, results of operations and market price of our common stock.

The Merger Agreement contains “no shop” covenants that restrict the Company’s ability to, directly or indirectly, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any alternative acquisition proposals, subject to certain exceptions.

These provisions, in addition to a $10 million termination fee payable by the Company under certain circumstances, may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of the Company from considering or making that acquisition proposal.

Holders of Company common stock will have a substantially reduced ownership and voting interest in the combined company after the consummation of the Merger.

Shareholders of the Company currently have the right to vote in the election of the board of directors and on other matters affecting the Company.

When the Merger is completed, each Company shareholder will become a shareholder of the combined company, with a percentage ownership of the shares of common stock of the combined company that is substantially smaller than the holder’s percentage ownership in the Company’s common stock individually prior to the consummation of the Merger.

The current Company shareholders are estimated to own approximately 8.3% of the outstanding shares of the combined company on an economic basis and 8.7% of the voting power in the combined company immediately after the merger.

Following the consummation of the Merger, a controlling shareholder and its controlled affiliates will control approximately 74.3% of the voting power of the combined company.

Accordingly, Company shareholders are expected to have less influence over the management and policies of the combined company after the closing of the Merger than they now have on the management and policies of the Company

Shareholder litigation related to the merger could prevent or delay the completion of the Merger, result in the payment of damages or otherwise negatively impact the business and operations of the Company.

Shareholders of Mechanics Bank or the Company may file lawsuits against Mechanics Bank, the Company and/or the directors and officers of either company in connection with the Merger.

If any plaintiff were successful in obtaining an injunction prohibiting Mechanics Bank or the Company from completing the Merger or any of the other transactions contemplated by the Merger Agreement, then such injunction may delay or prevent the effectiveness of the Merger and could result in significant costs to Mechanics Bank or the Company, including any cost associated with the indemnification of directors and officers of each company.

Mechanics Bank and the Company may incur costs in connection with the defense or settlement of any stockholder or shareholder lawsuits filed in connection with the Merger.

Such litigation could have an adverse effect on the financial condition and results of operations of Mechanics Bank and the Company and could prevent or delay the completion of the Merger.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Sales of Unregistered Securities

There were no sales of unregistered securities during the third quarter of 2024.

There were no sales of unregistered securities during the first quarter of 2025.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

3 unchanged sentences

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What changed 10-Q

Item 1A. Risk Factors